Focus On Employee Benefits
Information Reporting: New Law Repeals Recent Increases to Information Reporting Requirements
On April 14, 2011, President Obama signed into law H.R. 4, the Comprehensive 1099 Taxpayers Protection and Repayments of Exchange Subsidy Overpayments Act of 2011. This new legislation repeals the amendments to information reporting requirements under Internal Revenue Code ("Code") section 6041 made by the Patient Protection and Affordable Care Act ("PPACA"), which expanded information reporting requirements to payments made to corporations and to payments for property as well as other gross proceeds payments. It also repeals the amendments made by the Creating Small Business Jobs Act of 2010, which expanded information reporting requirements to landlords for rental property expense payments. These prior changes were extremely unpopular among businesses, and the Internal Revenue Service had received hundreds of comment letters asking for the repeal of these provisions.
To offset the revenue loss caused by repealing these information reporting requirements, estimated to be approximately $25 billion over 10 years, the new legislation amends Code section 36B, relating to the refundable credit for coverage under a qualified health plan. The legislation increases the amount of additional income tax imposed on lower income taxpayers whose advance subsidy payments under section 1412 of PPACA exceed the credit allowed under Code section 36B.
Information Reporting: Questions Remain Regarding Form 1099-K, Reporting of Payment Card and Third Party Network Payments
Under Internal Revenue Code ("Code") section 6050W and the regulations issued thereunder, payment settlement entities must report, on new Form 1099-K, the proceeds of payment card and third party network transactions that occur after December 31, 2010. A number of questions and uncertainties related to the scope of these new reporting rules confront payment settlement entities that are or may be required to file Forms 1099-K on or before February 28th (March 31st if filed electronically), 2012, for monthly transactions occurring in 2011. Confusion has resulted due to the breadth of the rules and the many new concepts and terms adopted under the statute and regulations.
Many issues arise in applying the term "third party payment network" as it is defined in the regulations. An agreement or arrangement is a third party payment network and, therefore, subject to the Code section 6050W reporting rules if it (A) involves the establishment of accounts with a central organization by a substantial number of providers of goods or services who are unrelated to the organization and who have agreed to settle transactions for the provision of the goods or services to purchasers according to the terms of the agreement or arrangement; (B) provides standards and mechanisms for settling the transaction; and (C) guarantees payment to the persons providing goods or services in settlement of transactions with purchasers pursuant to the agreement or arrangement. (Italics provided). None of the italicized terms above are defined in the regulations. The legislative history refers to the notion of "substantial number" of persons as being "(e.g., more than 50)". Beyond that, however, a person whose payments might be part of a "third party payment network" is provided with little or no guidance regarding the application of the "substantial number" requirement or whether the person is a central organization or has guaranteed payment for purposes of the requirements for filing Form 1099-K.
Some transactions covered by Code section 6050W would also be covered by the provisions of Code section 6041 requiring the reporting of certain payments of $600 or more on Form 1099-MISC. Section 6050W grants the Treasury authority to provide rules to avoid duplicate reporting, and the regulations now provide that transactions that otherwise would be subject to reporting under both section 6041 (or section 6041A) and section 6050W are to be reported only on Form 1099-K. In other words, when reporting is required under both sections 6041 and 6050W, section 6050W trumps section 6041. Although this approach works well in certain cases, it causes trades and businesses that have in place long established and effective procedures for properly reporting payments under section 6041 to quickly develop new procedures to comply with the more onerous section 6050W requirements. With the limited time between final promulgation of the regulations in August of 2010, and the effective date on January 1, 2011, many reporting organizations -- including many that did not even realize they were subject to these rules -- are scrambling to comply.
The IRS has announced that it is in the process of developing FAQs to address some of the questions that have been raised by the final Code section 6050W regulations.
Information Reporting: Transitional Relief for Reporting Actions Affecting Basis of Specified Securities
On February 22, 2011, the IRS issued Notice 2011-18 announcing that it will not impose penalties under Internal Revenue Code ("Code") section 6721 on an issuer of corporate stock for not making a timely return of information under Code section 6045B, provided that the issuer files the return with the IRS or makes it publicly available by January 17, 2012.
This transitional relief applies to the information reporting requirements in Code section 6045B that apply to issuers of stock with respect to organizational actions (such as stock-splits, mergers, and acquisitions) that affect the basis of the stock. Code section 6045B provides that, for organizational actions beginning in 2011, an issuer of stock must file a return with the IRS to describe any organizational action that affects the basis of a specified security, which in 2011 is limited to stock in a corporation (other than stock in a regulated investment company). The issuer generally must file the return within 45 days after the organizational action. The issuer must also furnish a corresponding statement to each nominee of the stockholder (other than a nominee that is the issuer, its agent, or a plan operated by the issuer), or to each stockholder if there is no nominee, by January 15th of the year following the calendar year of the organizational action. Alternatively, the issuer, in lieu of filing the return and furnishing the statement, may post the return on its primary public Web site in a readily accessible format by the filing date.
