Health Care Reform

Small Business Tax Credits

Note: To be eligible for the maximum tax credit, employers must have average annual wages of no more than $25,000.

Who is eligible for the tax credits?

Employers may be eligible for the tax credits if they:

• have fewer than 25 employees;
• have average annual wages of less than $50,000; and
• contribute at least 50 percent of the aggregate single premium cost for each enrolled employee.

Note: To be eligible for the maximum tax credit, employers must have average annual wages of no more than $25,000.

Employers should check with their tax advisor for tax advice.

Do I qualify for the tax credits?

The Health Care Reform Act provides tax credits to small businesses that offer health insurance to their employees and meet the criteria listed in Question 1. Information available on www.irs.gov can help you find out if you may qualify. However, we recommend that you consult your tax advisor for assistance in performing the calculations needed to file for the credit.

Paychex Insurance Agency clients may use our free Small Business Tax Credit Package to help assess their eligibility and file for the credit.

When do I file for the small business health care tax credit?

The due date to claim the new small business health care tax credit is dependent on the business tax year end date and type of business.

• Sole proprietors and some partnerships filing Forms 1040
  April 15 (April 18 as approved by IRS for 2011) deadline. The entities may also file for an extension.
• Corporations filing Forms 1120
  The 15th day of the 3rd month following end of tax year (the business tax year may be different than the calendar year). These entities may also file for an extension.
• Non-profits filing 990T
  The 15th day of the 5th month following end of the tax year (tax year may be different than calendar year). These entities may also file for an extension.

How do I receive the tax credits?

Non tax-exempt employers eligible for the tax credits can take the credits on their annual income tax returns. Tax-exempt businesses must use Form 8941 to calculate the credit and then may claim it on line 44f of IRS Form 990-T.

Can I use tax credits to offset my payroll taxes?

Tax credits cannot be used to offset payroll taxes for non tax-exempt organizations. Tax-exempt businesses can receive the credit it based on their Medicare and employee income tax withholding, although the IRS has not yet provided specific guidance on how this credit will be administered.

Does an employer have to contribute 50 percent of the employees' premium?

Yes, however, the contribution requirement of at least a uniform 50 percent of the employees' cost is based on the premium for single coverage only. When an employee has family coverage, the requirement is met if the employer pays at least 50 percent of what single coverage would have cost for the employee.

What does full-time equivalent mean?

Full-time equivalent (FTE) refers to either a full-time employee or more than one part-time employee as fractions of a single full-time employee. For example, you have two part-time employees each working 20 hours per week in a company where 40 hours is considered full-time. In this example, each part-time employee works 50 percent of a full-time employee. So, together the two part-time employees are the equivalent of one full-time employee. The IRS has issued guidance on how to calculate FTE including how to determine number of hours. Please refer to the following link:

http://www.irs.gov/pub/irs-drop/n-10-44.pdf

For a small business that has less than 25 employees, are all employees counted for the purpose of determining full-time equivalent or are there exceptions?

There are exceptions. For example, the calculation won't include business owners and their family members. The IRS includes the following in its definition of a family member: parent/step parent, child/step child, sibling/step sibling, aunt, uncle, niece, nephew, or in-laws. Also, seasonal workers that work no more than 120 hours are not counted as part of the full time equivalent. Further details can be found at:

http://www.irs.gov/newsroom/article/0,,id=223577,00.html

How often may an employer be eligible for the small business tax credits?

Eligibility for small business tax credits is determined annually through 2013 and is based on tax year full-time equivalents and wages. Employers must apply each year. In 2014, the credit increases, but it is limited to two consecutive years.

Where does a staffing agency fall as far as large or small employer if they have over 100 employees "active" but not all of them work every month?

Consult your legal counsel. There is no specific guidance from the IRS on staffing agencies. Keep in mind different provisions interact separately for valuing how to count employees.

We are a Paychex HR Solutions client; can we apply for the small business credit if we use Paychex' tax ID to report wages?

Shortly after the release of the bill, Senators Nelson (D-FL), Baucus (D-MT), and Grassley (R-IA) provided a communication regarding the intent of the Small Business Tax Credit as it pertained to clients of professional employer organizations (PEOs), such as Paychex HR Solutions. The communication stated that this credit should be made available to clients of the PEO. Based on this communication, it is our understanding that clients will be able to receive this tax credit; however, further clarification is needed regarding exactly how this credit will be applied. We are continuing to monitor this situation and will notify clients as more information is available.

Does Health Care Reform affect employers who have less that 25 employees and currently do not pay any health insurance premiums?

There are additional reporting requirements (notably Form W-2 reporting), as well as notice requirements that most employers will be subject to, although the IRS has not yet provided specifics. The tax credits are also available for small employers as incentives for offering insurance.

How is turnover accounted for in counting full-time equivalents?

Per IRS guidance, the number of an employer's full-time equivalents is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. Certain employees are excluded from the count. See IRS FAQs for additional clarification at http://www.irs.gov/newsroom/article/0,,id=220839,00.html.

One of our companies within a group plan has less than 25 employees and less than $50,000 in average annual wages. They participate in a plan that is a group plan with at least five companies due to common ownership, but each entity files its own tax return. Would they qualify for the tax credit?

Per IRS guidance, members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. For example, all employees of the controlled group or affiliated service group and all wages paid to employees by the controlled group or affiliated service group are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Consult your tax advisor to determine if you meet the IRS definition of a controlled or affiliated group.

Where do we access the state average insurance premium listing for each state?

The average premium per state is published on the IRS Website. It was released under IRS Revenue Ruling 2010-13. You can access it here: http://www.irs.gov/pub/irs-drop/rr-10-13.pdf.

If an employer chooses to reimburse employees for a portion of their individual contracts instead of forming a group, can this employer claim a tax credit?

No guidance is available at this time from the IRS.

If an employee does not participate in the employer-provided health plan, should the employee be counted in the FTE calculation for purposes of the tax credit?

