The ERISA Litigation Newsletter - December 2015

Editor's Overview

In this month's newsletter, we focus on the recent wave of guidance and case law related to the Affordable Care Act. We also discuss IRS Notice 2015-86, which provides guidance on the application of the U.S. Supreme Court's decision in Obergefell v. Hodges requiring states to allow same-sex marriage and to recognize lawful same-sex marriages performed in other states. In addition, the newsletter reviews legislation extending MAP-21 Pension Funding Relief and recent case law addressing attorneys' fees and standing.

Rulings, Filings, and Settlements of Interest

IRS Extends Deadlines for Affordable Care Act Reporting

By Damian A. Myers

Today [Dec. 28, 2015], the IRS released Notice 2016-4, which extended the distribution and filing deadlines for the Affordable Care Act (ACA) reporting requirements set forth in Sections 6055 and 6056 of the Internal Revenue Code (the "Code"). Under Code Section 6055, health coverage providers are required to file with the IRS, and distribute to covered individuals, forms showing the months in which the individuals were covered by "minimum essential coverage." Under Code Section 6056, applicable large employers (generally, those with 50 or more full-time employees and equivalents) are required to file with the IRS, and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage. In most cases, employers and coverage providers will use Forms 1094-B and 1095-B and/or Forms 1094-C and 1095-C.

The chart below shows the new deadlines.

Old Deadline

New Deadline

Deadline to Distribute Forms to Employees and Covered Individuals

Feb. 1, 2016

March 31, 2016

Deadline to File with the IRS

Feb. 29, 2016 (paper) March 31, 2016 (electronic)

May 31, 2016 June 30, 2016

Notice 2016-4 brings welcome, albeit late, relief for employers and coverage providers that have been furiously working to meet the original deadlines. Importantly, the IRS explained that because the new deadlines are available to all filers and are more favorable than the extensions that were otherwise available, no additional automatic or permissive extensions will be granted.

The importance of filing by the new deadlines cannot be understated, as the IRS is applying a good faith compliance standard to all timely filed forms reporting 2015 information. Under this standard, the IRS will not assess a penalty for incomplete or incorrect information on the reporting forms as long as the forms were filed on time and the filer can show that it completed the forms in good faith.

Those that do not file by the new deadlines will be subject to penalties under Code Sections 6721 and 6722. The IRS stated in Notice 2016-4 that it would apply a reasonable cause analysis when determining the penalty amount for a late filer. According to the IRS, this analysis will take into account such things as whether reasonable efforts were made to prepare for filing (e.g., gathering and transmitting data to an agent or testing its own ability to transmit information to the IRS) and the extent to which the filer is taking steps to ensure that it can comply with the reporting requirements for 2016.

IRS Notice 2015-87 (Part 1) - IRS Issues New HRA Integration Rules

By Robert Projansky and Damian A. Myers

On December 16, 2015, the Internal Revenue Service issued Notice 2015-87 containing guidance on a wide-range of topics under the Affordable Care Act (ACA). In addition to providing guidance on affordability and COBRA matters (which will be described in subsequent blogs), Notice 2015-87 builds upon prior guidance to regulate further the use of health reimbursement arrangements to reimburse premiums paid for individual market premiums.

By way of background, as described in IRS Notices 2013-54 and 2015-17, the IRS considers arrangements whereby employers reimburse employees (whether on a pre-tax or after-tax basis) for medical-related costs (including premiums) to be group health plans subject to the ACA's market reforms. The problem is that, by their very nature, these health reimbursement arrangements (HRAs) and premium payment plans cannot on their own satisfy certain market reforms, such as the required coverage of preventive services or prohibition on annual limits. Therefore, in order for HRAs to be ACA compliant, they must be "integrated" with a group health plan that meets the ACA's market reforms. Although the IRS allows an HRA to be integrated with a group health plan, including a group health plan not sponsored by the employer sponsoring the HRA, the IRS has unequivocally stated that an HRA cannot be integrated with an individual market plan (subject to the few exceptions described below).

As described here and here, the IRS has already declared after-tax reimbursements for individual market insurance premiums impermissible and has provided guidance on integration with group health plans, Medicare and TRICARE. With Notice 2015-87, the IRS now provides the following additional guidance related to HRAs:

Notice 2015-87 reaffirms that HRAs limited to retirees may reimburse individual market insurance premiums (including Medicare supplement plans) and other medical-related costs. The rationale for this exception is that the Internal Revenue Code and ERISA contain a "retiree-only exception," stating that plans that cover less than two active employees are excepted plans that are not required to comply with the market reforms. This guidance is helpful given the current trend to replace traditional retiree group health plans with HRAs tied private individual insurance marketplaces.

Unless the retiree-only exception applies, unused amounts in an HRA cannot be used to reimburse premiums paid by former employees for individual market coverage even if the amounts were originally earned in the HRA when the HRA was properly integrated with a group health plan. To allow for post-termination reimbursements, an employer could presumably establish a separate payment plan or HRA program covering only former employees and credit this new HRA with the amount of the unused balance from the existing HRA for active employees.

The IRS reiterated statements in prior guidance that amounts credited to an HRA before 2014 may be used to reimburse medical expenses pursuant to the terms in effect before 2014 without violating the ACA market reforms.

An HRA that reimburses medical expenses for an employee and the employee's spouse and dependents cannot be integrated with self-only group health plan coverage provided by the employer. However, the IRS will not enforce this requirement until 2017.

Thus, starting in 2017, an HRA generally cannot reimburse medical expenses for a spouse or dependent not covered by the group health plan coverage sponsored by the employer. However, given that Notice 2013-54 clearly contemplates that an employee's HRA can be integrated with a group health plan sponsored by his or her spouse's employer, one would imagine that the HRA could still reimburse that spouse or dependent if he or she was covered by another group health plan (even if not one sponsored by the participant's employer).

An HRA that reimburses an employee for premiums paid for individual market coverage will not result in a violation of the ACA market reforms if the coverage solely provides excepted benefits. Thus, for example, an HRA could reimburse premiums for individual market dental or vision benefits.

An employer payment plan or HRA that is part of a cafeteria plan established under Section 125 of the Internal Revenue Code must be integrated with a group health plan to be ACA compliant. Some benefits consultants have advised that employers may reimburse employees for individual market premiums if the reimbursement is funded with employee salary deferrals or employer flex credits made to a cafeteria plan. Notice 2015-87 effectively ends this practice.

In order to be compliant with the ACA's market reforms, an HRA apparently must be in both documentary and operational compliance. For example, it is not enough that the HRA not actually reimburse employees for medical coverage purchased on the individual market. Instead, the terms of the HRA must explicitly state that individual insurance reimbursements are not permitted.

Considering the guidance issued over the past few years with respect to HRAs, and Notice 2015-87's apparent documentary compliance requirements, employers should review their HRA documentation to assess compliance with the ACA. Given the potential pitfalls, employers considering establishing an HRA should proceed carefully and consult with counsel. Additional blogs covering Notice 2015-87's other guidance will be forthcoming in the next few days.

IRS Notice 2015-86 — The Limited Effect of Obergefell

By Roberta Chevlowe and Damian A. Myers

Last week, the Internal Revenue Service (IRS) issued Notice 2015-86, providing guidance on the application of the U.S. Supreme Court's decision in Obergefell v. Hodges to qualified retirement plans and health and welfare plans, including cafeteria plans. Importantly, and as expected, the IRS comments in the...