As noted above, under Notice 2011-18, the IRS has stated that it will not impose the penalty under Code section 6721 for a failure to file an issuer return within 45 days of an organizational action taken in 2011, provided that the issuer files the return with the IRS (or posts the return on its Web site) by January 17, 2012. In addition, the IRS stated that it expects issuers to make a good-faith effort to comply with the requirements of Code section 6045B(a). Thus, if the IRS makes the reporting form available a reasonable time before January 17, 2012, it is possible that satisfying the IRS's expectation of good-faith compliance would involve filing the newly available form prior to January 17, 2012, notwithstanding that, under the transitional relief of Notice 2011-18, no penalty under section 6721 would be imposed for failing to do so.
Health and Welfare: Budget Resolution Repeals and Cuts Funding for Health Care Reform Programs
On April 15, 2011, President Obama signed into law H.R. 1473, the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (the "CAA"), to fund the Federal government through September. The CAA contains a number of provisions that will have a significant impact on the Patient Protection and Affordable Care Act ("PPACA"), enacted last March.
First, section 1858 of the CAA fully repeals the "Free Choice Voucher" provisions of PPACA. Those provisions, effective January 1, 2014, would have required employers who offered and contributed to employee health coverage to provide a voucher to any employee who (1) was required to contribute between 8 and 9.8% of his or her family income toward coverage, (2) had a family income of less than or equal to 400% of the federal poverty line, and (3) elected to opt out of employer-sponsored coverage and instead purchase health insurance through one of the Health Benefit Exchanges required to be established by 2014. The amount of the voucher would have been equal to the amount of the employer contribution for coverage under the plan to which the employer made the largest proportional contribution.
Second, section 1857 of the CAA strips $2.2 billion of the $6 billion originally appropriated to the Consumer Operated and Oriented Plan ("CO-OP") program under section 1322(g) of PPACA. The CO-OP program provides for federal loans and grants to foster the creation of new, member-run nonprofit entities, independent from the health insurance industry, to offer qualified health plans in a state's individual and small group markets. At this time, the effect that the funding cut will have on the CO-OP program is not entirely clear. A summary of the CAA released by House Appropriations Committee Chair Harold Rogers (R-KY) states that the legislation "terminates" the CO-OP program. However, the CAA does not actually repeal the CO-OP program provisions, and $3.8 billion will still be appropriated to the program despite the funding cut. Notably, at an April 15 meeting, the CO-OP program's Advisory Board approved a final "draft report" that will be sent to the Department of Health and Human Services, making recommendations on how loans and grants should be made under the program. During the April 15 meeting, Richard Popper -- Director of the Insurance Programs Group and CMS's Center for Consumer Information and Oversight -- reportedly confirmed that despite the funding cut, work is "continuing and intensifying" on drafting the applicable regulations, and other activities related to the CO-OP program.
Health and Welfare: Extended Enforcement Grace Period for New Claims and Appeals Requirements
On March 18, 2011, the Department of Labor ("DOL") issued Technical Release 2011-01 to modify and extend its "enforcement grace period" for certain requirements related to internal claims and appeals under the Patient Protection and Affordable Care Act. The DOL had previously announced, in Technical Release 2010-02 (Sept. 20, 2010), an initial grace period until July 1, 2011 for group health plans and insurers to come into compliance with a number of requirements relating to the new claims and appeals rules, namely:
- the new 24-hour timeframe for providing notice of an urgent care claim decision,
- the requirement to provide adverse benefit determination notices (such as EOBs) in a "culturally and linguistically appropriate" manner,
- deemed exhaustion of administrative remedies where a plan or insurer fails to strictly comply with all of the new claims and appeals requirements, thus allowing the claimant to initiate an available external review process or other remedies under ERISA or applicable state law, and
- various additional content and specificity requirements for adverse benefit determination notices.
The Departments of Health and Humans Services ("HHS") and the Treasury joined the DOL's pledge not to enforce these provisions -- until July 1, 2011 -- against a plan or insurer that was at least "working in good faith" to implement them.
Technical Release 2011-01 announces an extension and modification of this grace period, to "act as a bridge" until the DOL, HHS, and the Treasury (the "agencies") amend the Interim Final Rule on Internal Claims and Appeals and External Review (the "IFR") that was issued last July. The agencies have stated that they intend to amend the IFR "in the near future" to take into account comments and other feedback received in the past 8 months.
Specifically, Technical Release 2011-01 extends the grace period until plan years beginning on or after July 1, 2011 (i.e., January 1, 2012 for calendar-year plans), with respect to the following additional content and specificity requirements for adverse benefit determination notices:
- the reason(s) for the adverse benefit determination,
- a description of available internal appeals and external review processes,
- certain information that identifies the claim (other than the diagnosis and treatment codes), i.e., the date of service, health care provider, and claim amount, and
- the availability of, and contact information for, an office of health insurance consumer assistance or ombudsman, for group health plans and insurers in States that have established a consumer assistance program pursuant to section 2793 of the Public Health Service Act.1
The grace period was further extended until plan years beginning on or after January 1, 2012 with respect to the following requirements:
- the new 24-hour timeframe for providing notice of an urgent care claim decision,
- the requirement to provide adverse benefit determination notices in a "culturally and linguistically appropriate" manner,
- deemed exhaustion of administrative remedies where a plan or insurer fails to strictly comply with all of the new claims and appeals requirements, and
- the requirement to include the applicable diagnosis and treatment codes (and their corresponding meanings) in adverse benefit determination notices.
In addition, Technical Release 2011-01 clarifies that group health plans and insurers are no longer required to be "working in good faith to implement" the applicable standards in order for the enforcement grace period to apply.
The extended grace period provides some level of relief for group health plans and insurers, most of which will not need to worry about the agencies enforcing the specified requirements for at least another several months (regardless of whether such plans and insurers have taken any steps to implement the requirements in the meantime). However, it is important to emphasize that, similar to the initial enforcement grace period, the extended grace period does not appear to impact a group health plan participant's ability to bring a lawsuit under ERISA -- or a state's ability to enforce penalties under a state law that implements the IFR2 -- for a failure by a plan or insurer to comply with any or all of the applicable requirements as of their original effective date: the first day of the first plan year beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar-year plans). Accordingly, self-funded and insured group health plans, as well as insurers, should consider the risks carefully in determining the time and manner of implementing the various new claims and appeals requirements. Relying on Technical Release 2011-01 could potentially expose a plan or insurer to unanticipated litigation risks.
Health and Welfare: IRS Issues Interim Guidance on Form W-2 Reporting of Cost of Health Coverage
Fred Oliphant and Garrett Fenton
On March 29, the IRS issued interim "Q&A" guidance in Notice 2011-28, regarding the new requirement under the Patient Protection and Affordable Care Act that employers report the cost of employer-sponsored health coverage provided to each employee for the year. New Internal Revenue Code ("Code") section 6051(a)(14) requires employers to report on Form W-2 the "aggregate cost of applicable employer-sponsored coverage" provided to employees, calculated under rules similar to those used to determine the "applicable premium" for COBRA continuation coverage.
The statutory effective date for the reporting requirement was January 1, 2011. However, on October 12, 2010, the IRS issued Notice 2010-69, making the reporting optional with respect to 2011 Forms W-2 (which will generally need to be furnished to employees in January 2012). Thus, the new interim guidance in Notice 2011-28 generally applies to 2012 Forms W-2 (and 2011 Forms W-2, if an employer chooses to voluntary report the cost of employer-sponsored coverage for that year), and emphasizes that employers need not report the cost of employee health coverage on any Forms W-2 "required to be furnished to employees prior to January 2013."3
Relief for Small Employers
Notice 2011-28 provides additional transition relief for certain "smaller" employers. Specifically, employers need not comply with the reporting requirements for any calendar year if they were required to furnish fewer than 250 Forms W-2 for the preceding calendar year. For example, if an employer is required to furnish fewer than 250 Forms W-2 for 2011 (which generally must be issued in January 2012), then it will not need to report the cost of health coverage on any 2012 Forms W-2 (which generally must be issued in January 2013).
Calculating Reportable "Cost of Coverage"
The total "cost of coverage" provided under all applicable employer-sponsored coverage must be reported in box 12 of Form W-2, using Code DD. Applicable employer-sponsored coverage is coverage that is excludable from the employee's gross income -- or is of such a nature that it would be excludable from gross income if it were employer-paid -- with the exception of certain "HIPAA-excepted" benefits (e.g., liability and supplemental insurance, long-term care, accident , disability, workers' compensation, stand-alone dental and vision, and certain specified-disease or hospital indemnity coverage). In addition, the reportable cost of coverage does not include any amount(s) contributed to an Archer medical savings account, health savings account, or flexible spending arrangement, or any coverage provided under a multiemployer plan, health reimbursement arrangement, self-insured plan that is not subject to Federal continuation coverage requirements (e.g., church plans that are exempt from COBRA), or governmental plan maintained primarily for members of the military. Coverage provided by an employer's on-site medical clinic, however, must be taken into account.
The reportable amount generally includes the portion(s) of the cost of coverage paid by the employer and the employee -- on a pre-tax or after-tax basis -- including coverage provided for any person as a spouse or dependent of the employee (even if the employee is taxed on the coverage provided to such other person). For example, if an employer offers health coverage to an employee's domestic partner who does not qualify as the employee's tax dependent, then the cost of that coverage will be included in the amount reported on the employee's Form W-2, notwithstanding that the coverage is not "excludable from the employee's gross income."
There are essentially three available methods of calculating the cost of coverage: (1) the "COBRA applicable premium" method, (2) the "modified COBRA premium" method, and (3) the "premium charged" method (for insured plans only). An employer need not use the same method for each different plan that it offers, but must use the same method, within each plan, for every employee who receives coverage under that plan. Notice 2011-28 provides special rules regarding the calculation of the cost of coverage for employees who commence, change, or terminate coverage mid-year (and mid-month, for example, where the cost of coverage is generally calculated on a monthly basis).
Under the "COBRA applicable premium" method, the employer simply calculates the COBRA applicable premium for the coverage at issue, in a manner that satisfies the COBRA rules (i.e., in good faith compliance with a reasonable interpretation of the COBRA rules), and reports that amount on Form W-2. If an employer charges a COBRA premium amount that is based on the COBRA applicable premium for the coverage for a prior year, then the employer may use the "modified COBRA premium" method to report that amount on Form W-2. Alternatively, the modified COBRA premium method would allow certain employers who subsidize the cost of COBRA coverage -- so that the premium charged to COBRA beneficiaries is less than the COBRA "applicable premium" for that coverage -- to report on Form W-2 a "reasonable good faith estimate" of the cost of coverage for that period. Notice 2011-28 contains a number of examples that illustrate the modified COBRA premium calculation method. For an insured group health plan, an employer may use the "premium charged" method to simply report the premium that the insurance carrier charges for the employee's type of coverage (e.g., employee-only, family, etc.) on Form W-2.
If an employee terminates employment mid-year and elects to continue his or her group health coverage under COBRA, then the employer may generally choose whether or not to include the cost of the COBRA coverage in the amount it reports on Form W-2, provided that whichever method the employer chooses is applied consistently to all employees who terminate employment mid-year.
Notice 2011-28 notes that future guidance may limit the availability of some or all of the transition relief provided under the interim guidance (e.g., relating to a "smaller" employer; an employer required to furnish a Form W-2 to a terminated employee, pursuant to a written request, before the end of the year at issue; coverage provided under a multiemployer plan; stand-alone dental and vision coverage; and an employer with a self-insured plan that is not subject to Federal continuation coverage requirements). However, any such guidance will be prospective only, will apply no earlier than January 1 of the calendar year beginning at least 6 months after the guidance is issued, and will in no event apply to the 2011 or 2012 Forms W-2 (which are generally required to be furnished in January 2012 and 2013, respectively).
Notice 2011-28 also emphasizes that the Form W-2 reporting requirements are "informational only," and will not cause any health coverage that was previously excludable from gross income to become taxable. The purpose of the requirement is merely to "provide useful and comparable consumer information to employees on the cost of their health care coverage."
Notice 2011-28 neither provides any additional guidance regarding the actual calculation of the value of coverage (i.e., the "applicable premium") under the COBRA rules, nor indicates whether or when such additional guidance may be expected in the future. The Notice does request comments on all aspects of the Form W-2 reporting requirement of Code section 6051(a)(14), including areas that should be addressed in future regulations or other guidance.
1 The Technical Release includes a list of states with such consumer assistance programs, which is reproduced (and will be updated) at www.dol.gov/ebsa/healthreform. Plans and insurers should refer to this list before each plan year to ensure that their notices of adverse benefit determination contain up-to-date information.
2 Technical Release 2011-01 does note that HHS is "encouraging States to provide similar grace periods with respect to issuers," however.
3 If an employee terminates employment mid-year, and submits a written request to receive his or her Form W-2 for the year of termination before the end of the applicable calendar year, then the employer will not need to report on that “early” Form W-2 the cost of employer-sponsored coverage provided to the employee for the year. For example, if an employee terminates employment during 2012 and requests to receive his or her Form W-2 before the end of the year, then that 2012 Form W-2 need not contain any information regarding the cost of health coverage provided to the employee because the Form W-2 is "required to be furnished to [the former employee] prior to January 2013."
For additional information, please contact any of the following attorneys in our ERISA/ Employee Benefits practice:
Michael Lloyd, firstname.lastname@example.org, 202-626-1589
Garrett Fenton, email@example.com, 202-626-5562
Fred Oliphant, firstname.lastname@example.org, 202-626-5834