- After the Supreme Court invalidated Section 3 of DOMA, the IRS issued guidance on the tax treatment of legally married same-sex couples, instituting a “state of celebration” rule. This affected numerous federal income tax, employment tax, and employee benefit provisions.
- The American Taxpayer Relief Act of 2012 continued many of the tax cuts originally enacted in 2001 that were scheduled to expire at the end of 2012, but also provided for slightly higher taxes on higher-income individuals and on trusts and estates. Among its significant employee benefit provisions was a special rule for in-plan Roth IRA conversions after 2012.
- As the health care law continued its phased-in implementation, the agencies charged with implementing the new rules, including the IRS, continued to issue guidance.
- The IRS issued regulations on the individual mandate under Sec. 5000A, but it delayed implementing the employer mandate under Sec. 4980H until 2015. The IRS also issued final regulations and proposed regulations providing additional guidance for the benefit mandates included in the health care law, as well as final regulations clarifying how employers must structure wellness programs to comply with the law.
Sitting down to write this article brings to mind the old cliché: The only thing certain in life is change. While there continues to be much debate over it, the Patient Protection and Affordable Care Act of 2010 1 (the health care law) is the law of the land. Much has changed in 2013 in compensation and employee benefits as regulatory agencies issued guidance on the implementation of the health care law’s phased-in provisions (many of which were designed to pay for the health care law through the Code). However, while the health care law garnered much of the attention this past year, other developments unrelated to the new law in the employee plans area were just as significant—including the American Taxpayer Relief Act of 2012 (ATRA)2 and the Supreme Court’s decision in Windsor.3
ATRA and Treasury Guidance Affecting Qualified Plans
ATRA eliminated the sunset provisions set to take effect after 2012 and made permanent many of the 2001 and 2003 tax cuts, except for the top marginal income tax rates. For trusts that fund qualified plans and voluntary employees’ beneficiary association (VEBA) trusts subject to unrelated business income tax, the top marginal tax rate increased from 35% to 39.6%;4 the top rate applies to taxable income over $11,950 in 2013.5 In addition, although ATRA retained the favorable tax treatment for qualified dividends—i.e., taxing qualified dividends at capital gains tax rates—the maximum capital gains rate was increased to 20% beginning in 2013.6 Therefore, VEBAs subject to unrelated business income tax on their investment income must now consider the increased ordinary income and capital gains tax rates when calculating 2013 estimated tax payments and making funding decisions regarding the trusts’ reserves going forward.7
ATRA also included as a revenue raiser an expansion of individual taxpayers’ ability to convert existing tax-deferred accounts in Secs. 401(k), 403(b), and governmental 457(b) plans to Roth accounts within the same plan. Provided the plan provides for Roth contributions and in-plan Roth conversions, any participant should generally be able to elect an in-plan Roth conversion, regardless of whether the participant has otherwise had a distributable event such as separation from service or reaching age 59½. Conversions to Roth IRAs are taxable, which is why this provision was enacted as a revenue raiser, but the special rule exempts these conversions from the 10% penalty under Sec. 72(t).8 This change is effective for conversions after Dec. 31, 2012.9
Other than ATRA, not much occurred on the legislative front. Similarly, on the regulatory front, with few exceptions, the agencies’ efforts were more focused on preparing to implement the health care law. However, final regulations under Sec. 411(d)(6) were amended to add a limited exception to the anti-cutback rules permitting a plan sponsor that is a debtor in a bankruptcy proceeding to amend a single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments), effective after Nov. 8, 2012.10
The IRS also extended the deadline for amending defined benefit plans to satisfy Sec. 436’s funding-based limits on benefits and benefit accruals until the later of the last day of the 2013 plan year, the last day of the plan year for which Sec. 436 is first effective for the plan, or the due date (including extensions) for the employer’s federal tax return for the tax year that contains the first day of the plan year for which Sec. 436 is first effective for the plan.11
Federal Recognition of Same-Sex Marriages
In Windsor, the Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA),12 which barred federal recognition of same-sex marriages, is unconstitutional. Within months, both the IRS and the Department of Labor announced they would follow a “state of celebration” rule in determining marital status.13 Therefore, a same-sex couple who are legally married according to the laws of a state or foreign country that recognizes same-sex marriages are now treated as married for federal tax purposes, including the qualification requirements for qualified plans, regardless of where the couple live. The status of a couple who enter into a registered domestic partnership, civil union, or other formal relationship that is not a marriage under state or foreign law is not changed; those couples are not treated as married for federal tax purposes or the qualification requirements for qualified plans.
