PPI in the News Compliance Corner - December 24, 2020 Archive
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On December 1, 2020, the IRS released final regulations clarifying that when Congress zeroed out the personal exemption deduction (provided for meeting the individual mandate) for taxable years beginning after December 31, 2017, and before January 1, 2026, it did not prevent individuals from claiming the premium tax credit when enrolling in a health plan on the Marketplace.

The premium tax credit is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance bought through the Health Insurance Marketplace. Among other requirements, a person can obtain the credit by establishing a household income for the taxable year that is at least 100% but not more than 400% of the federal poverty line for the taxpayer’s family size for the taxable year. The individual’s family size is determined by the number of personal deductions that the person makes on their individual tax returns.

Although the Tax Cuts and Jobs Act of 2017 (TCJA) ended the personal exemption for the years 2018 – 2025 by effectively making it zero, the TCJA also made clear that this should not be considered when determining whether an individual qualified for the deduction in other parts of the IRS Code. The new regulations make clear that an individual’s family, for purposes of obtaining the credit, include the person’s spouse and any other individual from whom the applicant can claim a personal exemption deduction, regardless of whether the applicant could claim that deduction under the TCJA. Similarly, a person who would be the subject of another person’s claim for a personal exemption cannot obtain the premium tax credit.

The new regulations also govern how to distribute advance payments of the premium tax credit in light of this clarification, as well as income tax return filing requirements related to the premium tax credit.

Employers should be aware of this development and how it may affect employees’ ability to obtain and use the premium tax credit.

IRS Guidance and Final Regulations »

On December 11, 2020, the DOL, HHS and IRS issued final rules that amend certain requirements for grandfathered group health plans to maintain their grandfather status. The rules provide such plans with greater flexibility to make changes in response to increases in health coverage costs.

As background, the ACA allows certain group health plans that existed as of the law’s enactment on March 23, 2010, to be treated as grandfathered health plans. This treatment exempts the plans from some ACA mandates. To preserve grandfather status, these plans are restricted in their ability to make plan design changes or increase cost sharing. The 2015 grandfathered plan rules outline these limitations.

The final rules follow July 15, 2020, proposed rules, which have been adopted without substantial change. The 2015 existing regulations are modified in two respects.

First, the rules provide an alternative method of measuring permitted increases in fixed amount cost sharing. Under the existing regulations, increases for fixed amount cost sharing other than copayments (e.g., deductibles and out-of-pocket maximums) cannot exceed thresholds based upon the Consumer Price Index measure of medical inflation. Specifically, the 2015 rules define the maximum increase as medical inflation (from March 23, 2010) plus 15 percentage points. However, this component of the CPI index includes price changes for Medicare and self-pay patients, which are not reflected in grandfathered group health plan costs.

The alternative standard relies upon the premium adjustment percentage, rather than medical inflation. The premium adjustment percentage is published by HHS in the annual notice of benefit and payment parameters and reflects the cumulative historic growth in private health insurance premiums from 2013 through the preceding calendar year. As a result, this measure may better reflect increases in underlying costs for grandfathered group health plans.

This new measurement method does not replace the current standard. Rather, an employer can use the method that yields the greater result. Therefore, grandfathered plans are allowed to increase these out-of-pocket costs at a rate that is the greater of the medical inflation adjustment percentage or premium adjustment percentage, plus 15 percentage points.

Second, the final rules permit a grandfathered group HDHP to increase fixed-amount cost-sharing requirements, such as deductibles, to the extent necessary to maintain HDHP status without losing grandfather status. This change was designed to ensure that participants enrolled in such coverage remain eligible to contribute to an HSA.

Employers who sponsor grandfathered plans should be aware of these final rules, which will be applicable beginning on June 15, 2021.

Grandfathered Group Health Plans »
Grandfathered Group Health Insurance Coverage »

On December 10, 2020, the US Supreme Court held in Rutledge v. Pharmaceutical Care Management Association that ERISA did not preempt a state regulation of pharmacy benefit managers (PBMs) that required the PBMs to pay pharmacies regulated by the state for drugs at a price equal to or greater than wholesale cost.

PBMs are entities that coordinate and administer prescription drug programs on behalf of group health plans. As such, they reimburse pharmacies for the cost of drugs covered by those plans. Pharmacies in Arkansas complained that PBMs purchased drugs from them at rates below the wholesale price that the pharmacies pay, thereby forcing the pharmacies to lose money. Arkansas passed Act 900, which required PBMs to reimburse the pharmacies for at least the wholesale cost and requires PBMs to update the lists they keep of the costs they will pay for drugs, referred to as the MAC (Maximum Allowable Cost) list, whenever wholesale prices go up. Act 900 also required PBMs to allow pharmacies to challenge the rates posted in the MAC list and it gives pharmacies the right to refuse to supply a drug when the price offered by the PBMs is less than the wholesale price.

