In This Compliance Corner Issue:
SIXTH CIRCUIT UPHOLDS HEALTH REFORM INDIVIDUAL MANDATE
On June 29, 2011, the U.S. Court of Appeals for the Sixth Circuit, the first federal court of appeals to rule on the constitutionality of the individual mandate provided under PPACA, affirmed the law’s constitutionality in a 2-1 decision. The panel of judges was comprised of Judge Boyce S. Martin, a Democratic appointee, and two Republican appointees, Judge Jeffrey S. Sutton and Senior Judge James L. Graham. Judge Sutton’s vote to uphold the law marked the first time a Republican-appointed judge has ruled in favor of the constitutionality of the individual mandate. While Judges Martin and Sutton both voted to uphold the law, each provided a separate opinion explaining why, in their view, the law is a valid exercise of Congress’s authority to regulate interstate commerce under the Commerce Clause of the U.S. Constitution. In his opinion, Judge Sutton noted that the Supreme Court “has considerable discretion in resolving this dispute.” Judge Graham dissented and voted to strike down the mandate as exceeding Congress’s authority under the Commerce Clause.
The case could potentially be heard by the entire Sixth Circuit en banc, meaning that the entire panel of Sixth Circuit judges would rule on the case. Ultimately, the issue is expected to be heard by the U.S. Supreme Court, which could occur as early as the upcoming term.
AGENCIES AMEND INTERNAL CLAIMS AND APPEALS AND EXTERNAL REVIEW PROCESS REGULATIONS
The U.S. Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury have amended the interim final regulations released in July 2010 that imposed new requirements on group health plans (both self-insured and fully insured) for internal appeals of claim denials and required an independent external appeal process in accordance with PPACA. As discussed in Technical Release 2011-02, issued by the DOL on June 22, 2011, the amendments revise the minimum standards that a state external review process must include, update the compliance standards for internal claims and appeals processes, and modify the transition period for states to implement these external review processes in order to provide plans and issuers sufficient time to adapt to the new process. If a state’s external review process does not meet these minimum standards, group health plans and health insurance issuers in the group and individual market in that state are required to establish their own external review process that meets the minimum standards established by HHS.
Some modifications to the internal claims and appeals process include:
As for external review, the amendments establish a transition period until Jan. 1, 2012, for states to ensure that their external review processes include the necessary consumer protection standards. HHS will determine whether each state external review process meets the required standards by July 31, 2011. The Technical Release issued in conjunction with the rule amendments also establishes a set of 13 temporary standards that external review processes must meet that will apply until Jan. 1, 2014, when all state external review plans must comply with the full set of standards. If these standards are not met, plans and issuers will be subject to federal external review.
The Technical Release also modifies the enforcement policy with respect to independent review organizations (IROs). Two separate Technical Release documents (2010-01 and 2011-01, issued in August 2010 and March 2011, respectively) set forth an interim enforcement safe harbor for self-insured plans not subject to a state external review process or to the HHS-supervised process. This safe harbor permits a private contract process under which plans contract with accredited IROs to perform reviews. The guidance provides that self-insured plans must contract with at least two IROs by Jan. 1, 2012, and with at least three IROs by July 1, 2012, and to rotate assignments among them in order to be eligible for a safe harbor from enforcement by the DOL or IRS.
In addition, the agencies have released a revised model notice of adverse benefit determination, a revised model notice of final internal adverse benefit determination, a revised model notice of final external review decision and an updated list of consumer assistance programs as of May 23, 2011. Comments on these changes are due on or before July 25, 2011.
Amendment to Interim Final Rule
Technical Release 2011-02
Revised Model Notice of Adverse Benefit Determination
Revised Model Notice of Final Internal Adverse Benefit Determination
Revised Model Notice of Final External Review Decision
Updated List of Consumer Assistance Programs as of May 23, 2011
Source: Littler Mendelson
IRS SEEKS COMMENTS ON FEES IMPOSED ON INSURERS AND PLAN SPONSORS
On June 10, 2011, the IRS issued IRS Notice 2011-35. The notice seeks public comments on the new fees imposed on health insurers and self-funded plan sponsors to fund comparative effectiveness research.