Qualified Retirement Plans
Rev. Rul. 2013-17 requires qualified plans to apply a state-of-celebration rule for purposes of applying any qualification requirements relating to legally married same-sex spouses beginning Sept. 16, 2013. As a result, a same-sex spouse is entitled to all spousal benefits and protections provided to opposite-sex spouses under a qualified retirement plan. Even employers operating only in states that do not currently recognize same-sex marriages are required to treat a same-sex spouse as a participant’s spouse for purposes of applying the federal retirement plan qualification requirements that relate to spouses.
Numerous protections apply to spouses of qualified retirement plan participants. For example, defined benefit plans must provide automatic survivor benefits to spouses in the form of a qualified preretirement survivor annuity if a participant dies before normal retirement age, or a qualified joint and survivor annuity (QJSA) upon retirement. Defined contribution plans (e.g., Sec. 401(k), profit sharing, and stock bonus plans) usually satisfy spousal survivor protections by paying the participant’s vested account balance upon death to the surviving spouse (unless the spouse consents to a different beneficiary).14
The surviving spouse of a deceased participant also has broader rollover rights than does a nonspouse beneficiary, including the right to roll over an eligible distribution to another qualified plan, Sec. 403(b) plan, or governmental Sec. 457(b) plan that allows rollover contributions. A surviving spouse who is the beneficiary of a decedent spouse’s IRA may treat it as his or her own and may make rollovers to and from the IRA. While a nonspouse beneficiary may currently roll over a distribution from a qualified plan to an IRA, unlike a spousal beneficiary, he or she may not make any subsequent rollovers from that IRA.15
Often coupled with marriage is divorce. As a result of the Windsor decision and Rev. Rul. 2013-17, qualified plans are required to recognize qualified domestic relations orders (QDROs)16 involving the division of legally married same-sex couples’ assets. Therefore, qualified plan sponsors should ensure QDRO administrative procedures provide for the recognition of QDROs issued upon the dissolution of a legally recognized same-sex marriage.
Same-sex marriage recognition also affects the administration of defined contribution plans that allow participant loans and hardship withdrawals. Many defined contribution plans that offer loans to participants also require spousal consent for the loans. For hardship withdrawal provisions, safe-harbor standards for determining whether a participant has experienced an immediate and heavy financial need include medical, tuition, and funeral expenses incurred by a participant’s spouse. Similarly, to determine whether a hardship withdrawal is necessary to satisfy an immediate and heavy financial need, the participant’s resources are deemed to include a spouse’s assets.
Other favorable provisions that apply to spouses (and will now apply to legally married same-sex spouses) include the application of Sec. 415 limits, which generally ignore the value of a spouse’s survivor benefit under a QJSA when adjusting a benefit under a defined benefit plan. In addition, all tax-favored retirement plans (including qualified pension and profit sharing plans, Sec. 403(b) plans, Sec.457(b) eligible deferred compensation plans, and IRAs) are subject to required minimum distribution requirements under Sec. 401(a)(9) that affect when distributions must begin (generally at age 70½) and how much must be distributed. Special rules, including longer distribution periods and more favorable mortality tables, apply when calculating required minimum distributions of a participant’s surviving spouse.17
The IRS also said it intends to publish additional guidance on the retroactive application of the Windsor holding to other employee benefits, plans, and arrangements, including consideration of the potential impact on all stakeholders, such as plan sponsors, employers, and affected employees. Future guidance will address required plan amendments (including the timing of adoption of retroactive amendments) and corrective actions needed for plan operations for periods before future guidance is issued. In the meantime, employers should inventory spousal benefits provided under their benefit plans to modify claims and payment procedures to account for the validity of same-sex marriages and consider whether changes are needed for election forms, notices, and other participant communications.
