On Jan. 22, 2018, President Donald Trump signed into law a short-term continuing spending resolution to end the government shutdown and continue funding through Feb. 8, 2018. The continuing resolution impacts three taxes and fees under the Affordable Care Act (ACA).
Specifically, the continuing resolution:
- Delays implementation of the Cadillac tax on high-cost group health coverage until 2022;
- Provides an additional one-year moratorium on the health insurance providers fee for 2019 (although the fee continues to apply for 2018); and
- Extends the moratorium on the medical device excise tax for an additional two years, through 2019.
- Removed a provision prohibiting the Cadillac tax from being deducted as a business expense; and
- Required a study to be conducted on the age and gender adjustment to the annual limit.
Employers should be aware of the evolving applicability of existing ACA taxes and fees so that they know how the ACA affects their bottom lines. HealthSure will continue to keep you informed of changes.
Cadillac Tax Delayed
The ACA imposes a 40 percent excise tax on high-cost group health coverage, also known as the “Cadillac tax.” This provision taxes the amount, if any, by which the monthly cost of an employee’s applicable employer-sponsored health coverage exceeds the annual limitation (called the employee’s excess benefit). The tax amount for each employee’s coverage will be calculated by the employer and paid by the coverage provider who provided the coverage.
Although originally intended to take effect in 2013, the Cadillac tax was immediately delayed until 2018 following the ACA’s enactment. A federal budget bill enacted for 2016 further delayed implementation of this tax until 2020, and also:
The continuing resolution delays implementation of the Cadillac tax for an additional two years, until 2022.
There is some indication that this additional delay will lead to an eventual repeal of the Cadillac tax provision altogether. Over the past several years, a number of bills have been introduced into Congress to repeal this tax. Although President Trump has not directly indicated that he intends to repeal the Cadillac tax, he has stated that repealing and replacing the ACA is a key goal for his administration.
Moratorium on the Providers Fee
Beginning in 2014, the ACA imposed an annual, nondeductible fee on the health insurance sector, allocated across the industry according to market share. This health insurance providers fee, which is treated as an excise tax, is required to be paid by Sept. 30 of each calendar year. The first fees were due Sept. 30, 2014.
The 2016 federal budget suspended collection of the health insurance providers fee for the 2017 calendar year. Thus, health insurance issuers were not required to pay these fees for 2017. However, this moratorium expired at the end of 2017.
The continuing resolution provides an additional one-year moratorium on the health insurance providers fee for the 2019 calendar year. However, the continuing resolution specifically declines to extend the moratorium through 2018. Therefore, the fee continues to apply for the 2018 calendar year.
Employers are not directly subject to the health insurance providers fee. However, in many cases, providers of insured plans have been passing the cost of the fee on to the employers sponsoring the coverage. As a result, this one-year moratorium may result in significant savings for some employers on their health insurance rates.
Moratorium on the Medical Devices Tax
The ACA also imposes a 2.3 percent excise tax on the sales price of certain medical devices, effective beginning in 2013. Generally, the manufacturer or importer of a taxable medical device is responsible for reporting and paying this tax to the IRS.
The 2016 federal budget suspended collection of the medical devices tax for two years, in 2016 and 2017. As a result, this tax did not apply to sales made between Jan. 1, 2016, and Dec. 31, 2017.
The continuing resolution extended this moratorium for an additional two years, through the 2019 calendar year. The continuing resolution provides that this additional delay applies to sales made after Dec. 31, 2017. Therefore, as a result of both moratoriums, the medical devices tax will not apply to any sales made between Jan. 1, 2016, and Dec. 31, 2019.
Earlier this month, the U.S. Department of Labor (DOL) issued a proposed rule to expand the opportunity of unrelated employers of all sizes (but particularly small employers) to offer employment-based health insurance through Association Health Plans (AHPs). This rulemaking follows President Trump’s October 12, 2017 Executive Order 13813, “Promoting Healthcare Choice and Competition Across the United States,” which stated the Administration’s intention to prioritize the expansion of access to AHPs.
If adopted, the proposed rule would expand the definition of “employer” within the meaning of ERISA section 3(5) to broaden the criteria for determining when unrelated employers, including sole proprietors and self-employed individuals, may join together in a “bona fide group or association of employers” that is treated as the “employer” sponsor of a single multiple employer “employee welfare benefit plan” and “group health plan.”
By treating the association itself as the “employer” sponsor of a single plan, the regulation would facilitate the adoption and administration of such arrangements. The proposed rule does not appear to limit the size of employers who may participate in an AHP.
