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SIIA Appeals Decision Upholding Michigan Tax; Qualified Plan Relief for Hurricane Sandy Victims; IRS Invites Public Comments on Furnishing Form 1099-C; Agencies Issue Additional Guidance on PPACA's Pay-or-Play and Waiting Period Provisions

Focus On Employee Benefits

Health and Welfare: SIIA Appeals Decision Upholding Michigan Tax on Claims Paid under Employer-Sponsored Plans

Garrett Fenton and Gary Quintiere

A recent district court decision, out of the Eastern District of Michigan, upheld a state law that imposes a 1% assessment on certain claims paid under employer-sponsored group health plans and other entities.  Self-Insurance Institute of America v. Rick Snyder, et. al., 2012 U.S. Dist. LEXIS 124405 (E.D. Mich. Aug. 31, 2012).  This case is now on appeal before the Sixth Circuit.

In September 2011, the Michigan legislature passed the Health Insurance Claims Assessment Act, 2011 Mich. Pub. Acts 142 (the HICA Act) which  imposes a 1% assessment on certain medical claims paid by third party administrators (TPAs) and "carriers," a term that expressly includes ERISA group health plan sponsor and insurers.  The HICA Act assessment applies to claims paid for health care services rendered within the State of Michigan to Michigan residents.  Thus the law, which is scheduled to expire on January 1, 2014, generally affects any employer that sponsors a group health plan covering Michigan employees and dependents, regardless of the state in which the employer is located or headquartered.  Please see our January 27, 2012 Employee Benefits Alert for a more complete description of the law.

The Self- Insurance Institute of America – a nonprofit trade association whose members include employers, plan sponsors, plan administrators and TPAs – brought an action in the Eastern District of Michigan last year, seeking a declaration that the HICA Act is preempted by ERISA, and violates the Supremacy Clause of the U.S. Constitution.  In granting the state's motion to dismiss, the district court held that the HICA Act is not preempted by ERISA because it does not "relate to" ERISA plans, under the two-prong test articulated by the U.S. Supreme Court in Shaw v. Delta Airlines, Inc., 463 U.S. 85, 96-97 (1983).  Specifically, the court held that the law neither refers to nor has an impermissible connection with ERISA plans.  (For the same reason, the court also held that the Supremacy Clause was not violated.)

In its reasoning, the court noted that the HICA Act does not apply exclusively to ERISA plans, and does not single out such plans for different treatment.  Rather, the law treats ERISA plans in the same manner as other types of entities that pay claims to health care providers in Michigan.  Furthermore, the court observed that although the HICA Act refers expressly to ERISA plans, it does not impose an impermissible burden on such plans and therefore should not be nullified by the ERISA preemption rule.  Regarding plaintiffs' "connection with" argument, the court found that the HICA Act does not mandate any particular benefits structure nor does it bind administrators to certain benefits choices. In the court's view, the HICA Act merely imposes an assessment on claims for which a coverage decision has already been made and monies have already been paid.   The fact that the this assessment may result in some lack of uniformity in "post-benefit-decision plan administration" was, in the court's judgment, unrelated to ERISA's concern of establishing uniform procedures for the processing of claims and disbursement of benefits under ERISA plans.

The SIIA appealed the case to the Sixth Circuit last month and the upcoming decision could have far-reaching implications, even outside the State of Michigan.  Some commentators believe that if the Michigan law is upheld, other states may follow suit and enact similar taxes on claims paid by employer-sponsored group health plans and insurers.

Pending the decision on appeal, the HICA tax will continue to apply, and employers that sponsor group health plans covering Michigan residents might expect to see an increase in their administrative fees paid to TPAs, or premiums paid to health insurers, to cover the cost of the tax.   In addition, employers that self-insure and self-administer a group health plan covering Michigan residents should continue making quarterly payments of the assessment, and prepare to file an annual return for the 2012 calendar year by February 28, 2013.

Qualified Plans: IRS Announces Qualified Plan Relief for Hurricane Sandy Victims

Elizabeth Drake and Mike Chittenden

In Announcement 2012-44, the Internal Revenue Service (IRS) alerted employers on November 16 that it was providing additional relief to victims of Hurricane Sandy that is similar to the relief provided to victims of past natural disasters.  To qualify, participants, or their lineal descendants or ascendants, must reside in one of the counties or tribal nations in covered disaster areas in New Jersey, New York, or Connecticut.  The IRS relief:

  • allows hardship withdrawals to aid with any hardship—including food and shelter—faced by participants (or certain members of their families) affected by Hurricane Sandy;
  • allows plan administrators to rely on participants' representations regarding the need for, and amount of, hardship withdrawals related to Hurricane Sandy;
  • eliminates the requirement to suspend post-distribution contributions for those taking hardship withdrawals related to Hurricane Sandy;
  • extends the deadline for adopting amendments adding hardship withdrawals or loan provisions to qualified plans until the last day of the first plan year beginning after December 31, 2012; and
  • provides relief through February 1, 2013, for certain procedural distribution and plan loan requirements for participants affected by Hurricane Sandy.

