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New Overtime Ruling from the Depart of Labor, how will it affect my business?


New Overtime Ruling From The Department Of Labor

The US Department of Labor (DOL) released its final rule that will raise the white collar overtime exemption threshold under the Fair Labor Standards Act (FLSA) – a decision that could affect about 7.4 million organizations.

The Final Rule guarantees a minimum wage for all hours worked and limits to 40 hours per week the number of hours an employee can work without additional compensation.

Rule Highlights

  • Effective Start Date – The effective start date of the Final Rule will be December 1, 2016.
  • Salary Threshold – The salary level threshold for full-time exempt “white collar” workers is raised to $913 per week; $47,476 annually.
  • Highly Compensated Employee Threshold – The exempt highly compensated employees (HCEs) threshold for full-time salaried workers will be $134,004 annually.
  • Future Updates – There will now be an automatic update done every three years (1) The minimum salary level to the 40th percentile of full-time salaried workers in the lowest income region of the country; and (2) The HCE threshold to the 90th percentile of full-time salaried workers nationally.
  • Discretionary Bonuses – The Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level.

Workers not subject to a salary level test include:

  • Teachers
  • Academic Administrative Personnel
  • Physicians
  • Lawyers
  • Judges
  • Outside Sales Workers

In addition, the Department of Labor expects many employers will adjust base wages downward to some degree so that even after paying the overtime premium, overall pay and hours of work for many employees will be relatively minimally impacted.

How To Avoid Becoming A Target Of An Employee Lawsuit Or A DOL Audit?

As a result of this new regulation, organizations will need to start tracking hours for exempt salaried employees that are at or below the new threshold; therefore, if your organization is not currently tracking the number of hours its salaried employees work, it should do so immediately.

  • Start Paying Overtime: As a result of this proposed regulation, employers would have to pay their salaried employees that are below the new threshold for any overtime hours worked.
  • Create An Audit trail: If an employee reports your organization for not following this regulation, the DOL (Department of Labor) will audit your business.
  • Get A Time Clock Installed At Your Business: Effective immediately, you should start tracking an employee’s time as the amount of hours they work will directly impact their compensation.

Immediate Steps To Take

  • Identify employees making less than salary threshold (see above).
  • Determine the actual hours these employees work per week.
  • Determine the appropriate hourly rate for affected employees.
  • Calculate a new hourly rate for those salaried employees.,
  • Prepare to have a conversation with your employees.
  • Begin tracking reclassified employees’ hours.

Executive Summary: The Fair Labor Standards Act (FLSA), the federal wage law, requires employees to be paid at least the federal minimum wage and overtime for any time worked in excess of 40 hours in a workweek. In addition, the FLSA provides strict record-keeping requirements for employees to track their working hours. There are employees, however, that are “exempt” from the FLSA’s minimum wage, overtime and record-keeping requirements.

Before making any type of decision, ask yourself the following questions:

  • Is my organization affected?
  • Which employees are affected?
  • What do I need to do to prepare my organization (to avoid lawsuits and/or DOL audit)?
  • How can I control my costs as a result of this new regulation?


Healthcare Consultants, Inc. recommend that you contact Affiliated Payroll. With over 30 years of serving local Houston businesses,  Affiliated Payroll Services is staffed by CPA’s and recent college graduates with degrees in Accounting, Finance, and Business not your typical Sales people. Their costs are generally lower than the Big Box vendors like ADP, Paychex, Etc. with a significantly higher level of knowledge. We use them and many clients have personally thanked us for referring them. If you would like to have your current payroll reviewed and have them make a recommendation to provide a  more customized and efficient solution,  please call us. We would be glad to set up a meeting for you, or if  you would prefer, you can contact them directly at  (713) 777-2729 or visit their website at www.affiliatedpayroll.com.

What is an ERISA “wrap” document, and how does it differ from a regular plan document?

      Posted by Maschino, Hudelson & Associates on 08/26/2011

ERISA requires group health plans to have a written plan document in place, and to provide a summary plan description (SPD) to plan participants upon enrollment in the plan, among other times. The written plan document is the instrument by which the plan administrator must operate the plan. The SPD, on the other hand, is the instrument by which the plan notifies the participants of the plan’s terms, such as plan eligibility, funding, contributions and benefits. While the plan document and the SPD should be consistent, they are two separate documents and are both separately required by ERISA.