Employer-Sponsored Health Plans
The recognition of same-sex marriages applying a state-of-celebration rule affects employer-sponsored group health plans and employees with same-sex spouses in a variety of ways. Perhaps most significant are the changes to income imputation. Under Secs. 105 and 106, employer-paid health benefits are generally excluded from an employee’s income, which also applies to benefits provided to an employee’s spouse and dependents. Because DOMA precluded a same-sex spouse from qualifying as a spouse for this tax benefit, and most same-sex spouses did not themselves qualify as dependents for tax purposes, the value of health coverage provided to a same-sex spouse has historically been imputed as taxable income to the employee (even in those states that recognize same-sex marriages), with both the employee and his or her employer subject to employment taxes on the imputed income amount.
Because same-sex marriages were not recognized for federal purposes und er DOMA, employees with same-sex spouses were treated as single for purposes of income tax withholding, employment taxes, and benefits that are based on marital status. Now that legal same-sex marriages are recognized for federal tax purposes, employers should review and revise plan administrative, employment tax, and income tax withholding procedures for married employees with same-sex spouses.
Further, taxpayers can apply Rev. Rul. 2013-17 prospectively and retroactively for filing original, amended, or adjusted federal income or employment tax returns, or claims for refund for open tax periods for overpayments of tax, provided that all items required to be reported on the return or refund claim that are affected by the taxpayer’s marital status are adjusted to be consistent with the marital status reported.
Notice 2013-6118 provides detailed guidance for employers seeking a refund of employment taxes previously paid as a result of benefits provided for their employees’ same-sex spouses because those benefits were treated as taxable wages before same-sex marriages were recognized under federal law. Employers may request a refund of both the employer’s and the employee’s share of employment taxes paid in open tax years on the imputed value of benefits that can now be provided tax free.
Notice 2013-61 provides two alternative adjustment procedures for employers that withheld employment and income taxes on the imputed value of benefits provided to same-sex couples for the 2013 tax year. Under the first procedure, employers must reimburse affected employees for the overcollected federal income and employment taxes withheld from the employees’ wages for all four quarters of 2013 on or before Dec. 31, 2013. The employer should report the reduced wages and withholding on the fourth quarter Form 941 as well as the 2013 Forms W-2, Wage and Tax Statement, for the affected employees.
The second alternative requires filing a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the fourth quarter of 2013. Employers can use this procedure to make adjustments or claim refunds of employment taxes for the entire year, including the employee’s share of employment taxes (but not income tax withheld from an employee’s wages) provided the employer satisfies the usual Form 941-X requirements such as repaying or reimbursing the affected employee for the overcollection of employment taxes and securing the employee’s written statement confirming that the employee has not made any previous claims (or the claims were rejected) and the employee will not make a future claim for credit or refund of the excess employment taxes withheld.
For open periods prior to 2013 employers can use a Form 941-X adjustment procedure similar to the second alternative described above for 2013 and issue the affected employees a revised wage and withholding statement (Form W-2c, Corrected Wage and Tax Statement). Affected employees may use the Form W-2c to claim a refund of income taxes paid on the value of the spousal benefits for those open tax years. Because these refund provisions are optional, not all employers will choose to claim refunds or make adjustments, particularly where the number of their employees eligible for refunds is small. However, all employers with employees in valid same-sex marriages who have imputed income for the value of same-sex spousal benefits should be prepared to respond to inquiries from those employees regarding the amounts imputed in open tax years since the affected employees will need this information to file their own amended returns for individual income and employment tax refunds.
Cafeteria Plans, Flexible Spending Accounts, Health Reimbursement Accounts, and Health Savings Accounts
The federal recognition of same-sex marriages will have other effects on employer-provided health benefits. For example, once a period of coverage has begun, a participant’s election under a cafeteria plan generally may not be changed during the plan year unless there has been a life event, such as marriage, death of a spouse, or legal separation or annulment.19 New same-sex marriages should be treated as life events just as new opposite-sex marriages are.
In addition, although regulatory guidance has not created any window during which participants could change an otherwise valid flexible spending account election as a result of the federal recognition of same-sex marriages, Rev. Rul. 2013-17 permits taxpayers to treat amounts paid for same-sex spousal coverage as paid on a pretax premium basis if the employee spouse made a pretax salary reduction election for health coverage under the employer’s cafeteria plan and had previously elected same-sex spousal coverage on an after-tax basis.