As background, PPACA established a new nonprofit corporation called the Patient-Centered Outcomes Research Institute to conduct the research, which will evaluate and compare health outcomes and the clinical effectiveness of various medical treatments, procedures and drugs. The fees are payable in connection with health insurance policies and self-insured health plans for policy/plan years ending after Sept. 30, 2012. The fees will not be imposed on policy/plan years ending after Sept. 30, 2019. The fees would apply for calendar policy/plan years 2012 through 2018. The request for information provides insight into regulatory guidance that will be released in the future.
“Specified health insurance policy” is defined as an accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States. “Applicable self-insured health plan” is defined as a self-funded plan providing accident or health coverage, which is established or maintained for employees or former employees by an employer, a union or specified groups of employers (including multiple employer welfare arrangements). The fees do not apply if substantially all of the coverage is an excepted benefit under IRC section 9832(c). Excepted benefits include, among others, Health Flexible Spending Accounts (FSAs) satisfying certain conditions, certain limited-scope dental and vision coverage, and certain supplemental coverage. Retiree-only plans are not an exception under IRC section 9832(c); thus it appears such plans will be subject to the fees. The IRS specifically seeks comments on whether non-excepted FSAs or Health Reimbursement Arrangements (HRAs) should be treated as not providing “accident or health coverage” and thus not be subject to the fees.
The fee is $2 times the average number of covered lives under the policy or plan (the fee amount is graduated beginning with a fee of $1 for policy or plan years ending before Oct. 1, 2013). For later years, the fee will be adjusted to reflect the projected per capita increase in the National Health Expenditures (as published by the Treasury). The notice also seeks comments on the methodology used to determine the average number of lives covered. The deadline for comments is Sept. 6, 2011.
IRS ANNOUNCES INCREASE IN STANDARD MILEAGE RATES
In IRS Announcement 2011-40, the IRS announced that it has revised the optional business standard mileage rate, which is used to calculate the deductible costs of operating an automobile for business and other purposes in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage. The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51-cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
The IRS also revised the rate for computing deductible medical or moving expenses, increasing the rate by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The revised standard mileage rates apply to deductible transportation expenses paid or incurred on or after July 1, 2011.
IRS RELEASES 2009 FORM 8955-SSA AND INSTRUCTIONS
The IRS recently released 2009 Form 8955-SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits) and Instructions.
As background, for plan years beginning on or after Jan. 1, 2009, Form 8955-SSA replaces Schedule SSA to satisfy the reporting requirements of IRC section 6057(a), which requires 401(k)s and other retirement plans to report certain information relating to separated plan participants with vested benefits that have not been distributed. Schedule SSA was eliminated from the Form 5500 filing requirements to facilitate the all-electronic filing of Form 5500 beginning with the 2009 plan year.
Form 8955-SSA is a stand-alone reporting form that is filed with the IRS, not the U.S. Department of Labor. The IRS has developed a voluntary electronic filing system for plan administrators who want to file the form electronically. Form 8955-SSA generally must be filed by the last day of the seventh month following the last day of the plan year to which the form applies. To provide administrators with additional time to complete and file the new Form 8955-SSA, the IRS has announced that the due date for filing the Form 8955-SSA for the 2009 and 2010 plan years is the later of Jan. 17, 2012, or the due date that generally applies for filing the Form 8955-SSA for the 2010 plan year. Lastly, Rev. Proc. 2011-31, which was recently released by the IRS, provides specifications for electronic filing with the IRS. The IRS has also released FAQs that address specific issues, including how to obtain credentials for electronic filing.
NINTH CIRCUIT EXPANDS ERISA LIABILITY TO INCLUDE CARRIERS
On June 22, 2011, the U.S. Court of Appeals for the Ninth Circuit in San Francisco, in Cyr v. Reliance Standard Life Ins. Co., ruled that ERISA does not specifically limit which parties can be sued to recover benefits due under the terms of an employee benefits plan.
