ProView Standard: Tax Treatment of Coverage for Dependent Age Extension, Implications of Arizona’s Immigration Law

Important IRS Guidance on Tax Treatment of Health Coverage for Children Under Age 27
Health Care Reform Increases Employer Exposure to Claims, Penalties and Litigations
A New State Order: Implications of Arizona’s New Immigration Law
FASB Proposal Regarding Multiemployer Plans
Doctor’s Orders: Celebrate Mother’s Day with a Check-Up

May 2010

Important IRS Guidance on Tax Treatment of Health Coverage for Children Under Age 27

On April 27, 2010, the Internal Revenue Service (the “IRS”) issued Notice 2010-38 (the “Notice”), which provides important guidance regarding the tax treatment of employer-provided health coverage to employees’ adult children.

Background

The Affordable Care Act (the “Act”)¹ requires group health plans and health insurance issuers that provide dependent coverage to provide coverage to an employee’s child up to age 26, and amends Section 105(b) of the Internal Revenue Code (“Code”) to extend the Code’s income exclusion for reimbursements for medical expenses incurred by an employee, to include reimbursements with respect to an employee’s children through the end of the taxable year in which they attain age 26.² Prior to this change, an employee’s child generally had to be no older than age 19 (or age 24 if a full-time student) in order to qualify as a dependent for purposes of the income exclusion.

The Notice

The Notice confirms that the Act’s change to Section 105(b) of the Code with regard to reimbursements paid to employees for medical expenses of such adult children, as described above, is effective March 30, 2010. In addition, in order to address the fact that the Act failed to provide a parallel income exclusion under Code Section 106 with respect to the employer-provided coverage itself (i.e., amounts paid by the employer for the coverage of the child), the Notice states that the IRS and Treasury Department intend to amend the applicable regulations under Code Section 106 retroactively to provide for such exclusion. Accordingly, effective March 30, 2010, both the amounts paid by an employer for coverage for an employee’s adult children and the amounts paid (or reimbursed) to the employee for such coverage are excluded from the employee’s gross income, in the same manner as coverage that is provided to an employee’s spouse or dependent defined under Section 152 of the Code. The Notice includes examples that illustrate this concept.

Importantly, although the Act does not require that a plan’s dependent coverage be extended to cover adult children until the first plan year beginning on or after September 23, 2010, the Notice states that the new income exclusions are effective as of March 30, 2010 (the date of the Act’s enactment). (See our Client Alert of April 1, 2010 for more information about the effective date of this requirement and the impact on grandfathered plans.)

Impact on Cafeteria Plans

The Notice confirms that these changes apply to cafeteria plans (including flexible spending accounts), such that coverage and reimbursement provided with respect to adult children are “qualified benefits” under a cafeteria plan and employers may permit employees to make pre-tax salary reductions to pay for the benefits. However, since the Section 125 cafeteria plan rules only permit employees to make mid-year election changes due to specific change in status events (which do not currently include an event that would apply in this situation), the IRS states in the Notice that the applicable Treasury Regulations will be amended retroactive to March 30, 2010 to include change in status events covering children under age 27 who do not otherwise qualify as dependent children, including becoming newly eligible for coverage or eligible for coverage beyond the date on which the child otherwise would have lost coverage.

In addition, the IRS recognizes that cafeteria plans may need to be amended to include coverage for these adult children, but that current law only permits prospective amendments to such plans. Accordingly, the Notice provides relief from that rule, allowing employers to permit employees to immediately make election changes and pay for the coverage of such adult children on a pre-tax basis, provided that the plan is amended to cover these children no later than December 31, 2010 and the amendment is effective retroactive to the first date in 2010 when the employees are permitted to make such salary reductions (but no earlier than March 30).