ERISA places the burden of satisfying the plan document and the SPD requirements on the plan administrator, which is generally the employer. With respect to the SPD, fully insured plans may think that they can rely on the insurance carrier’s contract, policy or certificate booklet (collectively, the certificates) with the plan sponsor to satisfy the SPD requirement. However, while the carrier certificates may contain much of the information that is required to be contained in the SPD, most certificates will not likely satisfy the SPD requirement in and of itself.

The employer may contract with the carrier or a third-party administrator (TPA) to provide the SPD. However, unless the carrier or TPA has been designated as plan administrator (and even then it’s not entirely clear), the employer as plan administrator is still liable if the carrier or TPA fails to furnish an adequate SPD. While a carrier or TPA that contracts to provide SPDs and/or become “plan administrator” may be liable to the employer as a matter of contract law for failure to do so, the employer will remain liable under ERISA for the carrier or TPA failure. A plan administrator may draft an SPD by itself or engage an outside entity to assist.

Oftentimes, in conjunction with the carrier certificates, the plan administrator will use a “wrap” document, which basically means that the employer will take the insurance carrier’s certificate and add (or “wrap”) any required ERISA language (and any additional items that are needed) to the certificate.

There are two types of wrap documents. The first is called a mega-wrap document, which has two purposes. The first purpose of the mega-wrap document is to wrap the required ERISA language around a carrier’s certificate of coverage. The second purpose of the mega-wrap document is to combine or bundle many employer-sponsored plans into a single plan. The main reason that an employer would want to combine multiple plans into a single plan is that it simplifies their Form 5500 filing. If the employer is large and has several separate plans subject to filing, it has to file multiple Forms 5500. If the employer uses a mega-wrap document to combine them into one plan, it only files a single Form 5500. However, there are other considerations with using a mega-wrap document. If an employer is close to 100 participants on one or more plans, the employer may not want to combine plans into a single plan, because it may have to file a Form 5500 for a plan that would otherwise not be subject to filing.

Another consideration with using mega-wrap documents is in relation to HIPAA. Fully insured plans are exempt from many of HIPAA’s privacy and security requirements. If a plan sponsor uses a mega-wrap document to combine a fully insured plan with a self-funded plan, the sponsor would have to comply with HIPAA’s full measure of requirements for all of their plans, including the fully insured plans that would otherwise be partially exempt.

The second type of wrap document is used solely to wrap the required ERISA language around a single policy or plan. This would be used by a fully insured client that simply wants to wrap the ERISA language around a medical certificate of coverage (or dental, vision, disability, life). Carriers often include state-mandated provisions regarding coverage, but do not always include the required federal ERISA requirements. Both a wrap and a mega-wrap document may be useful, depending on whether the plan has multiple benefits it wishes to bundle.

Based on the above, while carrier contracts, policies and certificate booklets may function as the written plan document, such documents will usually not include required ERISA language and specifics about the plan itself. When this happens, adding a wrap document or mega-wrap document will be necessary for compliance with the written plan document and SPD requirements under ERISA.

To have a document prepared for you, please call us at 713.626.2838

One of our clients is looking into putting in a Section 105 plan to pay for their employees’ individual health insurance premiums. Our client is thinking about dropping their group health plan and getting their employees individual health plans and contributing an amount each month towards their premiums under a Section 105 plan. The company is a corporation. Is this something they can do and if so how does it work?

I wanted to get back to you quickly on this issue as this is not allowed.

An employer is not permitted to pay the premiums for an employee’s individual policy on a tax advantaged basis.  Please see the article entitled “Agencies Issue Guidance Addressing Stand-Alone HRAs, Health FSAs, EAPs and Purchasing Individual Policies” from the Sept. 24, 2013 edition of Compliance Corner, which is attached.

Please also see the NFP white paper entitled “The Future of HRAs and Employer Reimbursement for Outside Coverage,” which is available at the following link and attached.


Lastly, please see the HR & Benefits Update, March/April 2014 edition which featured the Compliance FAQ “May an employer pay or provide reimbursement, on a pretax basis, for the cost of an employee’s individual policy?”  The newsletter is attached and available at the link below.  I have also included the answer for your convenience.


