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HR Update: DOL Clarifies Worker Classification Test

On July 15, 2015, the U.S. Department of Labor (DOL) issued an administrative interpretation to clarify how to determine whether a worker is an employee or an independent contractor.

Employee misclassification is a growing concern for the DOL. An increasing number of U.S. workplaces are restructuring their business organizations, creating a higher risk of misclassifying employees as independent contractors.

Employer misclassification has a direct impact on employee eligibility for benefits, legal protections (such as minimum wage and overtime rights) and taxation.

Worker Classification Tests

Several tests exist to determine whether a worker is an employee or an independent contractor. The most common tests include the common law or agency test, the economic realities test, the hybrid test and the IRS test.

Traditionally, the DOL has favored using the six-factor economic realities test because this test seeks to determine whether a worker is economically dependent on his or her employer or whether the worker is in business for him- or herself. The DOL’s rationale is that if the worker is economically dependent on the employer, the worker should be classified as an employee and protected by employment laws, including the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA).

The Economic Realities Test

The six factors for the economic realities test are:

  1. Whether the worker’s job is an integral part of the employer’s business;
  2. Whether the worker’s managerial skill affects his or her opportunity for profit or loss;
  3. Whether the worker’s and the employer’s investments are comparable;
  4. Whether the work performed requires special skills and initiative;
  5. Whether the relationship between the worker and the employer is permanent or indefinite; and
  6. An analysis of the nature and degree of the employer’s control over the worker.

In the administrative interpretation, the DOL emphasized repeatedly that no one factor is determinative and that the factors should not be applied in a mechanical fashion. Rather, the DOL encourages employers to use the six factors as a guide in their efforts to classify workers correctly.

The DOL further explains that the six factors should be interpreted within the context of the FLSA’s definition of employment. The FLSA defines “to employ” as to suffer or permit someone to work. The DOL explains that this broad definition of employment was “specifically designed to ensure as broad of a scope of statutory coverage as possible.” This “suffer or permit” standard prevents employers from using agents to evade labor and employment responsibilities. According to the DOL, under the economic realities test, most workers will be considered employees subject to the FLSA.

An Integral Part of the Employer’s Business

A worker that performs activities that are an integral part of the employer’s business is more likely to be dependent on the employer, and, therefore, should be classified as an employee.

The administrative interpretation states that the courts have found the “integral” factor to be compelling even when the activity in question is just one component of the business or is performed by hundreds or thousands of other workers. For example, the DOL states, “a worker answering calls at a call center along with hundreds of others is performing work that is integral to the call center’s business, even if that work is the same as, and interchangeable with, many others’ work.”

The DOL also mentioned that work can be integral to an employers’ business even if it is performed away from the employer’s premises, at the worker’s home or even on the premises of the employers’ customers.

Managerial Skill

The focus of this factor is whether the worker’s managerial skill can affect his or her opportunity for profit or loss. To determine profit or loss opportunities, employers should look beyond the job at hand and determine whether the worker’s skills can lead to additional business from other parties or reduce the opportunities for future work.

When evaluating this factor, employers should consider a worker’s decision to hire others, purchase materials and equipment, advertise, rent space and manage timetables.

The DOL specifically mentions that a worker’s ability to work more hours and the amount of work available from the employer have “nothing to do with the worker’s managerial skills and do little to separate employees from independent contractors.” This is because both are likely to earn more if they work more and if there is more work available.

Comparable Investments

To determine whether the employer and worker investments are comparable, employers should look at the nature and the extent of the investments.

An independent contractor should make some investment and undertake at least some risk of loss if he or she is in business for him- or herself. The investment should support a business beyond any particular job. These types of investments include furthering the business’ capacity to expand, reducing business cost structure and extending the reach of the independent contractor’s market.

However, a worker’s investments should not be considered in isolation. They should be compared to the employer’s investment. If the worker’s investment is relatively minor, the employer and the worker may not be on the same footing and the worker may be economically dependent on the employer.

Finally, investing in tools and equipment is not an automatic indication of significant investment or that the worker is an independent contractor. This type of investment must be compared to the worker’s investment in his or her overall business and to the employer’s investment in the project and perhaps in its overall activities.

Special Skills and Initiative

A worker’s skills and initiative can be an indicator of economic independence. However, when considering a worker’s skill, employers should consider the worker’s business skills, judgement and initiative, rather than his or her technical skills, which are often required to perform the work. Special skills and initiative are indicators of economic independence when the worker can use them in an independent way, such as demonstrating business-like initiative.

The DOL provides the following illustrative examples:

Example 1
A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.
Example 2
In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

Permanent or Indefinite Employment

Employment that is permanent or indefinite in character suggests that the worker is an employee. Most independent contractors will avoid permanent or indefinite work relationships and are usually hired to work until a job or a project is complete (even if this takes several months or years). Moreover, once a job or project is complete, the independent contractor does not necessarily continue to provide his or her services to the employer.

Employers should consider a worker’s reasons for intermittent, seasonal, permanent or indefinite employment. Neither working for others nor having multiple sources of income transforms a worker into an independent contractor. The key is to determine “whether the lack of permanence or indefiniteness is due to operational characteristics intrinsic to the industry (such as employers that hire part-time workers or use staffing agencies) or the worker’s own business initiative.”

For seasonal employment, the proper test to determine permanency is whether the employees worked for the entire operative period of a particular season, not whether the worker returns from season to season.

Nature and Degree of Employer Control

An independent contractor controls meaningful aspects of the work he or she performs. This type of control should lead objective observers to conclude that the worker is conducting his or her own business.

Control over meaningful aspects of the work may extend beyond controlling working hours and could include work schedules, dress code and task prioritization.

The DOL asserts that this control cannot be theoretical and explains that what counts is not what the worker could have done, but what the worker actually does.

Finally, the DOL warns that the control factor should not “play an oversized role” and dwarf other factors in the economic realities test when determining whether a worker is an employee or an independent contractor.