The tax rules for FSAs, health reimbursement arrangements (HRAs), and health savings accounts (HSAs) also provide for tax-free reimbursement of spouses’ qualifying expenses.20 Under DOMA, the expenses of a same-sex spouse could not be reimbursed from these accounts unless the spouse was also a dependent under the tax rules. However, now those spouses’ qualifying expenses must be reimbursed. Valid same-sex marriages must also be recognized for other purposes, such as the maximum limit for deductible contributions to HSAs for families (an inflation-adjusted amount that was $6,450 for 2013).
COBRA Continuation Coverage and HIPAA Special Enrollment Rights
Group health plans required to provide continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) when coverage would otherwise be lost due to certain qualifying events must now extend the same protections to same-sex spouses as are given to opposite-sex spouses.21 For example, the spouse of a covered participant should be allowed to elect COBRA coverage if the employee’s employment is terminated and upon the employee’s death, divorce, or legal separation. Similarly, group health plans must provide special enrollment rights that allow participants to enroll a new spouse midyear, or to change coverage elections if the participant’s marital status changes, such as by marriage, divorce, or legal separation, and when the employee loses coverage under a spouse’s plan or adds a dependent child.22 These special enrollment rights should also be extended to a same-sex spouse in a valid same-sex marriage.
Health Care Law Implementation
Despite the limited changes to qualified plans from Congress in recent years, the health care law guaranteed many changes to health benefits for years to come because that legislation is phased in over a nine-year period. Although several provisions became effective in 2013, 2014 is the big year in the health care law’s implementation. Much of the activity from the agencies responsible for implementing the law during 2013 has been focused on providing preparatory interpretive guidance.
Individual Mandate and Employer Shared Responsibility
The individual mandate goes into effect in 2014 and requires most individuals (including children and retirees) to have minimum essential health coverage or be subject to a penalty tax.23 Employer-sponsored coverage generally qualifies as minimum essential coverage (except specialized coverage, such as coverage only for vision or dental care, workers’ compensation, disability policies, or coverage only for a specific disease or condition). Similarly, if an employee enrolls his or her spouse, domestic partner, and/or any dependents in his or her employer’s group health plan, each of those individual enrollees is considered to have minimum essential coverage.24 Individuals who do not have access to employer-sponsored health coverage, or whose employer-sponsored health coverage is not affordable, will be able to shop for individual health insurance in the Health Insurance Marketplace (formerly referred to as health care exchanges),25 which began operating on Oct. 1.
New Section 18B of the Fair Labor Standards Act requires most employers to provide all employees with notice of coverage options in the Health Insurance Marketplace as well as the employee’s potential eligibility for federal premium tax credits under Sec. 36B. Model notices as well as revisions to the model COBRA notice were issued for use in satisfying these requirements. In addition, the Summaries of Benefits and Coverage (SBCs) were revised to include disclosures whether a health option provides minimum essential coverage and meets the minimum value standard.26
After a one-year delay in the rule, Forms W-2 provided by employers at the beginning of 2013 (for wages paid in 2012) were required to report the value of health coverage provided by the employer.27 However, employers and health insurance issuers were granted a one-year delay in the Secs. 6055 and 6056 requirements to report health insurance coverage information to the IRS and to individuals. Under this postponement, reporting will first be required in early 2016 (for coverage provided during 2015). Reporting for the 2014 year is voluntary.28 Proposed regulations were published in late summer 2013 providing minimum essential coverage reporting requirements as well as the requirement for employers with more than 50 full-time-equivalent employees to certify whether they offer minimum essential coverage to full-time employees (and their dependents).29
Because the reporting delay makes it difficult to identify employers that may be subject to the “pay or play” employer shared-responsibility penalty under Sec. 4980H, a one-year delay in enforcing that penalty was also announced.30 This delay will not affect the health coverage offered by most employers that are continuing to modify their plans to comply with the health care law’s mandates and market reforms (as discussed in more detail below). However, this delay gives employers additional time to develop and implement their pay-or-play strategies, particularly those employers with numerous part-time and other variable-hour employees.
