IRS Instructs Employers to Disregard Compliance Questions Included on Form 5500

By Joshua A. Diveley

The IRS has instructed employers to disregard various compliance questions included on the “final” version of the 5500 forms and instructions released in late 2015 by the DOL. Among others, the questions no longer requiring answers address topics including:

– Recent plan amendments
– Coverage testing
– ADP/ACP testing
– In-service distributions
– Unrelated business taxable income
– Paid preparer information

The updated guidance was required due to the questions not being approved for use with 2015 filings by the Office of Management and Budget. Employers and practitioners are encouraged not to complete the questions for 2015 filings, however, doing so will not cause the filings to be rejected. Corrective instructions from the DOL and IRS have been issued, but the forms continue to contain the questions to be disregarded.

For the IRS press release, see: https://www.irs.gov/Retirement-Plans/IRS-Compliance-Questions-on-the-2015-Form-5500-Series-Returns.

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Changes to Qualified Plan Determination Letter Program

The Internal Revenue Service (IRS) has made changes to the determination letter process for individually designed qualified retirement plans. For qualified plans currently in existence, several changes will occur beginning January 1, 2017. The 2017 changes will eliminate the 5 year remedial amendment cycle for individually designed plans and the accompanying determination letter process. Although the IRS will still accept determination letters for initial plan qualification and in other limited contexts, the 5-year amendment cycle and accompany determination letter process will largely be eliminated in 2017. The IRS has requested comments from practitioners on additional regulatory and other guidance needed to assist plan sponsors as a result of the changes announced by the IRS.

In addition, the availability of “off-cycle” determination letters has also been eliminated effective immediately. A plan’s determination letter application is filed off-cycle if it is submitted anytime other than during the last 12-month period of the plan’s remedial amendment cycle. Except for initial plan qualification determination letters, the IRS will no longer issue determination letters outside the parameters of the 5 year retroactive compliance cycle.

The IRS cites the need for more efficient use of resources in the eventual elimination of the 5 year retroactive amendment cycle determination letter process, and the immediate elimination of the off-cycle letters.

The IRS announcement may be found at the following link: http://www.irs.gov/pub/irs-drop/a-15-19.pdf

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IRS Issues Publications on Electronic Filing of Health Care Coverage Information Returns

The Patient Protection and Affordable Care Act (PPACA) implemented information reporting requirements for employers. Known as information returns, the employer supplied information allows the government to ascertain whether the employer is meeting their requirements under the PPACA. The type of information submitted pertains to the type of employer health-coverage offered, specific employee coverage, and other various requirements under the act.

In order to facilitate the information returns, the Internal Revenue Service (IRS) allows these filings to be submitted electronically. Known as the “AIR” system, the IRS issued publications to guide employers wishing to submit the PPACA information returns electronically. In order to submit the information returns, the employer must first create an account at least 28 days prior to submitting information. For some employers, such as those with over 250 of one type of information return, the returns must be submitted via the AIR system.

The AIR filings are subject to very specific instructions and requirements. To retrieve these publications, please visit the following website. http://www.irs.gov/for-Tax-Pros/Software-Developers/Information-Returns/Affordable-Care-Act-Information-Return-AIR-Program?utm_source=Mondaq&utm_medium=syndication&utm_campaign=inter-article-link

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CMS Proposes New Exceptions to the Stark Law

The Centers for Medicare and Medicaid Services (“CMS”) has proposed revisions to the regulations governing enforcement of the physician self-referral law, commonly known as the Stark Law.   The changes are part of a 282-page proposed rulemaking that establishes the 2016 Medicare Physician Fee Schedule.  According to CMS, the proposed changes to the Stark regulations are intended to accommodate delivery and payment system reform, to reduce regulatory burdens, and to facilitate compliance.  Many aspects of the proposal appear to be in response to physician self-disclosures of highly technical violations that have been submitted under the Medicare self-referral disclosure protocol (“SRDP”) adopted as part of the Patient Protection and Affordable Care, also known as Obamacare.

The Stark law  generally prohibits a physician from making referrals for certain designated health services (“DHS”) that are payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship (ownership or compensation), unless an exception applies.  Among other things, the proposal would add two new exceptions, primarily targeted at rural and underserved areas.  As with all things Stark-related, the proposed exceptions are highly technical.

The first new exception to Stark would permit a hospital, federal qualified health center, or rural health center to subsidize a physician’s payment of a nonphysician practitioner’s salary.  The proposed exception would apply only where the nonphysician practitioner is a bona fide employee of the physician or the physician’s practice and the purpose of the employment is to provide primary care services to the physician’s patients.  To qualify under this exception, a non-physician practitioner would have to be a physician assistant, nurse practitioner, clinical nurse specialist, or certified nurse midwife.  The subsidy would also be subject to a financial cap and two year time limitation.

