March 5, 2014
- IRS Releases Final Regulations for Employer PPACA Reporting
- Obama FY 2015 Budget Analysis: Summary of Retirement and Health Plan Proposals
- Council Responds to IRS Proposals for Frozen Defined Benefit Plan Nondiscrimination Issue
IRS Releases Final Regulations for Employer PPACA Reporting
The Internal Revenue Service (IRS) issued final regulations on March 5 governing information reporting by applicable large employers regarding their health coverage and information reporting of minimum essential coverage (MEC), as required by the Patient Protection and Affordable Care Act (PPACA).
As with the proposed regulations issued in September 2013 (See the September 5, 2013, Benefits Byte), the final regulations were released in two parts to address separate sections of the Internal Revenue Code: final regulations addressing employer reporting of health insurance coverage (under Section 6056) and final regulations on the reporting of MEC (under Section 6055).
As we have previously reported, these reporting requirements were delayed for 2014 under previously issued Notice 2013-45transition relief and will not be effective until 2015 (first reporting is due in early 2016). As stated in prior guidance and the proposed regulations, the IRS is encouraging voluntary reporting for coverage in 2014.
The Council, joined by the Silicon Valley Employers Forum (SVEF), provided written comments on both sets of proposed regulations in November 2013, urging additional relief that would simplify the reporting requirements for employers.
Reporting of Health Insurance Coverage under "Shared Employer Responsibility" Provisions
Under Section 6056, every applicable large employer (generally, an employer that employed on average at least 50 full-time employees (or equivalents) on business days during the preceding calendar year) must file a return with the IRS that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees during the year. The return is also required to include and certify detailed and specific information on the employer’s full-time employees, including those who received the coverage and when they received it. This information will be also used to administer the premium tax credit for eligible individuals.
The final regulations for Section 6056 generally preserve the proposed rule’s provisions regarding the content, manner and timing of information required to be reported to the IRS and to full-time employees. The final regulations adopt certain limited simplified reporting methods, although the IRS also rejected some of the proposed simplified methods that were contemplated in the initial draft of the rule.
Specifically, under the final regulations:
- Applicable large employers that sponsor self-insured plans can report the information required under both Section 6055 and Section 6056 on a single combined form.
- An applicable large employer can take advantage of simplified reporting obligations with regard to those employees for whom it can certify that that it offered minimum value MEC at an employee cost for employee only-coverage of no more than 9.5% of the federal poverty line, and also offered MEC to the employees’ spouses and dependents (defined in the regulations as a “qualifying offer”).
- Solely for 2015, an applicable large employer which can certify that it has made a “qualifying offer” to at least 95 percent of its full-time employees and their spouses and dependents will be able to provide a simplified notice to employees regarding the coverage provided.
- An applicable large employer that can certify that it offered minimum value and affordable MEC to 98 percent or more of its employees (and dependents) does not have to determine whether each employee is a full-time employee or report the total number of full-time employees.
Reporting of Minimum Essential Coverage
Under Section 6055, as amended by PPACA, every entity that provides MEC (including health insurance issuers and sponsors of a self-insured health plan) is required to file an annual return reporting specific information for each individual for whom MEC is provided. The information reported under Section 6055 can be used by individuals and the IRS to verify the months (if any) in which they were covered by MEC. This reporting facilitates compliance with, and administration of, PPACA provisions related to individual responsibility requirements and premium tax credits.
The final regulations under Section 6055 largely reflect the proposed regulations. As discussed above, however, applicable large employers that self-insure health benefits will be able to report the information required under both Section 6055 and Section 6056 to the IRS on a single form, which does provide some limited relief.
To provide input or for more information, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.
Obama FY 2015 Budget Analysis: Summary of Retirement and Health Plan Proposals
The latest version of President Obama’s federal budget proposal, while largely a political and philosophical statement and unlikely to receive serious consideration by Congress, includes a number of provisions that would substantially affect employer-sponsored benefit plans.
Obama’s Fiscal Year 2015 budget proposal, releasedon March 4, requests $3.9 trillion for the government operation; the White House Office of Management and Budget (OMB) released the detailed budget estimates by agency in conjunction with the proposal. As we have previously reported, the bipartisan budget deal reached in December 2013 essentially set the budgets and appropriations levels for 2014 and 2015, rendering the president’s budget largely inconsequential from a practical perspective. However, the president’s proposal does illustrate his administration’s policy priorities and approach for the coming year. Furthermore, several of these provisions could ultimately be taken from the budget and considered separately as federal revenue offsets for larger legislation or as stand-alone measures.
The thrust of the President’s proposal consists of continued investment in manufacturing, infrastructure and research and development, coupled with immigration reform and tax reform largely aimed at eliminating “loopholes” and minimizing deductions for high-income individuals. Generally, the proposal takes a less compromising tone than the FY 2014 Budget proposal, which was introduced as the president’s attempt at a “grand bargain” with congressional Republicans. Specifically, the 2015 budget does not contain the “chained Consumer Price Index (CPI)” calculation, which sought to raise revenue by replacing the current methodology used for calculating cost-of-living adjustments (and would have instituted a less generous annual rate of increase for Social Security payments).
