Shirazi Notice – January 2013
IN THIS ISSUE:
401(k) Fee Disclosure Regulations Go into Effect: New Rules Help Companies and Employees Compare Costs
Federal Law Alerts
Delay of Employer Exchange Notice
Under Section 1512 of the Patient Protection and Affordable Care Act (PPACA), employers subject to the Fair Labor Standards Act (FLSA) are required to provide their employees with written notice of coverage options available through state health insurance Exchanges. This requirement, set for a March 1, 2013, implementation deadline, has been delayed pending review by the U.S. Department of Labor (DOL), which may expand the requirement’s provisions. Among other guidance, DOL is considering providing model, generic language or other templates that employers could use to satisfy the notice requirement. A Department of Health and Human Services (HHS) Question & Answer document provides clarification on this delay.
Why a Delay?
Employers and others have anxiously anticipated a model notice from the DOL as the effective date of the requirement is only a month away. The notice was to be issued in accordance with regulations promulgated by the DOL Secretary. The Q&A details several reasons for the delay, stating: “First, this notice should be coordinated with HHS’s educational efforts and the Internal Revenue Service (IRS) guidance on minimum value. Second, we are committed to a smooth implementation process including providing employers with sufficient time to comply and selecting an applicability date that ensures that employees receive the information at a meaningful time.” Perhaps an additional reason for the delay is that state health benefit Exchanges are not yet operational. While HHS has not indicated a revised date for the requirement to take effect, it does anticipate distribution of employer notices by late summer or fall of this year, just in time for Exchanges to go operational.
Important Notice Elements
The original Section 1512 notice mandated all employers subject to the FLSA to notify employees in writing regarding state health benefit Exchange options. This notice required the following information:
- Exchange Overview – To include a description of the services provided by the Exchanges and the manner in which the employee may contact Exchanges to request assistance.
- Premium Tax Credit Details – If the employer’s plan share of the total allowed costs of benefits provided under the plan is less than 60% of such costs, the employee may be eligible for a premium tax credit if that employee purchases a qualified health plan through an Exchange.
- Potential Loss of Employer Contribution – If the employee purchases a qualified health plan through an Exchange, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer. Further, all or a portion of such contribution may be excludable from income for Federal income tax purposes.
We will continue to monitor the regulations issued on this topic and will keep you up to date on any changes, model templates, and additional information.
How to Report Health Care Costs on an Employee’s W-2
As of January 1, 2013, certain employers must report the cost of health care coverage provided under an employer-sponsored group health plan on employees’ W-2 forms. This requirement became effective as of January 1, 2012 but was deferred by making the requirement optional for employee’s Tax Year 2011 W-2 forms. The requirement is now effective for employee Tax Year 2012 W-2 forms that will be issued in 2013. The IRS has provided some additional relief to employers who issue fewer than 250 W-2 forms in the previous calendar year, as those employers do not have to report health care costs on Tax Year 2012 W-2 forms. This Legislative Alert provides key information related to this new requirement stemming from the Patient Protection and Affordable Care Act (PPACA).
What legal statute mandates this requirement?
PPACA Section 9002 amended Section 6051(a) of the Internal Revenue Code to require certain employers to track health care costs on employees’ W-2 forms.
Does an employer have to report the cost of coverage on its employees’ W-2 forms?
Under PPACA, employers that provide applicable employer-sponsored group health plan coverage must report the cost of this coverage on an employee’s W-2. Applicable employer-sponsored coverage is defined as coverage under any group health plan made available to the employee by an employer, which is excludable from the employee’s gross income under section 106 of the Internal Revenue Code, or would be so excludable if it were employer-provided coverage. This requirement applies to:
- Tax-exempt organizations
- Federal, state and local government entities (except with respect to plans maintained primarily for members of the military and their families)
- Churches and religious organizations
- Employers that are not subject to the COBRA continuation coverage requirement
This requirement does not apply to:
- Federally recognized Indian tribal governments
- Any tribally chartered corporation wholly owned by a federally recognized Indian tribal government
In some cases, the reporting obligations are optional for employers. For example:
- Employers that filed fewer than 250 W-2 forms for the preceding calendar year
- The employee is terminated before the end of a calendar year but requests, in writing, a W-2 form before the end of the year
- In this case, the employee must be provided a W-2 within 30 days; however, the employer is not required to report any amount
- The W-2 is provided by third-party sick-pay provider to employees of other employers
What types of coverage must the employer report?