For the purpose of the tax credit, the total number of full-time equivalent employees for the tax year is counted regardless of whether or not they are participating in the health coverage.

Are an owner's wages included in the calculation of FTE for purposes of the tax credit?

Generally, a sole proprietor, a partner in a partnership, a shareholder owning more than 2 percent of an S-corporation, and any owner of more than 5 percent of other businesses are not considered employees for purposes of the credit. The wages or hours of these business owners and partners are not counted in determining either the number of full-time equivalents or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

If eligible for credit, can an employer apply it to previous or future years' tax liability?

For non tax-exempt organizations, the credit for a year offsets only an employer's actual income tax liability (or alternative minimum tax liability) for the year; however, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. An unused credit amount cannot be carried back to a year before the effective date of the credit, so any unused credit amount for 2010 can only be carried forward.

If an employer is tax-exempt, can the employer receive a refund?

For a tax-exempt employer, the credit is a refundable credit, so even if the employer has no taxable income, the employer may receive a refund (as long as it does not exceed the income tax withholding and Medicare tax liability).

How will the credit work for flow-through entities such as S-corps?

Please consult your tax advisor for guidance.

Is the credit available for employee salaries at the $40,000 level?

The credit is based on average salary for the company not on an individual level. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer's tax year by (2) the number of the employer's full-time equivalents for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation). Certain employees are not counted as employees for purposes of determining the amount of average annual wages. For more information see IRS FAQs at: http://www.irs.gov/newsroom/article/0,,id=220839,00.html.

What form can employers use to calculate the tax credit?

Small businesses, including tax-exempt organizations, can use the Credit for Small Employer Health Insurance Premiums form (Form 8941) to calculate the tax credit.

What form will tax-exempt organizations use to claim the tax credit?

Tax-exempt organizations will use a revised Form 990-T to claim the tax credit.

Are non-profit organizations eligible for the tax credit?

Yes, if the eligibility criteria are met.

Is there a mandate under Health Care Reform that will require employers to contribute more than 50% of the total employee premium cost for a plan to be qualified?

For an employer to be eligible for the small business tax credit, they must contribute at least 50% of the total premium cost for each employee enrolled in coverage. The requirement is based on single coverage only. When an employee has family coverage, the requirement is considered met for the employee if the employer pays at least 50% of what single coverage would cost for that employee.

I have three employees year round and 200 that work from April through September. Is my business subject to the provision of greater than 50 full-time equivalents? Am I required to provide insurance to these seasonal full-time employees or risk having to pay a penalty?

The provision of the health care law pertaining to employers providing health insurance coverage to their employees is not effective until 2014; needless to say, there has been no specific guidance issued on the exact implementation of it. As of today, this is what we know.

• Beginning January 1, 2014, employers with at least 50 full-time employees who do not offer minimum essential coverage to full-time employees and have at least one employee receiving federal premium assistance will be subject to a $2,000 annual penalty per employee. Also, if an employer does offer coverage to its full-time employees but also has at least one employee receiving federal premium assistance, the employer will be deemed as providing insufficient coverage and will be subject to the lesser of $3,000 for each employee receiving assistance or $2,000 for each full-time employee.
• For this provision, full-time is defined as working an average of 30 hours or more per week.
• The number of employees is calculated on a monthly basis.
• The first 30 full-time employees are excluded when calculating the annual penalty.

Can a dependent under age 26 who is employed in a family business remain on his parent's plan with the group or should he obtain his own coverage?

Under Health Care Reform, group health plans that offer coverage for dependent children must make that coverage available to certain adult children until they reach age 26. However, there is an exception for grandfathered plans (a group health plan that was in existence on March 23, 2010). Until plan years beginning on or after January 1, 2014, grandfathered plans can exclude an adult child from coverage if he is eligible to enroll in his own employer-sponsored group health plan. Since the adult child is eligible for his own coverage under his employer's plan, as long as the employer's plan is considered a grandfathered plan, he can be excluded from coverage under the parent's plan.

What is the maximum credit for a tax-exempt qualified employer?

For tax years 2010 through 2013, the maximum credit for a qualified tax-exempt employer is 25 percent of the employer's premium expenses. However, the amount of the credit cannot exceed: the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees' annual wages, and the employer's share of Medicare tax on employees' annual wages.

Will Paychex provide any assistance to clients who are eligible for the tax credit?

Paychex does not file business taxes. Clients should ask their tax preparer for help with calculating and filing for the credit. However, if the Paychex Insurance Agency handles the employees' health insurance enrollment applications and changes, clients can receive a free Small Business Tax Credit Package to help assess their eligibility and file for the credit (available for tax year 2011). Additionally, the Paychex Insurance Agency Small Business Tax Credit Estimator allows employers to enter basic information about their employees and receive an estimate of the tax credit they would receive for the coverage they have or are looking to purchase.

Grandfathering Plans

What is a grandfathered plan?

A plan is grandfathered if it provided coverage to participants on, or before, March 23, 2010.

If I change the waiting period or employer contribution of my grandfathered plan, will that affect the grandfathered status of my plan?

On Monday, June 14, the U.S. Department of Health and Human Services, Department of Labor, and Department of the Treasury issued interim final rules that address what changes can be made to health insurance coverage or a group health plan without causing it to lose its "grandfather" status. According to the rule, the following changes will cause a loss of a plan's grandfather state:

• Eliminating all, or a substantial number of, benefits to diagnose or treat a particular condition
• Increasing a coinsurance or other percentage-based, cost-sharing requirement above the level at which it was set on March 23, 2010
• Increasing an annual deductible or out-of-pocket limit by a total percentage — measured from March 23, 2010 — that exceeds the sum of the medical inflation rate plus fifteen percentage points
• Increasing a co-payment by an amount that exceeds the greater of (1) the amount just described for other fixed-amount, cost-sharing requirements, or (2) $5.00 increased by the medical inflation rate since March 23, 2010
• Decreasing the rate of employer contributions by more than five percentage points below the rate that was in effect on March 23, 2010
• Adopting or decreasing an annual benefit limit with the specific rules depending on whether the plan had already imposed an annual or lifetime limit as of March 23, 2010

What are the repercussions to an employer for losing grandfathered status?