A trade association representing PBMs challenged Act 900, asserting that it was preempted by ERISA. A state statute is preempted by ERISA when it relates to or has a connection with a benefit plan. The PBMs argued that Act 900, by allowing pharmacies to challenge PBM prices for prescription drugs and to refuse to provide drugs, affected matters related to plan administration and interfered with nationally uniform plan administration. Since it is in the interest of benefit plans to contain costs, granting pharmacies these rights interferes with the efficiencies in the PBM arrangement and raises prices. Similarly, by refusing to supply drugs, pharmacies may deny plan beneficiaries the drugs they are entitled to under their plans. So the PBMs claimed that the state statute relates to or has a connection with a benefit plan and is therefore preempted by ERISA, which does not require PBMs to behave in this way.

The Court disagreed with these arguments. For a state statute to be preempted, it must require benefit plans to be structured in certain ways. Act 900, in the Court’s view, does not do this; rather, it focuses on, and affects, costs. The fact that the statute may create inefficiencies in the system is not, by itself, a basis for preemption. Act 900 does not regulate the benefit plans, but instead provides a mechanism whereby the pharmacies have more of a role in determining the costs of drugs paid for by the plan. The procedures established by Act 900 are incidental to this purpose and not enough to call for preemption by ERISA. From this reasoning, the Court ruled that the statute was not preempted.

Employers should be aware of the impact this case will have on prescription drug costs, which may, in turn, cause insurance premiums to rise. This case may also instigate changes in the system under which prescription drug programs are administered, the impacts of which are uncertain but profound enough to merit employers’ attention.

Rutledge v. Pharmaceutical Care Management Association »

On December 10, 2020, HHS released a proposed rule that modifies the HIPAA privacy rules. The proposed rules come after HHS issued a 2018 Request for Information on how HIPAA could be modified to support healthcare coordination. As a result of the comments received, HHS is seeking to amend HIPAA’s privacy regulations in a way that removes barriers to coordinated care and reduces regulatory burdens on the healthcare industry.

The proposed rules make many changes to individuals’ right to access their PHI. Specifically, the rule would allow individuals to use their own electronic devices to access their PHI, and that electronic access would need to be provided to the requestor free of charge. It would also shorten the period of time that covered entities have to respond to requests for access to 15 days (from the current 30-day timeframe). Additionally, any fees related to accessing PHI would need to be posted on covered entities’ websites.

The proposed rules also add additional context to the disclosures that can be made without the need for patient authorization. As background, HIPAA allows disclosures for treatment and healthcare operations to be made without the individual’s authorization. The proposed rule includes care coordination and case management activities within the definitions of “treatment” and “health care operations.” The proposed rule also allows for covered entities to disclose PHI to various social service agencies, community-based organizations, home and community based service providers, and other similar third parties to facilitate coordination of care and case management.

In order to assist individuals in special situations, the proposed rules also allow for covered entities to make certain disclosures when there are emergency circumstances if there is a serious and reasonably foreseeable threat to health and safety. The rule also allows covered entities to make disclosures based on their good faith belief that the disclosure would be in the best interest of the individual (replacing their "professional judgment” as the standard).

Finally, the proposed rule removes the requirement for individuals to acknowledge receipt of the notice of privacy practices in writing. This change will likely ease the administrative burden on care providers.

There will be a 60-day comment period beginning on the date the proposed rule is published in the Federal Register. Since the proposed rule is a part of the Trump administration’s “Regulatory Sprint to Coordinated Care,” and because the rule would potentially be finalized after the start of the Biden administration, it’s hard to know how the rule will proceed through the administrative process. We will continue to report on this rule in Compliance Corner.