Other Clarifications Included in the Notice

The Notice clarifies that:

The guidance also applies to reimbursements made under a health reimbursement arrangement (HRA)
Coverage and reimbursements provided under an employer-provided accident or health plan for these adult children are not considered wages for purposes of FICA and FUTA, and are exempt from income tax withholding
For purposes of the following, the term “dependent” includes adult children under the age of 27:

The VEBA rules (which allow for the payment of sick and accident benefits to the “dependents” of VEBA members)
Accounts established under a pension or annuity plan pursuant to Code Section 401(h) (which allows for the payment of hospitalization and medical expenses of “dependents” of retired employees)
The Code Section 162(l) deduction for amounts paid by a self-employed individual for insurance that constitutes medical care for such individual’s “dependents”

Conclusion

In light of the changes made by the Act, the Code’s income exclusions for employer-provided health coverage and reimbursements now apply with respect to children who have not attained age 27 as of the end of the employee’s taxable year (which employers may assume is the calendar year), and the Notice provides important guidance and further clarifications with regard to these issues. Importantly, with regard to deadlines for employers, the Notice clarifies that, although an employer may immediately begin allowing employees to pay for medical coverage for these adult children on a pre-tax basis under a cafeteria plan, an appropriate amendment must be made to the cafeteria plan document by the end of the year (and it must be retroactive to the first day in 2010 for which the plan allowed the pre-tax salary reductions, but no earlier than March 30).

¹ “Affordable Care Act” means The Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 (HCERA).
²For purposes of the new income exclusions under Code Sections 105(b) and 106, as described in this Alert, the term “child” includes the employee’s son, daughter, stepson, stepdaughter, legally adopted individual (or an individual placed with the employee for adoption), and eligible foster child. In addition, as the Notice confirms, such a child does not have to satisfy the age limits, residency, support and other tests described in Section 152 of the Code in order to be considered an employee’s child for purposes of these new income exclusions.

Note: The information in this Alert was provided to Precept by Proskauer Rose LLP. Proskauer is an international full-service law firm with over 60 employee benefits attorneys located in offices across the United States. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Proskauer, please contact Peter Marathas at (617) 526-9704 or pmarathas@proskauer.com. ©2010 Proskauer Rose LLP. All rights reserved. Used with permission.

Health Care Reform Increases Employer Exposure to Claims, Penalties and Litigations

The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the "Act") implements significant changes to the provision of health care and health coverage applicable to all aspects of health care delivery, operation and administration. The Act imposes many different requirements on employers that become effective over time. These requirements are discussed in more detail in Epstein Becker & Green’s Client Alert of April 8, 2010, entitled "Health Care Reform: What Employers Need to Know."

In implementing the requirements under the Act, employers face new challenges and increased exposure to claims and penalties if they fail to satisfy the new obligations under their benefit plans and programs. The Act includes new statutory provisions that specifically allow employees and agencies to file or impose additional claims, penalties and litigations. Certain highlights of the statutory provisions are set forth below.

Prohibition Against Discrimination with Respect to Participation in Health Programs or Activities on Grounds Set Forth in Other Statutes

The Act provides that no individual shall, on any ground prohibited under Title VI of the Civil Rights Act of 1964, Title IX of the Education Amendments of 1972, the Age Discrimination Act of 1975 or Section 504 of the Rehabilitation Act of 1973 (the "Employment Statutes"), be excluded from participation in, be denied the benefits of or be subjected to discrimination under:

Any health program or activity, any part of which is receiving federal financial assistance, including credits, subsidies or contracts of insurance; or
Under any program or activity that is administered by an Executive Agency (such as the Department of Health & Human Services ("HHS")) or any entity established under Title I of the Act.

Although it would appear that these protections generally extend only to federal assistance, Title I of the Act provides many different credits, subsidies and other elements that benefit employers in general, and those employers would be subject to this prohibition of discrimination
The enforcement mechanisms available under the Employment Statutes will apply to violations of this subsection of the Act. In other words, an aggrieved individual would be permitted to pursue a claim under the Employment Statutes. Further, nothing in Title I of the Act will be construed to invalidate or limit the rights and remedies available under the Employment Statutes, or to supersede state laws that provide additional protections against discrimination.
This provision is effective immediately

Prohibition on Discrimination Based on Health Status

The Act prohibits discrimination against individual plan participants and beneficiaries based on their "health status." This means that group health plans and health insurance issuers offering group or individual coverage may not establish rules for eligibility (including continuing eligibility) of any individual to enroll based on health status. (There are special exceptions for wellness programs.)
Health status is defined to mean:

Health status
Medical condition (including physical and mental illnesses)
Claims experience
Receipt of health care
Medical history
Genetic information
Evidence of insurability
Disability
Any other health status-related factor determined appropriate by the Secretary of HHS (the "Secretary")

It would appear that the Secretary has the authority to enforce these protections
This provision is effective January 1, 2014

Requirement to Provide Uniform Explanation of Coverage Documents

The Act requires group health plans and health insurance issuers to provide to enrollees a summary of benefits and coverage explanation that accurately describes the benefits and coverage under the applicable plan or coverage. These standards are in addition to any disclosure requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The Secretary is required to develop standards for the summary and explanation by March 23, 2011. These standards must prescribe a uniform format, not to exceed four pages in length, and ensure that the summary is presented in "a culturally and linguistically appropriate manner" and uses terminology understandable by the average plan enrollee.
The standards must further ensure that the summary contains:

Uniform definitions of standard insurance and medical terms
A description of the coverage, including cost sharing, for each of the categories of "essential health benefits" defined under the Act
The exceptions, reductions and limitations on coverage
The cost-sharing provisions, including deductible, coinsurance and co-payment obligations
The renewability and continuation of coverage provisions
A coverage facts label that includes examples to illustrate common benefits scenarios
A statement of whether the plan or coverage provides "minimal essential coverage" defined under the Act and ensures that the plan or coverage share of the total allowed cost of benefits provided is not less than 60 percent of such costs
A statement that the outline is a summary and the coverage document itself should be consulted to determine the governing provisions
A Web address where the actual individual policy or group certificate of coverage can be reviewed and obtained and a contact number for the consumer to call with questions

By March 23, 2012, health insurance issuers, plan sponsors or designated administrators of group health plans (whether insured or self-insured) must, prior to any enrollment restriction, provide the summary to applicants at the time of application, enrollees prior to enrollment/re-enrollment, and policy or certificate holders at the time of issuance
Health insurance issuers, plan sponsors and administrators also are required to provide notification of any "material modification" (defined under ERISA) 60 days prior to the effective date of the modification
Health insurance issuers, plan sponsors and administrators who willfully fail to provide the required information will be subject to a fine of up to $1,000 for each such failure with respect to each enrollee. Thus, it will behoove employers to ensure that the required summary is timely provided.
Please note that the required standards preempt any related state standards that require less information, as determined by the Secretary

New Claims and Appeals Procedures for Health Benefit Claims

The Act requires group health plans and health insurance issuers to establish internal claims appeal and external review procedures. The group health plans and health insurance issuers must, at a minimum:

Establish an internal claims appeal process
Provide notice to enrollees "in a culturally and linguistically appropriate manner" of the availability of internal and external appeals procedures and the availability of the office of health insurance consumer assistance or ombudsman to assist the enrollee with the claims procedures (which office or ombudsman must be established by the states)
Allow the enrollee to review the enrollee's file and present evidence and testimony as a part of the appeals process
Allow the enrollee to continue to receive health coverage pending the outcome of the appeals process

To establish an external review process, group health plans and health insurance issuers must comply with any applicable state external review process or implement an effective external review process that meets minimum standards to be established by the Secretary
These requirements are in addition to any ERISA claims procedures, although the existence of ERISA claims procedures may be used to establish the existence of an internal claims appeal process
This provision is effective for plan years beginning on and after September 23, 2010

Significant Amendments of the FLSA Regarding Mandatory Automatic Enrollment in Health Plans, Non-Discrimination/Whistleblower Protections and Breaks for Nursing Mothers