A grandfathered health plan is exempt from many of the requirements under Health Care Reform, including: non-discrimination rules; establishment of new appeals procedures; and cost-sharing limits. If a plan loses its grandfather status, the plan will need to meet all the new requirements created for group health plans.

If an employer is currently not paying 50 percent of the employee group coverage and passing along the majority of the cost of the premium to the employees, do they need to disclose that for purposes of grandfathering the plan?

On June 14, guidance was issued relative to grandfathered plans. Included in the regulations was a requirement that in order to maintain grandfather status, an insurer or plan must include a statement in any plan materials that describes the benefits provided under the plan, that it is "believed" that the plan meets the requirements of a grandfathered plan, and contact information for questions or complaints. The guidance also provided model language that can be used to satisfy this disclosure requirement.

We changed health care plans on May 1, 2010. Would we be considered grandfathered?

On June 14, 2010, guidance on grandfathered health plans was issued to identify that certain plan changes would cause a plan to lose its grandfather status. If a plan loses grandfather status, it will be required to follow many of the new requirements under Health Care Reform to which it was previously exempt. These changes include significantly raising deductibles and cutting benefits, as well as changing insurance companies.

On November 15, 2010, the Departments of Health and Human Services, Labor and Treasury issued an amendment (effective the same day) to the regulations previously issued in June regarding grandfathered health plans. Under this amendment, a group health plan would not lose that status if it changes insurance carriers as long as it does not make any of the other changes listed in the original regulation (including benefit eliminations, cost-sharing percentage increases, certain fixed-amount cost-sharing increases, certain employer contribution rate reductions, and annual benefit limit decreases.) A plan may lose its grandfathered status depending upon the effective date of the carrier change.

The effective date of this amendment is November 15, 2010, and applies on a prospective basis only; it will not apply to such changes made to group health insurance prior to this date. The date used to determine how this amendment will apply to group health plans is based on the date that the new coverage becomes effective and not the date that the contract for a new policy, certificate, or contract of insurance is entered into. Therefore, for example, if a plan enters into an agreement with an issuer on September 28, 2010, for a new policy to be effective on January 1, 2011, then January 1, 2011 is the new policy effective date and is therefore, the relevant date for purposes of determining the application of the amendment to the interim final regulations. If, however, the plan entered into an agreement with an issuer on July 1, 2010, for a new policy to be effective on September 1, 2010, then the amendment would not apply and the plan would cease to be a grandfathered health plan.

The Department of Labor's Employee Benefits Security Administration has posted the following information related to grandfathered health plans under the Affordable Care Act:

• Fact Sheet, available at: http://www.healthreform.gov/newsroom/keeping_the_health_plan_you_have.html
• FAQs, available at http://healthreform.gov/about/grandfathering.html

Group health plans and insurers are required to implement an "effective appeals process" for appeals of coverage determination and claims, including both internal and external appeals.

Internal appeals requirements include:

1. providing notification to employees of the available internal and external appeals process and the availability of consumer assistance or an ombudsman to assist with the process; and
2. allowing enrollees to review their files, to present evidence and testimony as part of the process, and to receive continued coverage pending the outcome of the appeal.

The requirement for the external appeals process can be satisfied by either:

• complying with the applicable state external review process; or
• establishing a process that meets the minimum standards set by the U.S. Department of Health and Human Services, and is similar to the applicable state requirements if the state has not issued guidance or if the plan is self-insured and therefore not subject to state regulation.

This is effective September 23, 2010, and does not apply to grandfathered plans.

If a company keeps their current plans started before March 23, 2010, but adds a high-deductible health plan (HDHP), will the current plans maintain grandfathered status?

The addition of an HDHP plan should not affect the ability for the company's existing plans to maintain grandfathered status; however, the HDHP that is added would not be grandfathered. There are other criteria that could cause the existing plans to lose this status. The company should check with an attorney or benefits provider regarding the status of their plans.

An employer wants to implement different contribution levels depending on whether the participants are smokers or non-smokers. Will this affect the grandfather status?

Based on additional guidance issued September 20, 2010, a group health plan or health insurance coverage will cease to be a grandfathered plan if an employer decreases its contribution rate toward the cost of any level of coverage by more than 5 percentage points below the contribution rate in effect on March 23, 2010.

If a group renews a plan without making any changes, will the plan maintain grandfathered status?

If a group renews the same plan and has not modified the plan in any way that would affect its grandfathered status since March 23, 2010, other than to comply with Health Care Reform provisions (i.e. increasing annual limits on essential benefits), the plan generally will maintain grandfathered status.

If an employer does not currently contribute to a plan, will the plan lose its grandfathered status?

A plan will lose grandfathered status if significant changes are made to the plan that reduce benefits or increase costs to participants. If a plan remains the same as it was on March 23, 2010, it most likely will not lose its grandfathered status.

Non-Discrimination

What is a Highly Compensated Individual (HCI)?

An HCI refers to a highly compensated employee who meets one of the following criteria: is one of the five highest paid officers of a company, is a shareholder of more than 10 percent of a company's stock (with the application of attribution under section 318), or is one of the highest paid 25 percent of all of a company's employees. Discrimination in favor of a company's HCIs with respect to eligibility and benefits is prohibited under IRC §105(h) for self-insured plans. The new Health Care Reform law expanded the non-discrimination provisions to non-grandfathered fully insured plans, although recent IRS guidance has delayed the effective date for fully insured plans to comply.

Does the non-discrimination provision mean that a corporation cannot pay 100 percent for owners and management if it does not pay 100 percent for all employees?