At the beginning of 2013, several of the health care law’s revenue raisers went into effect. Included among these is the additional 0.9% Medicare tax imposed on individual taxpayers who receive wages from employment in excess of $200,000 ($250,000 in the case of a joint return, or $125,000 in the case of a married taxpayer filing separately).31 Thus, when added to the current 1.45% employee portion of the Medicare tax, a high-income taxpayer’s wages above the thresholds will be subject to a total 2.35% of Medicare tax. There is no employer match for the additional Medicare tax; however, employers are required to withhold the additional Medicare tax on wages paid to an employee in excess of $200,000 in each calendar year after 2012.
A new lower annual dollar limit on employees’ elective salary reduction contributions to FSAs also took effect in 2013. This annual dollar limit applies on an employee-by-employee basis (and by aggregating all FSAs maintained within the employer’s controlled group to which the employee contributes). The annual limit is $2,500 for the first plan year beginning after Dec. 31, 2012, and then will be indexed for cost-of-living adjustments. The limit is not increased even if the employee’s FSA covers a nonemployee spouse or other dependents. The limit does not apply to employer nonelective contributions, contributions to HSAs or HRAs, employee pretax premium conversion contributions, or unused FSA contributions from the prior plan year that are carried over into a plan’s grace period for the current plan year. Plans must be amended to reflect the annual dollar limit by Dec. 31, 2014.32
2013 is also the first year of the seven years during which employers who sponsor self-insured group health plans will be subject to an annual fee to fund the Patient Centered Outcomes Research Institute (PCORI). The fee, which is $1 per enrollee for the first year, $2 for the second year, and then increased for the cost of medical inflation for the next five years, is reported and paid with Form 720, Quarterly Federal Excise Tax Return.33 Employers with plan years ending in October, November, and December of 2012 were required to report and pay the first year’s fees by July 31, 2013.34 Employers with plan years ending earlier than October will first be required to pay the fee in 2014. The IRS has confirmed that, if the PCORI fee is the only fee or excise tax required to be reported on Form 720, the employer will be required to file only in July of each year even though Form 720 is generally a quarterly excise tax return.35
Another change that is first effective for an employer’s 2013 tax year is the loss of a current-year income tax deduction for the cost of providing retiree prescription drug coverage if those costs are allocable to tax-free subsidies the employer receives under Section 1860D-22 of the Social Security Act (this provision was enacted when Medicare Part D was first passed to keep employers from dropping drug coverage for retirees). This change does not apply retroactively to deny tax deductions claimed in earlier years. It merely subjects deductions claimed after the effective date to the regular business income tax deduction rules under Sec. 265.36
Beginning in 2013, certain health insurance providers and other employers in their controlled groups became subject to a new $500,000 annual limit on income tax deductions for compensation paid to certain individuals.37 This limit applies generally to officers, directors, employees, and any other individual who provides services on behalf of the covered health insurance provider. To be a covered health insurance provider for purposes of this limit, at least 25% of the employer’s gross premiums received from providing health insurance coverage must come from minimum essential coverage as defined under the health care law.
Because this limit is applied on a controlled group basis, if any entity within a controlled group is a covered health insurance provider, then the entire controlled group is treated as a covered health insurance provider subject to the limitation. However, a de minimis exception applies to exclude an employer from this limit if the premiums the employer receives for providing health insurance coverage are less than 2% of gross revenues for the tax year determined on a controlled group basis.38
Special rules also apply to “deferred deduction remuneration,” which is compensation earned in a prior year and paid in the current year, such as long-term incentive plans, equity compensation, and nonqualified deferred compensation payments. Under these rules, unused amounts under the deduction limit in the year the remuneration is earned are carried forward to the year in which the remuneration is paid.39 Therefore, this deduction limitation requires many employers that sell health insurance to the general public to implement procedures to determine each year whether they are subject to the limits as well as to allocate compensation to the year in which it was earned. Further, appropriate tax accounting should be considered for the deferred tax assets associated with these deferred payments. This may require tracking the amounts over multiple years.
The health care law also includes a number of market reforms intended to increase health coverage. The application of these reforms generally differs depending on whether the health plan is grandfathered; the compliance obligations also vary depending on whether the coverage is insured or provided under an employer’s self-insured group health program. For example, although self-insured plans are not required to cover “essential health benefits,” those that do cannot impose any annual or lifetime maximums on those benefits.