The second new exception would expressly permit “timeshare arrangements,” and is intended to benefit communities where there is a need for certain specialty services but that need is not great enough to support a full-time physician specialist.   Under timeshare arrangements, a hospital or local physician practice may ask a specialist from a neighboring community to provide the services in space owned by the hospital or practice on a limited or as-needed basis. In such circumstances, the visiting physician may not have exclusive use of the premises and there may not be a one-year arrangement as required by the current exception for leased office space.

The proposed timeshare exception would provide relief from Stark where the visiting physician is a temporary licensee of the space rather than a lessor.  However, the proposed exception includes numerous technical requirements, including limitations on certain types of equipment that may be used in connection with the license.  In addition, the proposed exception would not protect a license of office space that is primarily used to furnish DHS to patients.

The proposed rule impacting the Stark Law can be found at the following link: http://www.gpo.gov/fdsys/pkg/FR-2015-07-15/pdf/2015-16875.pdf

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IRS Issues Notice on PPACA “Cadillac” Tax

On July 30, 2015, the Internal Revenue Service (IRS) issued Notice 2015-52, addressing issues and seeking public comments on the implementation of the “Cadillac” tax on high-cost health insurance under the Patient Protection and Affordable Care Act (“PPACA”). The Cadillac tax is intended to discourage expensive health care plans by imposing a non-deductible 40 percent excise tax on the portion of health plan costs that exceed a predetermined dollar amount. The tax, which will go into effect in 2018, generally applies to healthcare benefit packages costing more than $10,200 for individuals and $27,500 for families, subject to certain proposed adjustments. Although the law was passed in 2010, many details of how the tax will be implemented still remain to be sorted out.

For example, one of the basic issues with the Cadillac tax is determining who has the responsibility to pay it. The law provides that the tax must be paid by the “coverage provider.” Depending on the circumstances, that may be the insurance company, the employer or “the person that administers the plan benefits.” However, some key terminology impacting these determinations have yet to be defined. Other unresolved complexities addressed the in IRS notice include: timing issues relating to calculation and payment of the tax, circumstances under which employers will be aggregated for purposes of the tax, and adjustments to the dollar limit based on age and gender.

The IRS has invited public comments on the issues raised in the Notice, as well as any other issues relating to the Cadillac Tax. Public comments are due no later than October 1, 2015. Comments received will be used in the preparation of forthcoming Treasury Regulations governing the Cadillac tax.

Notice 2015-52 is available at the following link: http://www.irs.gov/pub/irs-drop/n-15-52.pdf.

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ABLE Accounts for Individuals with Disabilities

Financial planning for a family that includes an individual with disabilities, especially those without the resources to fully fund a special needs trust, often has substantial challenges. In December of 2014, the United States Congress passed legislation permitting families with individuals who develop a disability before age 26 to save for future expenses in an account that will grow tax-free. The Stephen Beck, Jr., Achieving a Better Life Experience (“ABLE”) Act of 2014, allows families to save in an account akin to a 529 college savings account. Those hoping to take advantage of the program must wait for their state to statutorily adopt the program, however many states, including Nebraska, have already acted.

An ABLE account holder can save up to $100,000 in the account and still be eligible for social security, Medicaid, and other federal programs. The annual limit for all contributions to an account is $14,000, paid from after-tax contributions. Although the contributions are after-tax, the disbursements, including the interest growth in the account, are tax free if spent on qualifying expenses. A qualifying expense for an individual with a disability includes “education, housing, transportation, employment training and support, assistive technology and personal supports services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight.”

On June 22, 2015, the Internal Revenue Service (“IRS”) issued proposed regulations to implement the law pertaining to ABLE accounts, enabling states to fully adopt the program. These proposed regulations have a variety of limitations, such as requiring the beneficiary to be a resident of the state where the ABLE account is created, requiring the beneficiary to have an eligible disability, limiting each beneficiary to one account, and limiting the investment direction a designated beneficiary can make to twice a year. Other aspects of the proposed regulations include limitations on types of contributions, specific accounting procedures, and options for states to contract with other states for administering programs.

The tax provisions in the proposed regulation include applying Internal Revenue Code (“IRC”) § 72 to distributions from the ABLE account. Under this section, all distributions during a tax year are treated as one distribution in that year and the value of the account is computed at the end of the calendar year. Further, if a distribution from an ABLE account is not for a qualifying expense, the distribution is includable in gross income for that taxable year. That means the distribution will be included as taxable income, as well as incurring an additional 10% tax on the amount of the distribution included in gross income. However, if the non-qualifying distribution occurs after the beneficiary dies or the distribution is a result of an excess contribution, the added 10% tax does not apply.

