January 31, 2016 Deadline to Furnish Forms to Employees
By January 31, 2016, many employers must furnish notices to employees in connection with the Affordable Care Act (“ACA”) information reporting requirements. Think of it as a W-2 for employer-provided health coverage. As summarized in our November 23, 2015 Client Alert, either a Form 1095-C or 1095-B must be furnished to employees, depending on the coverage type, the size of employer, and the existence of related employers. The Form will provide information about health care coverage offered (or not offered) to employees and their family members during the 2015 calendar year.
February (or March) Deadline for Filing Forms with IRS
Copies of these notices must be filed with the IRS by the end of February (or by March 16, if the employer files electronically). Employers submitting less than 250 returns to the IRS may be transmitted by mail, while employers filing 250 or more returns must file such forms electronically. Employers that fail to timely file these forms will be exposed to penalties of $250 per late document. When both the employee notice and the IRS form are provided late, a $500 penalty will apply. The penalty cap, per employer, is $3,000,000 per calendar year.
Unique Benefit Designs May Result in ACA Surprises
As employers prepare ACA employer information returns, the ACA compliance impact of certain benefit designs can come into focus. For example, some employers offer employees the option of taking a cash payment in lieu of health insurance coverage. This is often referred to as a “cash opt-out.” While many employers know that ACA guidance prevents them from placing any restrictions on how an employee may spend a cash opt-out, they may not know that the cash pay-out amount impacts the ACA affordability calculation.
ACA Affordability Requirement
Under the ACA’s employer mandate, a large employer (50 or more full-time/full-time equivalent employees) must offer at least one affordable, minimum value plan to all full-time employees, or risk incurring penalties. Affordability is based on the cost to the full-time employee for single-only coverage (whether the employee chooses single-only or family coverage). Generally speaking, coverage is affordable if the cost of single-only coverage does not exceed 9.5 percent of that employee’s annual household income (9.5 percent of that employee’s W-2 wages).
For ACA purposes, the IRS has informally indicated that the amount of a cash opt-out payment must be added to the monthly premium for single-only coverage to determine whether that coverage is affordable.
Example: A large employer offers health insurance coverage to its employees and the employee contribution for single-only coverage is $100 per month. If an employee declines the employer-sponsored health insurance coverage, and can prove enrollment in other group coverage, however, the employer will pay the employee an additional $150 per month as taxable compensation.
In this example, the monthly cost for single coverage for the purpose of calculating whether the coverage is affordable would be $250 ($100 per month for single-only coverage + $150 per month if the employee declines coverage = $250). The IRS takes this position reasoning that the employee must forego the $150 per month in additional compensation and pay a $100 per month in premium contributions in order to enroll in the plan, making the total cost to the employee $250.
Employers offering a cash opt-out will therefore need to carefully review whether coverage offered is still “affordable” after taking the cash opt-out into account. Phasing out and eliminating cash opt-outs is becoming a recommended best practice.
Cash Opt-Outs and the (now-delayed) ACA Cadillac Tax
The ACA’s “Cadillac” tax, when implemented, will levy a 40% excise tax on the portion of total applicable employer-sponsored health coverage that exceeds a certain threshold. IRS has not issued any formal guidance specific to the calculation of the Cadillac tax, and as of December 18th, the implementation of the Cadillac tax was officially delayed until 2020. However, because a cash opt-out is an employer-provided amount, and other employer-provided amounts for health benefits will be included in the Cadillac tax calculation, it would be reasonable to expect that the final regulations would include an employee cash opt-out as part of the cost of total applicable employer-sponsored health coverage.
If you have last minute questions about how ACA employer information reporting affects your business, or if you discover that an error has occurred in how notices and forms were furnished or filed, please contact your Davis & Kuelthau attorney.