The new Health Care Reform law notes that beginning for plan years on, or after, September 23, 2010, health plans satisfy the non-discrimination requirements if: (1) the plan does not discriminate in favor of highly compensated employees as to eligibility to participate based on certain criteria under the code; and (2) the benefits provided under the plan do not discriminate in favor of participants who are highly compensated employees. Recent IRS guidance has delayed the effective date for fully insured plans to comply.

What are the potential penalties for highly compensated individuals of fully-insured group health plans?

Rules similar to the non-discrimination rules for self-insured plans were originally effective January 1, 2011 for calendar year plans. However, IRS Notice 2011-1 issued in January 2011 provides that the non-discrimination provisions are not applicable until additional guidance is issued. The penalties for failure to comply with the non-discrimination provisions will also not apply until that time.

Can an employer have two different types of coverage so all employees have access to all plans but a certain (large) group of employees have higher employer contribution?

An employer will still want to ensure that plans do not discriminate in favor of highly compensated employees within the various classifications.

Can employers contribute more toward the premiums for non-highly compensated individuals?

The regulations do not specifically address whether required employee contributions (or corresponding employer contributions) must be uniform. However, it is implied that employers would need to contribute the same benefits amount to both non-highly compensated and highly compensated individuals.

An employer only offers group health insurance to key employees and pays 100 percent under the current plan. The employer wants to provide group health insurance to the other employees but does not want to pay 100 percent; however, he wants to continue paying 100 percent of the premium for key employees. Is the employer discriminating?

For self-insured plans, non-discrimination requirements are satisfied only if: (1) the plan does not discriminate in favor of highly compensated individuals (HCIs) as to eligibility to participate; and (2) the benefits provided under the plan do not discriminate in favor of participants who are highly compensated employees. Generally a plan does not meet the non-discrimination requirements unless all benefits provided to HCIs participating in the plan are provided to all other participants in the plan. An HCI is defined as:

• One of the five highest paid officers,
• A shareholder who owns (with the application of 318) more than 10 percent in value of stock of the employer, or
• Among the highest paid 25 percent of all employees.

Does non-discrimination take away a company's ability to class employees in different categories?

Under Health Care Reform, insured health plans (other then those that meet the grandfathered status requirement) must meet the nondiscrimination rules under Internal Revenue Code (Code) section 105(h)(2). These rules prohibit discrimination in favor of highly compensation individuals (HCIs) with respect to both the eligibility to participate in the plan, as well as the benefits received under the plan. All benefits provided to HCIs who are participating in the plan must also be provided to other participants in the plan. (Individuals will be considered an HCI if they are: one of the five highest paid officers of a company; a shareholder of more than 10 percent of the company's shares (attribution rules apply); or one of the highest paid 25 percent of all the company's employees.)

Can an employer have multiple medical plans with different waiting periods if they do not have different classes of employees? (For example, the employer has Aetna and Kaiser medical insurance. The Aetna policy has a waiting period of 60 days and the Kaiser policy has a waiting period of 90 days.)

The non-discrimination rules are not clearly outlined in the guidance provided in Internal Revenue Code (Code) Section 105(h). We cannot comment on a business's specific plan design; contact your attorney or benefits advisor to determine if this would be allowable.

Can an employer have different waiting periods by class or site location?

Offering different waiting periods could affect the Eligibility Test as well as the Benefits Test. Contact your CPA or benefits attorney for more specific information.

Which test would an employer use for discrimination testing for waiting period and contributions?

There are two components to the new non-discrimination requirements for fully insured plans that a plan must pass: (1) the Eligibility component and (2) the Benefits component.

a. The plan must benefit at least 70 percent of all employees.

Example: Company has 100 employees; 75 are participating (i.e. benefiting) in the plan. Since at least 70 percent of all employees are benefiting, this plan passes the test.

OR

b. b. A total of 80 percent of the 70 percent that would be eligible are benefiting from the plan.

Example: There are 100 employees. 75 are eligible but only 60 are participating. In this example, you have more than 70 percent eligible for the plan and since 60 employees are participating (which is greater than 80 percent benefiting of the 70 percent that is eligible), this plan passes the test.

(2) Benefits

c. All benefits provided to highly compensated employees (HCIs) who are participants in the plan must be provided to all other participants. Also, all the benefits available for the dependents of HCIs must be available on the same basis as dependents of all other participants. The regulations do not specifically address whether required employee contributions must be uniform (or corresponding employer contributions); however it is implied, and based on the spirit of the law, that participant contributions be considered under the Benefits Test and not discriminate in favor of HCIs. Recent IRS guidance has delayed the effective date for fully insured plans to comply.

Is it possible to avoid discrimination testing by offering a cafeteria plan?

An eligible small employer is provided with a safe harbor from cafeteria plan non-discrimination requirements for specified, qualified benefits offered under the plan, if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements. To take advantage of the safe harbor, these requirements must be written into the cafeteria plan documentation (i.e., Plan Document and Summary Plan Description). If a fully insured health plan has grandfathered status, that plan would be exempt from the new non-discrimination requirements under Section 105(h) as outlined in the new Health Care Reform laws. If the plan is not grandfathered and not part of a simple cafeteria plan, it would be subject to the non-discrimination requirements. Recent IRS guidance has delayed the effective date for fully insured plans to comply with the new nondiscrimination requirements.

An employer provides varying levels of life insurance depending upon the salary range of employees. Is this type of arrangement considered discriminatory?

Life insurance is not included in Health Care Reform, and therefore is not affected by the non-discrimination provisions of the reform; however, group life insurance offerings by employers are subject to non-discrimination testing. If an employer bases the amount of life insurance coverage on salary, the benefit level is not equal throughout the workforce. In this scenario, key employees would be in the highest bracket and receiving a higher value policy than an employee in a lower salary bracket. This type of plan is considered to be discriminatory. A tax advisor can provide guidance and specific details.

Is it discriminatory if an employer pays 100 percent of the premium for salaried employees and 50 percent of the premium for the remaining hourly employees?

