Bar News - February 22, 2013
Tax Law: Health Care Reform Means New Mandates for Employers
By: John E. Rich Jr.
The national health care reform legislation enacted in 2010 does not require individuals to buy health insurance or employers to provide it to workers. Starting in 2014, however, the government will impose tax penalties on individuals who arenít covered and large companies that donít make affordable coverage available.
The legislation contains several other important changes that will go into effect over the next two years and will impact New Hampshire employers.
Starting in 2014, the tax code provides that individuals not enrolled in "minimum essential coverage" will be required to pay a tax penalty. Minimum essential coverage includes Medicare, Medicaid, employer plans and exchange-based health coverage. Individuals and employers with fewer than 50 employees can obtain coverage through new health insurance exchanges. Under new provisions of the tax code, individuals can receive financial subsidies for exchange-based coverage through premium assistance tax credits and cost-sharing subsidies.
Like many provisions of the tax code, the calculation of the penalty is complex. The penalty is based on the lesser of a) the average national exchange premium cost or b) the greater of a flat dollar amount, indexed for inflation, or a percentage of income.
Although the legislation does not require employers to provide health insurance, starting in 2014, large employers that donít provide compliant health coverage to all full-time employees must pay a tax penalty. Tax Code Section 4980H defines a large employer as one that employs 50 full-time equivalent employees (FTEs) on more than 120 business days during the preceding calendar year. To determine the number of FTEs in a month, divide the total number of hours worked by all part-time employees by 120. If the monthly average of FTEs plus full-time employees is 50 or more, the employer must comply with the law throughout 2014.
In early 2013, the IRS issued proposed regulations on numerous aspects of the 4980H employer penalty provisions. The proposed regulations include a transition rule under which employers may use any consecutive six-month period in 2013, instead of the full year, to calculate the average number of employees in 2013. Thus, hiring decisions made this year could determine if an employer is subject to the employer mandate next year. The proposed regulations also clarify that all common law employees of all entities that are part of the same controlled group or affiliated service group must be counted to determine whether the 50 full-time employee level is met.
Section 4980H and the proposed regulations provide for yearly employer penalties of up to $3,000 per employee. These penalties can be imposed if coverage is not offered to substantially all full-time employees and their dependents, or the coverage offered is not affordable and employees obtain tax-subsidized coverage through an exchange. Coverage is not affordable if the single premium cost is more than 9.5 percent of an employeeís salary.
The proposed IRS regulations provide numerous rules on how to determine whether an employee is full time. It is important to note that employers do not have to provide coverage to part-time employees working less than 30 hours per week and receive no benefit for doing so under the penalty scheme.
Employers also need to be cognizant of new limitations on waiting periods that go into effect in 2014. Waiting periods can be no longer than 90 days from the date of employment for full-time employees. The waiting period for variable-rate employees can be after the measurement period, to determine whether the employee is eligible under Code Section 4980H. In such cases, coverage must commence no later than the first day of the next calendar month, 13 months after the hire date.
To assist the IRS with enforcement of the employer mandate and related rules, employers with more than 50 full-time employees will be required to report annually on various aspects of their health plans and workforce.
Other Key Reform Provisions
New nondiscrimination rules "similar to" the Tax Code Section 105(h) nondiscrimination rules applicable to self-insured health plans were added effective as of 2011 for fully-insured group health plans. Because fully insured plans were not subject to any discrimination rules, employers with fully insured group health plans were previously able to maintain different coverage with respect to certain highly compensated employees.
Although the IRS has stated that enforcement of the nondiscrimination rules would be delayed pending the issuance of regulations, employers need to be aware of the new rule due to the potential for significant excise tax penalties (up to $100 per day for each employee discriminated against) when enforcement commences. Key details to be determined in regulations include how "highly compensated employees" are defined and the precise nature of the discrimination tests.
Starting this year, a new federal premium tax of $1 will be imposed on each covered life in a self-insured or fully insured health plan. This premium tax will finance a new private corporation, the Patient-Centered Outcomes Research Institute, which was formed to assist patients, clinicians, purchasers, and policy-makers in making informed health decisions. The tax will increase to $2 per covered life in 2014 and will thereafter be indexed to the medical component of the consumer price index. It will sunset in 2019.
Health care reform legislation also reduced the annual contribution limit for flexible spending accounts to $2,500, effective for tax years beginning after Dec. 31, 2012. This limit is adjusted for inflation and does not apply to dependent-care accounts.
To educate employees about the value of health care, the legislation also required employers to report the value of health benefits on Form W-2 starting in 2011. Subsequent IRS guidance delayed the reporting, and currently, only employers issuing more than 250 W-2s are required to comply.
Lastly, the legislation creates new incentives to promote employer wellness programs and encourage opportunities to support healthier workplaces. Effective Jan. 1, 2014, the maximum reward under a health-contingent wellness program will increase from 20 percent to 30 percent of the cost of health coverage, and the maximum reward for programs designed to prevent or reduce tobacco use will be as much as 50 percent.
John E. Rich, Jr. is a director at McLane, Graf, Raulerson & Middleton PA, who specializes in employee benefits, pension, ERISA and tax-related matters. He can be reached at firstname.lastname@example.org or (603) 628-1438.