Cash Is Not King: IRS Issues New Guidance on Cash-in- Lieu and Other Arrangements Which Will Impact PPACA Compliance and Reporting

Yesterday, December 16, 2015, around the same time that Karen and Bobby

were giving a statewide presentation regarding PPACA reporting, the IRS

issued Notice 2015-87 (Notice). The Notice includes many important

updates on issues we’ve addressed yesterday and at other times, including

tax penalty amounts, special rules for “educational organizations” (think

subs and coaches), COBRA coverages, and many others. We will cover

these in detail at upcoming presentations. However, because PPACA

reporting will begin in a few short weeks, we want to draw your attention to

the issues which specifically impact reporting in this update.

The Notice addresses cash-in- lieu and other “flex cash out” arrangements.

This is one of the more troublesome reporting issues we’ve been discussing

for months and which Karen and Bobby discussed yesterday. As we feared,

the IRS has taken the approach which could significantly impact school

districts with these arrangements.

As part of the required reporting, the IRS requires each employer with 50 or

more employees report the employee’s cost of the cheapest available single

insurance plan. If you require an employee to pay $100 toward the cost of

their insurance each month, you would report $100 on each month of the

applicable form 1095-C. The IRS will then take this cost information and

compare it to the employee’s household income to determine if your

district’s offer of insurance was “affordable.”

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The Cash-in- Lieu Issue. For those of you who “speak PPACA,” this new

Notice document confirms our fear that in addition to the actual employee

cost, the IRS will now require employers to put their cash-in- lieu options into

the “cost” section of the form 1095-C, Line 15. The theory behind it is

simple: if you offer cash-in- lieu, the employee is required to give up the

cash in order to enroll in the insurance. The IRS now confirmed that they

consider this part of the “cost” to enroll. This concept is best illustrated by

way of example. Assume, like above, that you require an employee to pay

$100 toward their insurance premium, or they can decline insurance

coverage and receive $50 a month cash instead. If you had not offered the

cash-in- lieu, the IRS would require you to report only the $100 per month

you require the employee to pay in Line 15 of form 1095-C. However, the

$50 cash-in- lieu amount must be included, as well. So, the per-month

“cost” for that employee is now the $100 actual cost and the $50 cash

amount, for a total of $150 per month.

This is even more significant considering some of the offers made in

collective bargaining agreements to certificated staff. Some districts offer up

to the amount of a full family premium cost as a cash-in- lieu, upwards of

$20,000. That means for every employee who is offered the cash, their

1095-C must include the full $20,000 (or whatever the actual number is) in

the employee’s “cost” section. (Remember, however, that on the 1095-C,

the “cost” you are reporting on is the cost of a single premium. Think of it

this way: how much money could an employee get if he/she did not take

the single insurance? That amount is the “cost” of the cash-in- lieu.)

HRA’s, Flex Credits, and the Cash Out Problem. In the Notice, the IRS

confirmed its position that in some cases an employer may count the

employer’s contributions toward health reimbursement arrangements (HRA)

and flex credits in the calculation of the employee’s “cost.” For HRA’s, the

rules are complicated. If you have an HRA, you should contact your

district’s attorney to discuss whether you may consider it as part of your

employer contribution and whether it complies with other market reforms

under PPACA and the implementing regulations.

As it relates to flex accounts, generally for these arrangements to “count”

the employee must be able to use the amounts to pay for certain medical

expenses. Again, you should contact your attorney and/or accountant to

determine whether your flex plan meets the use requirements. However, the

most important question as it relates to calculating employee “cost” asks

whether the employee has the option to “cash out.” Many districts have

structured their Section 125 and other flex-type plans to permit an employee

cash-out option to avoid negative tax consequences. Now, however, the

IRS’s position in the Notice makes clear that if the employee is permitted to

withdraw from the flex account a taxable cash amount, the contribution

made by the employer will not qualify and cannot be used to offset the

employee’s reported “cost.” That means if you have a cash option out of

your 125 plan, you will have to list the amount that could be flexed out on

line 15 of form1095-C for employees regardless of whether they take


The Notice does provide a type of transition relief for HRAs and flex plans

prior to 2017, in some cases. If you have an HRA or flex plan, we encourage

you to speak with your district’s attorney or accountant on the ability to use

an otherwise non-qualifying HRA or flex plan contribution to offset employee

costs for the next few years.

Delayed Enforcement and Alternative Arrangements. As we read the

Notice, the IRS will release regulations on these issues relatively soon. In

addition to the de facto transition relief for many HRAs and flex plans, it

appears the IRS will not enforce the cash-in- lieu reporting until it can release

final regulations. As the Notice states: “[The] IRS anticipate[s] that the

regulations generally will apply only for periods after the issuance of final

regulations.” If you meet one of these conditions, you do not have to list

your cash-in- lieu amount in line 15 for 2015 only:

1. The employer offered the cash “opt out” (i.e., cash-in- lieu)

arrangement with respect to health coverage provided for a plan year

including Dec. 16, 2015;

2. A board, committee, or similar body or authorized officer of the

employer specifically adopted the opt-out arrangement before Dec. 16,

2015; or

3. The employer had provided written communications to employees on

or before Dec. 16, 2015 indicating that the opt-out arrangement would

be offered to employees at some time in the future.

If you have always had a cash-in- lieu arrangement, we believe the

continuing contract obligations in Nebraska will support every school’s

argument that they meet at least one of these tests, assuming they do not

otherwise meet them. If your board is currently negotiating for a new

or “substantially increased” cash-in- lieu payment of any sort, you

should contact your attorney before reaching any new agreement

with your teachers’ union. If you have a long-standing cash-in- lieu

program, you should be entitled to the flex payment transition relief

that was announced yesterday.

As part of these regulations, the IRS also seems likely to permit districts

with cash-in- lieu options now and in the future to impose “other meaningful

requirements…such as a requirement to provide proof of coverage provided

by a spouse’s employer.” Assume, for example, your district says that

employees are only entitled to the cash-in- lieu if they provide proof of

insurance through a spouse or other means. The IRS’s eventual regulations

may permit you to forego including the cash-in- lieu in the employee’s “cost”

if you have a condition like that in place. Obviously we do not know what

the IRS will ultimately decide, but its Notice indicated that the IRS at least

appears open to this concept.

Penalty Amounts for 2016. Lastly, we want to point out that the Notice

document clarifies the IRS’s long-held position that the “tax” (i.e., penalty)

amounts for both the 4980H penalties (“death penalty” and “unaffordable

penalty”) will be increased each year based on the “premium adjustment

percentage” in the ACA, tied to increases in premiums in the health

insurance market. For 2016, the “death penalty” (for failing to offer to 95%

of all full-time staff after transition relief) will be $2,080. The “unaffordable

penalty” (failing to offer “affordable” insurance to “full time” employees after

transition relief—which differs for 50-99 versus 100+ large employers) will

be $3,120.

This new Notice provides the clarity that we have been hoping for. However,

unless your district is proactive in learning how and when it will impact your

offerings, you may face increased penalty possibilities and other unintended

consequences. We strongly encourage you to address these matters with

your boards, and if you have questions or concerns about these or any

related issues, we recommend that you consult with your school district’s

attorney or call Karen, Steve, or Bobby.