Affordable Care ActThis post was authored by Heather DeBlanc and Stephanie Lowe

Two recent developments have surfaced impacting the application of the Affordable Care Act (“ACA”) for employers.  The first development is the postponement of the Cadillac Tax until 2020.  The second development is the IRS’s recently released Notice 2015-87, which provides guidance and clarification on the ACA’s employer mandate, including treatment of flex contributions, the ACA’s market reforms, reporting, and carry-over rules for health reimbursement arrangements (“HRAs”).  The following is a summary of these developments and how they affect employers.


Congress recently approved an omnibus federal funding bill, which President Obama signed into law on December 18, 2015.  This bill includes a two-year delay of the Cadillac Tax, which is an excise tax on plan sponsors that provide overly generous levels of health benefits to employees.  The Cadillac Tax was formerly set to begin in 2018 and is now postponed until 2020.

The two-year delay should not be used as a two-year period to ignore the Cadillac Tax.  Instead, the delay provides more time for employers to modify benefits to employees to avoid the eventual impact of the Cadillac Tax.  Once the Cadillac Tax goes into effect, it will impose a 40% excise tax on any excess benefit an employer provides to an employee through its applicable employer-sponsored health coverage.  The IRS will tax plans where the aggregate cost of the applicable employer-sponsored health coverage exceeds a statutory dollar limit ($10,200 for self-only coverage and $27,500 for self and spouse or dependent coverage), subject to various adjustments.  Employers will be responsible for calculating whether the health plans employees enroll in provide an excess benefit.  The calculations are based on the health coverage the employee actually enrolls in, not just what is offered to the employee.  ALL employer plans, not just large employer plans, are potentially subject to the Cadillac Tax.

IRS NOTICE 2015-87

IRS Notice 2015-87 provides various ACA guidance regarding employer health coverage.  Notice 2015-87 in its entirety may be found at  The major topics affecting employers are described below.


  • Increase in Percentage of Affordability Safe Harbors

The Treasury and IRS intend to amend the regulations to provide that the 9.5% threshold under the Form W-2, Rate of Pay, and Federal Poverty Line safe harbors, is now 9.56% for 2015 plan years.  This increase in percentage is consistent with the individual affordability analysis used by the exchange.  The amount will increase again to 9.66% for plan years beginning in 2016.

Employers should recalculate their affordability immediately to make sure that their 2015 plans are affordable using the 9.56% figure under the safe harbor (Form W-2, Rate of Pay, or Federal Poverty Line safe harbors) the employer selects.

  • Employer Mandate Penalties Increase

The IRC Section 4980H(a)(1) and (b)(1) penalty amounts will increase for plans in calendar years 2015 and 2016.  Under the ACA, there are two types of monetary penalties that the IRS can levy against employers when a full-time employee obtains subsidized coverage through the exchange.  Under Section 4980H(a), an applicable large employer who fails to offer substantially all of its full-time employees and their dependents minimum essential health coverage may have exposure to a penalty based on the employer’s aggregate number of full-time employees (Penalty A).  Under Section 4980H(b), an applicable large employer who fails to offer full-time employees affordable coverage that provides minimum value may have exposure to a penalty based on the number of full-time employees who obtain subsidized coverage through Covered California (Penalty B).

IRS Notice 2015-87 announces the “premium adjustment percentage” to account for inflation.  The employer mandate penalty amounts will increase to the following amounts based on the “premium adjustment percentage” of 4.213431463%:

Calendar Year 2015

Penalty A – $2,080 per year ($173.33 per month) multiplied by the number of full-time employees less 30 (less 80 in 2015)

Penalty B – $3,120 per year ($260 per month) multiplied by the number of full-time employees who obtain subsidized coverage through Covered California

Calendar Year 2016

Penalty A – $2,160 per year ($180 per month) multiplied by the number of full-time employees less 30

Penalty B – $3,240 per year ($270 per month) multiplied by the number of full-time employees who obtain subsidized coverage through Covered California

The Treasury and IRS anticipate further adjustments for future years.