Significantly, the proposed rule would apply “large group” coverage rules under the Affordable Care Act (ACA) to qualifying AHPs. AHPs that buy insurance would not be subject to the insurance “look-through” doctrine (i.e., the concept that the size of each individual employer participating in the association determines whether that employer’s coverage is subject to the small group market or the large group market rules). Instead, because an AHP would constitute a single plan, whether the plan would be buying insurance as a large or small group plan would be determined by reference to the number of employees in the entire AHP. This would offer a key advantage to participating sole proprietors and small employers as it would exempt them from rules that apply to individual and small groups under the ACA, such as those related to the coverage of essential health benefits and to certain rating rules.
Under the proposed rule, a “bona fide group or association of employers” must meet the following requirements:
- The group or association exists for the purpose, in whole or in part, of sponsoring a group health plan that it offers to its employer members;
- Each employer member of the group or association participating in the group health plan is a person acting directly as an employer of at least one employee who is a participant covered under the plan;
- The group or association has a formal organizational structure with a governing body and has by-laws or other similar indications of formality;
- The functions and activities of the group or association, including the establishment and maintenance of the group health plan, are controlled by its employer members, either directly or indirectly through the regular nomination and election of directors, officers, or other similar representatives that control the group or association and the establishment and maintenance of the plan;
- The employer members have a “commonality of interest;”
- The group or association does not make health coverage through the association available other than to employees and former employees of employer members and family members or other beneficiaries of those employees and former employees;
- The group or association and health coverage offered by the group or association complies with HIPAA (as amended by ACA) nondiscrimination requirements; and
- The group or association is not a health insurance issuer, or owned or controlled by a health insurance issuer.
Expanded Commonality of Interest Test
The proposed rule would amend ERISA section 3(5) to create a broader “commonality of interest” test for determining which groups or associations of employers (including “working owners”) could create AHPs.
The current definition of a “bona fide association” provides that an association may be treated as a single employer only if it has a bona fide purpose apart from the provision of health care. The proposed rule would allow employers to band together in new organizations whose sole purpose is to provide group health coverage to member employers and their employees even if their only connection is based on “common industry” or “common geography.” The determination of whether there is a “commonality of interest” is facts and circumstances test.
Specifically, employers could join together to offer health coverage if they either are:
- in the same trade, industry, line or businesses, or profession; or
- have a principal place of business within a region that does not exceed the boundaries of the same State or same metropolitan area (even if the metropolitan area includes more than one State).
Examples of a metropolitan area in the proposed rule include the “Greater New York city Area/Tri-State Region covering portions of New York, New Jersey and Connecticut; the Washington Metropolitan Area of the District of Columbia and portions of Maryland and Virginia; and the Kansas City Metropolitan Area covering portions of Missouri and Kansas.” A single city or county could also qualify.
The DOL is seeking public comment on whether additional clarification is needed to define a “metropolitan area;” whether there is any reason for concern that associations could manipulate geographic classifications to avoiding offering coverage to employers expected to incur more costly health claims; and whether there should be a special process established to obtain a determination from the DOL that all an association’s members have a principal place of business in a metropolitan area.
The proposed rule would allow associations to rely on other characteristics upon which they previously relied to satisfy the commonality provision. The DOL also is seeking comment on whether the final rule, if adopted, should also recognize other bases for finding a commonality of interest.
Self-Employed Individuals and Dual Treatment of “Working Owners”
The proposed rule defines a “working owner” any individual:
- Who has an ownership right of any nature in a trade or business, whether incorporated or unincorporated, including partners and other self-employed individuals;
- Who is earning wages or self-employment income from the trade or business for providing personal services to the trade or business;
- Who is not eligible to participate in any subsidized group health plan maintained by any other employer of the individual or of the spouse of the individual; and
- Who either:
- Works at least 30 hours per week or at least 120 hours per month providing personal services to the trade or business, or
- Has earned income from such trade or business that at least equals the working owner’s cost of coverage for participation by the working owner and any covered beneficiaries in the group health plan sponsored by the group or association in which the individual is participating.
The proposed rule provides a series of examples illustrating how the rules are intended to apply.
The DOL has asked for comment on whether this structure could potentially represent an expansion of current regulations or would create involuntary cross-subsidization across employers that would discourage formation of AHPs.
Potential Impact on Employers
The proposed rule is intended to allow small employers to enjoy some of the advantages of larger employers. In its News Release, the DOL claims that the proposed rule “may reduce [employers’] administrative costs through economies of scale, strengthen their bargaining position to obtain more favorable deals, enhance their ability to self-insure, and offer a wider array of insurance options.”
If adopted, the proposed rule could create more opportunity for unrelated employers of all sizes, however, it is primarily geared to enable small employers to join an AHP and it would allow sole proprietors for the first time to join AHPs.
Potential Limits Based on State Regulation of AHPs
Currently, coverage offered by an association is typically considered a multiple employer welfare arrangement (MEWA), which is an arrangement that is established to provide welfare benefits to two or more unrelated employers (i.e., not part of the same “controlled group”).
