The Treasury Department and the IRS this week issued Notice 2015-87 that addresses, among other things, the effect of Health Reimbursement Account (HRA) contributions, cafeteria plan flex credits and opt-out payments on affordability determinations for purposes of assessable payments under Code § 4980H(b). The notice also includes welcome clarifications relating to fringe benefit payments under the McNamara-O'Hara Service Contract Act and other, similar laws. This post explains how Notice 2015-87 changes the affordability calculus for these arrangements, both as a matter of substance and from the reporting perspective. The positions taken in Notice 2015-87 are consistent with our earlier predictions in the matter.
Before we get started, a quick note: Notice 2015-87 covers a host of other important topics including: the application of the ACA's insurance market reforms to HRAs (this has become something of a perennial topic); the application of Code § 6056 to government entities; the application of the rules for health savings accounts to persons eligible for benefits administered by the Department of Veterans Affairs (VA); the application of the COBRA continuation coverage rules to unused amounts in health FSA carry-overs; and relief from penalties under Code §§ 6721 and 6722 for employers that make a good faith effort to comply with the ACA reporting rules. We fully expect there to be a good deal of commentary on the notice. In keeping with the mission of the series, this post is limited to the notice's impact on reporting.
Background
An applicable large employer (generally, an employer with 50 or more full-time and full-time equivalent employees on business days during the prior calendar year) may be subject to tax under Code § 4980H(b) for any month for which a full-time employee has received a premium tax credit in connection with enrollment in health coverage through a public insurance exchange or marketplace. But an employee is not eligible for the premium tax credit for any month for which the employee is eligible for coverage under an eligible employer sponsored plan that provides minimum value and is affordable (or for any month for which the employee enrolls in an eligible employer-sponsored plan, regardless of whether the plan is affordable or provides minimum value). A plan that provides major medical benefits generally provides minimum value; coverage is affordable if the employee's required contribution for coverage under the plan is 9.5 % (adjusted annually) or less of the employee's household income.
The amount of an employee's required contribution for purposes of determining affordability is determined under the ACA's individual mandate rules. The term "required contribution" means:
"[i]n the case of an individual eligible to purchase minimum essential coverage consisting of coverage through an eligible employer-sponsored plan, the portion of the annual premium that would be paid by the individual (without regard to whether paid through salary reduction or otherwise) for self-only coverage."
Consequently, the determination of coverage affordability, and whether it provides minimum value, is based on the standards set forth elsewhere in the law.
Employer contributions to an HRA
In the case of HRAs, amounts made available for the current plan year that an employee may use to pay premiums for an eligible employer-sponsored plan, or that an employee may use to pay premiums for an eligible employer-sponsored plan and also may use for cost-sharing and/or for other health benefits not covered by that plan in addition to premiums, are counted toward the employee's required contribution (thereby reducing the dollar amount of the employee's required contribution). This is the case both substantively, and for purposes of reporting on Form 1095-C.
By way of example, if the employee contribution for health coverage is $200 per month, and the employer makes available $1,200 under an HRA ($100 per month) that the employee may only use to pay the employee share of contributions for the major medical coverage, the employee's required contribution for the major medical plan is $100 ($200 – $100) per month. Importantly, the HRA must satisfy the requirements for integration with the major medical group health plan. Thus, if the employee in this example could use HRA amounts to pay for the cost of vision or dental coverage in addition to major medical coverage, the arrangement would still comply, but if the employee could use the HRA to purchase duplicative coverage in the individual market, it would not.
Cafeteria plan flex credits
It is not uncommon for a cafeteria plan to be funded both by salary reduction and employer "flex contributions" (a/k/a "flex credits"). Final regulations implementing the ACA's individual mandate provide that flex contributions reduce the employee's required contribution if and only if
- The employee may not opt to receive the amount as a taxable benefit;
- The employee may use the amount to pay for minimum essential coverage; and
- The employee may use the amount exclusively to pay for medical care.
A contribution under an arrangement that satisfies all three criteria is referred to as a "health flex contribution." A health flex contribution reduces an employee's required contribution dollar-for-dollar. Conversely, an employer flex contribution that is not a health flex contribution does not reduce an employee's required contribution. Thus, for example, if an employer flex contribution that is available to pay for health care is also available to pay for any non-health care benefits (e.g., dependent care or group term life insurance), that contribution is not a health flex contribution and, as a result, does not reduce the required employee contribution.
By way of example, assume that an employer offers employees coverage under a group health plan through a cafeteria plan, with an employee contribution for self-only coverage of $200 per month. In addition, the employer offers employer flex contributions of $600 for the plan year that can be used for any benefit under the § 125 cafeteria plan (including benefits not related to health). Because the $600 employer flex contribution is not usable exclusively for medical care, it is not a health flex contribution and therefore does not reduce the employee's required contribution. For reporting purposes (Form 1095-C, Part II, Line 15), the employee's required contribution is $200 per month. The result would be the same if the employee may also elect to receive taxable cash in lieu of the $600 employer flex contribution.