As background, the plaintiff, Laura Cyr, worked for CTI as a vice president. CTI offered long-term disability benefits through Reliance Insurance. Reliance ultimately controlled whether benefits would be awarded, but it was not the “plan administrator” under ERISA. Cyr was on long-term disability at the time and sought an increase to her benefits. Reliance denied the increase in benefits, so Cyr sued CTI as the plan administrator, CTI’s Long-term Disability Plan and Reliance under different sections of ERISA and the common law, resulting in a settlement and a retroactive adjustment to her salary. In the Ninth Circuit, beneficiaries were limited to suing the plan and plan administrator for denial of benefits under ERISA plans. As a result of this case, insurance companies may now be sued where they have a role in denying benefits independent of the plan administrator. The Ninth Circuit ruling overturns four other employee benefits cases: Ford v. MCI Communications Corp. Health and Welfare Plan, Everhart v. Allmerica Financial Life Insurance Co., Spain v. Aetna Life Insurance Co. and Gelardi v. Pertec Computer Corp. The case could also shape the outcomes of similar lawsuits in other jurisdictions.
EIGHTH CIRCUIT RULES COBRA NOTICE SUFFICIENT BASED ON DATE-STAMPED EVIDENCE OF MAILING
On June 8, 2011, the U.S. Court of Appeals for the Eighth Circuit, in Hearst v. Progressive Foam Technologies, Inc., affirmed that a COBRA election notice was sufficient, based in part on date-stamped evidence of mailing by the United States Postal Service. In this particular case, after an employee failed to return from leave, the employee was terminated. He then sued his employer, claiming, among other things, that his employer failed to provide him with notice of the termination of his benefits as required by COBRA.
The trial court rejected his claim that he had never received an election notice because, to demonstrate that the COBRA notice had been mailed, the employer introduced as evidence an affidavit from their third-party COBRA administrator explaining their usual method of providing notice to a terminated employee, showing their daily log of mailings, verified and date-stamped by the Postal Service. Specifically, the affidavit showed that on April 30, 2007, it had “received notification of a qualifying event” regarding the employee; that on May 2, 2007, an “election notice addressed to [the employee] was generated, printed and placed in an envelope addressed to [the employee]”; and that “the election notice was mailed to [the employee] on May 3, 2007,” as indicated by the post office’s stamp on the administrator’s mailing manifest, which was applied after “the post office clerk verified that the envelope … was in fact mailed and that the name and the address on the envelope matched the name and address on the manifest.” Copies of the letter and the manifest bearing the post office’s stamp were also attached to that affidavit.
The Eighth Circuit agreed that merely claiming that the notice was never received was not sufficient to overcome this evidence of mailing. The court pointed out that the employer had produced evidence through the affidavit to demonstrate not only that the employer had a system for sending out the required notices, but also that the system was in fact followed with respect to the person in question; therefore, the court affirmed that the employer had used a method reasonably calculated to reach the employee.
U.S. SUPREME COURT DISMISSES WAL-MART SEX DISCRIMINATION CLASS-ACTION LAWSUIT
On June 20, 2011, in Wal-Mart Stores, Inc. v. Dukes, the U.S. Supreme Court dismissed one of the most expansive class-action lawsuits ever, brought by about 1.5 million plaintiffs. The plaintiffs were current and former female employees of Wal-Mart who alleged that the discretion exercised by their local supervisors over pay and promotion matters violated Title VII by discriminating against women. In dismissing the class action, the U.S. Supreme Court reversed a federal district court decision that had certified the class under Rule 23(b)(2) of the Federal Rules of Civil Procedure. The decision comes after rulings by the entire Ninth Circuit Court of Appeals, and a three-judge panel of the Ninth Circuit, both of which, in large part, had affirmed the class certification.
On June 3, 2011, the Arkansas Insurance Department issued Bulletin No. 3-2011, which provides a synopsis of all 2011 Arkansas legislation pertaining to insurance. Although the bulletin is specifically directed at insurers, it may be helpful for brokers, producers and employers. The highlights of the bulletin include:
This is a brief summary of the legislation. For full details, please see Bulletin No. 3-2011.