The Act adds new requirements to the Fair Labor Standards Act ("FLSA") that impact employers. The FLSA requirements are set forth in more detail under Epstein Becker & Green’s Client Alert of April 23, 2010, entitled "Health Care Reform Legislation Amends the Fair Labor Standards Act to Give the U.S. Department of Labor Increased Enforcement Authority Over Health Care."
Effective upon the promulgation of regulations by the DOL, the FLSA is amended to require employers with 200 or more full-time employees that sponsor a health plan to automatically enroll all new full-time employees in one of the health plans offered by the employer and to continue the enrollment of current employees in the health plans offered. Employees may opt-out of the employer plan if they demonstrate that they have coverage from another source. In addition, the FLSA requires employers to provide a detailed notice to employees of significant provisions of the Act regarding the American Health Insurance Exchange.
The FLSA also is amended to prohibit employers from taking adverse action against any employee because the employee challenged an employer's implementation of the requirements of Title I of the Act, and to establish a complaint procedure for employees who believe their rights under this provision have been violated. These protections are effective immediately, do not diminish any other rights under federal or state law, or under a collective bargaining agreement, and are not waivable.
Finally, the FLSA now requires employers to provide unpaid, reasonable break time and an appropriate place other than a bathroom for nursing mothers to express breast milk for one year after the child's birth. An employer with less than 50 employees will not be required to implement this provision if doing so would cause the employer an "undue hardship."
These provisions generally are effective immediately

Note: The information in this Alert was provided to Precept by Epstein Becker & Green, PC. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Epstein Becker & Green, please visit www.ebglaw.com. ©2010 Epstein Becker & Green PC. All rights reserved. Used with permission.

A New State Order: Implications of Arizona’s New Immigration Law

On April 23rd, Arizona Governor Jan Brewer (R) signed the nation’s toughest and most controversial state immigration bill to date. In response to the furor, on April 30th Governor Brewer signed a follow-up bill (HB 2162) to amend parts of the controversial immigration law. The original “Support Law Enforcement and Neighborhoods Act,” Arizona SB 1070, is set to take effect on August 24, 2010, and has ignited a passionate debate, with equally heated opinions expressed in favor of greater enforcement of our immigration laws, and criticism that the law is, on the one hand, pre-empted by the federal immigration laws, and on the other hand, constitutionally suspect. Garnering some of the most emotional responses are its first-ever provisions that make it a crime to be in the U.S. illegally, and give broad authority to local police officers to investigate, detain, and arrest individuals they “reasonably suspect” are in the U.S. without permission.

Not well publicized in the media frenzy are the provisions that impact employers. The new law amends Arizona’s Legal Arizona Workers Act (LAWA), the 2007 groundbreaking state law requiring employers to register for and use the federal government’s electronic employment verification system, E-Verify. SB 1070 supplements LAWA by creating a new obligation for employers to retain E-Verify records, and establishes a new affirmative defense for knowingly hiring an unauthorized worker if the employer is “entrapped” by law enforcement officers.

Governor Brewer and proponents of the bill argue that Arizona had to resort to its own measures because of the federal system’s failure to adequately address the country’s immigration issues and problems. The bill describes the intent of the law as deterring the unlawful entry, presence, and economic activity by undocumented individuals in Arizona. Furthermore, the stated purpose of the new law is to perform “cooperative enforcement” of the federal immigration laws, and to “discourage and deter entry or presence” of foreign nationals without authorization to be in the U.S. President Obama swiftly weighed in with his criticism of the new law, although he acknowledged federal deficiencies with respect to immigration, saying, “Our failure to act responsible at the federal level will only open the door to irresponsibility by others. That includes, for example, the recent efforts in Arizona, which threaten to undermine basic notions of fairness that we cherish as Americans…”

According to the Governor’s public statements, the changes made to the bill on April 30th are designed to clarify the intent of the law, and to "make it crystal clear and undeniable that racial profiling is illegal and will not be tolerated in Arizona." Specifically, now the law has been amended to include an explicit phrase, repeated in every section of the law, that a police officer or state agency “may not consider race, color, or national origin in the enforcement of the [law] except to the extent permitted by the U.S. or Arizona Constitution." The amendment states that immigration status may be determined either by a law enforcement officer authorized to verify status, or by an agent of U.S. Immigration and Customs Enforcement.

The follow-on bill removes the word "solely" from the sentence, "The attorney general or county attorney shall not investigate complaints that are based solely on race, color, or national origin." The import is that police officers are prohibited from "solely" using race to investigate an individual's immigration status. In addition, it revises the provision that allows a law enforcement officer to investigate someone's immigration status if they have reasonable suspicion that the person is in the U.S. illegally. The amendment also replaces the phrase "lawful contact" by the police officer with the phrase, "stop, detention, or arrest," making apparent that a police officer need not question a crime victim or a witness about her immigration status. Opponents to the law vehemently argue that these amendments are insufficient to prevent civil rights abuses, and that the Governor was simply forced to sign off on the changes because of mounting pressure of impending economic boycotts of the state.