More Information

Please contact us for additional information on appropriate worker classification. We provide Solutions for Business. Solutions….that Work!

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Exploring the “What if” Scenarios of Health Savings Accounts

Health savings accounts (HSAs) are a great way to save money and efficiently pay for medical expenses. HSAs are tax-advantaged savings accounts that accompany high deductible health plans (HDHPs).

While HSAs are a helpful approach to paying for medical care, the fact that they combine both insurance and tax regulations make them a unique type of benefit with a fairly involved set of requirements. There can be confusion over how HSAs are administered, especially concerning unusual scenarios. The following questions address situations that HSA owners may find themselves in, but are not a typical part of standard HSA information.

What if I want to deposit the maximum annual contribution at once?

This is allowable. While HSAs are typically deducted from your paycheck and deposited every pay period, you may opt for a one-time payment provided that:

Your contribution does not exceed the HSA limit when added to an employer contribution. HSA limits apply to the overall account contribution, and not to each person or entity depositing money into the account. For this reason, you may need to calculate the yearly employer contribution before determining your personal maximum contribution.

You are eligible to contribute to an HSA for the entire year. If you obtained HSA eligibility after Jan. 1, your maximum contribution limit decreases by one-twelfth for every month you are not eligible. You can only make a contribution for the months you’re eligible. There is an exception to this rule for individuals who are eligible to contribute to an HSA on Dec. 1 of a calendar year. They are allowed to contribute an amount equal to the annual HSA contribution amount provided they remained covered by the HSA for at least a 12-month period after contributing.

What if my spouse or family member wants to make contributions to my HSA?

Family members may make contributions on behalf of other family members, provided:

The total contribution put forth by you, your family member and your employer does not exceed the annual contribution limit (with only a single exception for the additional catch-up contribution if the account holder is at least 55 years old).

What if I want to use an HSA to pay for my dependent’s medical care?

This is generally allowable, as qualified medical expenses include unreimbursed medical expenses of the owner, his or her spouse or dependents.

What if I use my HSA for a nonqualified medical expense?

Nonqualified withdrawals from your HSA are considered taxable income. The money you spend would be added to your gross income and taxed, and would also be subject to a 20 percent penalty. An exception to this rule is if you are age 65 or older, you are totally and permanently disabled, or you make the withdrawal after you die.

What if I want to use my HSA to pay my premiums?

This would not be considered a qualified medical expense and would be subject to taxes and penalties.

What if I want to use my HSA to pay for long-term care insurance?

This is allowable. HSA distributions used to pay for long-term care insurance premiums qualify as tax-free, penalty-free distributions. However, there is an annual limit to the amount you may contribute toward this expense, which is adjusted by the IRS every year.

What if I want to close my account?

Unless any of the previous exceptions have been met, the funds remaining in the account would be subject to taxes and penalties if withdrawn for reasons other than a qualified medical expense.

What if I want to invest the funds in my HSA?

You can invest the funds in bank accounts, money markets, mutual funds and stocks, if that is something your HSA servicer allows. Any earnings made on the investments would not count toward your annual contribution limit. You may not invest in collectibles, art, automobiles or real estate.

What if I leave my employer?

Your HSA belongs to you regardless of your employment. If you change jobs, or stop working altogether, you can keep your total HSA balance, including all employer contributions. You can continue spending the account balance on qualified medical expenses free of taxes or penalties.

However, you will not be able to make further contributions to your account, unless you remain enrolled in a HDHP. If you lose your HDHP, all contributions to an HSA must be suspended until you are back on an HSA-compliant HDHP plan.

What if I change my health coverage to a plan that doesn’t allow an HSA?

You will have to stop making contributions to your HSA, but you will be free to spend the account balance with the same tax-free benefits, provided they go toward qualified medical expenses. You could also hold on to the balance and any investments until age 65, at which point the money would be available to you with no taxes or penalties.

 

For more information on these or other HSA scenarios, contact CIBC of Illinois, Inc. today.

Compliance Alert: EEOC Issues Proposed Rule on the ADA and Wellness Programs

On April 16, 2015, the U.S. Equal Employment Opportunity Commission (EEOC) released a proposed rule that describes how the Americans with Disabilities Act (ADA) applies to employee wellness programs that include questions about employees’ health or medical examinations. Although the ADA limits when employers may inquire about employees’ health or require them to undergo medical examinations, these inquiries and exams are permitted if they are part of a voluntary wellness program.

The long-awaited proposed rule would provide much needed guidance for employers on how to structure employee wellness programs without violating the ADA. Most importantly, the proposed rule addresses the amount of incentives that may be offered under employee wellness programs that are part of group health plans. This amount is generally consistent with HIPAA’s limits on wellness program incentives, although the proposed rule does not fully incorporate HIPAA’s increased incentive limit for tobacco cessation programs.

Implications for Employers

The EEOC is seeking comments on the proposed rule and may make revisions to its guidance before it is finalized. While employers are not required to comply with the proposed rule before it is finalized, they may choose to do so. According to the EEOC, it is unlikely that a court or the EEOC would find an ADA violation where an employer complied with the proposed guidance until a final rule is issued.

Wellness Programs

Many employers offer workplace wellness programs as a way to help control health care costs, encourage healthier lifestyles and prevent disease.

Employers may offer participatory wellness programs, which do not require individuals to meet a health-related standard in order to obtain an incentive. Participatory wellness programs include, for example, subsidized fitness club memberships, reimbursement of smoking cessation classes (without regard to whether the employee quits smoking) or rewards for completing a health risk assessment (HRA) without any further action required by the employee with respect to the health issues identified by the HRA.

Employers may also offer health-contingent wellness programs, which require individuals to satisfy a standard related to a health factor in order to obtain an incentive. For example, health-contingent wellness programs may require participants to participate in exercise programs, remain tobacco-free or attain certain results on biometric screenings (for example, low cholesterol, blood glucose and blood pressure levels) to obtain an incentive.

Wellness program incentives can be framed as rewards or penalties and often take the form of prizes, cash, or a reduction or increase in health care premiums or cost-sharing.