An employer is not required to issue a W-2 solely to report the value of health care coverage for retirees or other employees, or former employees, if the employer would not otherwise provide a W-2. However, if a W-2 is being issued for an employee, the following types of coverage must be reported:
- Major medical
- Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefits
- Hospital indemnity or specified illness (insured or self-funded), paid on after-tax basis
- Employee Assistance Plan (EAP) providing applicable employer-sponsored health care coverage (Note: this is required only if the employer charges a COBRA premium)
- On-site medical clinics providing applicable employer-sponsored health care coverage (Note: this is required only if the employer charges a COBRA premium)
- Wellness programs providing applicable employer-sponsored health care coverage (Note: this is required only if the employer charges a COBRA premium
The following types of coverage do not have to be reported:
- Health FSA funded solely by salary-reduction amounts
- HSA contributions (employer or employee)
- Archer MSA contributions (employer or employee)
- Hospital indemnity or specified illness (insured or self-funded) paid on after-tax basis
- Government plans providing coverage primarily for members of the military and their families
- Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government
- Accident or disability income
- Long-term care
- Liability insurance
- Supplemental liability insurance
- Workers’ compensation
- Automobile medical payment insurance
- Credit-only insurance
- Excess reimbursement to highly compensated individual, included in gross income
- Payment/reimbursement of health insurance premiums for 2% shareholder-employee, included in gross income
Reporting the following types of coverage is optional:
- Dental or vision plan not integrated into another medical or health plan
- Dental or vision plan that gives the choice of declining or electing and paying an additional premium
- HRA contributions
- Employee Assistance Plan (EAP) providing applicable employer sponsored health care coverage (Note: this is optional only if the employer does not charge a COBRA premium)
- On-site medical clinics providing applicable employer-sponsored health care coverage (Note: this is optional only if the employer does not charge a COBRA premium)
- Wellness programs providing applicable employer-sponsored health care coverage (Note: this is optional only if the employer does not charge a COBRA premium)
- Self-funded plans not subject to federal COBRA
Where does the employer report this on its W-2 forms?
If you are subject to the reporting requirement, the value of health care coverage should be reported in Box 12 on the W-2 with Code DD to identify the amount.
How is the cost of coverage treated by the IRS?
Simply reporting the cost of coverage on an employee’s W-2 form will not make the benefits taxable. This requirement is only meant to provide employees with useful and comparable consumer information on the cost of their health care coverage.
Should both the employer and employee’s amount they paid for health care coverage be reported on the W-2 form? Or just the employee’s share?
The amount reported on the W-2 should reflect the amount paid by both employer and employee.
How should the employer report the cost of coverage if an employee was terminated during the calendar year?
Any reasonable method of reporting the cost of coverage may be utilized by an employer provided that the method is used consistently for all employees receiving coverage under the plan who terminate employment during the plan year.
If an employee was previously employed by another employer, should the current employer report the previous employer’s health care costs?
Typically, no. Each employer will issue a separate W-2 form for the employee pursuant to the IRS guidance stating that each employer that provides employer-sponsored coverage must report the aggregate reportable cost of coverage. However, if both the former and current employers are related, within the meaning of IRS Code section 3121(s) and one such employer is a common paymaster within the meaning of the code, the common paymaster is required to include the aggregate reportable cost of the coverage and the employer that was not the common paymaster must not report the cost of coverage. In addition, if the current employer qualifies as a successor employer under IRS Code section 3121 (a)(1), the current employee, as the successor employer, can follow an optional procedure delineated in Rev. Prov. 2004-53, 2004-2 C.B. 320 and issue one W-2 that reflects wages paid to the employee during the calendar year by both the predecessor and current employers. If this option is selected, the current employer must include the aggregate reportable cost of coverage provided by both the previous and current employers. In this case, the previous employer must not report the cost of coverage it provided.
If an employee has COBRA coverage for an applicable premium period, how should the employer calculate the reportable cost of coverage for this period?
For this time, the reportable cost will equal the COBRA applicable premium for that period, so long as this amount was calculated in good faith with a reasonable interpretation of the statutory requirements.
Where can an employer go for additional information?
For more information on how to complete a W-2, please go here. For more information on different scenarios not examined in this guidance, please go here.
2013 Changes to Medicare & Medicaid
On January 1, 2013, several important changes to Medicare and Medicaid mandated by the Patient Protection and Affordable Care Act (PPACA) took effect. This Legislative Alert provides a brief update of many of those changes. For any specific legal or financial advice, it is recommended that you consult with a licensed professional in your state.