The follow-on bill did not amend any of the sections aimed at employers in Arizona

Below we provide an overview of the key provisions of the Arizona law:

Police officers are required to make a “reasonable attempt,” when practicable, to determine an individual’s immigration status when there is “reasonable suspicion” that the individual is unlawfully present in the U.S. While the law also provides that a law enforcement official “may not solely consider race, color, or national origin,” immigrant activists and the Latino community have argued that the “reasonable suspicion” standard opens the door to racial profiling by police. In response, the Governor has said she will establish law enforcement training to implement Arizona’s immigration laws. Many question whether such training alone could be efficacious in light of the law’s imperative, and its broad evaluation standards. What creates a “reasonable suspicion” someone may not be in the U.S. lawfully? Their skin color, their accent, their geographical location? While the follow-on bill amends the law to say that racial profiling is not permissible, it does not specifically address this point.

The law includes a presumption that a person who presents a valid Arizona driver or non-operating license; a valid form of tribal identification; or other form of federal, state, or local-issued identification that evidences his or her legal immigration status, is lawfully present. This is tantamount to a requirement that all people in the state of Arizona – whether a foreign born or not, whether a U.S. citizen or not – carry their identification at all times.

The law creates a state requirement, and penalty for failure to comply, that foreign nationals register their addresses with the government and carry registration/alien documents at all times. These requirements are in addition to the federal immigration laws already in place on these points. The amendments signed by Governor Brewer last Friday amend and remove some of the serious monetary fines, jail sentences, and felony consequences instituted by the original law. Under the revised bill, the first violation of this requirement would be classified as a Class 1 misdemeanor, punishable with a maximum fine of $100. Second violations may result in a jail term of no more than 20 days, and subsequent violations are punishable for no longer than 30 days in jail. The American Civil Liberties Union and other activist organizations argue that these provisions are a “back door” attempt to create state arrest authority for immigration violations, which is in clear violation of the Supremacy Clause of the U.S. Constitution.

The new law also creates a private right of action for any Arizona citizen to sue any Arizona agency, county, city, or town that implements a policy that restricts the enforcement of federal immigration laws. A court may order civil penalties of $1,000 to $5,000 for each day that the agency or municipality has been found in violation of the law. Opponents of the law warn that these provisions may subject local governments to various frivolous and expensive law suits filed by private citizens with anti-immigrant agendas.

The law prevents day laborers from seeking work, by making it a Class 1 misdemeanor for an undocumented individual to apply for or solicit work in a public place. The law even goes as far to define “solicit” as a verbal or nonverbal communication made by a gesture or a nod.

As mentioned above, the new law amends LAWA, which already requires all employers to utilize E-Verify, the federal government’s electronic employment eligibility verification system. When the new law goes into effect, employers will be required to maintain E-Verify records for the duration of the employee’s employment or at least three years, whichever is longer. There is no similar federal mandate for employers participating in the E-Verify program, but all employers have an obligation to maintain I-9 Identify and Employment Eligibility Verification records for three years after the date of hire, or one year after employment ends, whichever is later.

In addition, the law provides a new affirmative defense for employers who may be charged for knowingly employing an unauthorized worker. Employers may assert an “entrapment” defense if they can prove by a preponderance of the evidence that the idea of committing the offense started with the law enforcement officers.

Early predictions of speedy legal challenges to the constitutionality of the law, and to block its implementation, have been borne out. The first two suits were filed on April 29th: the first, National Coalition of Latino Clergy & Christian Leaders v. Arizona, D. Ariz., CIV 100943-PHX, complaint filed 4/29/10, contends that the law is unconstitutional, and requests an injunction to prevent its implementation while its legality is challenged. The second suit was filed by a Hispanic police officer in Tucson who contends the law itself was created out of racial bias, as well as challenging its constitutionality (Escobar v. Brewer, D. Ariz., No. 4:10-cv-00249-DCB, complaint filed 4/29/10).