  • Flex Contributions Only Help Make Premiums Affordable for the Employer Mandate If They Qualify as “Health Flex Contributions”

Employer flex contributions will reduce the amount of an employee’s premium contribution only if the amount constitutes a “health flex contribution.”  An amount qualifies as a “health flex contribution,” only if:

  1. the employee may not opt to receive the amount as a taxable benefit (i.e., the employee cannot cash out);
  2. the employee may use the amount to pay for minimum essential coverage; and
  3. employee may use the amount exclusively to pay for medical care, within the meaning of Internal Revenue Code Section 213.

For the purposes of IRC Section 4980H(b) and the related reporting under IRC Section 6056 (Form 1095-C), a health flex contribution is treated as made ratably for each month of the period to which it relates.

This guidance affects many public agencies because an employer flex contribution that does not qualify as a “health flex contribution” will not reduce the employee’s required contribution.  Any employer that allows employees to receive taxable cash will not have a health flex contribution.  Furthermore, any employer that allows employees to use the employer flex contribution towards non-health care benefits (such as a dependent care flexible spending account) will not have a health flex contribution.  If the employer’s flex contributions do not qualify as “health flex contributions,” they cannot be used to reduce the employee’s premium contribution when calculating affordability for the employer mandate.  The IRS reasons that because a non-health flex contribution may be used for benefits other than health benefits or turned into cash, it is not appropriate to assume that an employee would use the non-health flex contribution for health coverage.  Here are two examples IRS Notice 2015-87 provides:

Example 1 (Employer Flex Contribution Does Not Reduce Dollar Amount of Employee’s Required Contribution).
Facts: Employer offers employees coverage under a group health plan through a Section 125 cafeteria plan. An employee electing self-only coverage under the health plan contributes $200 per month toward the cost of coverage. Employer offers employer flex contributions of $600 for the plan year that can be used for any benefit under the Section 125 cafeteria plan (including benefits not related to health) but are not available as cash.

Conclusion: Because the $600 employer flex contribution is not usable exclusively for medical care, it is not a health flex contribution and therefore does not reduce the employee’s required contribution for the coverage under Sections 36B and 5000A and any related potential consequences under Section 4980H(b). For purposes of Section 4980H(b) and the related reporting under Section 6056 (Form 1095-C), the employee’s required contribution is $200 per month.

Example 2 (Employer Flex Contribution Does Not Reduce Dollar Amount of Employee’s Required Contribution).
Facts: Same as in Example 2, except that the employee may also elect to receive the $600 employer flex contribution as cash or other taxable compensation.

Conclusion: Same as conclusion for Example 2 because the employer flex contribution is not a health flex contribution. The same conclusion would apply if the employer flex contribution were available to pay for health benefits or to be taken as cash or other taxable compensation but not available to pay for other types of benefits.

The IRS will provide a period for transition relief.  Employers with plan years beginning before January 1, 2017, will be allowed to reduce the amount of an employee’s required contribution by a non-health flex contribution.  When reporting data from plan years 2015 and 2016, an employer can use any flex credits to reduce the contribution.  However, in the future, this will not be permitted.  Non-health flex contribution arrangements that are adopted after December 16, 2015, or that substantially increase the amount of the non-health flex contribution after December 16, 2015 will not be able to reduce the amount of an employee’s required contribution.  Employers should carefully assess their current flex contribution arrangements and ensure that any new arrangement they adopt after December 16, 2015, qualifies as a “health flex contribution.”

  • Cash In Lieu Does Not Help Make Premiums Affordable for the Employer Mandate

Cash in lieu incentives cannot be applied to the affordability analysis.  If an employer offers an employee cash to decline coverage offered under the employer’s health plan (referred to as an “opt-out payment” or “cash in lieu”), this choice between cash and coverage is analogous to offering to pay for an employee’s coverage via salary reduction.  In both cases, the employee may purchase the health plan coverage only if he/she foregoes a specified amount of cash or salary compensation.  For example, an employee who must pay $1,000 for employer-provided health coverage and an employee who is not required to pay anything for coverage but would receive an additional $1,000 for declining coverage, both forego $1,000 of compensation to obtain the employer-provided coverage.