Most notably, as in the prior year’s budget proposal, the FY 2015 budget proposes reductions in the value of itemized deductions and other tax preferences (including employer-sponsored health insurance and employee retirement contributions) to 28 percent for high-income earners. The proposal would also implement the “Buffett Rule,” requiring wealthy millionaires pay at least 30 percent of their income (after charitable giving) in taxes.
The budget also specifically addresses a number of other retirement and health benefit initiatives. On many of these issues, the Council is actively engaged with policymakers in opposition to provisions that would destabilize or impose additional administrative burdens on the employer-sponsored system.
- Like the 2014 budget, this proposal imposes a cap on the aggregate account balances and accruals in a taxpayer’s IRAs and employer-based plans – including defined benefit plans and 401(k) plans. Under the 2015 proposal, the cap is set at “an amount sufficient to finance an annuity of not more than $210,000 per year in retirement,” representing a cap of roughly $3.2 to $3.4 million. If the cap applies, contributions (or accruals) would be prohibited for the current year, but the taxpayer’s account balance could continue to grow tax-deferred without amounts being forced out via distribution and taxed. The Council described serious concerns with this proposal beginning on Page 12 of our April 2013 statement to the Pension/Retirement Tax Reform Working Group of the House Ways and Means Committee.While the FY15 budget’s provision is worded in a substantially similar manner as the FY14 budget’s provision, today’s release does make a number of clarifications with regard to assumptions of a spouse’s age and simplified reporting for defined benefit plans. Of particular note, however, the 2015 provision is estimated to raise $28.4 billion over 10 years. This amount is about three times as high as the $9.3 billion that OMB had estimated the near identical provision in the FY14 budget would have raised. It is not immediately apparently why the figure has increased so dramatically.
- In addition to the president’s MyRA proposal, described in the January 29 Benefits Byte, the centerpiece of the president’s retirement policy agenda is once again the required automatic enrollment in IRAs for employees without access to a workplace savings plan. The proposal also includes a small employer tax credit and doubles the tax credit for small employer plan start-up costs.
- The president’s budget proposes another $20 billion increase in Pension Benefit Guaranty Corporation (PBGC) premiums over ten years (beginning in 2017) by giving the PBGC Board of Directors the authority to adjust premiums in both single employer and multi-employer programs, “tak[ing] into account the risks that different sponsors pose.” It is unclear how the $20 billion would be divided between single-employer and multi-employer plans, or between flat-rate and variable-rate premiums.
These premium increases would be applied on top of the $9 billion in increases previously enacted as part of Moving Ahead for Progress in the 21st Century (MAP-21) Act of 2012 and the $7.8 billion raised through the Bipartisan Budget Act. The Council has called these repeated premium increases “unacceptable” and will continue to oppose the treatment of defined benefit plan sponsors as an easy revenue source.
- The budget proposal includes a new provision imposing required minimum distributions on Roth IRAs during the lifetime of the owner and prohibiting individuals from making additional contributions to Roth IRAs after they reach age 70½. Under current law, RMDs must be made from a Roth IRA only after the owner dies, and the owner can make contributions to the Roth IRA after age 70½. In contrast, traditional IRAs are subject to RMDs during the owner’s lifetime and owners cannot contribute after age 70½. In addition, under current law designated Roth accounts within qualified employer-sponsored plans must make RMDs during the participant’s life.
- The proposal prohibits so-called “stretch IRAs,” meaning that non-spouse beneficiaries of deceased IRA owners and retirement plan participants (that do not meet certain conditions) would be required to take inherited distributions over no more than five years. The Council has noted in meetings with lawmakers on Capitol Hill that such a prohibition could be problematic, particularly for defined benefit plans.
- The budget eliminates or reduces required minimum distributions for IRAs and other tax-qualified retirement arrangements with “low balances” (an aggregate value not exceeding $100,000 as of the “measurement date,” with phase-ins up to $110,000).
- Non-spouse beneficiaries of IRAs and qualified plans would be allowed to roll their distributions over within 60 days.
- The budget proposal repeals – for publicly traded companies only – the deduction companies can currently take for employer stock dividends paid to the plan.
- The budget proposal seeks to give the Internal Revenue Service (IRS) new authority to require electronic filing of the Form 5500 for all plans, including small employers. The Council has been broadly supportive of increased flexibility with regard to electronic filing, including a November 2013 letter to IRS regarding employee retirement benefit plan returns required on electronic media.
- The proposal establishes reciprocal reporting under the Foreign Account Tax Compliance Act (FATCA), expanding accounting and reporting requirements by certain financial institutions. The Council recently held a Benefits Briefing on FATCA issues and has covered foreign tax issues extensively in our Benefits Passport series of newsletters on international benefits policy. We continue to work with the IRS to reduce the burden of FATCA compliance.
- The 2015 budget proposal provides resources to continue to support implementation of the Patient Protection and Affordable Care Act (PPACA), including the Health Insurance Marketplace, premium tax credit and cost sharing assistance, and increasing federal support to states expanding Medicaid coverage for newly eligible low-income adults.
