American Benefits Council
Benefits Byte


March 30, 2015

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

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Newly Updated: Summary of 40% Excise Tax on High-Cost Health Coverage

Now available on the Council website, for members only, is an updated Benefits Blueprint summarizing the statutory requirements of  the 40 percent excise tax imposed on high-cost health coverage as required by the Patient Protection and Affordable Care Act (PPACA).

The Blueprint, prepared for the Council by Groom Law Group, Chartered, reflects Internal Revenue Service (IRS) Notice 2015-16, released by the U.S. Department of the Treasury and the IRS on February 23 (See the February 23 Benefits Byte for more details). An updated companion document, with answers to certain “Frequently Asked Questions” regarding the excise tax, is also available on the Council website.

The  nondeductible 40 percent excise tax, established under Internal Revenue Code (IRC) Section 4980I, applies to “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only, $27,500 for family). The tax is a “revenue raiser” to pay for other aspects of the PPACA, including federal subsidies for coverage for low-income individuals, and to address perceived over-consumption of health care coverage.

The previous version of the Blueprint, issued in September 2014, provided a summary and analysis of the statutory requirements of the excise tax (see the September 18, 2014, Benefits Byte). The updated Blueprint includes key provisions of Notice 2015-16, which sets out possible positions and approaches that Treasury and IRS are considering for implementing the excise tax. The Blueprint also highlights a range of specific issues and questions on which Treasury and IRS are requesting public comment. These include issues related to the age/gender, retiree and “high risk profession” adjusters to the thresholds and how the tax will apply to various types of health coverage.

Notice 2015-16 also sets out a possible approach for determining the value of applicable coverage for purposes of the excise tax. Under the statute, the cost of coverage is to be determined using rules “similar to” COBRA. As explained in the Blueprint, Treasury and IRS are considering a multi-step process that includes aggregation of all employees by “benefit package,” disaggregation based on self-only or other-than-self-only coverage and further mandatory aggregation and permissive disaggregation based on other distinctions. Treasury and IRS are requesting specific comment on several aspects of this approach.

The Notice also requests comment on the feasibility of any alternative approaches to determining cost of coverage, noting that “it has been suggested that the cost of applicable coverage could instead by determined by reference to the cost of similar coverage available elsewhere (for example, based on actuarial values, metal levels, or the cost of coverage available on an Exchange).”

According to Notice 2015-16, Treasury and IRS intend to issue another notice inviting comments on additional issues not addressed in Notice 2015-16, including procedural issues relating to the calculation and assessment of the excise tax. After considering comments on both notices, Treasury and IRS will then issue proposed regulations.  

Council members are encouraged to review the Blueprint and the highlighted Treasury requests for comments. The deadline for comments on Notice 2015-16 is May 15. The Council will be submitting a comprehensive comment letter on issues raised in Notice 2015-16, as well as other concerns relating to the implementation of the excise tax. For more information, questions or concerns on any aspect of the excise tax, or to provide input with respect to the notice, contact Katy Spangler, senior vice president, health policy, or Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.

New Council Analysis: Examining CEA Report Underlying Proposed Fiduciary Rule

As we have previously reported, the U.S. Department of Labor (DOL) has submitted to the Office of Management and Budget (OMB) a revised version of the “conflict of interest” rule expanding the definition of the term “fiduciary.” The Council has prepared a Benefits Blueprint summary of the official report being used as the basis for developing a new rule.  The Blueprint raises a number of questions about the studies relied upon, and assumptions made by, the White House Council of Economic Advisers (CEA) in developing its report.

The DOL has said that it is redefining the term “fiduciary” to protect participants from conflicts of interest and self-dealing, given the substantial changes in the retirement system since the passage of ERISA.  Unquestionably, more Americans must make informed decisions regarding the investment of their retirement assets, than was the case when the fiduciary standards were first developed.  According to proponents of the fiduciary proposal, this makes it important to expand the reach of the fiduciary rules. Critics point out that the original DOL proposal could have restricted access to much needed investment assistance.

The text of the DOL’s new proposal will not be made public until it is published (after OMB has completed its review), but it is expected to expand the definition of “fiduciary” with respect to investment advice provided in conjunction with retirement savings arrangements. A detailed history of the regulatory project is available in the February 23 Benefits Byte.

In announcing the new proposal, President Obama referenced a report from the Council of Economic Advisers, which estimates that “conflicted” investment advice results in retirement savings losses of $17 billion per year. The CEA report provides an economic rationale for new regulations in this area. One of the reasons the DOL’s initial proposal was withdrawn in 2010 was so a formal economic analysis could be prepared prior to re-proposal.  Previous private sector studies have described the potential adverse effects of the DOL proposal, with some calling into question the validity of the CEA report.