A cash in lieu payment can have the effect of increasing the amount of an employee’s contribution beyond the amount of any salary reduction contribution.  For example, if Townsville requires Employee A to pay $200 per month for the cost of health coverage, and at the same time offers Employee B $100 per month in taxable wages if Employee B declines coverage, then the cash in lieu offer has the net effect of increasing Employee A’s contribution of coverage. Employee A’s contribution for coverage is effectively $300 per month ($100 + $200) because by electing coverage, Employee A is missing out on the $100 per month cash in lieu payment and must also provide a $200 per month salary reduction.

The Treasury and IRS intend to propose regulations that treat an unconditional opt-out arrangement (where payment is conditioned solely on an employee declining coverage with no requirement to provide proof of coverage) in the same manner as a salary reduction for purposes of determining the affordability of an employee’s contribution.

The regulations will only apply after the IRS issues final regulations.  Transition relief provides that opt out arrangements adopted before December 16, 2015, do not increase the amount of the employee’s required contribution for reporting or for the employer mandate.  Employees should exercise caution before renewing any existing opt out/cash in lieu arrangements from this point forward and consider the serious consequences this arrangement could have with regard to the employer mandate.

  • Employer Contributions to Health Reimbursement Arrangements (HRA) May Reduce the Employee’s Required Contribution for Affordability for the Employer Mandate

An applicable large employer (“ALE”) may be subject to a payment for any month in which a full-time employee enrolls in a coverage through Covered California and receives a premium tax credit.  However, an employee is not eligible for the premium tax credit for any month when the employee is eligible for coverage under an employer-sponsored health plan that provides minimum value and is affordable.  A plan is unaffordable if the employee’s required contribution to the annual premium for the lowest cost self-only coverage exceeds 9.5 percent of the employee’s household income (under the IRC Section  4980H affordability safe harbors).

Employer contributions to an HRA count toward calculating the affordability of an employee’s required contribution (i.e., they reduce the dollar amount the employee must contribute) only to the extent the amount of the employer’s contribution is required under the terms of the HRA arrangement.  For example, if the employer contributes a required $1,200 per year under an HRA, the employee’s required contribution will be reduced by $100 per month (1/12 of the $1,200).  The $1,200 is taken into account as an employer contribution whether or not the employee uses the HRA to pay the employee share of contributions for the major medical coverage.

  • Government Entities May Apply a Good Faith Interpretation of Aggregation Rules

The ACA has aggregation rules that treat aggregated employers as a single employer to determine whether an employer has 50 or more full-time employees for purposes of the ACA’s Employer Mandate.  These aggregation rules do not specifically address how they apply to government entities.  Notice 2015-87 provides guidance that government entities may apply a reasonable, good faith interpretation of the aggregation rules to determine whether the entity is an applicable large employer.

  • Individuals Who Provide Services to Educational Organizations – Break in Service Rule Extended to Non-Educational Organizations Under Certain Circumstances

The ACA regulations have rules explaining when an employee may be treated as a new employee after a break in service for purposes of determining the status of these employees as full-time under both the monthly measurement method and the look back measurement method.  For non-educational organization employers, the break in service must be 13 weeks or more.  Educational organizations have a “special rule” in which the break in service must be 26 weeks or more to account for the periods in which education employees may not be asked to provide services (i.e., during summer break).  During a break of service, an employee is not credited with any hours of service and the employer may treat the employee as a new employee upon the resumption of services.