The prohibition on annual and lifetime limits on essential health benefits applies to both grandfathered and nongrandfathered plans. Although the prohibition on lifetime limits became effective in 2010, the complete prohibition of annual limits does not become effective until the first plan year beginning after 2013. Before the 2014 plan year, plans were permitted to phase in the elimination of annual limits on essential health benefits so that for plan years beginning after Sept. 22, 2012, but before Jan. 1, 2014, annual limits could be no more than $2 million.40
Although the restrictions on annual and lifetime limits will not generally apply to health care FSAs, medical savings accounts, HSAs, retiree-only HRAs, or integrated HRAs, stand-alone HRAs will be subject to the restrictions on annual limits. Transition rules apply to amounts credited to an HRA before 2014. For this purpose, an HRA is not considered integrated unless the HRA is available only to employees who are covered by an employer’s group plan (either insured or self-insured) that satisfies the prohibition on annual limits on essential health benefits. An employer-sponsored HRA cannot be integrated with insurance policies purchased in the individual insurance market or with an employer plan that provides coverage through individual insurance policies. An employer-sponsored HRA is integrated with other coverage only if the employee receiving the HRA is actually enrolled in that coverage.
Any HRA that credits additional amounts to an individual when the individual is not enrolled in coverage provided by the employer will fail to comply with the prohibition on annual limits. Nevertheless, unused amounts in an employer-sponsored HRA that were credited before Jan. 1, 2014, (under plan terms as in effect on Jan. 1, 2013) can be used after 2013 to reimburse medical expenses in accordance with those terms without causing the HRA to fail to comply with the health care law’s prohibition on annual limits.41
The essential health benefits standard is also important to employers (including sponsors of self-insured plans) because it affects the determination of whether the health plan satisfies minimum value standards used to determine whether a large employer may be subject to the pay-or-play penalties. Essential health benefits are a core benefits package that must include certain specified health services. Each state is required to define essential health benefits for insured products offered in that state and is allowed to select a plan operating in the state as a benchmark plan for essential health benefits. Self-insured plans can adopt any benchmark plan to define essential health benefits for purposes of the limits on annual and lifetime maximums.
Also significant among the health care law’s market reforms is the prohibition on exclusions for preexisting conditions. Under this prohibition, a health plan (including a grandfathered plan) cannot deny coverage or otherwise limit or exclude benefits because a health condition was present before coverage became effective, regardless of whether the individual previously received diagnosis, care, or treatment for the condition. This prohibition applied to enrollees under the age of 19 beginning in 2010. Beginning with the first plan year that starts after 2013, the prohibition on excluding preexisting conditions applies to all other enrollees regardless of age.
Although there is no requirement to notify participants of the elimination of the exclusion for preexisting conditions, employers will still need to update all applicable participant communications (including enrollment materials, the plan document, the summary plan description, and any other plan summaries of benefits or coverage) to correctly describe the plan’s terms.42 In addition, because no plan can impose any preexisting condition limitation after Dec. 31, 2014, plans will no longer be required to provide an individual with a Health Insurance Portability and Accountability Act (HIPAA) Certificate of Creditable Coverage (which was used to enable people to continue coverage for preeexisting conditions when they changed health insurance plans before the health care law’s prohibition was in effect) beginning in 2015.43
Also, beginning with the first plan year that starts after 2013, no health plan (including a grandfathered plan) can use an eligibility condition based solely on a lapse of time longer than 90 days. In addition, a plan may no longer apply a waiting period longer than 90 days after an employee or dependent satisfies the plan’s eligibility criteria before coverage becomes effective. For this purpose, all calendar days are counted, including weekends and holidays.
There are no de minimis exceptions or rules of administrative convenience. So, for example, plans that apply a first day of the calendar month rule for coverage to become effective would have to make coverage effective on the first day of the calendar month preceding 90 days to comply with the limit. Other eligibility conditions under a health plan are generally permissible, unless the condition is designed to avoid compliance with the 90-day limit on waiting periods. For example, employers may continue to condition eligibility on employment at a particular location, full-time status, or an employee’s regularly working a specified number of hours per stated period.44
New Wellness Regulations
Starting in 2014, group health plans and insurers will be able to offer higher financial rewards to participants for achieving healthy behaviors such as quitting smoking or reducing cholesterol. But these wellness programs will have to avoid discriminating against people based on other health factors. Employers offering group health plan-based wellness programs must follow several sets of legal requirements, including HIPAA (health factor discrimination), Genetic Information Nondiscrimination Act (genetic information discrimination), and Americans with Disabilities Act (disability discrimination). The health care law builds on existing HIPAA wellness program rules for group health plans and extends those nondiscrimination protections to nongrandfathered individual health insurance policies.
