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.”
Cornhusker Plaza P: (402) 804-8000
301 S. 13 th St., Suite 210 F: (402) 804-8002
Lincoln, NE 68508 KSBSchoolLaw.com
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
insurance.
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.