IRS Letter 226J

The Affordable Care Act (ACA) contains requirements called the employer shared responsibility rules (often called the employer mandate). Code §4980H requires applicable large employers (ALEs – those with 50 or more full-time equivalents) to offer coverage to full-time employees and their dependent children. Employers who fail to do so face two different potential penalties. The IRS has begun to send letters to employers (Letter 226J) to begin the collection process for employers who have failed to meet the §4980H requirements for benefits offered during 2015. Penalty calculations are based on data provided by employers to the IRS on Forms 1094 and 1095. There are two different penalties that could apply to ALE, but only one would apply for any particular tax year.

We believe that many of the 226J proposed employer assessments will be applied due to mistakes made in employer reporting, rather than to an actual violation of a §4980H requirement.

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Draft of House ACA “Replace” Legislation Leaked to the Press

A draft of a House "repeal and replace" bill has been leaked to the press. Although it's only a draft, and there is no confirmation that it is authentic, but if it is, the document is the most detailed we have seen to date on Republican plans to replace the ACA. The draft bill largely follows the priorities outlined in the recent white paper issued by House Republicans. It is also very similar to the 2015 ACA repeal legislation passed by Congress and vetoed by President Obama. 

It appears that the bill does not repeal the ACA, rather it repeals sections of the ACA, leaving other areas intact including: covering preexisting conditions; not allowing health status in underwriting factors, requiring coverage for adult children up to age 26 and the capping of out-of-pocket limits and removal of lifetime & annual limits. This draft also does not appear to impact ACA's Medicare cuts and reforms.

Limits on the Tax Exclusion for Employer Sponsored Health Benefits

The draft bill does repeal the Cadillac tax, but the biggest news for employers is the proposal to limit the tax exclusion on employer sponsored health benefits. Republicans have been talking ab out this for a long time as an avenue to pay for proposed tax credits and for the repeal of other fees and taxes contained in the ACA. 

As a point of reference, the Congressional Budget Office released an analysis last December that showed the impact of a tax exclusion on the Federal Budget. In one example in the study, the limit on the tax exclusion was set at the 75th percentile of health insurance premiums. In that analysis, the CBO projects that in 2020, the 75th percentile threshold will be $10,800 for individual coverage and $29,100 for family coverage. Based on the CBO estimates, the proposed tax beginning in 2019 and set at the 90th percentile of premiums will apply to annual plan costs above approximately $12,300 for individual and $33,200 for family coverage. The cap would be indexed to increase at the Consumer Price Index plus 2%. We know that historically, health care costs have risen at a rate faster than CPI, so more and more plan would be subject to the tax each year.

The bill proposes, beginning in 2019, the tax exclusion for employer-provided health benefits would be capped at the 90th percentile of average health insurance premiums. Any amount above that limit would be treated as taxable income to the employee.

There are a lot of questions regarding the method that will be used to calculate health insurance premiums, but those questions are not addressed in the bill, rather it instructs the IRS to draft regulation to determine the appropriate costs that will be the basis for the tax. 

Applicable Large-Employer “Penalties” Under §4980H Reduced to $0

The draft legislation is designed to be able to pass both the House and Senate using budget reconciliation. This would allow Republicans in the Senate to avoid a Democratic filibuster and pass a bill with a simple 51-vote majority. However, budget reconciliation cannot be used for a full repeal of the §4980H employer shared responsibility rules that require applicable large employer requirements to provide health insurance to full-time employees. So instead, the bill leaves the requirement in place, but eliminates the penalty for violating the rules. There will be much debate about what this exactly means if this approach is what ends up in whatever is eventually passed into law.

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Employer Exchange Subsidy Notices - Appeal or Not?

Employers are starting to receive notices from public Exchanges indicating that one or more employees are currently receiving a subsidy when purchasing individual health insurance coverage through a public Exchange, which could potentially trigger employer penalties under §4980H. If an employer receives such a notice for one of its employees, the employer has a right, but is not required, to appeal when they feel an employee should not be receiving a subsidy because the employer offers minimum value, affordable coverage.

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Proposed Revisions to SBC and Uniform Glossary Modifications

On February 22, 2016, the Departments of Labor, Treasury, and Health and Human Services (“the Departments”) released proposed updates to the Uniform Summary of Benefits and Coverage (SBC) template, instructions, and Uniform Glossary (“glossary”). The proposed documents build largely on the revised versions first proposed in December 2014; however, they incorporate additional stakeholder feedback—primarily from the NAIC—and the Departments are requesting public comments through the end of March before the documents are finalized.

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ACA Developments – House Fails to Override ACA Veto

On Tuesday, February 2 by a vote of 241 to 186 the House of Representatives failed to override President Obama’s veto of a budget reconciliation legislation that would have dismantled major portions of the Affordable Care Act (ACA). Specifically, the legislation had proposed to repeal much of the ACA, including the excise tax on high value employer-sponsored health care benefits.

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Form 1095 – Employee Communications

Many employers want to provide some type of communication along with, or before, the distribution of Form 1095s to relevant employees. Although any employee communication must be tailored to meet the employer’s specific circumstances, some general concepts are addressed here that can be adjusted as appropriate to help employees understand why Form 1095s are being provided, what type of information they provide, and how they are to be used.

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Cadillac Tax – Delayed Effective Date

In December, the Consolidated Appropriations Act, 2016 was signed into law which, amongst other provisions, effectively delayed the excise tax on high-cost health coverage (also known as the “Cadillac tax”) until January 1, 2020. In addition, the law made the excise tax deductible and provides for a study to determine whether appropriate age and gender benchmarks are being used to determine the Cadillac tax threshold adjustments.

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