Proposed Modifications to the HIPAA Privacy Rule to Support, and Remove Barriers to, Coordinated Care and Individual Engagement »

On December 4, 2020, HHS issued the proposed Notice of Benefit and Payment Parameters Rule for 2022. This notice is issued annually and, once final, adopts certain changes for the next plan year. While the proposed rule primarily impacts the individual market and the Exchange, it also addresses certain ACA provisions and related topics that impact employer-sponsored group health plans. Highlights include:

• Annual Cost-Sharing Limits . As background, the ACA requires non-grandfathered group health plans to comply with an out-of-pocket maximum on expenses for essential health benefits. This maximum annual limitation on cost sharing for 2022 is proposed to be $9,100 for self-only coverage and $18,200 for family coverage (an increase from $8,550 and $17,100 for self-only/family coverage respectively in 2021).
• Medical Loss Ratio Rebates . HHS proposes to amend the MLR calculation so that certain defined prescription drug rebates and other price concessions would be deducted from an insurer’s incurred claims beginning with the 2022 reporting year. Additionally, insurers would be permitted to distribute MLR rebates earlier than the date the insurer currently is required to submit their MLR data to HHS (July 31).
• Employer-Sponsored Coverage Verification . As a reminder, employees are not eligible for a premium tax credit in the health insurance exchange if they are offered coverage by their employer that meets the minimum value and affordability standards. Exchanges are not currently required to verify an employee’s statement that they are not eligible for such coverage. HHS proposes to extend the nonenforcement relief for an exchange to conduct random sampling verification through 2022.
• Exchange Special Enrollment Period . HHS plans to clarify that the complete loss of employer contributions toward an individual's COBRA premium would be a special enrollment period permitting the individual to enroll through the exchange program mid-year outside of the annual enrollment period.

Once final, employers should review the regulations and implement any changes needed for their 2022 plan year.

Proposed Rules »
Fact Sheet »

On December 3, 2020, the IRS provided an early release draft of the 2021 IRS Publication 15-B, the Employer’s Tax Guide to Fringe Benefits . This publication provides an overview of the taxation of fringe benefits and applicable exclusion, valuation, withholding and reporting rules.

As background, the IRS modifies Publication 15-B each year to reflect any recent legislative and regulatory developments. Additionally, the revised version provides the applicable dollar limits for various benefits for the upcoming year. As standard procedure, the IRS releases a preliminary draft of the updated guide prior to final publication.

Among the changes for 2021 is a new Form 1099-NEC. The Form 1099-NEC will be used to report nonemployee compensation paid in 2020 and will be due on February 1, 2021.

With respect to 2021 annual limits, the monthly exclusion for qualified parking is $270 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $270 (both unchanged from 2020). For plan years beginning in 2021, the maximum salary reduction permitted for a health FSA under a cafeteria plan remains $2,750. Further, if the health FSA permits a carryover, the maximum carryover amount for plan years beginning in 2021 is $550.

Employers should be aware of the changes reflected in the early release of the fringe benefits guide. The IRS is accepting comments regarding the proposed publication. Accordingly, employers should also recognize that some changes to the released draft may occur prior to finalization, and draft forms should not be used for filing.

Draft Publication 15-B »

On December 7, 2020, the IRS published final regulations relating to the deduction of qualified transportation fringe (QTF) and commuting expenses. Effective for taxable years ending after December 31, 2019, the final regulations adopt the proposed regulations (published back in August 2020) with minimal changes. As background, the 2017 Tax Cuts and Jobs Act (TCJA) disallowed deductions for QTF expenses and deductions for certain expenses of transportation and commuting between an employee’s residence and place of employment (effective for amounts paid or incurred after December 31, 2017). Importantly, QTFs, up to indexed monthly limits ($270 for 2020), are still excludable from employees’ income. The TCJA also provided that a tax exempt organization’s unrelated business taxable income (UBTI) is increased by the amount of the QTF fringe expense that is nondeductible (for amounts paid or incurred after December 31, 2017).

Then, on December 20, 2019, Congress enacted the Further Consolidated Appropriations Act of 2020 (FCAA), which retroactively repeals those provisions of the 2017 TCJA back to the original TCJA enactment date. These final regulations address this retroactive elimination of the deduction for expenses relating to QTFs provided to employees, building off interim guidance published in 2018 and the 2020 proposed regulations. Relevant topics are addressed below.

Qualified Parking
As with the proposed regulations, the final regulations distinguish between qualified parking purchased from a third party and parking provided at an employer-owned or leased parking facility. When through a third party, the disallowed amount is generally the annual qualified parking cost paid to the third party. However, when through an employer-owned/leased facility, the disallowed amount may be determined using a general rule or via any of three simplified methods. Employers may choose the applicable method each year and for each parking facility.

Under the general rule, the employer calculates the disallowed deduction for each employee receiving qualified parking, using a reasonable interpretation of the statute. To be reasonable, the interpretation must: 1) be based on the expense paid/incurred, not on the benefit’s value to employees; 2) disallow deductions for reserved employee spaces; and 3) properly apply the exception for parking made available to the general public.