“No. Many third-party administrators or vendors are currently marketing products to employers claiming that the employer may reimburse employees for individual policy premiums on a pretax basis. These products may have a name such as Section 105 plan, Health Reimbursement Plan or Premium Reimbursement Arrangement. No matter what the product is called, effective in 2014, an employer may not pay or provide reimbursement, on a pretax basis, for the cost of an employee’s individual policy. In order for an employer to provide tax‑advantaged health benefits to employees, it must do so through a permissible arrangement, such as a Section 125 cafeteria plan, a health reimbursement arrangement (HRA),health flexible spending arrangement (FSA) or health savings account (HSA). Most of the products being marketed to employers fit the definition of an HRA.

 An HRA is a self‑funded arrangement under Section 105 that is 100 percent employer funded and provides reimbursement for qualified medical expenses, which historically included premiums. However, on Sept. 13, 2013, the Internal Revenue Service issued guidance (Notice 2013-54) clarifying that an employer may not use a stand-alone HRA to reimburse the cost of an individual policy. To do so would violate the Patient Protection and Affordable Care Act’s (PPACA’s) prohibition on annual dollar limits for essential health benefits and the requirement to cover preventive services. For plan years starting on or after Jan. 1, 2014, an HRA must be integrated with a group health plan.


In regard to cafeteria plans, the Internal Revenue Code excludes individual marketplace coverage from the list of benefits that may be offered through a Section 125 cafeteria plan.

Further, Notice 2013-54 provides that other employer payment plans, which would include a cafeteria plan, may not reimburse employees for the purchase of an individual policy. Thus, an employee is not permitted to pay pretax premiums through an employer’s cafeteria plan for an individual policy purchased either inside or outside of the marketplace.

Per existing Treasury Regulations, insurance premiums are not a qualified medical expense from a health FSA. Finally, an HSA only permits tax-advantaged reimbursement of premiums in limited circumstances related to COBRA or USERRA coverage, qualified long-term care policies, an individual who is receiving unemployment compensation or an individual who is aged 65 or older.

In summary, an employer may not reimburse an employee on a tax-advantaged basis for the cost of an individual policy or pay for such coverage directly. Failure to comply could put the employer at risk for a penalty under PPACA, which is $100 per day per affected individual.”


Ford Darger
VP, Benefits Compliance, Counsel
Legal and Compliance
NFP Insurance Services, Inc.
1250 Capital of Texas Hwy. S. | Building 2, Suite 125 | Austin, TX 78746
P: 512.697.6862512.697.6862 | F:512.697.5852 | fdarger@nfp.com | www.nfp.com 


Should you offer Employees Health Care Benefits?

Benefits are a critical piece of an employee compensation package, and health care benefits are the crown jewel. Health care benefits, along with time-off benefits, are the most popular of benefits to employees. Every employer must at least consider whether to offer these types of benefits and in some cases employers must offer health care in order to remain competitive with other businesses for the most talented employees and avoid penalties imposed by health care reform. Another reason why many employers choose to offer health care benefits is so that they themselves can take advantage of less expensive health insurance than they could get on their own as well as tax breaks for the contributions made by the business.

Unless you are an employer in Hawaii, you are not required by state law to offer your employees health insurance benefits. Hawaii is the first state to require employers to provide health insurance to employees. The law, the Prepaid Health Care Act, was passed in 1974 and requires employers to provide health insurance to all full-time employees, either through an indemnity plan or an HMO. (The requirement that Massachusetts employers with more than ten employees make a fair share contribution for full-time employees’ health insurance coverage costs or pay a fair share contribution per employee is no longer in effect as of July 1, 2013, due to to the implementation of federal health care reform.)

The Patient Protection and Affordable Care Act and related legislation requires employers with 50 or more full-time employees (or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) to offer adequate health coverage or be subject to assessment if their employees receive premium tax credits to buy their own insurance. This mandate is in effect beginning in 2015. Conversely, beginning in 2010, small businesses with fewer than 25 employees may be eligible for a tax credit for purchasing health insurance for their employees.

If you do make the decision to offer health insurance benefits, be aware that you call into play a whole series of laws that will tell you what coverage you have to offer and how you have to offer it. Therefore, the first decision to make is whether to offer health insurance at all.