Providing different coverage levels for different classes may be considered discriminatory, as the higher-paid employees would be paying less for their coverage than the lower-paid employees. This aspect of discrimination is not addressed directly in the Health Care Reform law but can found be in correlating tax law (Section 1.105-11(c) and Section 105(h) of the Tax Code). Contact your tax advisor or benefits attorney for more specific guidance.

FSA, HSA, and HRA

What items are reimbursable without a prescription under my medical FSA?

Over-the-counter medicines and drugs, such as cough and cold medicine, pain relief treatment, and allergy and sinus medication, will require a prescription from a medical professional to be covered. Other items not considered a drug or medicine, such as bandages, contact lens solution, and crutches, will remain eligible for reimbursement without a prescription.

When referring to non-reimbursed plans for HSA accounts, does the HSA not pay for over-the-counter medications as of next year?

As of January 1, 2011, over-the-counter medicines or drugs (other than insulin) will no longer be eligible under a health FSA, HSA, or HRA unless they were prescribed by a medical practitioner. This would include expenses such as aspirin, over-the-counter cold or allergy medicine, or cough suppressants. It is important to stress that they are still eligible; however, participants need a prescription to accompany the purchase of these items.

Can the medical FSA cap be set at less than $2,500?

Medical FSAs will be capped at $2,500 beginning in 2013 and indexed for inflation thereafter. Employers must observe the cap; however, the maximum can be set at less than $2,500. This must be outlined in the plan documentation.

If an employer fully funds a health retirement account (HRA) and makes no contribution toward employee group insurance premiums, does the contribution to the HRA qualify the employer for the small business tax credit?

No, HRA employer contributions are not eligible for the small business tax credit.

Young Adult Coverage

Does the provision for coverage of dependents up to age 26 include their children or spouses?

Coverage of dependents up to age 26 does not extend to a spouse or a child of the adult child dependent.

When is the provision to provide coverage for dependents up to age 26 effective?

Effective September 23, 2010, or January 1, 2011, for calendar year plans, employers who already offer insurance coverage for dependents must provide coverage for dependent children up to age 26 under group and individual policies. Grandfathered plans are not required to provide coverage to dependents that do have access to an employer-provided health care plan until after January 1, 2014.

Will the provision for coverage of dependents up to age 26 cause insurance rates to increase?

The law prohibits insurers from raising rates based on the age of the dependents. According to regulations released by the U.S. Department of Health and Human Services, policy holders with dependents will generally see an across-the-board increase in premiums of 0.7 percent in 2011, which will likely be followed by a 1 percent increase each year for the next two years. This is in addition to regular annual insurance rate increases.

Can plans open up and give adult child dependents coverage now, or do the plans have to wait until September 23, 2010, or January 1, 2011?

They don't have to wait. A plan can bring on adult child dependents early. Some carriers have chosen to do so, but it is also up to the employer to agree to allow the adult dependent child to be covered. Participants should consult with their employer to see if coverage will be offered. It should also be noted that employers that currently do not offer health care to dependent children will not be under any obligation to do so until January 1, 2014.

If dependents were enrolled and then dropped at age 23, can they re-enroll for coverage up to 26?

There are special enrollment provisions for children that either lost coverage or had been denied coverage because of their age but are now eligible for coverage under the adult child rules. Eligible dependents must be provided a written notice detailing their enrollment rights, as well as a 30-day special enrollment period during which they elect coverage. These must be provided no later than the first day of the plan year beginning on, or after September 23, 2010 (January 1, 2011, for calendar year plans). The effective date of this coverage will be the first day of the plan year in which the dependent is enrolling.

Is it mandatory for dependents age 18-26 to be enrolled under their parents' health care plan or can they still enroll on their own?

The adult dependent provision does not require that dependents remain enrolled under their parents' plan.

Does the provision for coverage of dependents up to age 26 affect all businesses?

Employers that provide dependent coverage under the group health plan must continue to provide coverage to adult children until they reach age 26.

Does the provision for coverage of dependents up to age 26 apply if a 26-year-old files his own taxes and is not considered a dependent of an employee?

This adult dependent coverage is dependent upon a parent-child relationship existing between the dependent and the participant. It cannot be dependent upon any other factors, such as tax-dependent status, financial dependency, or residency. The only exception permissible is that before January 1, 2014, grandfathered plans are not required to provide coverage if the dependent is eligible for coverage under an employer-sponsored health plan (such as through their own job).

Are employers required to cover any full-time employee's adult child if requested by the employee?

Employers that provide dependent coverage under the group health plan must continue to provide coverage to adult children until they reach age 26; however, there is not a requirement for an employer to provide dependent coverage under their group health plan.

We already cover dependents up to age 25. What will we need to do when it changes and we need to cover until age 26?

Some carriers are currently providing coverage. So, you may have a choice if you wish to offer coverage earlier than your next plan year, on or after September 23, 2010. If you do want to offer coverage before that plan year, consult your carrier(s) to see if they are offering this early coverage. If so, allow them to walk you through the enrollment process. Otherwise, if you are going to offer coverage beginning at your next open enrollment, on or after September 23, 2010, the dependent child may be enrolled on the health care application as any other dependent child; however, keep in mind that the dependent cannot have healthcare available from his employer.

How does the age 26 regulation change when the adult dependent is eligible for other coverage?

Plans that offer dependent coverage must make that coverage available until the child reaches age 26. This applies to married and unmarried children, as well as children that have other coverage available to them. The only exception is for grandfathered plans, which are not required to continue coverage if the child has access to coverage through his employer; however, this exception will no longer apply beginning 2014.

What happens in the year a dependent turns 27?