Although ERISA generally preempts state laws, there is an exception to ERISA preemption for MEWAs. Currently, many states regulate self-funded MEWAs as commercial insurance companies and others prohibit them altogether. A state’s ability to regulate fully-insured MEWAs directly is limited to establishing reserve and contribution levels to ensure the solvency of the MEWA. However, states are free to regulate the underlying insurance contacts or policies, which are subject to state insurance laws.
It is unclear whether the flexibility added in the proposed rule will be hampered by state regulation of AHPs as MEWAs. AHPs will continue to be MEWAs to the extent that they provide coverage to employees of multiple unrelated employers. There is nothing in the proposed rule that provides that state insurance law is otherwise preempted with respect to AHPs. Nor is there anything in the proposed rule that creates an individual or class exemption from existing state regulation for self-funded MEWAs (although, the DOL did request public comments on whether to use its exemption authority).
In the past there has been opposition to AHPs because of consumer protection concerns. Under the proposed rule, AHPs cannot charge individuals higher premiums based on health factors or refuse to admit employees to a plan because of health factors. However, they can vary premiums based on other factors, such as gender, age, industry or occupation, or business size. Since qualifying AHPs would be subject to “large group” coverage rules, some have raised questions as to whether AHPs would be marketed toward the healthiest and youngest individuals, thus, undermining the individual and “small group” marketplace. It is likely that these concerns, as well as others relating to government oversight and fraud protection from unscrupulous promoters, will be raised as part of the public rulemaking process. It also remains to be seen the extent to which states will impose standards to protect consumers and guard against adverse selection, which may cause AHPs to be less attractive to employers.
The DOL is soliciting comments on its proposal, which are due on or before March 6, 2018.
The proposed rule does not include an effective date for a final rule. Since the rules are only in proposed form, employers should not currently take action in reliance on them, but await adoption of any final rule.
DOL Announces April 1 Applicability of Final Disability Plan Claims Procedure Regulations
by Marathas Barrow Weatherhead Lent LLP, a national law firm with recognized experts on the Affordable Care Act.
The U.S. Department of Labor (DOL) announced its decision for April 1, 2018, as the applicability date for ERISA-covered employee benefit plans to comply with a final rule (released in December 2016) that imposes additional procedural protections (similar to those that apply to health plans) when dealing with claims for disability benefits. In October 2017, the DOL had announced a 90-day delay of the final rule, which was scheduled to apply to claims for disability benefits under ERISA-covered benefit plans that were filed on or after January 1, 2018.
While the DOL’s news release indicates that the DOL has decided on an April 1 applicability date for the final rule, the regulatory provision modified by the 90-day delay specified that the final rule will apply to claims filed “after April 1, 2018.”
Plans Subject to the Final Rule
The final rule applies to plans (either welfare or retirement) where the plan conditions the availability of disability benefits to the claimant upon a showing of disability. For example, if a claims adjudicator must make a determination of disability in order to decide a claim, the plan is subject to the final rule. Generally, this would include benefits under a long-term disability plan or a short-term disability plan to the extent that it is governed by ERISA.
However, the following short-term disability benefits are not subject to ERISA and, therefore, are not subject to the final rule:
- Short-term disability benefits they are paid pursuant to an employer’s payroll practices (i.e., paid out of the employer’s general assets on a self-insured basis with no employee contributions); and
- Short-term disability benefits that are paid pursuant to an insurance policy maintained solely to comply with a state-mandated disability law (for example, in California, New Jersey, New York, and Rhode Island).
In addition, if benefits are conditioned on a finding of a disability made by a third party other than the plan itself (such as the Social Security Administration or insurer/third-party administrator of the employer’s long-term disability plan), then a claim for such benefits is not treated as a disability claim and is also not subject to the final rule. For example, if a retirement plan’s determination of disability is conditioned on the determination of disability under the plan sponsor’s long-term disability plan, then the retirement plan is not subject to the final rule (but the final rule would apply to the underlying long-term disability plan).
Overview of the Final Rule
The DOL has published a Fact Sheet that provides an overview of the new requirements, which include the following:
- New Disclosure Requirements. New benefit denial notices that include a more complete discussion of why the plan denied a claim and the standards it used in making the decision;
- Right to Claim File and Internal Protocols. New statement required in benefit denial notices that regarding claimant’s entitlement to receive, upon request, the entire claim file and other relevant documents and inclusion of internal rules, guidelines, protocols, standards, or other similar criteria used in denying a claim (or a statement that none were used).
- Right to Review and Respond to New Information Before Final Decision. Plans may not deny benefits on appeal based on new or additional evidence or rationales that were not included when the benefit was denied at the claims stage, unless the claimant is given notice and a fair opportunity to respond.
