With the end of 2015 fast approaching, employers should be aware of certain issues under the Patient Protection and Affordable Care Act (“ACA”), the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Employee Retirement Income Security Act of 1974 (“ERISA”) that may impact the health and welfare arrangements that are offered to employees. This client advisory outlines important issues and recurring concerns that employers should consider as they plan for 2016.

ACA Employer Pay-or-Play Transition Relief Phase Out
In the ACA regulations, the IRS extended eight forms of transition relief for 2015 that apply to various aspects of the employer shared responsibility provision (also known as the employer pay-or-play penalties). For plans with non-calendar year plan years, the transition relief also applies for the months in 2016 that are part of the 2015 plan year. Employers should be aware that these transition relief provisions will not apply in 2016.

Employers should particularly note that relief from pay-or-play penalties for employers who were considered “applicable large employers” (“ALEs”) in 2015, with at least 50 but fewer than 100 full-time employees (including full-time-equivalent employees), will not apply in 2016. Starting in 2016, all ALEs with at least 50 full-time employees (including full-time-equivalent employees) will be subject to employer pay-or-play penalties. Employers should also note that starting in 2016, they will be required to consider all twelve months in the prior year in determining ALE status.

The phase out will also require ALEs to offer minimum essential coverage to a full-time employee’s dependents and to a relatively greater percentage of its full-time employees and their dependents (95 percent, versus 70 percent in 2015), and use a different formula for calculating the amount of pay-or-play penalties. All of these changes will require employers to focus even more on their compliance with the pay-or-play mandate in 2016.

ACA Employer Mandate – Definition of Employer and Employee
The determination of who is the “employer” and which members of the workforce are considered “employees” under the ACA can be a trap for the unwary. If an employer fails to include all employees who are required to be included under ACA regulations for employer shared responsibility purposes, it can be exposed to substantial pay-or-play penalties. An employer near the 50 full-time employee (including full-time-equivalent employees) threshold described above can be particularly at risk if it fails to count the employees of a controlled group member or all common-law employees in its ALE determination. Employers need to be careful when applying the complex controlled group and common-law employment rules in making this determination.

In determining the number of full-time employees and full-time-equivalent employees an employer has for ACA purposes, an employer must remember that all employees of the employer’s entities that are part of controlled group and affiliated service group should be counted. Thus, strategies that seek to avoid the ACA’s employer mandate through creation of subsidiaries or affiliated entities often will be unsuccessful. Because the controlled group and affiliated service group rules are complex, employers must be careful to include all employees of all properly includable entities in making the ALE determination.

Similarly, the ACA regulations are broadly worded with respect to who is considered an “employee” of the employer. The regulations define an “employee” for ACA purposes as “an individual who is an employee under the common-law standard.” The common-law definition of an employee is fact dependent and, in certain circumstances, can include individuals who might otherwise be classified under an “independent contractor” or other non-employee job classification. An employer must be careful to count all individuals who would be considered employees for ACA purposes, regardless of their formal job classification.

ACA Reporting
By now, most employers know that ACA information reporting for ALEs, employers who sponsor self-insured health plans, and health coverage providers is required in early 2016 with respect to calendar year 2015. Each member of an ALE (an “ALEM”) and coverage providers will be required to file information returns with the IRS and furnish statements to individuals in 2016, based on data gathered in each month of 2015. The data required to be gathered by ALEMs and coverage providers in order to complete Forms 1094-C, 1095-C, 1094-B and/or 1095-B, as applicable, is broad in breadth and significant in quantity. Although this advisory does not go into the details of the ACA reporting forms, we want to call attention to a couple of issues that ALEMs should be mindful of as the 2016 reporting season approaches.

First, employers should remember that all ALEs with at least 50 full-time employees (including full-time-equivalent employees) – even those eligible for the 2015 transition relief from the employer pay-or-play penalties – are required to complete the ACA reporting requirements for 2015 that are due in 2016. There are special codes that the ALEM will fill out on the reporting forms in this circumstance, indicating that it was eligible for transition relief in 2015. Thus, ALEMs who employ between 50 and 100 full-time employees (including full-time-equivalent employees) must remember to complete and submit the required information reporting forms for 2015, or risk being assessed penalties for reporting failures.

Second, the cost of reporting noncompliance will increase for the 2015 reporting due in 2016. The general penalty for failure to file timely information returns, failure to include all the required information, or inclusion of incorrect information on Form 1094-B/C or 1095-B/C, will increase from $100 per return to $250 per return. The cap on the total amount of penalties for such failures during a calendar year will increase from $1,500,000 to $3,000,000. Note that if a failure relates to a Form that is due both as an information return due to the IRS and as a statement required to be furnished to an individual (such as the Form 1095-B or-C), the penalty is assessed individually for each requirement. Finally, if a failure is caused by intentional disregard of the reporting requirements, the $250 penalty stated above is doubled to $500 for each failure, and there is no cap on the amount of penalties that can be assessed with respect to the calendar year. Although there is limited relief from these penalties for those who can show they made “good faith efforts to comply with the reporting requirements,” ALEMs face stiff penalties for noncompliance, and should take steps necessary to ensure that they are accurately and timely meeting all of their ACA reporting requirements.