Pros and Cons of Offering Health Care Benefits

There are a number of advantages to offering health benefits to your workers. Here are a few of the major ones:

  • Attract and retain the most qualified employees. Whether health insurance is absolutely necessary to attract and retain the most qualified employees will depend upon factors such as whether your competitors or other similarly sized employers in your area are offering health insurance.
  • Avoid health care reform assessments. The Patient Protection and Affordable Care Act and related legislation requires employers with 50 or more full-time employees (or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) to offer adequate health coverage or be subject to assessment if their employees receive premium tax credits to buy their own insurance. This mandate is in effect beginning in 2015.
  • Gain tax advantages. You can offer employees something that increases their compensation package and yet allows you an income tax deduction for the contribution, so that your out-of-pocket cost is less than the value of the benefit to the employee. Self-employed individuals can deduct 100 percent of their health insurance premium costs as a business expense. You can always deduct 100 percent of premiums for your employees. If the business is incorporated, all costs for your own insurance as well as your employees’ is deductible.
  • Take advantage of the small business health care tax credit. Small businesses with fewer than 25 employees may be eligible for a tax credit for purchasing health insurance for their employees.
  • Offer employees group purchasing power. Even if you decide not to contribute anything toward your employees’ health insurance, you can offer them the opportunity to obtain group rates through your business. In addition, small businesses (generally, those with 50 or fewer full-time employees) may purchase health care coverage through a government-run insurance marketplace established specifically for them—the Small Business Health Options Program (SHOP).
  • Ensure the wellness of your workers. Insurance plans offer preventative care that can keep employees healthy and working. If employees don’t get preventative care and yearly physicals (which they might not do if they don’t have insurance), you could end up having more employees out for long periods of time with serious illnesses.

There is a downside to offering health benefits, too. Some of the cons of offering health benefits are:

  • The costs. Health care costs have risen enormously in recent years. As a result, not only are the costs draining valuable resources from many small employers, the uncertainty makes financial planning extremely difficult.
  • The sometimes tense business of cost-sharing with employees. There is a way for a small employer to control costs and return certainty to the process: push any additional costs on to employees. While that may solve the financial problems, it creates many others. Even if you don’t want to push all the costs on to employees, pushing some of the costs on to them is inevitable.
  • The administrative hassles. Even though the insurance company from whom you purchase the health insurance will usually act as plan administrator, you will have to choose the insurer and then spend part of your time filling out forms, remitting premiums, and acting as intermediary between employee and insurer, among many other tasks.
  • The potential liability. The potential for liability for selecting a health care provider that commits malpractice on an employee does exist. While this risk is small and should not be the driving reason behind a decision not to offer health insurance, you should be aware that several employers have been sued by their employees for what they contend was their employer’s carelessness in selecting a provider.

Small Business Health Care Tax Credit for Small Employers

What You Need to Know about the Small Business Health Care Tax Credit
How will the credit make a difference for you?

For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.

For tax years beginning in 2014 or later, there are changes to the credit:


  • The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
  • To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
  • The credit is available to eligible employers for two consecutive taxable years.


Here’s what this means for you. If you pay $50,000 a year toward employees’ health care premiums — and if you qualify for a 15 percent credit, you save… $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.


Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.


There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration. For more information on sequestration, click here.


And finally, if you can benefit from the credit this year but forgot to claim it on your tax return, there’s still time to file an amended return. Refund limitations may apply. Generally, a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.


Click here if you want more examples of how the credit applies in different circumstances.

Can you claim the credit?

Now that you know how the credit can make a difference for your business, let’s determine if you can claim it.

To be eligible, you must cover at least 50 percent of the cost of employee-only (not family or dependent) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 (as adjusted for inflation beginning in 2014) per year. Remember, you will have to purchase insurance through the SHOP Marketplace (or qualify for an exception to this requirement) to be eligible for the credit for tax years 2014 and beyond. Participating in the direct enrollment process, such as the one adopted by federally-facilitated SHOP Marketplaces, counts as SHOP Marketplace participation for 2014 only.

Let us break it down for you even more.

You are probably wondering: what IS an FTE. Basically, two half-time employees count as one FTE. That means 20 half-time employees are equivalent to 10 FTEs, which makes the number of FTEs 10, not 20.

Now let’s talk about average annual wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average annual wages you divide $200,000 by 10 — the number of FTEs — and the result is your average annual wage. The average annual wage would be $20,000.

