The Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) recently released new guidance clarifying important provisions in the Patient Protection and Affordable Care Act (“PPACA”).
The most recent DOL guidance comes in the form of a three-part series of FAQs posted to the PPACA section of its website. The most recent IRS guidance is Notice 2010–69.
PPACA FAQs Part I:
The DOL published Part I of the FAQs on September 20. It includes 16 questions and answers covering issues related to grandfathered health plan status (discussed in our June 2010 issue), the new claims and appeals requirements (discussed in our September 2010 issue), out-of-network emergency services, and nondiscrimination requirements for insured plans.
One of the more significant pieces of guidance in Part I relates to PPACA’s mandate to cover “children” up to age 26, regardless of the child’s residency, financial or student status, or marital status. PPACA did not define the term “children,” and therefore it was not clear what types of employee-to-child relationships plans were required to recognize for the purposes of the age 26 mandate. Q&A-14 clarifies that plans may impose those otherwise prohibited eligibility restrictions on children who do not fall within the Internal Revenue Code’s definition of a child in Section 152(f)(1) (e.g., children for whom the employee is a legal guardian, grandchildren, nieces and nephews, or unrelated children who reside with the employee).
Takeaway: Plans that offer dependent child coverage must cover an employee’s natural child, stepchild, adopted child (or child placed for adoption with the employee), or foster child up to age 26 without any restrictions. However, those plans can place residency, marital, financial support, or other restrictions on eligibility for any other category of child. This allows plans to limit non-152(f)(1) dependent child eligibility to those children who qualify for coverage on a tax-free basis. For example, a plan could cover grandchildren only if they qualify as the employee’s tax dependents.
PPACA FAQs Part II:
The DOL published Part II of the FAQs on October 8. It includes nine questions and answers covering issues related to grandfathered health plan status (discussed in our June 2010 issue), dental and vision benefits excepted from PPACA’s market reform provisions, preventive health services, and PPACA’s effective dates.
Also included in Part II is guidance on PPACA’s restrictions on rescissions of coverage. Under the new rules, plans generally cannot rescind coverage with retroactive effect unless there is fraud or an intentional misrepresentation of material fact, as prohibited by the plan terms. Q&A-7 addresses two types of retroactive terminations of coverage in the “normal course of business” that are permitted under the rescission rule:
- Plans that update their list of eligible individuals once per month can retroactively terminate (subject to offering applicable COBRA coverage) a terminated employee’s coverage back to the date of termination of employment because of a delay in administrative record-keeping.
- Plans not notified of an employee’s divorce until after it occurs can terminate (subject to offering applicable COBRA coverage) coverage of an ex-spouse retroactive to the date of divorce.
Takeaway: While PPACA generally requires that any termination of coverage is made on a prospective basis absent fraud, the DOL has provided two commonsense exceptions to ameliorate administrative issues.
PPACA FAQs Part III:
The DOL published Part III of the FAQs on October 13. This short two-question addition focuses on the PPACA market reform exemption for plans covering fewer than two participants who are current employees (which is the same exemption provision already applicable under HIPAA’s portability requirements). Prior to this guidance, it was not clear whether individuals who are on long-term disability were current employees for purposes of the PPACA exemption. In Q&A–2, the DOL states that until it issues further guidance, it will not treat individuals on long-term disability as current employees for purposes of the PPACA exemption. The DOL expects to publish guidance on this issue in 2011.
Takeaway: Until further notice, retiree-only plans that also cover individuals who are on long-term disability do not have to comply with the PPACA’s market reform provisions.
IRS Notice 2010–69: Form W–2 Reporting No Longer Required in 2011
IRS Notice 2010–69 addresses the requirement in PPACA that employers report the cost of coverage under their health plan on employees’ Form W–2. Forms W–2 generally are not provided to employees until January of the following year, but terminated employees can request a Form W–2 mid-year (in which case, the employer must provide it within 30 days of the request or within 30 days of the final wage payment, whichever is later). PPACA states that employers must report the aggregate cost of each employee’s coverage, as determined by the applicable premium under the COBRA rules, on the Form W–2 for taxable years beginning after December 31, 2010. In 2018, the IRS will use this information to enforce the so-called “Cadillac plan” tax, a 40% excise tax on high-cost plans.
Notice 2010–69 makes the new Form W–2 reporting requirement optional for 2011. This addresses the concern many had expressed that employers did not have sufficient time to update their systems to provide the required information for terminated employees who exercised their right to request a Form W–2 mid-year in 2011. The Notice states that the IRS anticipates issuing guidance on the reporting requirement by the end of 2010. The IRS also issued a draft 2011 Form W–2 which includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan (available on the IRS website).
Takeaway: Employers will not be penalized if they do not report the cost of coverage under their health plan on the 2011 Form W–2. Accordingly, employers now have an extra year to make any necessary changes to their payroll systems or procedures to prepare to comply with the Form W–2 reporting requirement.