On May 11, 2011, and May 20, 2011, the Connecticut Insurance Department issued Bulletin HC-82 and Bulletin HC-83, respectively, concerning the internal and external review processes directed to insurers offering group coverage under state law. Although these bulletins are not directed at employers, they may be helpful to review. Bulletin HC-82 provides the actual submission guidelines to consider, and Bulletin HC-83 specifically provides a helpful process workflow which provides a timeline of the full review process from the viewpoint of a participant who has received an adverse benefit determination.
On June 16, 2011, Gov. Abercrombie signed into law SB 1076. The new law makes it an unlawful practice for any employer or labor organization to bar or discharge from employment, withhold pay from or demote an employee solely because the employee uses accrued and available sick leave. The law also provides that employers may request written verification confirming that an employee was actually sick if the employee uses three or more consecutive days of sick leave, although the law does not provide any specific recourse for the employer should the employee fail to provide such verification. SB 1076 applies to employers with 100 or more employees and who have a collective bargaining agreement with their employees. SB 1076 is effective July 1, 2011.
On April 8, 2011, the governor signed into law HB 283. HB 283 amends Idaho Code section 41-1314, which prohibits any person from directly or indirectly offering or giving as an inducement to purchase insurance anything whatsoever that is not plainly specified in the insurance contract. The new law amends Idaho Code Section 41-1314 by replacing the terms “agent, solicitor or broker” with the term “producer,” and adds disability and producer marketing disability insurance to the list of identified providers subject to section 41-1314. In addition, HB 283 clarifies that producers and insurers may offer to an actual or prospective policyholder goods (but not services) so long as the aggregate value of the goods does not exceed $200 in a calendar year. HB 283 is effective July 1, 2011.
In connection with HB 283, on June 8, 2011, the Idaho Department of Insurance issued Bulletin No. 11-03, which replaces Bulletin No. 09-14. The bulletin is directed toward all insurers and insurance producers doing business in Idaho, and provides a summary of HB 283. The bulletin also states that if goods or services not specified in the contract are offered or provided as an inducement to purchase or renew insurance, a reasonable charge must be imposed to avoid a violation of section 41-1314. The charge should reflect the actual value of the good or service provided, and should not be less than the cost of providing the good or service. The bulletin also clarifies that services that fall within the traditional notion of “customer service” for which one would not normally expect an additional charge are not considered by the department to be a rebate or inducement in violation of section 41-1314. Examples of traditional customer services include offering a 24-hour hotline for claims, responding to questions or providing advice regarding coverage or benefits, maintaining loss runs and issuing insurance cards.
On June 13, 2011, the Idaho Department of Insurance issued Bulletin No. 11-04. The bulletin is directed toward single employer self-funded plan administrators, disability and health insurance carriers, and independent review organizations, and is meant to alert such individuals to amendments recently made to the Idaho Health Carrier External Review Act made by HB 131 and HB 299. The bulletin provides a summary of eight amendments made by HB 131 and HB 299, and also states that the department will revise its rules relating to the Health Care External Review Act to comply with the amendments. The bulletin also states that the department will revise its external review request forms and other information posted on its website for the amendments, which are effective July 1, 2011.
On May 10, 2011, the governor signed SB 461 into law, creating Enrolled Act 461. The law was a needed piece of legislation due to federal health care reform. The new law generally amends current Indiana health insurance law to conform to PPACA, including addressing coverage of dependent children until age 26, as well as a provision concerning grievances and rescissions under the new federal guidelines.
On June 6, 2011, Stephen W. Robertson, Commissioner of the Indiana Department of Insurance, sent a letter to the U.S. Department of Health and Human Services notifying them that the State of Indiana believes the external review and appeals code is in compliance with the PPACA external review provisions, as amended by the passage of SB 461. It is the belief of the commissioner that fully insured policies issued within Indiana may rely upon the process identified within the Indiana code for external review when requested.