Also, the amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000 (as adjusted for inflation beginning in 2014), the amount of the credit you receive will be less.

How do you claim the credit?

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941.


If you are a small business, include the amount as part of the general business credit on your income tax return.


If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.
Don’t forget… if you are a small business employer, you may be able to carry the credit back or forward. And if you are a tax-exempt employer, you may be eligible for a refundable credit.


IRS – finally – issues your health reform homework (but still in draft form)

More than four years after the Affordable Care Act was signed into law, employers are just now getting a complete picture of what’s required of them to comply with the employer “play-or-pay” mandate.

For years, the Internal Revenue Service (IRS) has been releasing info in dribs and drabs about the reporting requirements that will actually make enforcement of the employer mandate possible.

This past winter, the IRS attempted to lay out the two types of reporting that must be done:

  • Tax Code 6055 reporting. This applies to insurers and sponsors of self-insured plans. What must be reported? Data about the entity providing insurance coverage — like the contact information for the company — and which individuals are enrolled in coverage, with identifying information and the months for which they were covered.
  • Tax Code 6056 reporting. This applies to employers subject to the play-or-pay rules (employers with 50 or more full-time employees). What must be reported? Data about the organization — like the contact information for the company and the number of its full-time equivalent employees — and information about the coverage (if any) offered to each full-time employee, by month, including the lowest employee cost of self-only coverage offered.

Unfortunately for employers and insurers, these requirements weren’t issued with the forms that would be needed to complete the reporting. As a result, nobody knew exactly what would be asked of them.

Well, the IRS just released the draft reporting forms:

Form 1095-B will be sued to satisfy the reporting requirements under Tax Code 6055, and Form 1094-B will be used to transmit the 1095-B.

Form 1095-C will be used to satisfy the 6056 reporting requirements, and Form 1094-C will be used to transmit the 1095-C.

More to come

Still, in keeping with tradition, the IRS hasn’t yet painted the whole picture. While the draft forms have been released, instructions on how to fill out the firms haven’t.

The IRS says they will be provided in August. Stay tuned

Can Employers Reimburse Employees For Coverage Purchased On The Exchanges?

Can employers reimburse employees for coverage purchased on the Affordable Care Act exchanges? While it seems this question is still being debated among some service providers and a small group of insurance agents, the guidance on this issue is very clear:

Prior to Dec. 31, 2013, some employers were able to provide health insurance by reimbursing their employees for their own individual (non-group) health insurance on a pre-tax or tax-free basis. This approach (also known as a defined contribution health plan) was a popular alternative and permissible prior to 2014 under a few different tactics. But since the beginning of 2014, these plans have been strictly prohibited.


Prior to 2014, the Internal Revenue Service had long-established rules that permitted individual health insurance premium reimbursement by employers. The earliest such mention is IRS Revenue Ruling 61-146 stating that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code § 106. These arrangements were known as an employer payment plan, and applied if the employer paid the premiums directly to the insurance company or reimbursed the employee directly.

Using both health reimbursement arrangements (HRAs) and premium reimbursement accounts (PRAs), employers were permitted to reimburse their employees for non-group or individual health insurance premiums on a pre-tax (if employee was contributing to a PRA) or tax-free basis (if employer was reimbursing using either an HRA or a PRA). By relying on these two vehicles, employers could deduct any money they contributed to their employees’ health insurance premium cost as a business expense under IRC Section 152.

Finally, even before the ACA’s restrictions, employees could not use income that had been set aside on a pre-tax basis through a health flexible spending account to purchase individual health insurance premiums. As reflected in IRS Publication 969: “You cannot receive distributions from your FSA for… amounts paid for health insurance premiums.”

Regulatory action since adoption of ACA

When the ACA was adopted, it included various provisions that many saw as efforts to stop these reimbursement approaches beginning in 2014.

  1. ACA Section 1515: PRAs cannot pay for exchange/marketplace premiums. The ACA included specific language that prohibited PRAs from reimbursing employees for health insurance premiums purchased through the health insurance marketplace (see 26 USC § 125(f), as amended). This black-and-white statutory change was the clearest dead-end for one avenue to pre-tax or tax-free treatment of individual premiums.
  1. DOL FAQ 11, IRS Notices 2013-54, IRS Q&A 1: Standalone HRAs cannot be used for any individual premiums. The enforcement agencies have taken very clear action on pre-tax or tax-free treatment of individual health insurance premiums since 2012. They have specifically noted the difference between “integrated HRAs” and “standalone HRAs.”

