October 2, 2015
- Council Submits Comments on IRS /Treasury Proposed Approaches for Administration of the 40 Percent Tax
- Council Comments on IRS Revisions to Determination Letter Program
- Council Submits Amicus Brief on Court Case Addressing Fiduciary ‘Fraud’
Council Submits Comments on IRS /Treasury Proposed Approaches for Administration of the 40 Percent Tax
In our latest round of written comments to the Internal Revenue Service (IRS) regarding the Affordable Care Act’s (ACA) 40 percent excise tax on high-cost health coverage, the Council recommended a number of measures to make compliance with the tax less burdensome.
The letter responded to IRS Notice 2015-52, the second notice requesting comment on possible approaches for implementation of the tax. Notice 2015-52 addressed allocation, liability and other issues related to the administration of the 40 percent tax. (Treasury and IRS previously issued Notice 2015-16 requesting comment on possible approaches regarding the definition of “applicable employer-sponsored coverage” and determining the cost of coverage subject to the 40 percent tax; see the May 18 Benefits Byte for more details).
As we have previously reported, Internal Revenue Code Section 4980I , as added by the ACA, imposes a 40 percent excise tax on “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 Council’s comment letter on Notice 2015-52 urges IRS and the Treasury Department to implement the 40 Percent Tax in a manner least disruptive to the long-term viability of employer-sponsored health coverage. The letter furthered requested that implementing guidance be easy for employers and other coverage providers to administer, including the use of safe harbors to reduce employers’ administrative burden and to increase tax certainty and efficiency. The comments reiterated that employers will need information regarding the applicable dollar limits and valuation rules well in advance of 2018 and for subsequent years.
The Council’s letter included a range of specific recommendations, including:
- The Council expects that many employers may want to assume direct liability for the 40 Percent Tax with respect to self-funded coverage, as the “person that administers the plan benefits,” because doing so is likely to reduce the administrative burdens, complexities and costs attributable to the 40 Percent Tax. Regardless of the approach adopted by the Department as part of proposed rulemaking, it is important that employers be able to assume such direct liability via contract or via the governing plan documents in a clear and simple manner.
- Treasury and IRS should establish a reporting and payment timeline that recognizes the existing burdens imposed on employers by the ACA and provides sufficient time following the close of the taxable period for the calculation, noticing and payment of any 40 Percent Tax liability, given the many parties involved.
- The Council supports excluding from the “cost of applicable coverage” the amounts passed through by coverage providers to employers that are attributable to the 40 Percent Tax itself (referred to in the Notice as “Excise Tax Reimbursements”) as well as some or all of the indirect income tax effects to the coverage provider (referred to in the Notice as “Income Tax Reimbursements”); and
- The Council supports a safe harbor whereby 40 Percent Tax liability under Code Section 4980I would not be triggered merely for offering a plan with the minimum benefits required to avoid an excise tax under Code Section 4980H (i.e. the employer penalty)
The Council does not believe that the administrative burdens and tremendous negative impact of the 40 Percent Tax can be fully alleviated by regulatory action and– as part of our own advocacy activity and as part of the Alliance to Fight the 40 – we continue to strongly urge legislative repeal of the provision (see the September 17 Benefits Byte for more on these legislative efforts).
In addition to the Council’s letter, we also helped develop a letter filed on behalf of the Alliance to Fight the 40 on October 1, in which the Alliance said it “remains concerned about the lack of available regulatory options to mitigate negative effects the 40 percent tax will have on working individuals and their families, and will continue to pursue legislative opportunities to repeal the tax.” The letter also includes a number of specific recommendations mirroring those provided by the Council.
Council Comments on IRS Revisions to Determination Letter Program
In a comment letter to the Internal Revenue Service (IRS) on October 1, the Council expressed serious concerns about the recent announcement that the IRS will back the Employee Plans Determination Letter Program for individually designed defined contribution and defined benefit qualified retirement plans.
As we reported in the July 22 Benefits Byte, IRS Announcement 2015-19 indicates that the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans and limit the scope of the determination letter program for individually designed plans to initial plan qualification and qualification upon plan termination, beginning in 2017.
As our letter states, the determination letter program for individually designed plans is one of the IRS’ most successful programs, enhancing compliance and protecting plan participants. The existence of a favorable determination letter has become almost an expected part of prudent plan administration and fiduciary oversight.
The Council is particularly concerned that the loss of the determination letter program will harm the creation and maintenance of defined benefit plans, many of which have complex grandfathered features. Our letter suggests that the elimination of the program will, among other things, increase costs, disrupt corporate transactions, complicate financing agreements and provide a disincentive for plans to offer new features to participants.
The Council’s letter also urges IRS, along with the U.S. Treasury Department, to determine the proposed changes’ impact on all of the regulations, revenue procedures, and other rules upon which plans rely for ensuring tax qualification. If elimination of the program cannot be reversed, we strongly recommend that the agency take steps to ease compliance with existing law, such as:
- Rethink the IRS’ strict view of plan document failures, in favor of a more flexible approach to the formal plan requirements.
- Offer determination letters for significant plan amendments, such as when two plans merge or for conversions of plan type.
- Offer private letter rulings regarding qualification issues in cases where plan amendments are so important that the employer is willing to pay the associated fee.
- Remove the “expiration date” on determination letters, allowing an employer to rely on a determination letter with respect to any law or regulation that has not changed since the determination letter was issued.
- Revise the remedial amendment period and eliminate “interim” amendments (provide at least three years for a plan amendment).
- Revisit the 401(b) regulations, which were expressly designed for a system in which plans can request determination letters.
- Expand the pre-approved plan program to offer more flexibility in permissible plan designs.
Council Submits Amicus Brief on Court Case Addressing Fiduciary ‘Fraud’
The Council submitted an amicus “friend of the court” brief on September 28 in support of a petition to the U.S. Supreme Court to review a Tenth Circuit appeals court decision in Embarq Corporation, et al., v. William Douglas Fulghum. The case involves interpretation of ERISA’s statutory scheme with respect to a six-year statute of repose which limits the period during which claims of fiduciary breach may be brought. The decision has implications for health and welfare plans and retirement plans.
The statutory provision at issue in Embarq provides employers with a substantive right to be free of claims of fiduciary breach after six years, but makes an exception “in the case of fraud and concealment.” While a majority of courts of appeals have held that that the “fraud or concealment” exception applies only when the defendant takes steps to hide the alleged fiduciary breach, the Tenth Circuit (joining the Second Circuit) held that the exception may be invoked any time that the underlying claim is premised on a fraud theory.
The amicus brief, jointly submitted by the Council, the ERISA Industry Committee and the U.S. Chamber of Commerce argued that the current conflict among appeals court decisions promotes forum shopping by plaintiffs and a resolution is needed to provide predictable and uniform rules regarding the application of the exception.