This article addresses three important issues related to Affordable Care Act (ACA) provisions:
- As the year progresses, employers will need to remain mindful of the extra .9% Medicare tax withholding required on high earners. This article reviews some of the important aspects of this tax.
- In late July, two federal appellate courts took opposite stances on whether the IRS regulation authorizing individuals to receive tax credits for buying insurance via a federal Health Insurance Marketplace is legal. A sidebar looks at another important recent case: Burwell v. Hobby Lobby Stores, Inc., in which the U.S. Supreme Court allowed closely held businesses to claim a religious exemption from the ACA’s contraceptive coverage mandate. This article reviews the three decisions and looks at the potential impact on employers.
Halbig v. Burwell, No. 14-5018, July 22, 2014 (D.C. Cir.)
King v. Burwell, No. 14-1158, July 22, 2014 (4th Cir.)
Burwell v. Hobby Lobby Stores, Inc., No. 13-354, June 13, 2014 (Supreme Court)
- This issue addresses whether a plan with a general 60-day waiting period would comply with the ACA’s prohibition on “excessive” eligibility waiting periods if it continues to impose some benefit-specific waiting periods of up to six months.
- Additional Medicare Tax Withholding
Question: When did the additional Medicare tax withholding become effective?
Answer: The additional Medicare tax withholding for certain high earners went into effect for 2013.
Question: How do employers determine who and what amounts are subject to the additional withholding?
Answer: The tax is applied only to amounts exceeding certain income thresholds as follows:
Head of household
Married filing jointly
Married filing separately
The thresholds encompass all traditional FICA wages and net self-employment income for U.S. citizens. Taxable wages not paid in cash, such as noncash fringe benefits, may be included in the income base for purposes of this tax because they’re taxable to employees.
“Statutorily excluded” fringe benefits generally aren’t included in taxable income or subject to employment tax, including the additional Medicare tax. Some examples are cell phones, commuting benefits and group term life insurance cost for up to $50,000 of coverage. But keep in mind that additional rules and limits apply.
Employers don’t need to begin withholding the additional Medicare tax until the first pay period during which wages for the calendar year exceed $200,000. The $200,000 withholding threshold is strictly based on employee compensation, not tax filing status.
If, because of his or her filing status, an employee will end up with a liability not covered by withholding (such as a married employee filing a separate return), he or she bears the responsibility of making estimated payments to make up the difference. Alternatively, that employee can ask the employer to increase the income tax withholding amount using a W-4 form.
It’s not permissible, however, to do the opposite. Suppose, for example, a married employee with an unemployed spouse is planning to file a joint return and is earning $240,000. The employer must withhold the additional 0.9% on $40,000 — that is, the excess over $200,000 — even though the threshold for joint filers is $250,000.
The employee in that scenario cannot request exemption from the withholding on that $40,000. But when the employee and spouse file their tax return, the excess withholding amount ($360, in this example) can be applied as a credit to their overall tax liability using IRS Form 8959.
Question: How do the rules apply to contributions on an employee’s behalf to a Flexible Spending Account (FSA)?
Answer: It depends.
The value of qualified cafeteria benefits bought by an employee with employer contributions to the plan isn’t subject to the additional Medicare tax until the plan’s value exceeds $2,500. The plan’s cash amount isn’t subject to the tax either — even if the employee chooses simply to let those dollars sit in the FSA and not use them to buy eligible benefits. Benefits that can be purchased through a cafeteria plan include:
The value of benefits bought via an FSA that favors highly compensated or key employees, however, isn’t shielded from income tax in general or from the additional Medicare tax. For these purposes, highly compensated employees include:
- Corporate officers (regardless of income),
- Shareholders holding more than 5% percent of the company’s value or voting power of all classes of employer stock,
- “An employee who is highly compensated based on the facts and circumstances,” according to the IRS, and
- A spouse or dependent of someone included in the preceding three points.
In addition, those who own at least 1% of the company and whose annual pay exceeds $150,000 are typically included under the “key employee” definition.
Whether you handle your company’s payroll in house or use a payroll services provider, it’s important to understand the basics of the additional Medicare tax. If you suspect you’ve underwithheld amounts or you have any questions about the tax whatsoever, consult your tax advisor.
- ACA Court Decisions and Their Impact on Employers
Courts Divided Over Marketplace Matters
As the ACA was originally envisioned, each state would set up a Health Insurance Marketplace from which individuals could buy coverage in compliance with the law. But to date, only 16 states and Washington, D.C., have a state-based Marketplace. The rest of the states are either “defaulting” to the federal Marketplace (healthcare.gov) or running a partnership Marketplace.
Thus, many people must buy insurance from a federal Marketplace. And if they wouldn’t receive financial relief via a tax credit for doing so, they might not be able to afford coverage, and the stated purpose of the ACA would be undermined.
Here’s a look at the two legal decisions in question, neither of which negates the other:
- Halbig v. Burwell. In this case, the U.S. Court of Appeals for the District of Columbia Circuit concluded that the ACA “unambiguously restricts” the purchase of coverage to Health Insurance Marketplaces established by a state — not the federal government. The court’s approach in this case was based on the principle that the precise language of the statute itself should drive interpretation of the law.
- King v. Burwell. Here, the U.S. Court of Appeals for the Fourth Circuit ruled that individuals may receive tax credits for buying insurance from a federal Marketplace as well as from one that is state run. The court rejected the “strictly by the text” argument that carried the day in Halbig. Contrary to the D.C. Circuit’s reasoning, the Fourth Circuit found that the ACA’s language is ambiguous and open to interpretation — and that the IRS is entitled to deference in interpreting the law and writing its regulations to comply with it.