Under the federal law, adult dependent coverage only applies until the date the dependent reaches age 26; however, some plans may allow for coverage to continue beyond the dependent's 26th birthday. If coverage extends beyond the dependent's birthday (for example through the end of the plan year), the value of the coverage can continue to be excluded from the employee's income for the full tax year in which the child reached age 26. In addition, some states may require that adult dependent coverage continue beyond age 26. (Please check with your state's department of insurance to see if your state has such a requirement.) Once the dependent ages off the plan, he or she may be eligible to continue coverage through federal COBRA or state continuation regulations.

We charged imputed income for adult dependent coverage. Do we have to refund the April imputed amounts?

If you are speaking of tax you withheld because this imputed value before March 30 was taxable for federal income tax, then for federal purposes (only as of March 30) adult children who have not reached the age of 27 by the end of the tax year have the value of their health coverage tax-free; however, keep in mind that this may not apply at the state level, so imputed income may need to be reported and tax withheld and paid at the state level.

I am a young adult under the age of 26, and I am on my parents' plan now. I am scheduled to lose coverage soon. How can I keep my health insurance?

You have a number of options. First, check with your insurance company. Private health insurance companies that cover the majority of Americans have volunteered to provide coverage for young adults losing coverage as a result of graduating from college or aging out of dependent coverage on a family policy. This stop-gap coverage, in many cases, is available now.

Second, watch for open enrollment. Young adults may qualify for an open enrollment period to join their parents' family plan or policy on, or after, September 23, 2010. Insurers and employers are required to provide notice for this special open enrollment period. Watch for it or ask about it.

Finally, expect an offer of continued enrollment for plans that begin on, or after, September 23, 2010. Insurers and employers that sponsor health plans will inform young adults of continued eligibility for coverage until age 26. Young adults and their parents need not do anything but sign up and pay for this option.

I work in New York and there is a provision that indicates that dependents up to the age of 29 can be added to an insurance plan. Does the federal or state regulation take precedence?

The requirements for adult dependent coverage in New York apply to individual and group policies that provide dependent coverage, are issued in New York state and subject to New York state laws, and are fully insured plans. In addition, the young adult must meet certain eligibility requirements. (Information on adult dependent coverage can be found on the New York State Department of Insurance Website at: http://www.ins.state.ny.us/faqs/faqs_S6030_Age29_make.htm). The adult dependent coverage requirements apply to all group health plans and individual health insurance policies that provide dependent coverage. The only exception is for grandfathered plans that are not required to extend coverage if the adult dependent has access to other group coverage provided by their employer until 2014. The determination of which rule will apply will be based upon your specific plan.

How long can participants submit FSA claims for their adult dependents?

Participants can submit FSA claims for eligible expenses incurred by their adult dependents on or after March 30, 2010, through the end of the calendar year in which the dependent turns 26. Adult dependents no longer need to live with parents, attend school, or be a dependent for tax purposes. In addition, the dependent can be married; however, the spouse is not eligible. For example, Jane is a participant in her company's 2011 health FSA plan. She has a son who turns 26 on December 15, 2011. Because her son is considered an adult dependent through the end of the calendar year in which he turns 26, Jane can continue to submit expenses through the end of 2011 for her adult dependent son's expenses.

Can a dependent under age 26 who is employed in a family business remain on his parent's plan with the group or should he obtain his own coverage?

Under Health Care Reform, group health plans that offer coverage for dependent children must make that coverage available to certain adult children until they reach age 26. However, there is an exception for grandfathered plans (a group health plan that was in existence on March 23, 2010). Until plan years beginning on or after January 1, 2014, grandfathered plans can exclude an adult child from coverage if he is eligible to enroll in his own employer-sponsored group health plan. Since the adult child is eligible for his own coverage under his employer's plan, as long as the employer's plan is considered a grandfathered plan, he can be excluded from coverage under the parent's plan.

What is the maximum credit for a tax-exempt qualified employer?

For tax years 2010 through 2013, the maximum credit for a qualified tax-exempt employer is 25 percent of the employer's premium expenses. However, the amount of the credit cannot exceed: the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees' annual wages, and the employer's share of Medicare tax on employees' annual wages.

Reporting Value of Insurance Plans on Employee Forms W-2

What is the Form W-2 Reporting provision all about?

Essentially, this provision is about transparency and education, requiring employers to report the total value of an individual employee's health benefits on their W-2 form. As a result, employees will better understand the true benefit they receive through their employers, and at the same time gain awareness of the true cost to obtain health coverage. This provision is now optional for employers filing fewer than 250 Forms W-2 in the previous tax year. This is effective for 2012 Forms W-2 (issued in January 2013) and until further guidance is issued. Employers filing 250 or more Forms W-2 in 2011 must include the cost of employer sponsored health coverage on the forms beginning in the tax year 2012.

Even though it is now optional for tax year 2011 and 2012 for some businesses, according to the IRS, how will Paychex collect the information to report the aggregate cost of employer-sponsored health coverage on employees' W-2s?

For payroll clients, we are looking into solutions to be able to provide proper reporting of the total value of health coverage. We are closely monitoring the issue and will communicate more details if more guidance is offered by the IRS.

For clients who purchase health insurance coverage through Paychex Insurance Agency, we will be able to report the value of premiums of the plans we administer, and we are investigating possibilities for transferring the appropriate amounts to Forms W-2 at year-end.

Who is responsible for reporting insurance value on Forms W-2?

Though Paychex may provide assistance, the employer is ultimately responsible for meeting this reporting requirement.

What is the Cadillac Plan Tax?

Effective January 1, 2018, plan administrators or insurers will be charged a 40 percent excise tax if the total value of the employer-sponsored health insurance coverage is above $10,200 for single coverage or $27,500 for family coverage. For high-risk professions and qualified retirees, the figures change to $11,850 for single coverage and $30,950 for family coverage. Note that the IRS has not finalized the regulations on this provision.

What constitutes the total value of the employer premium that must be reported on the Form W-2?