From protests to travel boycotts, reaction to Arizona’s new immigration law has been undeniably intense. Mexico has issued a travel warning that “all Mexican citizens could be bothered or questioned without motive at any moment.” The fear of rampant copy-cat laws may turn into a reality – Texas Republican legislators have already announced that they plan to introduce immigration measures similar to the new law in Arizona, and reportedly so will conservative Oklahoman lawmakers.

As the debate unfolds, we will continue to provide updates and analysis of the law, its import, and the obligations of employers in Arizona and around the country.

FASB Proposal Regarding Multiemployer Plans

The purpose of this alert is to advise employers that they may soon be required to disclose in footnotes to their financial statements new quantitative and qualitative information regarding their participation in multiemployer defined benefit pension plans. Although this new requirement is only in proposed form and further developments are expected prior to finalization, the proposal will likely be of interest to collective bargaining parties (and multiemployer plans).

Background

Under U.S. Generally Accepted Accounting Principles (GAAP), employers are typically required to provide extensive disclosure regarding their participation in single-employer defined benefit plans (as well as health plans providing retiree coverage). In addition to footnote disclosure, the balance sheet and income statements must record certain information, such as the unfunded liability and the cost of benefits earned, respectively.

In contrast, there is now only limited disclosure required of employers contributing to multiemployer defined benefit pension plans. Currently, absent some non-routine event (e.g., withdrawal from a plan), an employer's financial statement footnotes must only set forth the fact of participation and list the amount of contributions made in the particular year. In addition, the balance sheet must only record liability for contributions earned but unpaid and the income statement must only include contributions paid or accrued during the year.

Current Development

On April 14, 2010, the Financial Accounting Standards Board (FASB), which has authority to modify GAAP, had a public meeting at which it tentatively decided to require employers contributing to multiemployer defined benefit pension plans to disclose in their notes to their financial statements further quantitative and qualitative information about their participation in such plans. While the scope of this disclosure has not yet been decided, it could include information related to the funding of the plan, the plan's "zone" status under the Pension Protection Act of 2006, and the employer's potential withdrawal liability (whether or not withdrawal is contemplated). While footnote disclosure will be required by the new standard, it appears that no new information will be required to be recorded in the financial statements themselves.

The next step in this process is for the FASB to issue an exposure draft that will outline its proposal, including the specific disclosures, in greater detail. This would be followed by a 60-day comment period, after which a final decision would be made. The FASB appears to be expediting this project, as it has indicated that the disclosure requirements would be effective for fiscal years ending after December 15, 2010. There is a delay for nonpublic companies, which will instead have to comply with the first annual period beginning after December 15, 2010.

We will alert you as to upcoming developments in this process.

Doctor’s Orders: Celebrate Mother’s Day with a Check-Up

By Dr. Christopher H. Coulter, M.D., M.P.H.

What better time than the month we celebrate Mother’s Day to help women live long, healthy lives? We know the benefits of a good diet, exercise, and not smoking, but regular screenings are also integral to health. Here are the tests women need and when to get them:

Mammograms – breast self-exam is not nearly good enough at finding breast cancer early. Detected early, breast cancer is usually cured; detected late, it is not. Have one every year or every two years beginning at age 40. If you have a family history of breast cancer, start earlier.

Pap smears – great at detecting cervical cancer early, when it is routinely curable. Get one every one to three years after age 21.

Cholesterol – you should have it checked starting at age 20 if you have a family history of heart disease, beginning at age 45 if not

Blood pressure – have it checked every two years

Colorectal cancer – beginning at age 50, you should be checked for colon cancer. Again, detected early it is very curable.

Diabetes – you should have your blood sugar checked annually, particularly if you are overweight or have a family history of diabetes

Depression – women have depression more often than men, or at least women will own up to it more often. Women who have symptoms suggesting depression for two weeks or more should see their physician.

Osteoporosis – beginning at age 60, some women are at increased risk for fractures. Your physician can order a bone density test, which is quick and painless, to detect and treat osteoporosis before it has done damage.

Chlamydia and sexually transmitted diseases – women age 25 or younger should be tested for Chlamydia, and any woman should discuss testing for Chlamydia and sexually transmitted diseases with her physician.