New final regulations clarify how wellness programs must be structured to comply with the health care law requirements. While the basic provisions of the regulations proposed late last year are retained, the final regulations include changes aimed primarily at programs that link rewards to activities or outcomes that could be affected by health status. Also released was a RAND Corporation research study commissioned by the DOL and the Department Health and Human Services to review workplace wellness programs, upon which the final regulations were partially based. The RAND report contains numerous statistics on wellness plan designs and utilization. The regulations apply to both grandfathered and nongrandfathered group health plans and group health insurance coverage for plan years beginning on or after Jan. 1, 2014. The rules also apply to nongrandfathered individual health insurance plans for policy years starting on or after Jan. 1, 2014.45
Authors’ note: The authors wish to thank Susan Lennon, Anne Waidmann, Sandy Wheeler, and Amy Bergner, PricewaterhouseCoopers LLP, Washington, D.C., for their contributions.
1 P.L. 111-148, as amended by the Health Care Education and Reconciliation Act, P.L. 111-152.
2 American Taxpayer Relief Act of 2012, P.L. 112-240.
3 Windsor, No. 12-307 (U.S. 6/26/13).
4 Sec. 1(e), as amended by Section 101 of the American Taxpayer Relief Act.
5 Rev. Proc. 2013-15, 2013-5 I.R.B. 444.
6 Sec. 1(h).
7 VEBAs, which are tax-exempt under Sec. 501(c)(9), are not subject to the 3.8% tax on net investment income, however (Prop. Regs. Sec. 1.1411-3(b)(2)).
8 Sec. 402A(c)(4)(E).
9 Section 902(b) of the American Taxpayer Relief Act.
10 Regs. Sec. 1.411(d)-4-Q&A-2(b)(xii); T.D. 9601.
11 Notice 2012-70, 2012-51 I.R.B. 712.
12 Defense of Marriage Act, P.L. 104-99.
13 Rev. Rul. 2013-17, 2013-38 I.R.B. 201, and DOL Tech. Rel. 2013-04.
14 Sec. 401(a)(11).
15 Secs. 402(c)(11)(A)(ii) and 408(d)(3)(C).
16 Sec. 401(a)(13)(B).
17 Sec. 401(a)(9)(B)(iv).
18 Notice 2013-61, 2013-42 I.R.B. 432.
19 Regs. Sec. 1.125-4(c).
20 Sec. 223(d)(2); Notice 2002-45, 2002-2 C.B. 93; Prop. Regs. Sec. 1.125-5(h).
21 Sec. 4980B(g)(1).
22 Sec. 4980B(f)(3).
23 Sec. 5000A.
24 Regs. Sec. 1.5000A-1.
25 Section 1311 of P.L. 111-148.
26 Department of Labor, “Summary of Benefits and Coverage.”
27 Notice 2012-9, 2012-4 I.R.B. 315.
28 Notice 2013-45, 2013-31 I.R.B. 116.
30 Notice 2013-45.
31 Sec. 3101(b)(2).
32 Sec. 125(i); Notice 2012-40, 2012-25 I.R.B. 1046.
33 Sec. 4376; Regs. Sec. 40.6011(a)-1.
34 Regs. Sec. 40.6071(a)-1.
35 IRS, “Patient-Centered Outcomes Research Trust Fund Fee (IRC 4375, 4376 and 4377): Questions and Answers.”
36 Sec. 139A.
37 Sec. 162(m)(6).
38 Regs. Sec. 1.162-31(b)(4)(iii).
39 Sec. 162(m)(6)(A)(ii).
40 T.D. 9491.
41 T.D. 9491.
42 Sec. 9815.
45 T.D. 9620.
Terry Richardson is a principal with PricewaterhouseCoopers LLP in Dallas. Kerry Eason is a manager with PricewaterhouseCoopers LLP in Chicago. For more information about this article, contact Mr. Richardson at firstname.lastname@example.org.