Medicare Tax Increase
Beginning on January 1, employers must withhold an additional 0.9 percent Medicare tax from employee paychecks with incomes over certain thresholds.
Employer Retiree Coverage Subsidy
Another key change in 2013 concerns the Retiree Drug Subsidy Reduction. As of January 1, employers will still receive the tax-free subsidy, but employers will no longer be able to deduct the cost of prescription drugs to the extent reimbursed by the federal subsidy on their federal tax returns.
Increasing Medicaid Payments for Primary Care Doctors
Beginning in 2013, the federal government is increasing Medicaid payment rates to primary care physicians. This increase is in response to Medicaid programs preparing to cover more patients. In 2013, the Medicaid payment rates are being increased to at least 100 percent of associated Medicare rates. From 2011 to 2015, the federal government will also provide funding to Medicare to provide a 10 percent bonus payment for primary care provided by qualified physicians. However, it should be noted that Medicare and Medicaid reimbursements are typically lower than private payer reimbursement rates.
Expanded Authority to Bundle Medicare Payments
To encourage hospitals, doctors and other providers to work together, PPACA allows for payment bundling. This means hospitals, doctors and providers are paid a flat rate for an episode of care rather than the current fragmented system where each service or test is billed separately to Medicare. These are only some of the changes that will be implemented in 2013. We will continue to keep you apprised of changes as they occur, and will tell you what you need to know to remain compliant with PPACA.
Q. When are employees or individuals subject to the tax?
A. If an employee or individual’s wages, compensation, or self-employment income is above certain thresholds, the person will be subject to the increased tax. The tax will apply to wages and compensation above the following thresholds:
|Filing Status||Threshold Amount|
|Married Filing Jointly||$250,000|
|Married Filing Separately||$125,000|
|Head of Household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
Q. What wages are subject to the tax?
A. Any wages that are currently subject to the Medicare tax will be affected by the tax increase.
Q. Does an employer have to withhold the additional tax from my employee’s wages?
A. Yes. An employer must withhold the additional tax from wages paid to an individual in excess of the $200,000 amount regardless of the individual’s filing status or wages paid by another employer.
Q. If an employee surpasses the threshold limit via multiple sources of income, can the employee request additional withholding from his employer?
A. Not specifically for the purpose of the additional Medicare tax. If an employee anticipates that their total income will surpass the threshold, but not through a single employer, the employee may request the employer withhold an additional amount of income withholding on IRS Form W-4. The additional income tax withholding will then be applied against the employee’s taxes as shown on their tax return, including any additional Medicare tax liability. The employee also may make estimated tax payments if the employee believes that he or she will exceed the threshold via multiple sources of income.
Q. If an employee or individual makes over $200,000 annually, files jointly with his or her spouse, and the couple makes less than $250,000, can the employee ask the employer to stop withholding the additional tax?
A. No. The employer must withhold the additional tax amount. However, the couple may claim credit for any additional Medicare tax liability against the total tax liability on your individual income tax return.
Q. Are employers required to match the amount of the additional Medicare tax?
A. No. Employers are not required to match the additional tax amount. For more information on the increased Medicare tax, please see the following IRS Question and Answer page.
Q. How is the Employer Retiree Coverage Subsidy changing?
A. Prior to January 1, employers were eligible for a tax-free subsidy of 28 percent of the costs they incurred to provide a prescription drug benefit program to their retirees. This subsidy was authorized by the Medicare Modernization Act of 2003. Employers were also able to deduct any outlays made with these subsidies to provide retiree drug coverage for income tax purposes. This year, employers may still receive the subsidy, but will not be able to deduct the cost of the prescription drugs to the extent reimbursed by the subsidy on federal tax returns.
Q. What types of coverage does this apply?
A. Prescription drug coverage that is actuarially equivalent to the coverage offered under Medicare Part D is eligible for the federal subsidy.
Q. Is this coverage included in taxable income?
A. The coverage is not included as taxable income. However, this change will eliminate the tax deduction to the extent of the subsidy received.
Q. What kind of impact will this change have on businesses?
A. Although the change just recently went into effect, a Towers Watson study estimated the total cost for U.S. corporate financial statements would be $14 billion if companies did not shift their retirees out of drug subsidy plans. An American Benefits Council study estimated that between 1.5 and 2 million retirees would have their drug coverage terminated because employers would be forced to shift them into Medicare Part D coverage. The exact impact on businesses remains to be seen.