In essence, federal directives require a two-step economic analysis process in the development of rules such as this one.   First, agencies are required to justify the need for new or modified regulations. Once that is done, they must indicate in the rulemaking itself, how the choices made among feasible alternatives are economically justified through cost-benefit analysis. The prevailing standards for the DOL’s regulatory analysis are set forth in Executive Orders 12866 (issued by President Clinton in 1993) and 13563 (issued by President Obama in 2011), which establish that proposed regulations must be justified by a cost-benefit analysis. Subsequent OMB guidance further states that “Before recommending Federal regulatory action, an agency must demonstrate that the proposed action is necessary.”  It requires that an economic rationale indicating a “market failure or other social purpose” be identified and all quantifiable and unquantifiable costs and benefits be evaluated in the analysis. The purpose of the Council’s Blueprint is to provide perspective on the CEA report and the analysis it relied upon in justifying a new rule.

The Council’s review of the CEA’s report finds that the $17 billion figure is based on certain economic assumptions and supported by four academic studies that do not account for the full universe of retirement savings, including employer-sponsored retirement plans.

It is also worth noting that the CEA report does not consider the effect of any advice on important decisions, such as the decision to save for retirement, the amounts saved for retirement or what happens at the distribution stage. These factors, while not examined by the CEA, have a substantial impact on retirement savings coverage, adequacy and leakage, with their own economic consequences.

In addition to the CEA analysis and a White House fact sheet, the DOL also released a set of frequently asked questions on “protecting your savings.”

In related news, Representative Ann Wagner (R-MO) has introduced the Retail Investor Protection Act, which would require the DOL to delay publishing a fiduciary definition rule until 60 days after the Securities and Exchange Commission (SEC) finalizes its rule relating to the standards of conduct applicable to brokers and dealers and includes additional requirements before the SEC can promulgate a rule.  The bill has been referred to both the House Education and the Workforce and Financial Services committees.

Under the Reorganization Plan No. 4 of 1978, the DOL has the authority to issue regulations concerning the definition of a fiduciary for both employer-sponsored retirement plans and IRAs (although the Internal Revenue Service retained the authority to enforce tax penalties for violations). In the previous Congress, Senator Orrin Hatch (R-UT) – who is now chairman of the Senate Finance Committee – introduced the Secure Annuities for Employee (SAFE) Retirement Act, a measure that – among many other retirement policy provisions – would have (1) with respect to IRAs, transferred that authority to the Treasury Department in consultation with the SEC, and (2) given DOL and Treasury joint jurisdiction with respect to retirement plans. .

Since the DOL proposal was sent to OMB on February 23, several lawmakers have written to OMB or DOL about the proposal. For example, in March, U.S. House of Representatives Education and the Workforce Committee Chairman John Kline (R-MN) and Health, Employment, Labor, and Pensions Subcommittee Chairman Phil Roe (R-TN)  sent two letters to DOL Secretary Thomas Perez requesting documentation of DOL’s consultation with the SEC as it developed the new proposal. SEC Chair Mary Jo White recently announced that the agency is developing its own rules for financial advisors.

As we reported in the March 19 Benefits Byte, the House Education and the Workforce Committee recently heard testimony from DOL Secretary Thomas E. Perez regarding President Obama’s Fiscal Year 2016 federal budget proposal. During the hearing, many members of the committee pressed Perez for more details about the fiduciary rule. In the course of this discussion, Perez assured the committee that the DOL is working very closely with the SEC on the dual fiduciary rule projects. Perez has made similar statements before other committees, as has White.

For more information on DOL’s fiduciary definition project, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.

DOL Updates Timeframe for Finalization of SBC Rules, Forms

In a Frequently Asked Questions document released on March 30, the U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA) updated the public on its anticipated timeframe for finalization of proposed regulations on the summary of benefits and coverage (SBC) and the uniform glossary, required under the Patient Protection and Affordable Care Act (PPACA). 

The SBC is a brief document, to be provided by group health plans and health insurance coverage in the group and individual markets, intended to provide standard and easy-to-understand information about health plan benefits and coverage options to help consumers compare and select health insurance. Proposed regulations on the SBC requirements were issued by the DOL (with the U.S. departments of Treasury and Health and Human Services) on December 22, 2014, to which the Council submitted written comments on March 2.

According to the proposed regulations, updates to the SBC rules, template and associated documents were proposed to apply beginning September 1, 2015. In response to questions from the public about the timing for finalization of the rules and associated forms, the new guidance states that “The Departments anticipate the new template and associated documents will be finalized by January 2016 and will apply to coverage that would renew or begin on the first day of the first plan year (or, in the individual market, policy year) that begins on or after January 1, 2017 (including open season periods that occur in the Fall of 2016 for coverage beginning on or after January 1, 2017).”

For more information, contact Kathryn Wilber, senior counsel, health policy, or Katy Spangler, senior vice president, health policy, at (202) 289-6700.

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.

Notice: the information contained herein is general in nature. It is not, and should not be construed as, accounting, consulting, legal or tax advice or opinion provided by the American Benefits Council or any of its employees. As required by the IRS, we inform you that any information contained herein was not intended or written to be used or referred to, and cannot be used or referred to (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party any transaction or matter addressed herein (and any attachment).