- As in prior years, the proposal “implements payment innovations and other reforms in Medicare and Medicaid and other Federal health programs that encourage high-quality and efficient delivery of health care, improve program integrity, and preserve the fundamental compact with seniors, individuals with disabilities, and low-income Americans.” This is accompanied by $25 million over two years to monitor and prevent fraud, waste and abuse in the Health Insurance Marketplace.
- The budget retains a modified version of last year’s proposal for income-related premiums. Specifically, the proposal would impose premium increases for beneficiaries in Medicare Parts B and D and impose a surcharge on Medicare Part B premiums for new beneficiaries and those that purchase near or full first-dollar Medigap coverage.
- The budget proposes a program to align employer group waiver plan payments with average Medicare Advantage plan bids.
- The budget proposes to expand mental health treatment and prevention services across the Substance Abuse and Mental Health Services Administration and the Centers for Disease Control and Prevention and make changes to the Medicaid program to increase access to mental health services, particularly for youth.
- As in the previous year’s budget proposal, the president recommends a program to penalize and eliminate misclassification of employees as “independent contractors.” The budget proposal specifically includes $14 million to combat misclassification (identical to the prior year’s budget), including $10 million for grants to states to identify misclassification and recover unpaid taxes and $4 million for the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) to investigate misclassification.
- With regard to family leave issues, the budget also again proposes a $5 million “State Paid Leave Fund” within DOL to provide competitive grants that would help states cover the start-up costs of launching paid-leave programs. The budget proposal also provides an increase of more than $41 million for the DOL WHD for increased enforcement of laws addressing wages, overtime and family and medical leave.
For more information on the retirement savings elements of the budget, contact Lynn Dudley, senior vice president, retirement and international benefits policy, or Jan Jacobson, senior counsel, retirement policy. For more information on the health care elements of the budget, contact Kathryn Wilber, senior counsel, health policy. For questions on either issue area, you may also contact Diann Howland, vice president, legislative affairs, or Jill Randolph, director, legislative and political affairs. All can be reached at (202) 289-6700.
Council Responds to IRS Proposals for Frozen Defined Benefit Plan Nondiscrimination Issue
On February 24, the Council filed written comments with the IRS, urging the agency to address the inadvertent effects of ERISA’s nondiscrimination rules on plans that attempt to grandfather participants from changes in a defined benefit plan. The Council’s letter also offered recommendations for a permanent solution to the problem.
As described in the December 13 Benefit Byte, IRS Notice 2014-5allows plans to be tested together (or “aggregated”) on a benefits basis for plan years beginning before January 1, 2016, if (1) the plans qualify for testing in 2013, based on meeting the “primarily defined benefit in character” rule or “broadly available” in the plan year beginning in 2013, or (2) the defined benefit (DB) plan passes nondiscrimination on its own in 2013. This allows plans that do not already have a problem to aggregate the defined benefit and defined contribution plans for testing purposes in their 2014 and 2015 plan years, even if they would not have met the test in those plan years. To qualify for the temporary relief, the “soft freeze” amendment had to be in place by December 13, 2013.
As the Council describes in the letter, there are several nondiscrimination testing problems that arise when a plan grandfathers a group of employees from changes in a DB plan. These problems can effectively force a plan sponsor to eliminate all grandfathering and to completely freeze the DB plan. The Council worked with several consulting firms to conduct a survey of the scope of the long-term problems, finding that “roughly 650,000 participants are affected by this issue and could potentially have their benefits frozen if this issue is not resolved in a workable way. With full data, we suspect that the number of participants at risk by reason of this issue is well into the millions,” the letter said. The survey also studied the feasibility of the possible solutions proposed in Notice 2014-5, but found that all of these proposals either failed to address the problem in the long term or for the full population of affected plans.
Under the Council’s proposal – outlined in a May 2013 letter to the U.S. Treasury Department – very generally, if (1) the group (or groups) of grandfathered employees in the DB plan is permitted to be tested on a benefits basis with the DC plan as of the date the plan is closed (or a later date), and (2) neither the group (or groups) nor the benefits of the DB plan are enhanced (or reduced in a discriminatory manner) after the plan is closed, the two plans would continue to be permitted to be tested together on a benefits basis indefinitely. The prohibition on enhancement of the group (or groups) or the benefits would not apply to enhancements only applicable to NHCEs.
A reduction in coverage would be considered discriminatory for this purpose (but not for any other purpose) unless the ratio of highly compensated participants who cease to be covered compared to all highly compensated participants in the closed group or groups, is at least as great as the same ratio with respect to non-highly compensated participants. A reduction in benefits would be considered discriminatory for this purpose (but not for any other purpose) unless it applies uniformly to a set of participants that meets the test in the preceding sentence. The determination of whether a reduction in coverage or benefits is discriminatory would be made at the time of the reduction, not on an ongoing basis.
While this approach is more restrictive than either the approach used in Notice 2014-5 or in current regulations, it would solve the problem for far more companies, thus preventing hundreds of thousands of participants from having their benefits frozen.
The Council will continue to work with IRS officials to address this issue through formal guidance. For more information, contact Lynn Dudley, senior vice president, policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-0700.