The Loop

Expensive Benefit Plan Penalties to Avoid

Filed under: Benefits

Upon assuming his role in the White House, one of the first matters of business President Trump conducted was to issue an Executive Order giving agencies like the Department of Health and Human Services, the U.S. Treasury and the Labor Department broad policy discretion with respect to levying penalties related to the Patient Protection and Affordable Care Act (PPACA). Specifically, the order permits an agency to "waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications."

However, the law requires agencies to post a notice and allow a commenting period before making changes to current policies or putting any final regulation in place. This limitation largely reduces the effect of the Trump executive order, making it more of a statement of intent rather than policy change. Currently, all employer penalties affiliated with PPACA remain in effect until further notice.

Healthcare Coverage Penalties
While PPACA was passed back in 2010, the majority of its provisions did not go into effect until 2014 and still others were delayed even further. Now that we're in 2017, the following provisions must be followed or employers will incur penalties.

The PPACA mandated that applicable large employers (ALEs - employing an average of at least 50 full-time employees, including full-time equivalent employees) must offer affordable minimum essential coverage to their full-time employees and their dependents or pay an "employer shared responsibility" penalty fee to the IRS. This provision generally is referred to as "the employer mandate".

Dependent Coverage
There are two things to note about dependent coverage. First, a dependent is considered an employee's child, including a child who has been legally adopted or legally placed for adoption with the employee, who has not reached age 26. Second, the definition of a dependent does not include a stepchild, a foster child, or a child who does not reside in the United States or a country contiguous to the United States and who is not a United States citizen or national. For this purpose, a dependent does not include a spouse.

Affordable Coverage
Given the variance of income levels within a company, not to mention across the country, it's easy to assume that what might be affordable in one household could create a financial hardship in another. For this reason, the law has defined what is considered affordable coverage for the sake of applying employer penalties.

Presently, employer-provided coverage is considered affordable if the employee -required contribution is no more than 9.69 percent (2017) of his or her household income. This includes the amount the employee is required to contribute via salary reduction or otherwise, and takes into account employer health reimbursement arrangements (HRAs), wellness incentives, flex credits, and opt-out payments.

One caveat to this rule is that an employer won't likely know the total household income of each worker. Therefore, the law offers a trio of safe harbor provisions to deem the coverage affordable for purposes of the employer shared responsibility provision:

• Form W-2 wages
• Rate of pay
• Federal poverty line

In other words, an ALE's coverage is deemed affordable if the employee's required contribution is no more than 9.69 percent of the baseline of at least one of these safe harbor provisions.

Shared Responsibility Penalties
Minimum essential coverage is defined as coverage for at least 60 percent of the total allowed cost of benefits expected under the plan as well as substantial coverage of inpatient hospitalization services and physician services.

The following are the two scenarios in which an ALE may owe an employer shared responsibility payment, including the 2017 penalty amounts:

• An ALE that does not offer minimum essential coverage to at least 95 percent of its full-time employees may owe an employer shared responsibility payment if at least one full-time employee receives the premium tax credit for purchasing coverage through the Marketplace. On an annual basis, this payment is equal to $ 2,260 for each full-time employee, with the first 30 employees excluded from the calculation.

• An ALE member that does offer minimum essential coverage to at least 95 percent of its full-time employees may owe an employer shared responsibility payment if at least one full-time employee receives the premium tax credit for purchasing coverage through the Marketplace. This is based on the premise that the employer's coverage is not affordable, does not provide minimum value, or because the employee was not one of the at least 95 percent of full-time employees offered minimum essential coverage. On an annual basis, this payment is equal to $3,390 for each full-time employee who receives the premium tax credit.

Cadillac Tax
The PPACA also established a tax for high-premium employer-sponsored healthcare plans that provide particularly rich benefits. These plans are generally considered to encourage over-utilization of healthcare services, which in turn contributes to the rising cost of healthcare. Starting in 2020, the reform law is scheduled to impose a 40 percent excise tax on employer plans that annually cost more than $10,200 for individuals and $27,500 for families. Calculated on a per month, per worker basis, any plan that cost more than $850 per month for single coverage ($2,292; family coverage) would be subject to this tax.

Interestingly, the recently passed House of Representative's American Health Care Act delays, but does not repeal, the effective date of the Cadillac Tax from 2020 to 2025. It is worth noting that the PPACA provision makes Cadillac penalty payments tax deductible.

Reporting Penalties
It also is worth noting that employers that do not comply with healthcare coverage information reporting requirements may be subject to additional penalties. These penalties fall under the general reporting penalty provisions under IRC sections 6721 (failure to file correct information returns) and 6722 (failure to furnish correct payee statement).

These penalties are as follows:

• $250 for each information return not filed, for a penalty total of no more than $3,000,000 in each calendar year.
• The penalty for failure to provide a correct payee statement is $250 for each statement, not to exceed $3,000,000 per calendar year.
• Special rules apply that increase the per-statement and total penalties if there is intentional disregard of the requirement to furnish a payee statement.

Worker Benefit Notice Penalty
Employers are required provide workers with a summary of benefits and coverage prior to the start of each plan year. This includes coverage in states in which premium assistance is provided via Medicaid or Children's Health Insurance Programs (CHIP). The penalty for failing to provide summary of benefits and coverage notices is $1,087 per failure, while the penalty for Medicaid/CHIP notices is $110 per day.

401(k) Plans
ERISA and the IRS require many employers and plan administrators to submit reports to government agencies and furnish certain plan information to participants.

Employers that offer a 401(k) plan are required to file Form 5500 every year. The due date for this form is the last day of the seventh month after the plan year ends. In other words, if your plan follows the calendar year, the due date is July 31. The IRS penalty for not filing by the due date is $25 per day, up to a maximum of $15,000. The Department of Labor penalty for a late filing can be is as high as $2,063 per day with no maximum. If the DOL requests further plan information, failure to comply can result in a penalty of up to $147 per day, not to exceed $1,472 per request.

Bear in mind that some employers don't realize they failed to file the annual Form 5500-series return until they receive a letter from the IRS or DOL – which typically is sent out a year after the due date. Obviously, if the mistake has not been caught before then, the accrued penalty can be severe.

Auto Enrollment Notice Penalty
Employers who offer retirement plans with automatic enrollment and contribution provisions must notify workers of their rights and obligations under the plan. Failure to do so may result in a penalty of $1,632 per day.

Blackout Notice Penalty
If an employer decides to change service providers for its 401(k) plan, this can cause a "blackout" period during which time workers may not be able to make adjustments to their investment options. Blackout periods can last anywhere from days to months; there is no legal limit to the length of time. However, employers must provide workers with written notice of a blackout period of three days or more at least 30 days before the period begins. The penalty for noncompliance is up to $131 per day.

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