An integrated HRA is one that’s integrated with a group health plan offered by an employer and which, under the terms of the HRA, is available only to employees who are covered by primary group health plan coverage that is provided by the employer and that meets the annual dollar limit prohibition. The guidance goes on to state that employer-sponsored HRAs cannot be integrated with individual market coverage

Any HRA that did not meet the definition of an integrated HRA is considered by the guidance to be a standalone HRA.

The guidance has focused on three broad prohibitions on standalone HRAs:

  1. Standalone health reimbursement arrangements violate the annual and lifetime limit benefit mandates and cannot be used after Jan. 1, 2014. Under the 11th release of FAQs by the U.S. Department of Labor, HRAs were prohibited by stating that these plans are considered group health plans and would violate the ACA’s prohibition on annual and lifetime limits.
  1. Employer payment plans must meet all ACA mandates. With the release of IRS Notice 2013-54, the IRS (and identical guidance issued by the DOL) stated very clearly that any standalone HRA must meet all mandates for group health plans (no annual or lifetime limits as well as provide no-cost preventive coverage for employees, and meet requirements related to minimum benefit value plans).
  1. Do not count as “offering coverage” for applicable large employers. HRAs and PRAs that are used to reimburse individual health insurance premiums are not considered as satisfying the large employer mandate to offer coverage, under IRS Guidance on Employer Health Arrangements issued on May 13, 2014.

In an apparent response to efforts by various vendors advocating that there were avenues to accomplish pre-tax reimbursement or payment plans, the Feds addressed one exception under the ACA:

The Departments understand that questions have arisen as to whether HRAs that are not integrated with a group health plan may be treated as a health FSA as defined in Code § 106(c)(2). Notice 2002-45, 2002-02 CB 93, states that, assuming that the maximum amount of reimbursement which is reasonably available to a participant under an HRA is not substantially in excess of the value of coverage under the HRA, an HRA is a health FSA as defined in Code § 106(c)(2). This statement was intended to clarify the rules limiting the payment of long-term care expenses by health FSAs. The Departments are also considering whether an HRA may be treated as a health FSA for purposes of the exclusion from the annual dollar limit prohibition. In any event, the treatment of an HRA as a health FSA that is not excepted benefits would not exempt the HRA from compliance with the other market reforms, including the preventive services requirements, which the HRA would fail to meet because the HRA would not be integrated with a group health plan. This analysis applies even if an HRA reimburses only premiums.

In the most recent posting, the IRS indicated that the U.S. Department of Health and Human Services would soon be issuing additional guidance on this issue.

Penalties for violating prohibition on employer pre-tax or tax-free reimbursement arrangements

There are three types of penalties that would apply for these pre-tax or tax-free reimbursement schemes:

  1. Violations of the ACA benefit mandate provisions (unlimited annual and lifetime limits, and preventive care mandates) would be subject to Section 4980(d) penalties of $100 per day per employee, which are capped at $500,000 per employer per year.
  2. Violations of the ACA applicable large employer mandate to offer coverage to their full-time employees would be subject to the 4980(a) excise tax penalty of $2,000 per full-time employee per year, or approximately $3,400 on a pre-tax basis.
  3. Under the May 13, 2014 guidance, the IRS noted that employers who offered standalone HRAs or PRAs in violation of their guidance and the related regulations would be subject to a $100 per day per person excise tax penalty, which equates to a pre-tax penalty of approximately $61,000 per employee per year for any such arrangements.

Each of these penalties are considered excise taxes, and therefore must be paid with pre-tax dollars and are not tax deductible business expenses for the employer.

Post-tax withholding of health insurance premiums is permitted

Under IRS Revenue Ruling 61-146, the IRS stated that in certain situations where the employee chooses either cash or an after-tax amount to be applied toward health coverage does not count as an employer payment plan. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.

Smith is vice president at Ebenconcepts in Fayatteville, N.C. He can be reached at davidcurtissmith@gmail.com

The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.