Another tax provision includes the application of the gift tax to ABLE account contributions by a person other than the designated beneficiary. Under the proposed regulation, the contribution is immediately considered a completed gift to the designated beneficiary and not a future transfer under IRC § 2503(e), thus any future distribution is not a taxable gift to the beneficiary. However, when the designated beneficiary dies, the amount remaining in the ABLE account is part of the beneficiary’s estate for purposes of the estate tax.

In Nebraska, Legislative Bill 591 was signed into law on May 27, 2015, formally adopting the program. The law, known as Nebraska ABLE, will allow qualifying individuals in Nebraska to take advantage of the program. At this time, however, it is unclear exactly how the state program will operate as the law allows the Nebraska State Treasurer to either establish a program within the state or contract with another state to provide for the accounts.

It is expected that final regulations will be issued at some point in the future, but the IRS states that the proposed regulations may be used and relied upon for creating programs and accounts. Those states that adopt programs and individuals who create an ABLE account based upon the proposed regulations will receive the benefits of IRC § 529(a), regardless of whether the final regulations impact the qualification of the ABLE program.

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IRS Issues Notice Regarding PPACA Excise Tax

Part of the Patient Protection and Affordable Care Act (“PPACA”) efforts to reduce healthcare costs include an excise tax on health insurers that provide benefits to employees above a threshold limit. This tax is designed to discourage insurance programs that allow employees to receive unusually generous benefits under the insurance plan, which is believed to encourage heavy usage of healthcare. By reducing the overall usage, it will decrease costs. Moreover, it is expected that this tax will help fund the PPACA and off-set the cost of healthcare for those who are not enrolled in a qualified welfare plan. The 40% excise tax is set to take effect in 2018 for the cost of an applicable coverage plan that is above the threshold limit.

In preparing for the implementation of the excise tax, the Internal Revenue Service (“IRS”) has issued Notice 2015-16. This notice serves to clarify “the definition of applicable coverage,” “the determination of the cost of applicable coverage,” and “the application of the annual statutory dollar limit to the cost of applicable coverage.” The notice also seeks input on these issues.

This notice is only the start of implementing the new excise tax and the IRS anticipates issuing further notices. Eventually, the IRS intends to propose regulations and will invite further comments. For details regarding Notice 2015-16, the notice may found at the following link: http://www.irs.gov/pub/irs-drop/n-15-16.pdf .

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Update to FMLA Definition of “Spouse”

The Department of Labor (“DOL”) has updated selected regulations to the Family and Medical Leave Act (“FMLA”). The updates change the definition of spouse to mean: “husband or wife refers to the other person with whom an individual entered into marriage as defined or recognized under state law for purposes of marriage in the State in which the marriage was entered into . . . .”

Essentially, the change now requires employers to recognize FMLA leave for same sex individuals if the marriage is recognized and valid in the state where they were married. This change departs from the previous rule that requires recognition of the marriage by the state where the employee resides. This update will impact several parts of FMLA regulations, including leave for pregnancy, adoption, next of kin, and the care of a parent.

Although this new rule brings FMLA closer to the definition of spouse in other federal regulations and Supreme Court precedent, it does not include domestic partners. It must be a legally recognized marriage, including common law marriage, but it does not include a domestic partnership.

For employers, this may mean updating employee manuals and handbooks, as well as being aware of the laws of the various states when an individual applies for FMLA leave. The DOL does not expect compliance with the new regulations to add substantial cost.

The update to the federal regulations can be found at the following link: https://s3.amazonaws.com/public-inspection.federalregister.gov/2015-03569.pdf

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Potential Employer Requirements Due to Anthem, Inc. Data Breach

On February 4, 2015, Anthem Inc., one of the largest U.S. health insurers, notified the public that their data systems were breached. This breach potentially left customer names, social security numbers, and other personal information vulnerable. Subsequently, Anthem Inc. has already seen a customer lawsuit filed in California over the breach, with many more expected.

Health plan participants that have been affected will be notified in compliance with federal law. However, as this investigation continues, this may place additional burdens on employers. Depending upon the nature of the breach, of which further details are expected soon, employers may have to issue breach notifications under the Health Insurance Portability and Accountability (HIPAA). Until it becomes clear what information was taken, specific notification requirements are unclear. For example, a key question is whether protected health information was taken.

Depending upon the type of health plan an employer offers, it will have a varying impact upon the obligations for each company. The requirements will become clearer once further information is released. Beyond the federal HIPAA requirements, 47 states have unique breach notification laws that may impose obligations.

If you have questions pertaining how this may impact your requirements under the law, please contact Houghton Vandenack Williams for further information.

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