To report the aggregate cost of employer-sponsored health coverage on employees' W-2s, the Form W-2 must include the combined cost of the employer-sponsored health coverage taking into account both the amount the employer pays and the amount the employee pays. The value will then be determined under rules similar to COBRA. The cost of coverage under all applicable employer-sponsored coverage must be included in the aggregate reportable cost. However, the following amounts are not included:

• the amount contributed to any Archer MSA
• the amount contributed to any Health Savings Account (HSA)
• the amount of any salary reduction election to a flexible spending arrangement
• the cost of coverage under a Health Reimbursement Arrangement (HRA)
• the amount that an employee elected to apply to a health FSA under a cafeteria plan under Section 125 (excluding any employer matching contribution)
• cost of coverage under a stand-alone dental plan or vision plan
• cost of coverage under a self-insured group health plan not subject to federal continuation requirements
• cost of coverage of military personnel provided by the federal government (or a state or local government)

Is reporting the value of insurance on Form W-2 informational or a taxable component?

The Form W-2 provision for reporting the total value of health insurance is informational and does not change the taxability.

Does W-2 Reporting mean that the value of health insurance will be taxable to employees?

The Health Care Reform Law includes a provision that all employers must report the total value of employer-sponsored insurance coverage, excluding salary reduction contributions under medical flexible spending accounts (FSAs) contributions to MSA and HSA plans, and stand-alone dental and vision coverage, on employees' Forms W-2. In October 2010, the IRS announced that it will defer the original start date of the requirement, making it optional for tax year 2011 and mandatory for larger employers filing 250 or more Forms W-2 beginning with the 2012 tax year.

There is much speculation in the public and political arena about how this information will affect taxable income and corresponding taxes paid by employers and employees. Paychex closely monitors Health Care Reform developments, and currently, there is no indication or reason to believe that this reporting requirement is an indicator that insurance coverage will be taxed simply because it is reportable on Form W-2.

Certain employer contributions to discriminatory health plans may result in taxable income to the employee; however, this is not a result of W-2 reporting included in the Health Care Reform Law.

We will continue to monitor this issue and will provide details as we receive additional information from the IRS.

Will the cost of the insurance premium we pay for an employee (currently 100%) and report on the Form W-2 be subject to federal, state, or local tax for the employer and employee?

In October, the IRS released the draft 2011 Form W-2 which indicates how the health care cost will be reported in existing Box 12 and also makes it clear that this amount is not taxable income to employees. This amount will not need to be reported on the Form W-3. Certain employer contributions to discriminatory health plans may result in taxable income to the employee; however, such treatment is not a result of Form W-2 reporting requirement of PPACA. Tax structure for employee and employer contributions for the most part have not changed under the new law. The only notable exception was the expansion of the tax exclusion of adult dependents to the age of 27 under section 125 plans. This change allows more dependents covered under their parents' employer's section 125 plan to be excluded from tax contributions, essentially reducing tax liability.

If a small employer doesn't offer group health insurance but pays accident insurance, does that premium need to be reported on the Form W-2?

Plans in which coverage costs can be reported on Form W-2 include medical, prescription, executive physicals, on-site clinics (if they provide more than de minimis care), Medicare supplemental policies, and employee assistance programs. The cost of coverage of stand-alone dental and vision plans and specific disease or hospital/fixed indemnity plans is excluded from the reporting requirement.

What premiums need to be included on the Form W-2?

Employer-sponsored coverage under Form W-2 reporting generally includes (but is not limited to): major medical coverage; Medicare supplemental coverage; employer-provided Medicare Advantage plans; and limited benefit plans. Coverage under dental and vision plans are also included unless they are "stand-alone" plans.

HRA contributions are not included.

Does Form W-2 reporting of insurance plan values apply to all employers?

No. The reporting is optional for the 2011 tax year for all employers but will only be mandatory for those employers filing 250 or more Forms W-2 beginning with the 2012 tax year.

When Does the Form W-2 insurance premium reporting begin?

Form W-2 reporting is now optional for tax year 2011 according to IRS Notice 2010-69 released in October,2010. For larger employers filing 250 or more Forms W-2, the aggregate cost of employer-sponsored health coverage is required to be included on the Form W-2 for tax year 2012.

Does insurance still need to be reported on Forms W-2 if a section 125 is in place?

Whether group health insurance premiums are deducted from an employee's pay on a pretax or post-tax basis does not affect whether it needs to be reported on the Form W-2. According to the new Health Care Reform law, the combined cost of employer-sponsored health coverage must be included on the employee's Form W-2. This combined cost specifically excludes salary reduction contributions under a section 125 health FSA, not the premiums under the premium portion of the section 125.

CLASS Act

What is the CLASS Act? (No longer in place.)

The Community Living Assistance Services and Supports Act (CLASS Act) was a national voluntary insurance program that was intended to offset the cost of long-term care for the elderly and disabled. It was originally planned to be funded by premiums, with cash benefits paid to enrollees (over the age of 18) who paid premiums for at least five years, worked at least three of those years, and met a functional or cognitive "trigger."

Note: in October 2011, Department of Health and Human Services (HHS) Secretary Kathleen Sebelius decided to halt plans to implement the CLASS Act after determining that financing mechanisms were not sufficient.

Miscellaneous Health Care Reform FAQs

What is required of health plans and insurance carriers now that there is a delay in the Summary of Benefits and Coverage (SBC) requirement? What is the timeline for issuance of future guidance on this requirement?

Group health plans and insurance issuers are not required to comply with the SBC requirement, according to the November 2011 announcement by the Departments of the Treasury, Health and Human Services, and Labor. The requirement was originally scheduled to take effect March 2012. There is not currently a timeframe for issuing the final regulations, but the departments anticipate the final regulations will include an applicability date that gives group health plan sponsors and insurance issuers sufficient time to comply. For more information about the SBC requirement, please visit the Department of Labor FAQ page.

Can employers contribute more towards the premiums for lower compensated employees?

Yes.

What is the penalty for individuals who do not obtain health insurance coverage?