The Treasury Department and the IRS take pains in the notice to explain their rational for these results:
The treatment of non-health flex contributions differs from the treatment of health flex contributions and contributions to HRAs . . . [T]he appropriate measure of an employee's required contribution is the amount of compensation that the employee could apply to something other than health-related expenses that the employee must forgo to obtain coverage under the employer's health plan. Thus, if an employer provides employees with an HRA contribution or a health flex contribution that may be used only to pay health expenses, the employee's cost of coverage (the amount of salary or other non-health benefits that the employee must forgo to obtain coverage under the employer's health plan) is reduced by the amount of the health flex contribution or HRA contribution. In that case, it is fair to assume that the employee would use the health flex contribution or HRA contribution to pay for the employer's health coverage (because the health flex contribution or HRA contribution can be used only for health benefits), and if the employee does not use it for that purpose the employee does not gain any other economic benefit. . . . [But if] the employer provides an employee with a flex contribution that may be used to pay health expenses but also may be used for non-health benefits (that is, a non-health flex contribution), an employee who elects coverage under the employer's health plan must forgo the non-health benefits in order to take the health coverage. Because a non-health flex contribution (unlike a health flex contribution or HRA contribution) may be used for benefits other than health benefits, it is not appropriate to assume that the employee would use the non-health flex contribution to pay for health coverage; the employee might choose to use that flex contribution for another non-health benefit. Accordingly, the employee's required contribution in this case is equal to the stated amount the employee must pay for health coverage (whether that amount is paid by the employee in the form of a flex contribution, a salary reduction, or otherwise) and is not reduced by the non-health flex contribution. (Emphasis added). (Footnotes omitted).
Perhaps anticipating objections to its treatment of contributions that are not health flex contributions, Notice 2015-87 includes a welcome transition rule, available only to existing arrangements, under which, for plan years beginning before January 1, 2017, an employer flex contribution that is not a health flex contribution will be treated as reducing the amount of an employee's required contribution.
Anticipating also that transition relief for plan years beginning before January 1, 2017 could cause employees who are otherwise eligible to enroll in subsidized coverage through a public insurance exchange, the regulators encourage employers "not to reduce the amount of the employee's required contribution by the amount of a non-health flex contribution for purposes of information reporting under § 6056." The notice recognizes and even anticipates that the employer who adopts this approach may be "contacted by the IRS concerning a potential assessable payment under § 4980H(b) relating to the employee's receipt of a premium tax credit." The regulators assure employers that they "will have an opportunity to respond and show that [they are] entitled to the relief" provided by the notice.
Cafeteria plan opt-out payments
Canonically if not universally, a cafeteria plan opt-out is an arrangement under which an employer offers to an employee an amount that cannot be used to pay for coverage under the employer's group health plan. Such arrangements can be either unconditional (i.e., an arrangement providing for a payment conditioned solely on an employee declining coverage) or conditional (e.g., an arrangement that requires the employee to provide proof of coverage provided by a spouse's employer). Readers who have made it this far can perhaps anticipate the notice's treatment of cafeteria plan opt-out payments.
In the view of the regulators:
"[A]n employee who must reduce his or her compensation by $1,000 to pay for employer-provided health coverage has a choice that is similar to the choice of an employee who is ostensibly not required to pay anything for employer-provided coverage, but who would receive an additional $1,000 in compensation only if he or she declined coverage. In each case, the price of obtaining employer-provided health coverage is forgoing $1,000 in compensation that otherwise would be available to the employee." This means, of course that an "opt-out payment may have the effect of increasing an employee's contribution for health coverage beyond the amount of any salary reduction contribution." (Emphasis added).
In the notice, the Treasury department announces their intent to propose regulations reflecting the treatment of the cafeteria plan opt-out arrangements described above. They also invite comments on the treatment of employer offers of opt-out payments.
Fringe benefits under the McNamara-O'Hara Service Contract Act ("SCA")
The SCA generally mandates that workers employed on certain federal contracts be paid prevailing wages and fringe benefits. An employer generally can satisfy its fringe benefit obligations by providing a particular benefit or benefits that have a sufficient dollar value. Alternatively, an employer may in most cases satisfy its fringe benefit obligations by providing the cash equivalent of benefits or some combination of cash and benefits, or it may permit employees to choose among various benefits or among various benefits and cash. If an employer chooses to provide fringe benefits under the SCA by offering an employee the option to enroll in health coverage provided by the employer (including an option to decline that coverage), and the employee declines the coverage, that employer would then generally be required to provide the employee with cash or other benefits of an equivalent value.
Under the rational set out above, one might expect that employer flex contributions that are available to pay for health care and non-health care benefits (including cash or other taxable compensation) under a cafeteria plan would not reduce the required employee contribution for affordability purposes. Wisely (in our view) and thankfully, the regulators have not adopted this rule. They have instead provided that, at least for plan years beginning before January 1, 2017, employer payments for fringe benefits made pursuant to the SCA are taken into account for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan. (The notice also applies to Davis Bacon Related Acts or "DBRA").
The notice offers an example positing that an employer offers employees subject to the SCA coverage under a group health plan through a cafeteria plan. Under the terms of the offer, an employee may elect to receive self-only coverage under the plan at no cost, or may alternatively decline coverage and receive a taxable payment of $700 per month. For plan years beginning before January 1, 2017, the required employee contribution for the group health plan for an employee who is subject to the SCA is $0; but for purposes of the ACA's individual mandate and premium subsidy rules, the employee's required contribution is $700 per month.
As is the case with flex credits, employers are "encouraged to treat these fringe benefit payments as not reducing the employee's required contribution for purposes of reporting under § 6056."
Closing thoughts
Notice 2015-87 covers a series of questions and issues that have dogged employers and their advisors for some time. It is lengthy, thoughtful and well-reasoned. Not everyone will be satisfied with the notice's treatment of HRA contributions, flex credits, and opt-out payments, however. That dissatisfaction is misplaced (in our view). The regulators have approached the treatment of affordability in a manner that is consistent with other parts of the ACA that operate in an integrated and interlocking scheme.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