To avoid providing the more generous 26 week break in service, some educational organizations have begun to use third-party staffing agencies to obtain services for certain positions, such as bus drivers and cafeteria workers.  Since the educational organization may not be considered the individual’s employer and the staffing agency is not an educational organization, these educational organizations believe the individuals are not subject to the 26 week break in service rule and they can treat the individuals as new hires upon a 13 week break of service.  The Treasury and IRS view this as circumventing the intent of the special rule for educational organizations.  Therefore, the Treasury and IRS intend to propose amendments to the regulations to apply the special rule to individuals who provide services to one or more educational organizations, even if an educational organization is not the individual’s employer.  Once these regulations come out, the 26 week break in service will not only apply to employees of educational organizations, but also to any employee providing services to one or more educational organizations for whom a meaningful opportunity to provide services during the entire year is not made available.


  • HRA Credits Cannot Be Used to Purchase Individual Market Coverage

Employers must remain cognizant of situations where an employee ceases to be covered by the employer’s group health plan but continues to participate in a health reimbursement arrangement (“HRA”).  If an employee is allowed to use employer-credited amounts from an HRA to purchase individual market coverage, the HRA will fail to be integrated with the employer’s group health plan.  HRAs are required to be integrated with other group health plans, and without such integration, the HRA fails to comply with the ACA market reforms, resulting in employer penalties for noncompliance.

  • HRAs Covering Spouses and Dependents Must be Integrated with Other Group Health Plans Also Covering Spouses and Dependents

An HRA can only cover individuals who are enrolled in both the HRA and the employer’s group health plan.  This means that if an employee is enrolled in self-only coverage, his/her HRA cannot reimburse the employee’s spouse’s and/or dependents’ medical expenses.  If an HRA allows reimbursements to individuals not covered on the employer’s group health plan, the HRA fails to meet the ACA market reforms.

In order for an HRA to cover spouses’ and/or dependents’ medical expenses, these individuals must also be enrolled in the employer’s group health plan.  One way for employers to ensure compatibility is to structure the HRA so that the HRA automatically applies only to individuals covered under the employer’s group health plan.  Since many HRAs currently allow employees to use HRA credits for their family members’ medical expenses regardless of whether those family members are also enrolled in the employer’s group health plan, the IRS provides a period of transition relief.  The Treasury and IRS will not treat an HRA that makes reimbursements available to family members who are not enrolled in the employer’s group health plan as failing to be integrated with the employer’s group health plan for plan years beginning before January 1, 2016.  However, in order for transition relief to apply, the HRA must meet all other requirements to be integrated with a group health plan.

  • HRAs May Be Used to Reimburse Individual Market Coverage Consisting Solely of Excepted Benefits

Generally an HRA fails to comply with market reforms if it allows an individual to reimburse premiums for individual market coverage.  However, if the HRA reimburses individual market coverage that only covers excepted benefits (such as dental coverage), it will not fail to comply with the market reforms.  This is because the market reforms do not apply to a group health plan that is designed to solely provide excepted benefits.

  • Employer’s Cafeteria Plan Contributions Cannot Directly Reimburse an Employee for Coverage Purchased through Covered California

A group health plan offered though a Section 125 cafeteria plan that uses salary reductions or other contributions to purchase coverage on the individual market cannot be integrated with individual market coverage.  This guidance confirms that an employer payment plan offered through a cafeteria plan will not integrate with coverage through the exchange and will fail to meet the ACA group health plan mandates.  This means employers cannot provide employer contributions to an employee through a cafeteria plan to directly reimburse for coverage the employee purchases through Covered California. Any employers who currently allow this practice could face penalties and should immediate change their arrangements.


  • Temporary Relief from Inaccurate Employer Reporting

For reporting in early 2016 related to coverage offered in 2015, the IRS will not impose penalties on ALEs who make a good faith effort to comply with the reporting requirements with regard to Forms 1094-C and 1095-C and statements furnished to employees.  This means that if an employer submits incomplete or incorrect information, but makes a good faith effort to comply, relief is available from penalties.  The returns and statements must still be timely filed and furnished unless certain reasonable cause standards are met.