Legal Concerns for Wellness Programs

Employee wellness programs must be carefully designed to comply with the ADA and other federal laws that prohibit discrimination based on race, color, sex (including pregnancy), national origin, religion, compensation, age or genetic information.

Additionally, wellness programs that are part of group health plans must be designed to comply with HIPAA’s nondiscrimination requirements, as amended by the Affordable Care Act (ACA). Under HIPAA, health-contingent wellness programs are required to follow certain standards related to nondiscrimination, including a standard that limits the amount of incentives that can be offered. The maximum reward under HIPAA for health-contingent wellness programs is 30 percent of the cost of health coverage (or 50 percent for programs designed to prevent or reduce tobacco use).

EEOC Guidance

Background

The ADA prohibits employers with 15 or more employees from discriminating against individuals with disabilities. Under the ADA, an employer may make disability-related inquiries and require medical examinations after employment begins only if they are job-related and consistent with business necessity. However, these inquiries and exams are permitted if they are part of a voluntary wellness program.

Neither the ADA nor prior EEOC guidance addressed the extent to which incentives affected the voluntary nature of a wellness program. Recently, the EEOC filed well-publicized lawsuits against a number of employers, alleging that their wellness programs violated the ADA and other federal fair employment laws. In response, Congress called on the EEOC to issue guidance on wellness programs and introduced legislation, the Preserving Employee Wellness Program Act, to provide more certainty for employers regarding wellness programs.

Proposed Guidance

The EEOC’s proposed rule would establish the following parameters for permissible wellness program designs under the ADA.

  • Reasonable Design: A wellness program must be reasonably designed to promote health or prevent disease. A program that collects information on an HRA to provide feedback to employees about their health risks, or that uses aggregate information from HRAs to design programs aimed at particular medical conditions is reasonably designed. A program that collects information without providing feedback to employees or without using the information to design specific health programs is not reasonably designed.
  • Voluntary: Wellness programs must be voluntary. Employees may not be required to participate in a wellness program, may not be denied health insurance or given reduced health benefits if they do not participate, and may not be disciplined for not participating. Employers also may not interfere with the ADA rights of employees who do not want to participate in wellness programs, and may not coerce, intimidate or threaten employees to get them to participate or achieve certain health outcomes.
  • Employee Notice: For wellness programs that are part of group health plans, employers must provide employees with a notice that describes what medical information will be collected as part of the wellness program, who will receive it, how the information will be used and how it will be kept confidential.
  • Limited Incentives: For wellness programs that are part of group health plans, employers may offer limited incentives for employees to participate in the programs or to achieve certain health outcomes. Consistent with HIPAA, the amount of the incentive that may be offered for an employee to participate or to achieve health outcomes may not exceed 30 percent of the total cost of employee-only coverage. For example, if the total cost of coverage paid by both the employer and employee for self-only coverage is $5,000, the maximum incentive for an employee under that plan is $1,500.

This incentive limit only applies to wellness programs that include disability-related inquiries or medical examinations. According to the EEOC, a smoking cessation program that merely asks employees whether they use tobacco (or whether they stopped using tobacco upon completion of the program) is not a wellness program that includes disability-related inquiries or medical examinations. Thus, the EEOC’s proposed guidance would allow an employer to offer incentives as high as 50 percent of the cost of employee coverage for that smoking cessation program, consistent with HIPAA’s requirements. However, an incentive tied to a biometric screening or medical examination that tests for the presence of tobacco would be limited to 30 percent under the proposed rule.

  • Confidentiality: Medical information obtained as part of a wellness program must be kept confidential. Generally, employers may only receive medical information in aggregate form that does not disclose, and is not reasonably likely to disclose, the identity of specific employees.

Wellness programs that are part of a group health plan may generally comply with their obligation to keep medical information confidential by complying with the HIPAA Privacy Rule. Employers that are not HIPAA covered entities may generally comply with the ADA by signing a certification, as provided for by HIPAA regulations, that they will not use or disclose individually identifiable medical information for employment purposes and abiding by that certification.

Practices such as training individuals in the handling of confidential medical information, encryption of information in electronic form, and prompt reporting of breaches in confidentiality can help assure employees that their medical information is being handled properly.

  • Reasonable Accommodations: Employers must provide reasonable accommodations that enable employees with disabilities to participate and to earn whatever incentives the employer offers. For example, an employer that offers an incentive for employees to attend a nutrition class must, absent undue hardship, provide a sign language interpreter for a deaf employee who needs one to participate in the class. An employer also may need to provide materials related to a wellness program in alternate format, such as large print or Braille, for someone with vision impairment. An employee may need to provide an alternative to a blood test if an employee’s disability would make drawing blood dangerous.

More Information

To help employers understand the proposed guidance, the EEOC provided a fact sheet and a set of questions and answers or call us at 877-936-3580.

ACA Update: Summary of Benefits and Coverage and Uniform Glossary Details Remain Fuzzy, FAQ Released

The Affordable Care Act (ACA) created new disclosure tools—the summary of benefits and coverage (SBC) and uniform glossary—to help consumers compare coverage options available to them. Generally, group health plans and health insurance issuers are required to provide the SBC and uniform glossary free of charge. This disclosure requirement applies to both grandfathered and non-grandfathered plans.

On March 31, 2015, the Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (Departments) issued a Frequently Asked Question (FAQ) announcing their intention to issue final regulations on the SBC requirement in the near future. The final regulations are expected to apply for plan years beginning on or after Jan. 1, 2016 (including open enrollment periods in fall of 2015 for coverage beginning on or after Jan. 1, 2016).

However, according to this FAQ, the new template, instructions and uniform glossary will not be finalized until January 2016, and will apply for plan years beginning on or after Jan. 1, 2017 (including open enrollment periods in fall of 2016 for coverage beginning on or after Jan. 1, 2017).

Overview of the SBC Requirement

The ACA requires health plans and health insurance issuers to provide an SBC to applicants and enrollees, free of charge. The SBC is a concise document that provides simple and consistent information about health plan benefits and coverage.

The SBC requirement became effective for participants and beneficiaries who enroll or re-enroll through an open enrollment period beginning with the first open enrollment period starting on or after Sept. 23, 2012. For participants and beneficiaries who enroll other than through an open enrollment period (such as newly eligible or special enrollees), SBCs were required to be provided beginning with the first plan year starting on or after Sept. 23, 2012.

The DOL has provided a template for the SBC and Uniform Glossary documents along with instructions and sample language for completing the template, available on the DOL’s website. On April 23, 2013, the SBC template was updated for the second year of applicability to incorporate ACA changes that become effective in later years. Until further guidance is issued, these documents continue to be authorized.

On Dec. 22, 2014, the Departments released proposed regulations on the SBC requirement, which would revise the SBC template, instruction guides and uniform glossary. At that time, the Departments expected that the new requirements for the SBC and uniform glossary would apply to coverage that begins on or after Sept. 1, 2015. The draft-updated template, instructions and supplementary materials are available on the DOL’s website under the heading “Templates, Instructions, and Related Materials—Proposed (SBCs On or after 9/15/15).”

The SBC and Uniform Glossary must be provided in a culturally and linguistically appropriate manner. Translated versions of the template and glossary are available through the Centers for Consumer Information and Insurance Oversight (CCIIO) website.

To the extent a plan’s terms do not reasonably correspond to the template and instructions, the template should be completed in a manner that is as consistent with the instructions as reasonably as possible, while still accurately reflecting the plan’s terms. In addition, the DOL notes that ACA implementation will be marked by an emphasis on assisting (rather than imposing penalties on) plans and issuers that are working diligently and in good faith to understand and comply with the new law.

Thus, during the first and second years of applicability, penalties will not be imposed on plans and issuers that are working diligently and in good faith to comply with the new requirements. This enforcement relief will continue to apply until further guidance is issued.

Overview of the FAQ Guidance

In the FAQ issued on March 31, 2015, the Departments stated that they intend to issue final regulations in the near future. These regulations would finalize proposed changes in the proposed regulations from Dec. 22, 2014, which were proposed to apply beginning Sept. 1, 2015.

However, the FAQ notes that the final rules are expected to apply in connection with:

  • Coverage that would renew or begin on the first day of the first plan year (or policy year, in the individual market) that begins on or after Jan. 1, 2016; or
  • Open enrollment periods that occur in the fall of 2015 for coverage beginning on or after Jan. 1, 2016.

Despite this effective date, the new template, instructions and uniform glossary are not expected to be finalized until January 2016. According to the Departments, this delay is necessary to allow for consumer testing and offer an opportunity for the public to provide further input before finalizing revisions to the SBC template and associated documents.

The revised template and associated documents will apply to:

  • Coverage that would renew or begin on the first day of the first plan year (or policy year, in the individual market) that begins on or after Jan. 1, 2017; or
  • Open enrollment periods that occur in the fall of 2016 for coverage beginning on or after Jan. 1, 2017.

Impact on Employers

This FAQ guidance leaves a lot of uncertainty for employers with regard to their SBC documents. The changes included in the final regulations may require health plans to update their SBC documents before the new template is released.

The forthcoming final regulations may address this issue. In some cases, the Departments have provided temporary enforcement safe harbors when guidance is not issued sufficiently in advance of an effective date. However, at this time, no safe harbors or other relief has been provided on this issue.

For clarification of this information, or to be kept up to date with any and all parts of the Affordable Care Act, contact CIBC today.

Q1 2015 Benefits Bulletin: A Look Back, and Ahead

From CIBC of Illinois

IRS Invites Comments on Cadillac Tax Implementation

On Feb. 23, 2015, the Internal Revenue Service (IRS) issued Notice 2015-16 to describe potential approaches for a number of issues related to the Affordable Care Act’s (ACA) so-called Cadillac tax. The IRS is seeking comments as it begins developing guidance for the implementation of the Cadillac tax. Public comments may be submitted to the IRS until May 15, 2015.

Proposed or final regulations have not yet been issued on the ACA’s Cadillac tax provision. This notice is intended to invite comment as guidelines are assembled, and taxpayers should not rely on the information provided in Notice 2015-16.

Cadillac Tax Overview

The Cadillac tax will go into effect beginning in 2018. This provision imposes a 40 percent excise tax on high-cost group health coverage. The Cadillac tax is intended to encourage companies to choose lower-cost health plans for their employees.

The Cadillac tax provision is found in Internal Revenue Code Section 4980I. This provision taxes the amount of an employee’s “excess benefit.” The excess benefit is the amount by which the monthly cost of an employee’s employer-sponsored health coverage exceeds the annual limitation.

For 2018, the statutory dollar limits are:

  • $10,200 per employee for self-only coverage; and
  • $27,500 per employee for other-than-self-only coverage.

The tax amount for each employee’s coverage will be calculated by the employer and paid by the coverage provider.

The Cadillac tax applies to “applicable employer-sponsored coverage” (both insured and self-insured). Applicable employer-sponsored coverage is coverage under any group health plan made available to the employee by the employer, which is excludable from the employee’s gross income under Code Section 106.

Applicable coverage also includes health flexible spending accounts (FSAs), health savings accounts (HSAs), on-site medical clinics, retiree coverage, multiemployer plans and coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance (if paid on a pretax basis or if a Section 162(l) deduction is allowed).

 

DOL Issues Final Rule to Expand FMLA Protections for Same-sex Spouses

The Department of Labor (DOL) has issued a final rule that will expand rights under the Family and Medical Leave Act (FMLA) for same-sex spouses. Under the final rule, eligible employees in legal same-sex marriages will be able to take FMLA leave in order to care for their spouses or family members, regardless of where they live.

The DOL’s new guidance is effective March 27, 2015, and it replaces guidance regarding FMLA protections for same-sex spouses that was issued following the U.S. Supreme Court’s decision in United States v. Windsor.

The final rule changes the definition of “spouse” under the FMLA as follows:

Adopts a “place of celebration” rule (which is based on where the marriage was entered into), instead of the “state of residence” rule that applied under prior DOL guidance; and

  • Expressly includes same-sex marriages in addition to common law marriages, and encompasses same-sex marriages entered into abroad that could have been entered into in at least one state.

This change will impact FMLA leave in several ways. Specifically, the definitional change means that eligible employees, regardless of where they live, will be able to:

  • Take FMLA leave to care for their same-sex spouses with serious health conditions;
  • Take qualifying exigency leave due to their same-sex spouses’ covered military service; or
  • Take military caregiver leave for their same-sex spouses.

In connection with the final rule, the DOL also issued a set of frequently asked questions (FAQs) to help employers and employees understand the changes to the FMLA’s definition of “spouse.”

To comply with the final rule, employers should review and update their FMLA policies and procedures as necessary. Employers should also train employees who are involved in the leave management process on the expanded eligibility rules for same-sex spouses under the FMLA.

DOJ to Allow Claims Based on Gender Identity Discrimination

On Dec. 18, 2014, the U.S. Department of Justice (DOJ) announced a reversal of its position regarding whether discrimination based on sex incudes discrimination based on an individual’s gender identity and transgender status.

The DOJ has now taken the position that discrimination based on sex includes discrimination based on an individual’s gender identity and transgender status.

Although the DOJ’s authority to file discrimination lawsuits is limited to government employers, this announcement solidifies the federal government’s position on gender identity rights.

Background Title VII of the Civil Rights Act prohibits employers from discriminating on the basis of race, color, religion, sex or national origin when making employment decisions. In 2006, the DOJ took the position that discrimination based on sex excluded discrimination based on an individual’s gender identity or transgender status. The DOJ has now reversed this position.

Gender identity is an individual’s internal sense of being male or female. An individual’s internal identification may or may not correspond to the individual’s biological gender. Transgender individuals are people with a gender identity that is different from the sex assigned to them at birth.

Effect on Employers Employers can expect to see more individuals file claims based on gender identity discrimination and increased federal support for employee protections against discrimination based on gender identity and sexual orientation.

Employers should review their employment policies to ensure that they are compliant with federal, state and local anti-discrimination regulations.

New Guidance and Relief for Employer Payment of Individual Premiums

Under the ACA, employer payment plans do not comply with several provisions that took effect beginning in 2014. Violations of these rules can result in excise taxes of $100 per day for each employee.

An employer payment plan is an arrangement where an employer reimburses or pays premiums for an employee’s individual health insurance.

New Guidance on Employer Payments
The Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury have released several pieces of guidance clarifying the rules regarding these arrangements. The IRS issued Notice 2015-17 on Feb. 18, 2015, providing further clarification.

Specifically, this notice provides information on several related issues:

  • Reiterates that employer payment plans are group health plans that will fail to comply with the ACA’s market reforms applicable to group health plans;
  • Clarifies that increases in employee compensation do not constitute an employer payment plan, as long as the increases are not conditioned on the purchase of individual health coverage;
  • Provides transition relief from the excise tax for employer payment plans sponsored by small employers (those not subject to the ACA’s employer shared responsibility rules) and to S corporation health care arrangements for 2-percent shareholder-employees;
  • Addresses whether employers may reimburse employees for Medicare or TRICARE premiums for active employees under the ACA; and
  • States that employer payments for individual premiums can be excludable from an employee’s income under the tax code but will still violate the ACA’s market reforms.

Employers should review their benefit and compensation plans and policies to ensure they are not in violation of current guidance regarding employer payment plans.

The information contained in this newsletter is not intended as legal or medical advice. Please consult a professional for more information.

Affordable Care Act Update: Subsidy Certifications Explained

Certifications of Employee Eligibility for Subsidies

The Affordable Care Act (ACA) requires health insurance Exchanges to send a notice to employers regarding employees who purchase coverage through an Exchange and qualify for a health insurance subsidy. These notices are also called “Section 1411 Certifications” because the notice requirement is contained in Section 1411 of the ACA.

The Section 1411 Certification is part of the process established by the Department of Health and Human Services (HHS) for verifying that only eligible individuals receive health insurance subsidies. Both state-run and federally facilitated Exchanges are required to send these certifications to employers. For 2015, it is expected that HHS will issue the certifications in batches, beginning in spring 2015.

These certifications are not directly related to the ACA’s shared responsibility rules for applicable large employers (ALEs). Starting in 2016, the Internal Revenue Service (IRS) will contact ALEs to inform them of their potential liability for a shared responsibility penalty for 2015, and it will provide them with an opportunity to respond. Employers that receive certifications may appeal a subsidy determination to help ensure, as much as possible, that employees are not mistakenly receiving subsidies. Appealing subsidy determinations may also help limit an ALE’s potential liability for a shared responsibility penalty.

affected employers

The Exchanges are required to provide the certifications to all employers with employees who purchase coverage through an Exchange and qualify for a health insurance subsidy. This includes ALEs that are subject to the ACA’s shared responsibility rules and small employers that do not qualify as ALEs. Also, for efficiency reasons, Exchanges can either send the certifications on an employee-by-employee basis as subsidy determinations are made, or the Exchanges can send the certifications to employers for a group of employees.

health insurance subsidies

There are two federal health insurance subsidies available for coverage purchased through an Exchange—premium tax credits and cost-sharing reductions. Both of these subsidies vary in amount based on the taxpayer’s household income, and they both reduce the out-of-pocket costs of health insurance for the insured.

  • Premium tax credits are available for people with somewhat higher incomes (up to 400 percent of the federal poverty level), and they reduce out-of-pocket premium costs for the taxpayer.
  • Reduced cost-sharing is available for individuals who qualify to receive the premium tax credit and have lower incomes (up to 250 percent of the federal poverty level). Through cost-sharing reductions, these individuals have lower out-of-pocket costs at the point of service (for example, lower deductibles and copayments).

To be eligible for a health insurance subsidy, a taxpayer:

  • Must have a household income for the year between 100 percent and 400 percent of the federal poverty level for the taxpayer’s family size,
  • May not be claimed as a dependent of another taxpayer,
  • Must file a joint return if married,
  • Cannot be eligible for minimum essential coverage (Government or employer sponsored plan).

 

An employee who may enroll in an employer-sponsored plan, and individuals who may enroll in the plan because of a relationship with the employee, are generally considered eligible for minimum essential coverage if the plan is affordable and provides minimum value.

The requirements of affordability and minimum value do not apply if an employee actually enrolls in any employer-sponsored minimum essential coverage, including coverage provided through a cafeteria plan, a health FSA or an HRA, but only if the coverage does not consist solely of excepted benefits. Thus, if an employee enrolls in any employer-sponsored minimum essential coverage, the employee is ineligible for a subsidy.

section 1411 certification

The ACA directed HHS to establish a program for verifying whether an individual meets the eligibility standards for receiving an Exchange subsidy. As part of this verification process, an Exchange must notify the employer when it determines that an employee is eligible for subsidized coverage.

Final regulations issued by HHS on March 27, 2012, specify the content requirements for the Section 1411 Certifications.

Here is a key point:

Employees who are eligible for employer-sponsored coverage that is affordable and provides minimum value are not eligible for a subsidy. This is significant because the ACA’s shared responsibility penalty for ALEs is triggered when a full-time employee receives a subsidy for coverage under an Exchange. An employee who is not eligible for a subsidy may still be eligible to enroll in a health plan through an Exchange. However, this would not result in a shared responsibility penalty for the employer.

 

section 1411 certification

The ACA directed HHS to establish a program for verifying whether an individual meets the eligibility standards for receiving an Exchange subsidy. As part of this verification process, an Exchange must notify the employer when it determines that an employee is eligible for subsidized coverage.

Final regulations issued by HHS on March 27, 2012, specify the content requirements for the Section 1411 Certifications.

 

section 1411 certification

The ACA directed HHS to establish a program for verifying whether an individual meets the eligibility standards for receiving an Exchange subsidy. As part of this verification process, an Exchange must notify the employer when it determines that an employee is eligible for subsidized coverage.

Final regulations issued by HHS on March 27, 2012, specify the content requirements for the Section 1411 Certifications.

Section 1411 Certifications must: ·          Identify the employee;·          Provide that the employee has been determined to be eligible for advance payments of a health insurance subsidy;·          Indicate that, if the employer has 50 or more full-time employees, the employer may be liable for a penalty under Code Section 4980H; and

·          Describe the employer’s appeal rights.

appeal rights

When an employer receives a certification regarding an employee’s eligibility for an Exchange subsidy, the employer may appeal the determination to correct any information about the health coverage it offers to employees. The appeals process can help:

  • Minimize the employee’s potential liability to repay advance payments of the subsidy that he or she was not eligible to receive; and
  • Protect the employer from being incorrectly assessed with a tax penalty under the shared responsibility rules (if the employer is an ALE). If the appeal is successful and the employee does not receive an Exchange subsidy, the employee cannot trigger penalties for an ALE under the shared responsibility rules.

Final regulations issued by HHS on Aug. 30, 2013, established general parameters for the employer appeal process. A state-run Exchange may have its own appeals process or it may follow the federal appeals process established by HHS. In either case, the Exchange must:

  • Give employers at least 90 days from the date of the Exchange notice to request an appeal;
  • Allow employers to submit relevant information to support the appeal;
  • Not limit or interfere with an employer’s right to make an appeal request; and
  • Accept appeal requests made by telephone, by mail, via the Internet or in person (if the Exchange is capable of receiving in-person appeal requests) and provide assistance in making the appeal request if this assistance is needed.

The appeals entity must provide written notice of the appeal decision within 90 days of the date the appeal request is received, if administratively feasible.

 

Another key point:

HHS’ final regulations clarify that an appeals decision in favor of the employee’s eligibility for a subsidy does not foreclose any appeal rights the employer may have for a penalty assessment under Code Section 4980H. Thus, while ALEs that receive certifications may appeal a subsidy determination to help ensure, as much as possible, that employees are not mistakenly receiving subsidies, they are not required to appeal a subsidy determination to preserve their rights to appeal an IRS assessment of a penalty tax.

Also, employers may develop policies to allow an employee to enroll in employer-sponsored coverage outside an open enrollment period when the employee is determined to be ineligible for Exchange subsidies as a result of an employer appeal decision.

other employer considerations

To help avoid incorrect subsidy determinations, HHS encourages employers to educate their employees about the details of employer-sponsored health coverage. This includes information on whether their plans are affordable and provide minimum value. Employees enrolling in Exchange coverage will generally complete an Employer Coverage Tool that gathers information about the employers’ group health plans. HHS encourages employers to assist employees with their Exchange applications by providing information regarding the employer-sponsored coverage through the Employer Coverage Tool.

In addition, employers should remember that the ACA amended the Fair Labor Standards Act (FLSA) to include whistleblower protections for employees. Employees are protected from retaliation for reporting alleged violations of the ACA. Employees are also protected from retaliation for receiving a subsidy when enrolling in an Exchange plan. If an employer violates the ACA’s whistleblower protections, it may be required to reinstate the employee, as well as provide back pay (with interest), compensatory damages and attorney fees.

As always, contact us at 877-936-3580 for more information on this, or any other aspect of employee benefits and the Affordable Care Act.

 

HR Brief from CIBC of Illinois-March 2015

HR Brief Newsletter April 2015

ACA Update: New Guidance and Relief for Employer Payment of Individual Premiums

In the past, many employers have helped employees pay for individual health insurance policies instead of offering an employer-sponsored plan. In recent months, the Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (Departments) have released several pieces of guidance addressing these arrangements.

The Departments’ guidance specifically addresses “employer payment plans,” under which an employer reimburses or pays premiums for an employee’s individual health insurance policy.

According to this guidance, employer payment plans do not comply with several ACA provisions that took effect beginning in 2014. Violations of these rules can result in excise taxes of $100 per day for each employee.

IRS Notice 2015-17

On Feb. 18, 2015, the Internal Revenue Service (IRS) issued Notice 2015-17. This notice:

  • Reiterates that employer payment plans are group health plans that will fail to comply with the ACA’s market reforms applicable to group health plans;
  • Clarifies that increases in employee compensation do not constitute an employer payment plan, as long as the increases are not conditioned on the purchase of individual health coverage;
  • Provides transition relief from the excise tax for employer payment plans sponsored by small employers (those not subject to the ACA’s employer shared responsibility rules) and to S corporation healthcare arrangements for 2-percent shareholder-employees;
  • Addresses whether employers may reimburse employees for Medicare or TRICARE premiums for active employees under the ACA; and
  • States that employer payments for individual premiums can be excludable from an employee’s income under the tax code, but will still violate the ACA’s market reforms.

The DOL and HHS have reviewed the notice and agree with the guidance provided. The Departments noted that they expect to issue further clarifications regarding other aspects of employer payment plans and HRAs in the near future.

Increases in Employee Compensation

Notice 2015-17 clarifies that, if an employer increases an employee’s compensation, but does not condition the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form or issuer of health insurance), it is not considered an employer payment plan.

According to the IRS, providing employees with information about the Exchange or the premium tax credit is not endorsement of a particular policy, form or issuer of health insurance. Because this type of arrangement generally will not constitute a group health plan, it is not subject to the ACA’s market reforms.

Excise Tax Delay for Small Employers

Small employers have often helped employees pay for individual coverage. As noted above, these employers would normally be subject to an excise tax of $100 per day for each employee.

Notice 2015-17 provides a delay in the excise tax penalty for employers that are not applicable large employers (ALEs) under the ACA’s employer shared responsibility rules. These employers may need additional time to obtain group health coverage or to adopt a suitable alternative.

Therefore, an excise tax will not be assessed for violations of the ACA’s market reforms by certain employer payment plans that pay (or reimburse employees) for individual health policy premiums or Medicare Part B or Part D premiums.

This transition relief is available on a temporary basis. Employers may be eligible for relief from the excise tax as late as June 30, 2015. Specifically:

  • For 2014, the relief applies to employers that are not ALEs in 2014.
  • For Jan. 1 to June 30, 2015, the relief applies to employers that are not ALEs in 2015.

After June 30, 2015, these employers may be liable for the excise tax.

This relief does not extend to stand-alone HRAs or other arrangements that reimburse employees for medical expenses other than insurance premiums.

Employers eligible for this relief are not required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans) as a result of having these arrangements during the period for which the employer is eligible for the relief.

Reimbursement of Medicare and TRICARE Premiums

Notice 2015-17 notes that an arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan. Similarly, an arrangement under which an employer reimburses (or pays directly) some or all of medical expenses for employees covered by TRICARE constitutes an HRA. In both cases, if the arrangement covers two or more active employees, it is a group health plan subject to the ACA’s market reforms.

An employer payment plan or an HRA may not be integrated with Medicare coverage or TRICARE to satisfy the market reforms, because Medicare coverage and TRICARE are not group health plans for integration purposes.

However, an employer payment plan or HRA that pays for or reimburses Medicare Part B or Part D premiums, or medical expenses for employees covered by TRICARE, is integrated with another group health plan offered by the employer for purposes of the market reforms if:

  • The employer offers a group health plan (other than the employer payment plan or HRA) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
  • The employee participating in the employer payment plan or HRA is actually enrolled in Medicare Parts A and B or TRICARE;
  • The employer payment plan or HRA is available only to employees who are enrolled in Medicare Part A and Part B or Part D, or TRICARE; and
  • The employer payment plan or HRA is limited to reimbursement of Medicare Part B or Part D premiums, or cost-sharing, and excepted benefits, including Medigap premiums or TRICARE supplemental premiums.

Note that, to the extent that this type of arrangement is available to active employees, it may be subject to restrictions under other laws, such as the Medicare secondary payer provisions or laws that prohibit offering financial or other incentives for TRICARE-eligible employees to decline employer-provided group health plan coverage, similar to the Medicare secondary payer rules.

An employer payment plan that has fewer than two participants who are current employees (for example, a retiree-only plan) on the first day of the plan year is not subject to the market reforms, and, therefore, integration is not necessary to satisfy the market reforms.

Also, an employer may provide more than one type of healthcare arrangement for its employees (for example, a Medicare Part B employer payment plan and a TRICARE-related HRA), provided that each arrangement meets the applicable integration or other rules.

S Corporation Healthcare Arrangements for 2-percent Shareholder-employees

Under IRS Notice 2008-1, if an S corporation pays for (or reimburses) premiums for individual health insurance coverage covering a 2-percent shareholder, the payment or reimbursement is included in income, but the 2-percent shareholder-employee may deduct the amount of the premiums (provided that all other eligibility criteria for deductibility are satisfied). Notice 2015-17 refers to this as a 2-percent shareholder-employee healthcare arrangement.

The Departments stated that they may issue additional guidance on the application of the market reforms to a 2-percent shareholder-employee healthcare arrangement. However, until further guidance is issued (and at least through the end of 2015), the excise tax will not be assessed for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement.

Furthermore, until additional guidance provides otherwise, an S corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans, including the market reforms) solely as a result of having a 2-percent shareholder-employee healthcare arrangement.

However, this guidance does not apply to reimbursements of individual health insurance coverage with respect to employees of an S corporation who are not 2-percent shareholders.

The IRS is also considering whether additional guidance is needed on the federal tax treatment of 2-percent shareholder-employee healthcare arrangements. However, until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1 with regard to the tax treatment of these arrangements for all federal income and employment tax purposes.