On July 1, 2011, Gov. Jindal signed into law HB 646. The new law requires employers to use the federal E-Verify system to determine the legal status of workers or require picture identification in addition to a U.S. birth certificate, naturalization certificate, alien registration card or U.S. immigration form I-94. An employer who has utilized the E-Verify system to determine the employment eligibility of an employee is presumed to have been in good faith and is not subject to any penalty as a result of the reliance on the accuracy of the E-Verify system.
As for penalties for noncompliance, for a first violation, employers will be fined up to $250. For a second violation, employers will be fined up to $500 for each illegal alien employed, hired, recruited or referred, and employers will have their permit or license suspended for not less than 10 days. For a third or subsequent violation, the fine increases to $1,000 per worker and the permit or license suspension increases to at least six months. HB 646 is effective Aug. 15, 2011.
On July 1, 2011, Gov. Jindal signed into law HB 342. This new law is similar to HB 646, but relates to employers that bid on or enter into Louisiana state or local government contracts for the physical performance of services within Louisiana. Such employers must attest through a signed, sworn statement that they registered with and participate in the federal E-Verify system to verify the work authorization status of all employees in Louisiana and that they will continue to use E-Verify during the term of such contracts to verify the work authorization status of all new employees in Louisiana.
Employers who violate the new law are subject to cancellation of any public contract, resulting in ineligibility for any public contract for a period of not more than three years from the date the violation is discovered. Furthermore, a violating employer is liable for any additional costs incurred by a public entity as a result of the cancellation of contract or loss of any license or permit to do business in Louisiana. The new law applies to contracts entered into or bids offered on or after Jan. 1, 2012.
On May 19, 2011, the governor signed into law SB 701 and SB 702. SB 701 requires insurers, nonprofit health service plans and health maintenance organizations (HMOs) to provide coverage for a refill on prescription eye drops in two situations. The first situation requires coverage in accordance with guidance issued by the Centers for Medicare & Medicaid Services for early refills of topical ophthalmic products provided to Medicare Part D plan sponsors. The second situation is when the prescribing health care practitioner indicates on the original prescription that additional quantities of the eye drops are needed, the refill requested by the insured does not exceed the number of additional quantities indicated on the original prescription and the prescription eye drops are a covered benefit under the insurance policy or contract.
SB 702 relates to insurers, nonprofit health service plans and HMOs that provide coverage for hearing aids to an insured or enrolled individual that is not a minor child and that place a dollar limit on the hearing aid benefit. The law requires such insurers to allow the individual to choose a hearing aid that is priced higher than the benefit payable under the policy or contract and pay the difference between the price of the hearing aid and the dollar limit on the benefit.
Both SB 701 and SB 702 are effective Oct. 1, 2011.
On June 16, 2011, the governor signed into law SB 440. The new law creates the Silver State Health Insurance Exchange. The new law also sets forth the purposes of the exchange, and provides for the composition, appointment and terms relating to the members, powers and duties of the board of directors charged with implementing and supervising the exchange.
As background, PPACA requires states to establish or join a state or regional insurance exchange by 2014. If a state fails to do so, the federal government will set up the exchange in the state. According to PPACA, a state exchange is meant to create a marketplace for buyers of health insurance, thus giving individuals a choice for health coverage. The initial target population for an exchange will be people who purchase individual plans, as well as small businesses with up to 100 employees. In the future, exchanges may be expanded to larger employers. While states are at different stages of establishing exchanges, many states have begun to enact legislation to either study and evaluate and/or establish such exchanges. The passage of SB 440 signals Nevada’s intent to implement its own state exchange.
On June 24, 2011, Gov. Andrew M. Cuomo signed A08354, known as the Marriage Equality Act, which grants same-sex couples the ability to marry in the state of New York. The passage of A08354 provides same-sex couples with numerous rights, benefits and protections that have previously been limited to married opposite-sex couples. The Marriage Equality Act adds a new section to New York’s Domestic Relations Law to state that:
As a result of this legislation, private employers that offer fully insured group insurance coverage may be required to offer the same benefits to the spouses of employees who have entered into a same-sex marriage as are offered to spouses of employees in opposite-sex marriages. We will watch for guidance from the New York Insurance Department on whether they interpret the Marriage Equality Act in this manner. Please note that policies issued in New York have already required plans to offer coverage to same-sex spouses legally married in other states (OGC Opinion 08-11-05; 08-06-09).