To qualify for relief, hardship withdrawals must be taken on or after October 26, 2012, and before February 1, 2013, because of a hardship related to Hurricane Sandy.  Plan sponsors wishing to offer expanded hardship withdrawal criteria or add loan provisions should review their plans to determine whether an amendment is required. 

As explained in our November 7 Employee Benefits Alert, it is still possible that Congress may provide additional distribution options and tax relief to affected participants. 

Information Reporting: IRS Invites Public Comments on Furnishing Form 1099-C upon Expiration of Non-Payment Testing Period

Michael Lloyd and Marianna Dyson

In Notice 2012-65 (the "Notice"), the IRS has invited public comments regarding guidance to be provided to certain governmental and financial entities that discharge indebtedness and may be required to furnish Form 1099-C (Cancellation of Debt) information returns upon the occurrence of an "identifiable event" pursuant to Code section 6050P and the regulations thereunder.  For certain financial entities, one of the identifiable events is the expiration of the non-payment testing period that is presumed to occur during a calendar year if a creditor has not received a payment on an indebtedness during a testing period (generally a 36-month period).  The presumption that an identifiable event has occurred may be rebutted by the creditor in the case of collection activity or other facts and circumstances indicating that the indebtedness has not been discharged, in which case the creditor is not required to issue a Form 1099-C.

In the Notice, the IRS states that creditors who issue a Form 1099-C upon expiration of a 36-month non-payment testing period are not necessarily signaling that a debt has actually been cancelled.  The actual discharge of indebtedness, for purposes of determining when taxable income is incurred, may be prior to or after the identifiable event, or, in fact, there may never by an actual discharge of indebtedness.  As a consequence, the receipt of a Form 1099-C upon expiration of a non-payment testing period can cause confusion for taxpayers regarding whether and when to include any income attributable to an actual discharge of indebtedness.

To address this confusion, Treasury and the IRS are considering clarification, revision, or removal of the non-payment testing period as an identifiable event requiring the issuance of Form 1099-C.  The Notice requests comments from all affected persons and entities, particularly regarding:

  • whether the regulations should be amended to remove the non-payment testing period as an identifiable event;
  • whether the removal of the non-payment testing period would increase or decrease the burden on creditors and taxpayers;
  • if the non-payment testing period is removed, whether additional rules are necessary to address continuing collection activity; and
  • if the non-payment testing period is retained, how it should be modified to improve its usefulness and alleviate confusion.

Written comments regarding the non-payment testing period should be sent to: CC:PA:LPD:PR (Notice 2012-65), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.  Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR: (Notice 2012-65), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC  Comments may also be transmitted electronically via the following e-mail address:  Include "Notice 2012-65" in the subject line of any electronic communications.  All comments will be available for public inspection and copying and must be received by February 11, 2013.

Health and Welfare: Agencies Issue Additional Guidance on PPACA's Pay-or-Play and Waiting Period Provisions

Fred Oliphant and Garrett Fenton

The IRS has issued guidance describing certain "safe harbor" methods that employers may (but need not) use to determine who must be treated as a "full-time employee" for purposes of the employer pay-or-play provisions, which become effective beginning in 2014, under the Patient Protection and Affordable Care Act (PPACA).  IRS Notice 2012-58.  The IRS and the Departments of Labor (DOL) and Health and Human Services (HHS) (collectively, the "agencies") also issued guidance regarding PPACA's 90-day limitation on waiting periods for group health plans.  IRS Notice 2012-59; DOL Technical Release 2012-02; HHS Guidance on 90-Day Waiting Period Limitation under Public Health Service Act § 2708.  The two pieces of guidance are designed to coordinate with each other, and may be relied upon by employers at least through 2014.

Determining Full-Time Employees

Under PPACA's pay-or-play provision, an "applicable large employer" – generally, an employer with 50 or more full-time and full-time-equivalent employees – may be subject to a penalty tax, effective beginning in 2014, if it either fails to offer its full-time employees (and their dependents) the opportunity to enroll in group health coverage, or offers such employees group health coverage that is deemed "unaffordable" or does not provide an actuarial value of at least 60%.  The IRS previously issued guidance describing (and requesting comments on) various rules and potential safe harbors under this provision.  Please see our March 29, 2012 Focus On Employee Benefits article.  The safe harbors provided in Notice 2012-58 continue to use a lookback/stability period approach whereby an employee's level of service is determined during a "measurement period" and then the determination is applied for a "stability period."  Notice 2012-58 allows employers under certain circumstances to utilize an "administrative period" after the measurement period in order to process the determinations.