Impact on employers
For large employers (as defined under the ACA), the stakes here are huge. If the D.C. Circuit’s conclusion in Halbig prevails and the tax credits originating from the federal Marketplaces are invalidated, many of the “play or pay” tax penalties imposed on these employers presumably would also be eliminated because they’re triggered by full-time employees receiving the tax credits.
Moreover, from a broader perspective, the back-and-forth of these decisions indicates the persistent political instability of the law, which bears close observation by employers of all sizes.
What lies ahead
As of this writing, the tax credits available under the ACA for buying coverage from either a state- or federal-run Health Insurance Marketplace remain in place. Meanwhile, either Halbig or King, or both, could go back to their respective deciding courts for “en banc” review. Or the U.S. Supreme Court could weigh in on either or both. There’s even a possibility Congress could act to revise the law’s language. Whatever developments lie ahead, it’s important for employers to follow the evolution of this law.
Sidebar: Supreme Court allows exemption from contraceptive coverage mandate
On June 30, the U.S. Supreme Court held in favor of three for-profit employers that challenged the ACA’s preventive services mandate relating to coverage of women’s contraceptive services.
The mandate generally requires nongrandfathered, nonexcepted group health plans to provide coverage for all FDA-approved contraceptives without cost-sharing when services are provided in-network. But qualifying religious employers are exempt, and accommodations are available to certain nonexempt, nonprofit organizations with religious objections.
In Burwell v. Hobby Lobby Stores, Inc., the business’s owners asserted religious objections to providing certain types of contraceptives. The Court held that the requirement to provide contraceptive coverage, as applied to “closely held” for-profit corporations, violates the federal Religious Freedom Restoration Act (RFRA) when providing the coverage would be contrary to the owners’ religious beliefs.
As a result of this decision, closely held businesses can now claim the religious exemption from the contraceptive services mandate if offering such coverage is contrary to the owners’ religious beliefs. Employers considering the exemption, however, should consult with experienced legal counsel before eliminating any mandated preventive services coverage.
- Can our group health care plan impose benefit-specific waiting periods?
Question: To comply with the ACA, we changed the maximum waiting period under our calendar-year self-insured health plan to no more than 60 days. But the plan continues to impose some benefit-specific waiting periods of up to six months. Is our plan compliant with legal requirements?
Answer: Your plan’s general 60-day waiting period would comply with the ACA’s prohibition on “excessive” eligibility waiting periods. (The act generally limits waiting periods to 90 days, effective for plan years beginning on or after Jan. 1, 2014.) However, as we’ll explain further, benefit-specific waiting periods — which typically make certain benefits available to participants only after they’ve been covered under the plan for a certain period — raise additional compliance issues.
The ACA’s maximum 90-day eligibility waiting period appears to apply to plan coverage as a whole, rather than to specific benefits. The act doesn’t expressly prohibit benefit-specific waiting periods. But the final regulations do contain an anti-abuse rule, which prohibits a plan from imposing eligibility conditions designed to sidestep compliance with the 90-day waiting period limitation.
For example, a plan that imposes several benefit-specific waiting periods exceeding 90 days may be found to violate the anti-abuse rule — even if its overall waiting period is less than 90 days.
2 key legal requirements
Along with abiding by the ACA’s prohibition on excessive waiting periods, plans need to consider whether benefit-specific waiting periods comply with other legal requirements. Two prime examples:
- Nondiscrimination requirements under the Health Insurance Portability and Accountability Act (HIPAA) and the Americans with Disabilities Act (ADA), and
- Limits on pre-existing conditions exclusions (PCEs) under HIPAA and the ACA.
HIPAA’s nondiscrimination rules don’t prohibit plans from excluding or limiting benefits for a specific disease or condition as long as the exclusion or limitation applies uniformly to all similarly situated individuals — for example, participants in a certain employment classification. Benefit exclusions or limitations generally are permissible under the ADA so long as coverage is equally available to the disabled and nondisabled.
Thus, these nondiscrimination rules should allow a benefit-specific waiting period as long as it’s not directed at certain individuals because of their health status or disabilities. Generally, a waiting period that targets a particular illness or disability shortly after a claim related to the illness or disability is submitted is more likely to violate HIPAA’s nondiscrimination provisions, the ADA or other nondiscrimination laws.
For example, a plan that adopts a waiting period for HIV treatment shortly after receiving a claim for an HIV medication would likely violate the rules. On the other hand, a waiting period for a service that’s used to treat a wide variety of conditions — such as chiropractic services — probably wouldn’t be found to impermissibly discriminate.
Remember that HIPAA restricts PCEs — and the ACA prohibits PCEs for plan years beginning on or after Jan. 1, 2014. A benefit-specific waiting period wouldn’t violate PCE limitations if it applies regardless of whether the treated condition was present before the first day of coverage.
But some benefit-specific waiting periods can be “hidden” PCEs, because their primary effect is to exclude coverage for individuals whose conditions existed before they were enrolled in the plan. One example is a 12-month waiting period for pregnancy benefits.
More specific questions
What we’ve discussed here are the general guidelines regarding benefit-specific waiting periods. If you have more specific questions, it would be wise to review your specific plan design with your benefits advisor and legal counsel.