By contrast, as related to self-insured plans, generally, the specific plan/eligibility language that is included within the self-insured plan will influence eligibility for same-sex spouses as determined under the Marriage Equality Act in New York. In other words, if the self-insured plan intends to benefit from ERISA preemption (and therefore most likely not be subject to the Marriage Equality Act), then the plan must rely upon the language found in the Defense of Marriage Act (DOMA), which defines marriage as between a man and a woman only. However, if the self-funded plan refers only to a “spouse” and does not distinguish between a man and a woman, then the plan language could be construed to apply to same-sex couples because of New York’s new law. It is important to note that because federal law under DOMA does not require a self-funded plan to define a spouse as a man or a woman, a plan can always be more generous.
Importantly, for federal tax purposes, the new law did not eliminate the requirement to impute income for the value of health coverage received for those who do not meet the definition of a federal tax dependent able to receive tax-free health coverage under federal IRC section 105(b), which is not the same definition for purposes of federal income taxes. This is because DOMA is still in place for purposes of federal law, and continues to define marriage as between a man and a woman. However, the law may have affected state tax implications, and guidance from a knowledgeable CPA or tax accountant familiar with state tax laws should be obtained.
Employers should anticipate a rise in requests for same-sex spouse benefits, particularly with respect to health plans. Employers should review their current benefit plans and policies, watch for guidance from the New York Insurance Department and then determine what actions, if any, need to be taken to comply with the law. We anticipate that guidance regarding same-sex spouses and employee benefit plans will continue to evolve, and we will keep you posted on any new developments in this area. The effective date of the legislation is 30 days from the date the law was enacted, or July 24, 2011.
On June 20, 2011, the New York Insurance Department published model language to be used by insurers for purposes of notifying a participant of their right to an external appeal of a denial of coverage. The model language is significant because it includes language specific to New York State law, specifically requiring that a completed request for appeal must be filed within four months of either the date on which written notification of the denial was received or the date on which written waiver of any internal appeal is received. As a reminder, the scope of the federal review process for external reviews is still being reviewed and may be addressed in future guidance. This model notice is specific for purposes of the applicable state external review process, as determined under state law, and required for most insured plans and certain non-ERISA self-insured plans that may be subject to a state external review process.
On June 23, 2011, the governor signed into law HB 36. The new law requires employers that transact business in North Carolina to verify employees’ work authorization by using the federal E-Verify employment eligibility program. In addition, HB 36 requires employers to retain work authorization verification records for the duration of such employees’ employment and for one year after employment terminates. The new law does not apply with respect to a seasonal temporary employee who is employed for 90 or fewer days during a consecutive 12-month period.
As for penalties for noncompliance, for a first violation an employer may be required to file a sworn affidavit stating that the employer has requested a verification of work authorization through E-Verify, and may be subject to a $10,000 fine for not filing the affidavit. For a second violation, an affidavit must be filed and the employer is subject to another $10,000 fine plus the $1,000 fine for not using E-Verify. For third and subsequent violations, an affidavit must be filed and the employer is subject to another $10,000 fine plus a $2,000 fine for each verification that the employer failed to make through E-Verify. The new law’s effective date varies based on the number of employees employed in North Carolina. For employers with 500 or more employees, the effective date is Oct. 1, 2012. For employers with 100 to 499 employees, the effective date is Jan. 1, 2013. And for employers with 25 to 99 employees, the effective date is July 1, 2013.