The Treasury and IRS request comments on the guidance provided in IRS Notice 2015-87.  Public comments should be submitted no later than February 18, 2016. For more information regarding how to submit a comment, see IRS Notice 2015-87 at:

  • Each Government Entity that Qualifies as a Applicable Large Employer Must Have Its Own EIN

Each government entity employer that is subject to a reporting requirement must have and use its own employer identification number (“EIN”) for reporting.  Even if a government entity is an aggregated employer, each employer that is considered an ALE must submit its Form 1094-C and Forms 1095-C with its own EIN.


  • Carryover Amounts Are Included in the Benefit Amount a Qualified Beneficiary is Entitled to Receive During the Remainder of a Plan Year in Which a Qualifying Event Occurs

At the end of each plan year, employees may be allowed to carry over up to $500 of unused amounts that remain in a health FSA.  If a qualifying event, such as termination, occurs during the following plan year, any carryover amount is included in determining how much the employee or former employee is entitled to receive for the remainder of the plan year, even if he/she is no longer an employee.

For example, an employer maintains a calendar year health FSA that qualifies as an excepted benefit.  Under the health FSA, during the open season an employee elects a salary reduction of $2,500 for the year.  In addition, the employee carries over $500 in unused benefits from the prior year.  Thus, the maximum benefit that the employee is entitled to receive under the health FSA for the entire year is $3,000.  The employee experiences a qualifying event that is a termination of employment on May 31.  As of that date, the employee had submitted $1,100 of reimbursable expenses under the health FSA.  Therefore, the maximum benefit that the employee could become entitled to receive for the remainder of the year as a benefit under the health FSA is $1,900 (($2,500 plus $500) minus $1,100).

  • Carryover Amounts Are Not Included in Calculating Applicable COBRA Premiums

The maximum amount that a health FSA can require an employee or former employee to pay for COBRA continuation coverage is 102 percent of the application premium.  When calculating the applicable premium, employers cannot include amounts that have been carried over and remain unused from prior years.  The applicable premium is based solely on the sum of the employee’s salary reduction for the year and any non-elective employer contribution for the year.

  • COBRA Beneficiaries Can Carry Over Unused Health FSA Amounts to the Extent NonCOBRA Beneficiaries Can

If a health FSA allows nonCOBRA beneficiaries (i.e., employee beneficiaries who have not incurred a COBRA-qualifying event) to carry over unused amounts from the prior year, the health FSA must also allow similarly situated COBRA beneficiaries to carry over.  If nonCOBRA beneficiaries are allowed to carry over up to $500 in unused benefits remaining at the end of the plan year, then COBRA beneficiaries can carry over up to $500 as well.  However, unlike nonCOBRA beneficiaries, the health FSA is not required to allow a COBRA beneficiary to elect additional salary reduction amounts or to access any employer contributions for the carryover period.  This means that the employee only has his/her carryover amount available for the carryover period.  Furthermore, once the COBRA continuation period ends, the employer does not need to reimburse expenses incurred after that time period.

  • Health FSAs May Condition the Ability to Carry Over on Participation in the Next Plan Year

A health FSA may limit the availability to carry over unused amounts (subject to the $500 limit) to individuals who have elected to participate in the health FSA for the next plan year, even if the ability to participate requires the employee to make a minimum salary reduction election.  This means that an employee who has unused amounts in his/her health FSA at the end of a plan year will forfeit those amounts (i.e., will not get to carry them over) if the employee does not participate in the health FSA for the following plan year.

  • Health FSAs May Limit the Ability to Carry Over Unused Amounts to a Maximum Period

A health FSA may limit the ability to carry over unused amounts to a maximum period of time (subject to the $500 limit).  For example, if a health FSA limits the ability to carry over unused amounts to one year, any individual who carried over unused amounts would need to use those amounts or would otherwise forfeit them after one year.  If an individual carried over $30 and did not elect to contribute any additional salary reductions for the next year, the health FSA could require forfeiture of the $30 at the end of that next year.


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