Beginning in 2014, individuals will be required to maintain a minimum level of essential coverage. Failure to maintain this monthly minimum level of coverage will result in penalties. The monthly penalty is 1/12th of the greater of:

• 2014 - $95 per uninsured person or 1% of household income over the filing threshold,
• 2015 - $325 per uninsured person or 2% of household income over the filing threshold, and
• 2016 - $695 per uninsured person or 2.5% of household income over the filing threshold.
• After 2016 – the penalty will be increased annually based upon the cost of living

Exceptions to the individual mandate include: financial hardship; religious objections; American Indians; individuals having less than three months of coverage; incarcerated individuals; undocumented immigrants; individuals who cannot afford coverage (required contributions toward coverage exceed 8 percent of household income); and taxpayers with income below the tax filing threshold.

What is the penalty for employers who do not provide health insurance coverage?

There is no penalty for not providing insurance; however, effective 2014, there is a free-rider provision for employers with 50 or more full-time equivalent employees. Employers that have an employee receiving subsidies through the exchange will need to pay a penalty that is assessed on a monthly basis. The fee is different for those that offer insurance and those that do not. For those that do not offer insurance, the employer pays a fee of $2,000 for total full-time employees (minus the first 30 employees). For those that offer coverage but have employees receive subsidies through the exchange, they pay the lesser of the $2,000 per full- time employee (minus the first 30 employees) or $3,000 per employee receiving a subsidy through the exchange.

What happens if an employer chooses not to provide health insurance coverage and accepts the penalties the government imposes?

Refer to question 5 in this section.

What are free choice vouchers?

On April 15, 2011, President Obama signed into law a bill (the Department of Defense and Full-Year Continuing Appropriations Act, 2011) repealing a Health Care Reform provision that required employers who offer health coverage, and pay a portion of the cost, to give health insurance vouchers to low-earning employees.

Under the provision, which would have taken effect in 2014, employees who met certain conditions (based on household income, previous participation in an employer's plan, and required premium contributions) would have been eligible for vouchers, allowing them to use employer funds to help pay for the cost of coverage received through health insurance exchanges.

What type of notice are employers required to provide to employees relating to material modifications of health insurance plans?

Plans must provide no less than 60 days notice before a material modification of the health insurance plan takes effect. There is a fine of not more than $1,000 per day per enrolled individual for failure to provide this notice in the timeframe prescribed.

What is the early retiree subsidy program?

The early retiree subsidy program, effective through January 1, 2014, is a temporary reinsurance program that will help offset costs of coverage for companies that provide early retiree health benefits for those ages 55 and older who are not eligible for Medicare. It reimburses 80 percent of the cost between $15,000 and $90,000 of these employment based plan amounts adjusted each year for the consumer price index. Payments from the reinsurance program must be used to lower costs for the enrollees in the employer's plan. There is $5 billion appropriated for this provision so funds are limited. The Secretary of the U.S. Department of Health and Human Services can stop taking applications for the reimbursement if funds run out. There is guidance and application information on the U.S. Department of Health and Human Services site, http://www.hhs.gov/ociio/regulations/index.html.

When is the provision to limit any waiting periods for coverage to 90 days effective?

The provision is effective for plan years beginning on, or after, January 1, 2014.

If I have an employee who is covered under a spouse at another employer, will she still be forced to obtain coverage through us?

If your employee has qualifying coverage through another employer or through their spouse, you are not required to offer duplicate coverage, nor do you have to provide them with an uncompensated premium co-pay for the other plan.

Is Paychex now offering insurance?

Paychex Insurance Agency offers a wide array of coverage from many different insurance carriers as an agent; however, neither Paychex nor Paychex Insurance Agency is acting as an insurer.

Will there be a time in the future when all full-time and part-time employees must be covered by insurance?

We cannot speculate on what might happen in the future.

Will all employees be required to elect health insurance through their own employer, or can they elect health insurance through their spouse's employer, or from another source?

Employees will be allowed to select the coverage that best suits their needs from all options available to them. They will not be obligated to take the coverage offered by their employer.

I am in the construction industry. Is the industry still required to provide insurance with five or more employees?

The new Health Care Reform law as passed on March 23, 2010, mandated that construction companies with five or more employees (as opposed to 50 or more employees as required for all other industries) provide health coverage for its employees. However, this stipulation was repealed on March 30, 2010, with the Healthcare and Education Reconciliation Act of 2010 and the construction industry is now treated the same as other industries.

What is cost-sharing?

Cost-sharing refers to the amount you pay towards your health care, such as co-pays, deductibles, or coinsurance. It does not include premiums, balance amounts for out of network providers, or costs for non-covered items or services.

Does the 100/200 employee limit for "safe harbor" apply to full-time equivalents or to total number of employees?

The new law does not specify within its definition of an eligible employer if it is the total number of full-time equivalent employees or total number of employees employed. We anticipate additional guidance from the Department of Health and Human Services to be released at a future time as it relates to Simple Cafeteria Plans.

For non-grandfathered plans, what is the employee appeals process?

Group health plans and insurers are required to implement an "effective appeals process" for appeals of coverage determination and claims, including both internal and external appeals.

What is the difference between the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act?

The Health Care and Education Reconciliation Act was signed into law by President Obama on March 30, 2010, to amend certain aspects of the Patient Protection and Affordable Care Act signed into law on March 23, 2010. Together, these two laws make up Health Care Reform.

When a business files Forms 941 and gives credit to the employer for paying the COBRA subsidy, does the employer have to individually list employees receiving the subsidy or is it submitted as one number?

Regarding the Form 941 filing, an employer must indicate the number of individuals who are receiving the premium subsidy. The employer must maintain the detail supporting the information reported on the filing in their records, but those details do not need to be sent with the return. The IRS has created a Web page regarding the COBRA premium subsidy that includes FAQs, as well as the current Form 941 and its instructions. It can be found at http://www.irs.gov/newsroom/article/0,,id=204505,00.html.