On May 26, 2011, the governor signed into law SB 384. The new law amends the North Carolina Persons with Disabilities Protection Act to conform with the federal changes made under the Americans with Disabilities Act Amendments Act of 2008 (ADAAA). The new law incorporates the ADAAA’s definitions of “covered governmental entity,” “physical or mental impairment,” “major life activities” and “reasonable accommodations,” as well as the ADAAA changes relating to an employer’s duties in connection with reasonable accommodation of an individual’s disability. SB 384 is effective immediately.
On June 17, 2011, the governor signed into law SB 99. The new law establishes the Oregon Health Insurance Exchange. The new law also establishes the Oregon Health Insurance Exchange Corporation, which is charged with establishing and administering the exchange. The new law sets forth the purposes of the exchange, and provides for the composition, appointment and terms relating to the members, powers and duties of the corporation’s board of directors.
As background, PPACA requires states to establish or join a state or regional insurance exchange by 2014. If a state fails to do so, the federal government will set up the exchange(s) in the state. According to PPACA, a state exchange is meant to create a marketplace for buyers of health insurance, thus giving individuals a choice for health coverage. The initial target population for an exchange will be people who purchase individual plans, as well as small businesses with up to 100 employees. In the future, exchanges may be expanded to larger employers. While states are at different stages of establishing exchanges, many states have begun to enact legislation to either study and evaluate and/or establish such exchanges. The passage of SB 99 signals Oregon’s intent to implement its own state exchange.
WHAT IS IMPUTED INCOME AND HOW IS THE VALUE CALCULATED?
If a group offers benefits to individuals who are not usually considered federal tax dependents, such as either same-sex or opposite-sex domestic partners, same-sex spouses, and/or civil union partners, there may be federal tax consequences. Previously, there were also implications for providing tax-free coverage for children in some cases, which has recently been clarified and is discussed further below.
The determination of whether an individual is able to receive tax-free dependent health coverage must be made by a knowledgeable accountant or other tax professional familiar with the definition found under IRC section 105(b), which is not the same as the definition of who is a tax dependent for purposes of federal income taxes found in IRC section 152. There are other tests considered under section 105(b) that are outside the scope of this FAQ, such as age limit, relationship status, residency and support.
Once it is determined that an individual does not qualify under section 105(b) for tax-free dependent health coverage, then the employer must add the fair market value of the coverage provided to the individual to the employee’s gross income, and the fair market value is taxed as normal wages. This is known as “imputed income.”
There is no federal guidance specifying how to calculate the value of “imputed income.” However, there are two accepted approaches with respect to calculating the value to be treated as imputed income. The first approach is to use the incremental amount that the employer pays toward the partner’s or dependent’s coverage. For example, to determine a non-section 105(b) spouse’s cost, the employer would take the employee-plus-spouse employer contribution and subtract the employer’s contribution for employee only. The difference would be imputed as income to the employee.
The second approach would be to use the employee-only COBRA rate minus the 2 percent administration fee and minus the amount that the employee contributed on a post-tax basis as a premium contribution. The resulting amount would be imputed as income to the employee.
Please note that the portion of the employee’s premiums that pay for the non-section 105(b) dependent’s coverage must be paid with after-tax dollars. In other words, this amount cannot be paid pre-tax through the cafeteria plan.
Importantly, the analysis for imputed income became much simpler effective March 30, 2010, as related to providing tax-free coverage for a child who may not otherwise qualify as the employee’s tax dependent. As a result of the change conveyed in IRS Notice 2010-38, the age limit, residency, support, and other tests that otherwise have to be met for an individual to qualify as a tax dependent under section 105(b) do not apply to a child. Thus, children who are under age 27 as of the end of the taxable year are treated the same as section 105(b) dependents for purposes of tax-free health coverage. Only where a plan covers children over age 26 will it be necessary to use the section 105(b) analysis to determine how coverage is treated for tax purposes. For this purpose, a “child” is an individual who is the employee’s son, daughter, stepson or stepdaughter, and includes both a legally adopted individual of the employee and an individual lawfully placed with the employee for legal adoption by the employee. The term “child” also includes an eligible foster child, defined as a child placed with the employee by an authorized placement agency or by judgment, decree or other order of any court of competent jurisdiction.
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