IRS Finalizes Regulations for Health Insurance Tax Credits for Small Employers

The Internal Revenue Service has issued final regulations on the tax credit available to certain small employers that offer health insurance coverage to their employees under the Affordable Care Act.

As under the original law, the final regulations in TD 9672 define an eligible small employer as an employer that has no more than 25 full-time equivalent employees, or FTEs, for the taxable year, whose employees have average annual wages of no more than $50,000 per FTE (as adjusted for inflation for years after 2013), and that has a qualifying arrangement in effect that requires the employer to pay a uniform percentage of not less than 50 percent of the premium cost of a qualified health plan offered by the employer to its employees through a Small Business Health Options Program, or SHOP, Exchange. Consistent with the proposed regulations, the final regulations further provide that employees (determined under the common law standard) who perform services for the employer during the taxable year generally are taken into account in determining FTEs and average annual wages.

In determining FTEs, the regulations provide that FTEs should be calculated by computing the total hours of service for the taxable year (using one of three allowable methods) and dividing by 2,080. If the result is not a whole number, the result is rounded down to the next lowest whole number, except if the result is less than one the employer rounds up to one FTE.

The final regulations also provide that premiums paid on behalf of a former employee may be treated as paid on behalf of an employee for purposes of calculating the credit provided that if so treated, the former employee is also treated as an employee for purposes of the uniform percentage requirement.

Consistent with the proposed regulations, the final regulations provide that an employee’s hours of service for a year include the hours for which the employee is paid, or entitled to payment, for the performance of duties for the employer during the employer’s taxable year and provide three methods for calculating the total number of hours of service for employees for the tax able year.

A commenter on the proposed regulations requested that employees of educational organizations be credited with hours of service during employment breaks because the use of a 12-month measurement period for employees who provide services only during the active portions of the academic year could inappropriately result in these employees not being treated as full-time employees. The IRS said the final regulations do not adopt this suggestion because it is inconsistent with the statutory framework of Section 45R, which bases calculations on FTEs, not full-time employees. Wages, for purposes of the credit, are defined in the final regulations (and the proposed regulations) as amounts treated as wages under Section 3121(a) for purposes of FICA, determined without considering the Social Security wage base limitation. To  calculate average annual FTE wages, an employer must determine the total wages paid during the taxable year to all employees, divide the total wages paid by the number of FTEs, and if the result is not a multiple of $1,000, round the result to the next lowest multiple of $1,000.

Another commenter requested that the final regulations clarify whether bonuses are included in the average annual wage calculation. The proposed and final regulations provide that the average annual wage limitation is determined using the definition of wages found in Section 3121(a), determined without regard to the Social Security wage base limitation under Section 3121(a)(1); therefore, bonuses would be included to the extent treated as wages under Section 3121( a) for purposes of FICA.

U.S. Supreme Court Holds That Contraceptive Mandate Does Not Apply to Closely Held Companies

This morning, the U.S. Supreme Court, in a 5-4 ruling in Burwell v. Hobby Lobby, held that PPACA’s contraceptive mandate, as it applies to closely held for-profit employers, violates the Religious Freedom Restoration Act of 1993 (RFRA). As background, PPACA requires non-grandfathered group health plans to provide coverage for women’s preventive services – including Food and Drug Administration-approved contraceptive services (e.g., birth control) – with zero cost-sharing to the participant. On the contraceptive services, there is a limited exception for religious employers and their affiliates. However, that exception does not extend to private for-profit employers.

In this case, various for-profit employers (including Hobby Lobby Stores and Conestoga Wood Specialties Corporation), based on their owners’ sincere religious beliefs, objected to covering some or all contraceptive services mandated by PPACA. The essential question addressed by the court was whether for-profit corporations can be considered “persons” that can have and exercise their own religious beliefs — a right protected under the RFRA. Very generally, the RFRA prohibits the government from substantially burdening a person’s religion unless the government demonstrates that the burden has a compelling governmental interest and is the least restrictive means of furthering that interest.

The U.S. Supreme Court held that the government failed to show that the contraceptive coverage mandate is the least restrictive means of advancing its interest in guaranteeing cost-free access to birth control. Thus, PPACA’s contraceptive mandate cannot be imposed on a closely held for-profit company, meaning such companies do not have to provide contraceptive coverage at zero-cost sharing. Importantly, the ruling is limited only to the contraceptive mandate, and should not be understood to mean that all insurance mandates (e.g., those for blood transfusions or vaccinations) necessarily fail if they conflict with an employer’s religious beliefs.