HIPAA Breaches
2015 was a turbulent year with respect to data breach incidents suffered by health plans, including a well-publicized incident involving the nation’s second-largest health insurance company. In light of the heightened scrutiny of HIPAA covered entities, this is a good time for group health plans and plan sponsors with access to protected health information to review their existing business associate agreements, service provider contracts, HIPAA privacy and security policies and procedures, and technical systems and safeguards to ensure that they are updated and legally compliant. Failure to implement compliant policies, procedures and systems can expose plans and plan sponsors to significant civil and criminal penalties under HIPAA and state law.

Employer Payment Plans
The IRS and DOL have issued substantially identical guidance addressing arrangements where an employer reimburses employees for premiums for individual coverage in or outside of the Marketplace (with the exception of certain “employee choice” plans offered through the SHOP marketplace to employees of certain qualifying small employers). Employers seeking to offer such arrangements – called “employer payment plans” pursuant to IRS and DOL guidance – should be aware that employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. The IRS has stated that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100 per day excise tax per applicable employee under section 4980D of the Internal Revenue Code.

The IRS and DOL also have issued guidance on how ACA market reforms apply to health reimbursement arrangements (HRAs) and health flexible spending arrangements (FSAs). In general, such arrangements are also considered to be group health plans subject to the market reforms. Thus, unless an HRA or FSA is structured as a “limited purpose” HRA or FSA (e.g. limited to reimbursing only dental and/or vision expenses), an HRA or FSA cannot be offered as a stand-alone plan without running afoul of ACA market reforms. There are certain permissible circumstances where an employer may offer an HRA that is integrated with a group health plan providing major medical coverage, or a FSA consisting solely of excepted benefits along with another group health plan that is not limited to excepted benefits. However, the rules surrounding HRA integration and FSAs are complex, and employers should review existing arrangements to ensure that they are compliant with current IRS guidance.

Waiving Benefits – Pitfalls for Employers
In light of the high cost of offering coverage, some employers have proposed offering employees cash benefits or a higher salary in exchange for the employee agreeing not to enroll in the employer’s group health plan. This can be a risky proposition for both employer and employee, for a number of reasons:

Constructive Receipt: When an employee is offered a choice between a receiving a benefit or taking cash, the employee should be concerned about the doctrine of constructive receipt. By providing this choice, the employee who took the benefit arguably could be taxed on the amount of the opt-out payment (even if he or she didn’t take it). Therefore, the opt-out should be built into a qualified cafeteria plan sponsored by the employer that meets the specific requirements and regulations of section 125 of the Internal Revenue Code. A cafeteria plan is the only way that an employer can legally offer an employee the choice between cash and a non-taxable benefit, such as coverage under the employer’s group health plan. Note that, even under a cafeteria plan, an employee may have the ability revoke an election with respect to a group health plan in the case of certain reductions in hours, or during eligibility for special or annual enrollment periods.

Employer Payment Plan: If the employer requires the employee to use the opt-out amount to pay for other coverage (especially individual coverage), the employer will likely run afoul of the IRS’ prohibition on employer payment plans, described in the prior section. By sponsoring an employer payment plan noncompliant with market reforms, the employer would be potentially liable for section 4980D excise taxes.

Discrimination Based on Health Status: If the option of receiving a cash benefit or higher salary in exchange for declining enrollment in the employer’s group health plan was directed to individuals with high risk or high claims, the employer runs the risk of violating HIPAA’s prohibition on discrimination based on health status.

Impact on Affordability Calculation: Under IRS guidance regarding how the payment of cash for waiving group health plan coverage affects the calculation of “affordable” health coverage for purposes of the individual mandate, cash that could be received for waiving group health plan coverage is counted towards the cost an employee would pay for enrolling in the employer’s plan when determining affordability, even if the employee does not enroll or enrolls in coverage other than the employer’s plan. Because the affordability threshold is generally calculated as a percentage of pay, for certain full time employees, the added cost could cause an employer’s lowest cost health plan option to be reported as unaffordable. Some informal guidance indicates that this option will be factored into the affordability calculation for purposes of the employer shared responsibility mandate, but additional guidance would be appreciated on this point.

Impact on Insurer Enrollment Requirements: Certain insurers of fully-insured plans, especially those offered by smaller employers, may require certain enrollment levels as a condition of insuring the plan. Encouraging waiver of enrollment in the plan may run afoul of such requirements.

As employers know by now, compliance with ACA, HIPAA and ERISA is complex and not for the faint-hearted. If you need assistance in any of these matters, please contact a member of our Employee Benefits Group.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.

©2015 Sherman & Howard L.L.C.                                                                                   October 29, 2015