401(k) Fee Disclosure Regulations Go into Effect: New Rules Help Companies and Employees Compare Costs
The impact of fees on retirement plans, coupled with the new-found knowledge that many small business retirement plans have annual recurring fees of three percent or greater, led the U.S. Department of Labor (DOL) to pursue new regulations designed to shine a light on fees. New fee disclosure regulations, now currently in effect for plan sponsors and participants, require service providers to provide detailed information on exactly how much they are paying, what they are paying for and to whom it’s being paid. While fees within retirement plans aren’t new, these disclosure regulations are – and they are seen by most financial experts as an important step in redefining, or perhaps defining for the first time, what a successful retirement plan outcome might look like. The disclosure rules are expected to have a big impact on the retirement industry because:
- The average 401(k) investor is 45 years old, has $60,000 in his or her account and little investing experience outside of retirement savings.
- Investors likely check their balance a couple of times a year to see how their investments are doing but rarely know what they are paying in fees. In fact, an AARP survey (PDF) found that more than 70 percent of workers believe there are no costs associated with their 401(k).
Many employers believe the same. A recent survey of employers by Congress’ nonpartisan Government Accountability Office uncovered that half of all employers don’t know what they are paying in fees for their retirement account. In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan.
While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account. The Department of Labor provides the following example of how fees and expenses can impact an account: Assume you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent. Locating and deciphering fees has been difficult, to say the least. Investments, administration, recordkeeping, trustee, advisory, trading, custodial fees, etc. must all be analyzed in order to determine all costs. Plan fees and expenses generally fall into three categories: investment-related, administrative and individual fees.
- Investment-related Fees. These fees are associated with the investments in the portfolio. For example, investment management fees are charged to investors in the fund – they’re part of the fund’s operating expenses. It is important to note that the fees involved are based on the specific investment and will vary.
- Administrative Fees. These fees cover such services as recordkeeping, accounting, and other plan-related services. They’re charged to the plan as a whole, and the plan participant pays a proportionate amount based on his or her account balance.
- Individual Fees. These fees are based on account activity choices, such as processing a loan or taking a withdrawal. Individual fees can be managed by limiting these types of account activities.
Once plan sponsors are fully aware of the fees associated with their retirement accounts, the following questions should be answered:
- Is the expense justified for the service received? Is there a process in place for evaluating this?
- If participants ask the company to justify the amount of fees coming from their account in the last quarter, could it be done to their satisfaction?
- Could lower cost investments like Exchange Traded Funds (ETFs) replace existing investments and reduce fees?
- Who is responsible for the plan’s investment performance?
- Is compensation based on bad assumptions? Is the plan paying a fiduciary premium for an administrative service?
- Has the financial advisor provided a written document outlining their fiduciary responsibilities?
Looking at what services are needed is another step in the process. Retirement plan servicing has evolved to the point where, in many cases, there is a presumption of need for such services as paperless distribution/loan processing and customized enrollment materials. These convenient features are not essential for many plans, especially in the micro and small plan markets. A fiduciary may contemplate the necessity of these features and negotiate a fee that reflects only fees for services that contribute to the plan’s successful operation. A plan fiduciary is required to terminate its relationship with a service provider if the service provider fails to provide requested information relating to services, and must file a report with the Department of Labor. Like compounded interest, cutting fees or expenses in a retirement plan may not look like much in the short run, but over time the impact can be very meaningful. The long-term effect is important because the 401(k) is a benefit that not only helps businesses attract and keep the best employees but also works to ensure that workers are on a path to secure retirement.
FEDERAL LAW ALERT:
- Effective January 1, 2013, an additional Medicare tax will impact employers and payroll service providers. The Patient Protection and Affordable Care Act (PPACA) increases the Medicare tax rate on wages by 0.9% (from the current rate of 1.45% to 2.35%) for higher-income individuals starting in 2013. This Medicare payroll tax increase applies to wages over $200,000 for single tax filers and $250,000 for couples filing jointly ($125,000 for a married individual filing separately). The Internal Revenue Service (IRS) plans to release revised Forms 941, 943 and the tax return schemas for the Form 94X series of returns.
- By February 1, 2013, an employer subject to the Occupational Safety and Health Administration (OSHA) recordkeeping provisions for OSHA 300 logs regarding workplace injuries and illnesses must post its 2012 annual summary (Form 300A). The OSHA 300A Log must be posted in a conspicuous workplace location from February 1st – April 30th. Organizations with ten or fewer employees during all of the last calendar year (2012) or organizations classified in specific low-hazard industries are exempt from this requirement, unless specifically directed in writing to comply with these parameters by the Bureau of Labor Statistics (BLS) or OSHA.