Finally, the ruling applies specifically to “closely held corporations,” a term generally defined by state corporate law, but which very generally includes companies whose stock is not publicly traded and whose ownership is controlled by members of a single family or a limited number of investors. Thus, the ruling does not appear to apply broadly to other for-profit companies, such as publicly traded corporations; rather, it applies only to those that are closely held by families and limited investors with sincere religious beliefs. It remains unclear whether closely held corporations will be required to certify their religious objections; future guidance will hopefully address that issue.

NFP Benefits Compliance will continue to monitor these developments, and will provide additional information in Compliance Corner, our biweekly benefits compliance newsletter.

Burwell v. Hobby Lobby

Employer Mandate: Measurement and Look-back Periods

Beginning in 2015, PPACA’s employer mandate generally requires applicable large employers to offer

coverage to all full-time employees (FTEs), defined as those working at least 30 weekly or 130 monthly

hours, and their dependents, or risk a penalty. Employers face special challenges in identifying which

of their employees are FTEs, particularly for those with irregular or seasonal work schedules, such as

landscaping and construction companies, hotels, restaurants, retail and similar businesses. Employers

with these types of employees may choose to implement “measurement periods” (also commonly

referred to as “look-back periods”) to determine whether the employee actually works enough hours to

be considered an FTE for purposes of the employer mandate.

“Variable Hour” and “Seasonal” Defined

   Before discussing the details relating to measurement periods, it is important to understand the

   definition of “variable hour” and “seasonal” employees.

A “variable hour” employee is one whose schedule cannot be definitively known in advance. In other

words, the employee’s hours vary such that it is not possible to determine in advance whether the

employee will work 30 weekly (or 130 monthly) hours or more during their period of employment.

Factors that may apply in identifying variable hour employees include whether:

1. The employee is replacing a full- or part-time employee

2. Employees in the same or similar positions are full- or part-time employees

3. The job was advertised or otherwise represented as requiring 30 hours or more per week

A “seasonal” employee is one whose customary annual employment does not exceed six months and

whose work begins at approximately the same time each year. Examples of a seasonal employee may

include a holiday seasonal retail store employee, a ski instructor or a golf course maintenance worker.

In special circumstances, an employee may still be considered seasonal where the season extends

beyond six months, such as when a ski instructor works seven or eight months due to an unusually

long winter.

Importantly, the following would not likely be considered variable hour or seasonal employees: a nonseasonal,

short-term, full-time employee; an intern or per diem employee working full-time hours; or

an employee hired into a high-turnover position but working full-time hours.

Measurement and Stability Periods Generally

For variable hour and seasonal employees, employers have the option to use measurement periods to

determine if the employee is an FTE to whom they must offer coverage. In the alternative, employers

can track hours and determine FTE status on a monthly basis. Generally, a measurement period

is a period of between three and 12 months (the employer can choose) during which the employer

measures the average weekly or monthly work hours of the employee. If, during that measurement

period, an employee works 30 hours or more per week (or 130 hours per month) on average, then

that employee becomes eligible for coverage (i.e., is treated as an FTE) during a subsequent coverage

period, called a “stability” period. Employers may also implement an “administrative” period between

the measurement and stability periods, in which the employer calculates the measurement period

hours, notifies eligible employees of FTE status and provides an enrollment opportunity for them to

elect coverage.


Employers may use a different measurement period for employees in the same category, of which there are four: collectively bargained and non-collectively bargained employees, employees covered by different collective-bargaining agreements, salaried or hourly employees, and primary places of employment in different states.

Details on the measurement periods vary for ongoing employees (standard periods) versus newly hired employees (initial periods). The differences between standard and initial periods are described in more detail below.


Ongoing Employees

General Parameters for Standard Periods (Ongoing Employees)

Measurement Period 3-12 consecutive months Stability Period The longer of 6 months or the standard measurement period length Administrative Period Up to 90 days Below are two examples of how the ongoing employee standard measurement periods might work with a six-month measurement period (counting hours monthly) and a 12-month measurement period with an administrative period and a calendar-year plan.


For more information please call David at 713.626.2838