To the extent that a 2-percent shareholder is allowed both the deduction described above and a premium tax credit for coverage through an Exchange, Revenue Procedure 2014-41 provides guidance on calculating the deduction and the credit with respect to the 2-percent shareholder.

Notice 2015-17 also noted, however, that the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. Thus, an arrangement covering only a single employee (whether or not that employee is a 2-percent shareholder-employee) generally is not subject to the market reforms, whether or not the reimbursement arrangement otherwise constitutes a group health plan.

However, if an S corporation maintains more than one of these types of arrangements for different employees (whether or not 2-percent shareholder-employees), all are treated as a single arrangement covering more than one employee, so that this exception does not apply.

Employer Payment Plans under Code Sections 105 and 106

The notice also addresses Revenue Ruling 61-146 (Rev. Rul. 61-146), which has been cited by some as authority permitting employer payment plans under the tax code. Under Rev. Rul. 61-146, employer reimbursements of an employee’s individual insurance premiums are excluded from the employee’s gross income under Code Section 106. This exclusion also applies if the employer pays the premiums directly to the insurance company.

According to the IRS, this guidance regarding the tax exclusion continues to apply. This means only that the payments are excludable from the employee’s gross income under Section 106 (regardless of whether the employer includes the payments as wages on the Form W-2).

However, the IRS stated that Rev. Rul. 61-146 does not address the application of the ACA’s market reforms, and should not be read as containing any implication regarding the application of those market reforms.

An arrangement under which an employer provides reimbursements or payments that are dedicated to providing medical care (such as cash reimbursements for the purchase of an individual market policy) is, itself, a group health plan. Accordingly, the arrangement is subject to the ACA’s market reform rules applicable to group health plans, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. These employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, do not comply with the ACA.

The notice supplements two Information Letters previously issued by the IRS Office of Chief Counsel. Letter 2014-0037 and Letter 2014-0039 addressed the ability of employers to reimburse employees’ medical expenses with pre-tax dollars under Code Section 105. These letters note that, although the ACA has not changed the tax treatment under Section 105 or 106, these arrangements violate the ACA’s prohibition on annual limits because they reimburse medical expenses up to a fixed amount.

Prior Employer Payment Plan Guidance

  • 24, 2013: Department FAQs addressed compliance of HRAs with the ACA’s market reforms.
  • 13, 2013: IRS Notice 2013-54 and DOL Technical Release 2013-03 clarified that HRAs, certain health FSAs and other employer payment plans are considered group health plans subject to the ACA’s market reforms, and they cannot be integrated with individual policies to satisfy those requirements. As a result, effective for 2014 plan years, these plans are essentially prohibited.
  • May 13, 2014: IRS FAQs addressed the consequences for employers that reimburse employees for individual health insurance premiums. These arrangements may trigger an excise tax of $100 per day for each applicable employee ($36,500 per year for each employee) under Code Section 4980D.
  • 6, 2014: Department FAQs clarified that employer payment plans do not comply with the ACA’s market reforms and may subject employers to penalties, whether provided on a pre- or after-tax basis.

Individual Health Insurance: Reporting Coverage and Paying Penalties

A key provision of the Affordable Care Act (ACA) is the individual mandate, which requires most individuals to purchase health insurance coverage for themselves and their family members or pay a penalty.

Starting in 2015, individuals will have to report on their federal tax return whether they had health insurance coverage for 2014 or were exempt from the individual mandate. Any penalties that an individual owes for not having health insurance coverage will generally be assessed and collected in the same manner as taxes.

How will coverage be reported under the individual mandate?

Starting in 2015, when you file a federal tax return for 2014, you will have to:

  • Report that you, your spouse (if filing jointly) and any individual you claim as a dependent had health care coverage throughout 2014; or
  • Claim a coverage exemption from the individual mandate for some or all of 2014 and attach Form 8965; or
  • Pay an individual mandate penalty (called a shared responsibility payment) for any month in 2014 that you, your spouse (if filing jointly) or any individual you claim as a dependent did not have coverage and did not qualify for a coverage exemption.

If you and your dependents all had minimum essential coverage for each month of the tax year, you will indicate this on your 2014 tax return by simply checking a box on Form 1040, 1040A or 1040EZ; no further action is required.

If you obtained a coverage exemption from the Marketplace or you qualify for an exemption that you can claim on your return, you will file Form 8965, and attach it to your tax return.

For any month you or your dependents did not have coverage or a coverage exemption, you will have to make a shared responsibility payment. The amount of the payment due will be reported on Form 1040, Line 61, in the “Other Taxes” section, and on the corresponding lines on Form 1040A and 1040EZ.

Who is exempt from the individual mandate?

You may be exempt from the individual mandate penalty if you:

  • Cannot afford coverage
  • Have income below the federal income tax filing threshold
  • Are not a citizen, are not considered a national or are not lawfully present in the United States
  • Experience a gap in coverage for less than a continuous three-month period
  • Qualify as a religious conscientious objector
  • Are a member of a health care sharing ministry
  • Are a member of certain American Indian tribes
  • Are given a hardship exemption by the Department of Health and Human Services
  • Are incarcerated

How much will the individual mandate penalty cost me?

The penalty for not obtaining acceptable health care coverage is being phased in over a three-year period. The amount of the penalty is either your “flat dollar amount” or your “percentage of income amount”—whichever is greater.

For 2014, the annual penalty is either:

  • One percent of your household income that is above the tax return filing threshold for your filing status; or
  • Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285.

Your payment amount is capped at the cost of the national average premium for a bronze level health plan, available through the Marketplace in 2014. For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $2,448 per individual ($204 per month), but $12,240 for a family with five or more members ($1,020 per month).

Calculating your payment requires you to know your household income and your tax return filing threshold.

Household income is the adjusted gross income from your tax return plus any excludible foreign earned income and tax-exempt interest you receive during the taxable year. Household income also includes the adjusted gross incomes of all of your dependents who are required to file tax returns.

Tax return filing threshold is the minimum amount of gross income an individual of your age and filing status (for example, single, married filing jointly, head of household) must make to be required to file a tax return.

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