- Avoidance of Conflicts of Interest. Claims and appeals must be adjudicated in a manner designed to ensure independence and impartiality of the persons involved in making the decision. For example, a claims adjudicator or medical or vocational expert cannot be hired, promoted, terminated, or compensated based on the likelihood of such person denying benefit claims.
- Deemed Exhaustion of Claims and Appeal Procedures. If a plan does not adhere to all claims processing rules, the claimant is deemed to have exhausted the administrative remedies available under the plan, unless the violation was the result of a minor error and other conditions are met.
- Certain Coverage Rescissions are Subject to the Claim Procedure Protections. Rescissions of coverage, including retroactive terminations due to alleged misrepresentation of fact (e.g., errors in the application for coverage) must be treated as adverse benefit determinations, which trigger the plan’s appeals
- Communication Requirements in Non-English Languages. Language assistance for non-English speaking claimants are required under some circumstances.
Before April 2018, employers should:
- Identify which benefit plans (in addition to long-term disability) it sponsors are subject to the final rule (and consider whether to amend any plan that currently triggers the new rules to rely on the disability determinations of another plan to avoid having to comply with the final rule);
- For any plan subject to the final rule, review and revise claims and appeal procedures prior to April if the plan is not already in compliance with the new rule;
- Update participant communications, such as summary plan descriptions and claim and appeal notices, as needed; and
- Discuss administration of disability benefits with any third-party administrators and insurers to ensure compliance.
On Jan. 22, 2018, Pres. Trump signed H.R. 195 into law. The main purpose of this legislation was to continue funding government operations and reauthorize the Children’s Health Insurance Program (CHIP) for six more years. However, it also impacts several provisions of the ACA, including the Cadillac tax and the health insurance tax (HIT).
First, the effective date of the excise tax on employer-sponsored coverage that exceeds a certain threshold, known as the Cadillac tax, has been pushed back until 2022 (tax years beginning after Dec. 31, 2021).
Second, the health insurance provider fee, also called the HIT, will be in moratorium for calendar year 2019. In other words, the HIT is effective for 2018, suspended for 2019, and effective again for calendar year 2020 and beyond. In response to the changes, the IRS released an FAQ that provides greater detail on how the provider fee is paid, when it applies and how the moratorium in 2019 affects 2018, 2020 and beyond.
Additionally, the bill delays the medical device tax, which will now be effective for sales made after Dec. 31, 2019.
The delay of the Cadillac tax and the HIT is welcome relief for employers, considering the effect these taxes may ultimately have on their plans. Bipartisan efforts for a full repeal of the Cadillac tax and HIT are likely to continue. Regardless, employers should evaluate whether plan amendments are necessary considering these recent changes.
In January 2018, the IRS updated Publication 571, entitled “Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.” This publication is designed to help tax filers better understand 403(b) plans and the related tax rules.
Specifically, the publication provides information that will help individuals determine the amounts that can be contributed to their 403(b) plans (in 2017 and 2018), identify excess contributions, understand the basic rules for claiming the retirement savings contribution credits and understand the basic distribution rules.
Although the updates to the Publication mainly describe the increased contribution and tax credit limits, this publication would be helpful to any employer that sponsors a 403(b) plan.
On Jan. 18, 2018, the U.S. District Court presiding over the AARP wellness case removed a deadline it recently imposed on the EEOC. As we discussed in the Jan. 9, 2018 edition of Compliance Corner, the court in this case issued a ruling that would set aside the EEOC’s wellness rules in 2019. Part of that ruling, though, required the EEOC to promulgate new proposed rules by Aug. 31, 2018.
The EEOC responded to the Court’s decision by objecting and arguing, among other things, that the Court didn’t have the jurisdiction to require the EEOC to issue proposed rules by a certain date. Instead, they posited that the rulemaking process is within the EEOC’s discretion and subject to the agency’s policy judgment. The Court agreed with that argument and removed the Aug. 31, 2018 deadline.
Unfortunately, this additional ruling doesn’t add much finality to this issue. Instead, the EEOC is still bound by the court’s decision to invalidate the rule on Jan. 1, 2019. So although the EEOC no longer has to issue proposed rules by August 2018, the current rules will still become unenforceable in early 2019.
Ultimately, this means that employers should comply with the EEOC’s rules for the time being and then analyze the issue when deciding how they’re going to proceed in 2019. We’ll continue to monitor this case and provide any additional information. Employers with specific questions should work with outside counsel to assist.
The Tax Cuts and Jobs Act, signed into effect late December, creates a new tax credit for wages paid by employers in 2018 and 2019 to employees while on family and medical leave, as defined by the Family and Medical Leave Act (FMLA).
The tax credit will range from 12.5 percent to 25 percent of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. Any leave besides FMLA leave or leave paid for or mandated by a state or local government may not be taken into account for purposes of the credit.