There are actually three simplified methods. The first is the “primary use” method, which requires the employer to calculate the disallowance for reserved employee spaces, determine if the exception for general public parking applies (and if not, calculate an allowance for reserved nonemployee spaces), and allocate the remaining expense as nondeductible to the extent employees use them during peak demand period. The second is the “cost per space method” (multiplying the cost per space of the employer’s parking by the total number of spaces used by employees during peak demand). The third is the “qualified parking limit” method (multiplying the qualified parking exclusion limit by the total number of spaces used by employees during peak demand or the total number of employees).

Vanpooling and Transit Expenses as QTFs
The final regulations also address vanpooling and transit expenses. Similar to qualified parking, where an employer pays a third party for qualified vanpooling or transit fringe benefits, the nondeductible amount is generally the amount paid. Conversely, if the employer provides these benefits in kind, the disallowed deduction must be calculated based on a reasonable interpretation of the statute (rather than on the value of the benefit to the employee).

Exceptions
Like so many rules, there are exceptions in certain circumstances that would preserve all or a portion of an employer’s deduction for QTFs. An employer’s deduction generally will not be disallowed to the extent the expenses are treated as taxable compensation for withholding and other purposes because they exceed the exclusion for QTFs. Also, expenses may be deductible if they are for transportation or parking made available to the general public. This exception does not apply to reserved employee parking, and is limited if the “primary use” of the parking (more than 50%) is not by the general public. Lastly, expenses may be deductible if the vanpooling, transit pass or parking is sold to customers (including employees) in a bona fide transaction for full consideration. Notably, this exception does not apply to benefits purchased under a compensation reduction agreement.

Tax-Exempt Organizations and UBTI
The TCJA also added a provision (Section 512(a)(7)) stating that a tax-exempt organization’s UBTI is increased by the amount of the QTF expense for which a deduction is not allowable under Sec. 274, effective for amounts paid or incurred after December 31, 2017. In December 2017, though, that TCJA provision was repealed, retroactive to the original date of enactment of the TCJA. Although Sec. 512(a)(7) was retroactively repealed, Sec. 274 and the final regulations still apply to a tax-exempt organization to the extent that the amount of the QTF expenses paid or incurred by an exempt organization is directly connected with an unrelated trade or business conducted by the exempt organization. In that case, the amount of the QTF expenses directly connected with the unrelated trade or business is subject to the disallowance, and thus disallowed as a deduction in calculating the UBTI attributable to that unrelated trade or business. Tax-exempt employers with questions on QTFs and UBTI should work with outside counsel.

Takeaways
Employers should be aware of the final regulations, and should work with their accounting team and/or outside tax counsel to determine appropriate next steps. Despite their complicated nature, the final regulations provide greater clarity on various QTF issues, and employers may find potentially meaningful opportunities to simplify the calculation of nondeductible expenses, which could result in cost savings. The final regulations are effective for tax years ending after December 31, 2019.

Final Regulations »

On December 9, 2020, the IRS issued Notice 2020-86, which provides guidance regarding safe harbor provisions under Sections 102 and 103 of the SECURE Act. The questions and answers are intended to assist employers that sponsor safe harbor plans with compliance until comprehensive regulations are developed.

As background, qualified retirement plans are prohibited from providing contributions or benefits that discriminate in favor of highly compensated employees. Instead of satisfying the annual nondiscrimination tests with respect to elective deferrals and matching contributions, an employer can choose to make safe harbor non-elective and/or matching contributions. Additionally, as an alternative to a traditional safe harbor plan design, an employer can adopt a qualified automatic contribution arrangement (QACA), which combines safe harbor contributions with an automatic enrollment feature.

Section 102 of the SECURE Act increased the QACA elective deferral maximum percentage from 10% to 15%. The guidance explains that a QACA is not required to adopt this increase. Rather, the qualified percentage under a QACA safe harbor 401(k) plan may be any percentage of compensation specified under the plan, provided it is applied uniformly and does not exceed 10% during the initial period of participation and 15% thereafter.

However, the plan document may need to be amended if the language incorporates the 15% rate by reference (e.g., by referring to the maximum permitted rate under the Code) and the plan sponsor wishes to continue to apply the prior 10% maximum rate. In such case, the plan would need to be amended retroactive to the first day of the plan year beginning after December 31, 2019, in accordance with the timeframes referenced in IRS Notice 2020-68.

Section 103 of the SECURE Act removed the safe harbor notice requirements for traditional and QACA 401(k) plans that satisfy the automatic deferral percentage safe harbor through safe harbor non-elective contributions. The guidance confirms that safe harbor notices must still be provided for traditional safe harbor 401(m) plans in order for matching contributions not to be subject to automatic contribution percentage testing.