Maximum Waiting Period for Regular Employees. 

Notice 2012-58 coordinates PPACA's pay-or-play and waiting period requirements and provides that an employer will not be subject to a pay-or-play penalty if, with respect to a new employee who is reasonably expected to work 30 or more hours per week as of his or her start date, the employer offers coverage by the end of the employee's initial three calendar months of employment. 

New Rules for Variable Hour and Seasonal Employees. 

Notice 2012-58 also updates and revises the IRS's previously-issued safe harbor guidance on determining if an individual constitutes a full-time employee who must be offered coverage – as well as the timing for providing that coverage – under the pay-or-play provisions.  Specifically, the guidance provides detailed rules regarding newly-hired "variable hour" and seasonal employees. 

Variable hour employees for these purposes are those (1) for whom it cannot be determined, as of their start date, that they are reasonably expected to work an average of at least 30 hours per week, or (2) who initially are expected to work at least 30 hours per week for only a limited duration, and it cannot be determined if they are reasonably expected to work an average of at least 30 hours per week over the full "initial measurement period" (described below).  Seasonal employees, by contrast, generally may be defined under an employer's "reasonable, good faith interpretation" of that term.  Notably, the rules pertaining to such new variable hour and seasonal employees do not apply to employees whose full-time status is clear when they are hired, and thus it appears that an employer may be subject to pay-or-play penalties if it applies these rules to individuals who clearly constitute full-time employees.

Determining the Status of Ongoing Employees

Notice 2012-58 confirms that an employer may determine the full-time status of "ongoing employees" – i.e., those who have been employed for at least one complete standard measurement period (which is a specified period of 3-12 months, chosen by the employer) – using essentially the same safe harbor method that was prescribed in previous IRS guidance (Notices 2011-36 and 2012-17).  Specifically, the employer may look back at an employee's weekly hours over the applicable standard measurement period, and apply a subsequent "stability period" that is at least six months long (and no shorter than the standard measurement period). 1

Use of an Administrative Period in Determinations

The guidance also permits employers to use an "administrative period" of up to 90 days, between the end of the standard measurement period and the beginning of the stability period, before an employee's coverage takes effect.  The administrative period is intended to provide time for an employer to determine which ongoing employees are eligible for coverage, notify such employees of their eligibility, answer questions and collect enrollment materials and enroll the employees in coverage.  The administrative period may not operate to reduce or lengthen the measurement or stability periods and will overlap with the preceding stability period to prevent potential gaps in coverage. 

For example, if an employer selects a 12-month standard measurement period beginning October 15, and a 12-month stability period beginning January 1 (i.e., the calendar year), and an employee is found to work an average of at least 30 hours per week from October 15, 2014 through October 14, 2015, then the employer must allow the employee to enroll in coverage for the entire 2016 calendar year, as long as he or she remains employed.  (The period from October 15 through December 31, 2015 would constitute a permissible 2½-month administrative period.)  If the employee then is found not to work an average of at least 30 hours per week from October 15, 2015 through October 14, 2016 – making him or her ineligible for coverage for the 2017 calendar year – the employee's coverage would need to remain effective through the end of the 2016 calendar year (including during the October 15 through December 31 administrative period).

Determination of Status of New Variable Hour or Seasonal Employees

The guidance confirms that an employer may determine whether a new variable hour or seasonal employee is a full-time employee by using a 3-12 month initial measurement period (selected by the employer).  If an employee worked an average of at least 30 hours per week during that period, then the employer will need to treat him or her as a full-time employee for a subsequent stability period of at least six consecutive months (and no shorter than the initial measurement period).  If not, then the employer may classify the employee as non-full-time for a subsequent stability period that is no more than one month longer than the initial measurement period (and does not exceed the remainder of the standard measurement period, plus any associated administrative period, in which the initial measurement period ends). 

As with ongoing employees, an employer may provide for a reasonable administrative period, following the initial measurement period, of up to 90 days total – which includes any days that elapsed between the employee's start date and the beginning of the measurement period – before offering coverage to a full-time employee 2.   An overall limit on the initial measurement period (which, again, cannot exceed 12 months) and administrative period (which, again, cannot exceed 90 days) applies, pursuant to which the combined length of those periods cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee's start date.

For example, if an employer uses a 12-month initial measurement period that begins on the first day of the month following a new variable hour or seasonal employee's start date, then the administrative period following that initial measurement period could be no longer than one month.  Thus, if a new variable hour or seasonal employee's start date were February 12, 2014, and he or she were found to be a full-time employee during the initial measurement period of March 1, 2014 through February 28, 2015, then the administrative period could not extend beyond March 31, 2015 (and coverage would need to be offered by no later than April 1, 2015).

Transition From New Employee to Ongoing Employee

Notice 2012-58 also provides rules regarding the transition from new employee to ongoing employee status, which may require testing to occur during overlapping intervals.  For example, using the same facts as above, and assuming the employer selects a 12-month standard measurement period (for ongoing employees) beginning October 15 each year, the full-time status of a new variable hour employee with a February 12, 2014 start date would be tested first based on the initial measurement period (March 1, 2014 through February 28, 2015), and again based on the standard measurement period (October 15, 2014 through October 14, 2015).  If the employee is found to work full-time during the initial measurement period, then he or she must be treated as a full-time employee for the entire associated stability period (e.g., April 1, 2015 through March 31, 2016, assuming a one-month administrative period), even if the employee is found not to work full-time during the October 15, 2014 through October 14, 2015 standard measurement period.  The employee could be classified as non-full-time after the end of the stability period (e.g., beginning April 1, 2016), after which time his or her full-time status would be determined as an ongoing employee.

If, by contrast, the employee is found not to work full-time during the initial measurement period (March 1, 2014 through February 28, 2015), but is determined to be a full-time employee during the overlapping or immediately following standard measurement period (October 15, 2014 through October 14, 2015), then he or she must be treated as a full-time employee for the entire stability period associated with the standard measurement period (e.g., the one-year period beginning January 1, 2016, assuming an administrative period of October 15 through December 31, 2015).  This would be the case notwithstanding the fact that such stability period may begin before the stability period associated with the initial measurement period (i.e., April 1, 2015 through March 31, 2016) ends.  Going forward, the employee's full-time status would be determined as an ongoing employee.

Guidance on 90-day Waiting Period Limitation

Another PPACA provision prohibits a group health plan (or group health insurer) from imposing any waiting period longer than 90 days on employees and dependents who otherwise are eligible for coverage, effective for plan years beginning on or after January 1, 2014.  See our March 29, 2012 Focus On Employee Benefits article.  The guidance confirms that the waiting period provisions will not be violated where a delay of more than 90 days in an employee's enrollment in coverage is due solely to his or her failure to act, e.g., where the employee could have enrolled in coverage within 90 days of becoming eligible but took additional time to submit the enrollment forms. 

The guidance also clarifies that where a group health plan conditions eligibility on an employee working a specified number of hours, and it cannot be determined at the date of hire that a new employee is "reasonably expected to regularly work" the requisite number of hours (i.e., in the case of a new variable hour employee), the plan may take a reasonable period of time to determine if the employee is eligible for coverage.  This may include a measurement period that is consistent with the timeframe permitted under the safe harbor pay-or-play rules described above, even if the employer is not an "applicable large employer" subject to those provisions. 

Finally, an example in the guidance confirms that a group health plan may impose a "cumulative hours of service condition" of up to 1,200 hours, for part-time employees to be eligible for coverage, without being deemed to have violated the waiting period provisions.  Therefore, an employer will not run afoul of the waiting period limitation if it requires an employee first to work up to 1,200 hours, and then to satisfy a waiting period of up to 90 days, before coverage takes effect.  A cumulative hours of service condition of more than 1,200 hours would be problematic, however.


The agencies' guidance provides helpful, albeit somewhat complicated, rules for determining which employees will need to be offered coverage under PPACA's employer pay-or-play provisions, and coordinates that guidance with PPACA's waiting period provisions.  The guidance also underscores the importance of employers – and particularly those with a large number of part-time employees and/or less stable hourly and seasonal workforces, such as in the retail and restaurant industries – beginning to plan now (if they have not already done so) to address their plan designs and enrollment practices in light of the guidance taking effect in 2014.  Finally, it is important to note that additional guidance implementing the employer pay-or-play provisions is expected in the near future, perhaps before the end of 2012 or in early 2013. 

1 Employers generally may designate different measurement and stability periods with respect to different categories of employees, namely collectively-bargained versus non-collectively-bargained, salaried versus hourly, employees of different entities, and employees located in different states.

2 Note that an employee (or related individual) will not be considered eligible for coverage – and thus may be eligible for a federal premium subsidy to purchase coverage through an Exchange – during “any period when coverage is not offered” by the employer. This would include any measurement period or administrative period prior to the date that coverage takes effect, notwithstanding that the employer may not be subject to a pay-or-play penalty for failing to offer coverage during that period.


For more information, please contact:

Gary Quintiere,, 202-626-1491

Fred Oliphant,, 202-626-5834

Elizabeth Drake*

Marianna Dyson*

Mike Chittenden*

Garrett Fenton*

Michael Lloyd*

*Former Miller & Chevalier attorney

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