Additionally, plans wanting the ability to reduce or suspend safe harbor contributions mid-year and maintain safe harbor status must still provide notice before the beginning of the plan year. However, one-time relief is provided for plans that elected safe harbor status for 2021 without providing such advance notice (as allowed under Section 103). Specifically, these plans can issue a notice to eligible participants describing the potential mid-year reduction or suspension of safe harbor non-elective contributions by January 31, 2021.

The notice also addresses questions related to retroactive adoption of safe harbor status. The SECURE Act allows traditional and safe harbor 401(k) plans to attain safe harbor status by adoption of an amendment no later than 30 days before the plan year end (if providing 3% non-elective employer contributions) or by the end of the following plan year (if providing a 4% non-elective contribution). The notice explains that a 4% non-elective contribution would not be deductible for the prior year if contributed to the plan after the tax filing deadline for such year (including extensions). Additionally, guidance is provided with respect to the applicable amendment deadlines to adopt safe harbor status under the new SECURE Act provisions.

Employers who sponsor safe harbor 401(k) plans may find this guidance instructive.

IRS Notice 2020-86 »

On December 16, 2020, the DOL finalized a rule instituting standards for situations where fiduciaries exercise shareholder rights, such as voting proxies. As background, ERISA’s investment duties regulation generally requires a fiduciary to act prudently when making decisions on investments. Sometimes, that duty involves the fiduciary having to vote on matters on behalf of plan shareholders (i.e., by proxy). The proposed rule provides guidance on the factors that fiduciaries should consider when exercising shareholder rights. (We discussed the proposed rule in the September 17, 2020, edition of Compliance Corner .)

The final rules substantially alter the proposed rules in a number of ways. First, in response to the many comments they received, the DOL takes a more principles-based approach in the final rules. In the proposed rule, the DOL required fiduciaries to act solely based on the economic interests of the plan and participants, only considering factors that will affect the economic value of the plan’s investments. However, the DOL removed that requirement due to being persuaded that the complexity involved in a determination of economic versus non-economic impact could be costly. Instead, the final rule focuses on whether the fiduciary has a prudent and loyal process for proxy voting and other exercises of shareholder rights.

The final rule again confirms that fiduciaries do not always have to vote proxies or exercise every shareholder right. The rule does, however, provide a safe harbor provision that fiduciaries can use to satisfy their fiduciary obligations with respect to decisions on whether to vote proxies. Importantly, the DOL clarifies that these regulations do not apply to voting, tender and other rights that are passed through to participants in individual account plans.

As part of the final rule, the DOL removed Interpretive Bulletin 2016-01 and invalidated Field Assistance Bulletin 2018-01. The rule will become effective 30 days after the rule was published in the federal register (January 15, 2021), and it involves compliance dates in 2022. Plan fiduciaries should discuss this rule with their plan advisers to ensure that they are meeting their fiduciary obligations related to exercising shareholder rights.

Final Rule: Fiduciary Duties Regarding Proxy Voting and Shareholder Rights »

On December 15, 2020, the DOL issued the finalized prohibited transaction exemption 2020-02 for investment advice. As background, the DOL issued a final rule providing an amended fiduciary conflict of interest rule back in June 2020. At that time, the DOL also proposed this class exemption to go along with that final rule. (We discussed the final conflict of interest rule and the proposed class exemption in the July 9, 2020, edition of Compliance Corner. )

Under the class exemption, those that provide fiduciary investment advice (including rollover advice) can receive compensation for conflicted advice as long as they meet certain impartial conduct standards. This rule aligns the DOL’s rule with the SEC’s rule and provides the exemption if:

• The investment advice is in the best interest of the retirement investor at the time it is made;
• The compensation received is reasonable under ERISA 408(b)(2); and
• The advice does not place the financial or other interests of the advising fiduciary before the interests of the investor.

The final exemption makes a number of changes to the proposed version. Specifically, the final exemption:

• Narrows the recordkeeping requirements to allow only the DOL and the Department of the Treasury to obtain access to a financial institution’s records;
• Revises the disclosure requirements to require a written disclosure to retirement investors on the specific reasons that a rollover recommendation was in their best interest;
• Revises the retrospective review provision to provide that certification can be made by any senior executive officer, and not just the chief executive officer (as proposed); and
• Adds a self-correction provision; and
• Sets forth the DOL’s final interpretation of the five-part test used for determining investment advice fiduciary status.

The final prohibited transaction exemption will be effective beginning 60 days after the date of publication in the Federal Register. Plan sponsors should discuss this rule with their plan advisers.

Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees »