Procedures Should Be Implemented To Comply With New Self-Reporting And Excise Tax Payment Requirements For Certain Health Plan Violations

Posted on January 4, 2010 by Ted Lewkowicz

Starting January 1, 2010, employers and certain other entities that administer group health plans will be required, for the first time, to report on an Internal Revenue Service ("IRS") form certain types of group health plan violations and pay the applicable excise taxes. Violations that must be reported include a failure to satisfy health coverage continuation requirements under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), certain requirements under the Health Insurance Portability and Accountability Act ("HIPAA"), certain mental health benefit parity requirements, childbirth hospital stay requirements, and certain health coverage continuation requirements for seriously ill higher education students. Administrators of group health plans were not required to self-report such violations when they were discovered, and the lack of such self-reporting often resulted in any applicable excise taxes not being paid. The IRS has issued regulations that will require such violations to be self-reported, and will require any applicable excise taxes to be paid in a timely manner.


Steps that should be implemented by employers to comply with these new requirements include:

making sure that employees or other persons who are involved in the administration of each applicable group health plan are informed about these new requirements;

implementing procedures that will help ensure the timely discovery of applicable group health plan violations, the timely submission of the IRS form reporting such violations, and the timely payment of all applicable excise taxes; and

to the extent an employer's group health plan is administered by another entity (e.g., a third party administrator, an insurance company or a health maintenance organization), reviewing any agreement with such entity to see if any changes are needed to help ensure compliance with these new requirements.

 

Taxpayers Required To Comply With These New Requirements

The new self-reporting and excise tax payment requirements for certain group health plan violations generally apply to: (1) employers who sponsor a group health plan that is subject to the requirements described in the following paragraph ("Covered Health Plan"); (2) unions and other employee organizations who sponsor a Covered Health Plan; (3) third party administrators of Covered Health Plans (e.g., a third party administrator of a self-insured Covered Health Plan); and (4) certain other third parties who are responsible for providing benefits under a Covered Health Plan (e.g., insurance companies or health maintenance organizations).

Types of Violations That Are Covered By These New Requirements

Violations that must be reported include a failure to comply with the following requirements:


COBRA Health Coverage Continuation Requirements -- Group health plans that are subject to COBRA are required to comply with certain coverage continuation requirements.

HIPAA Preexisting Condition, Creditable Coverage and Special Enrollment Requirements -- Group health plans that are subject to HIPAA are required to, among other things, comply with limitations on preexisting exclusions, certification of creditable coverage requirements, and special enrollment requirements.

HIPAA Nondiscrimination Requirements Based on Health Status Factors -- Group health plans that are subject to HIPAA are not allowed to discriminate based on a health status factor.

Genetic Information Nondiscrimination Requirement -- The Genetic Information Nondiscrimination Act ("GINA") prohibits, among other things, discrimination based on genetic information.

Mental Health Parity Requirements -- The Mental Health Parity and Addiction Equity Act imposes certain parity requirements between mental health benefits and medical/surgical benefits.

Childbirth Hospital Stay Requirements -- The Newborns' and Mothers' Health Protection Act imposes requirements regarding minimum hospital lengths of stay in connection with childbirth.

Health Coverage Continuation Requirements for Seriously Ill Higher Education Students -- Michelle's Law imposes certain health coverage continuation requirements for dependent university and college students with serious medical conditions.

Comparable Contribution Requirements for Health Savings Accounts and Medical Savings Accounts -- Health savings accounts ("HSAs") and Archer medical savings accounts ("MSAs") are subject to requirements that help ensure that comparable contributions are made for nonhighly compensated employees.

Excise Taxes That Apply To Such Violations

The applicable excise taxes vary depending upon the type of violation involved. An excise tax of $100 a day per affected beneficiary generally applies to a violation of the COBRA health coverage continuation requirements. An excise tax of $100 a day per affected individual generally applies to violations of: (1) HIPAA's preexisting condition, creditable coverage, and special enrollment requirements; (2) HIPAA's nondiscrimination requirements based on health status factors; (3) GINA's genetic information nondiscrimination requirement; (4) the mental health parity requirements; (5) the childbirth hospital stay requirements; and (6) the health coverage continuation requirements for seriously ill higher education students. A violation of the comparable contribution requirements for HSAs and MSAs generally will be subject to an excise tax of 35 percent of the aggregate amount contributed to the HSAs or MSAs for all employees within the applicable calendar year.

IRS Form That Must be Filed If a Violation Occurs

If a violation of one of the requirements described above occurs, the applicable employer generally will be required to report that violation on IRS Form 8928 and will be required to pay the applicable excise taxes. If a COBRA health coverage continuation requirement is involved, the applicable third party administrator or insurer could be responsible for filing Form 8928 and paying the applicable excise taxes. If a violation occurs with respect to a multiemployer plan, the plan will be responsible for filing Form 8928 and paying the applicable excise taxes.

Deadline For Filing the Required IRS Form and Paying the Applicable Excise Taxes

For all violations described above other than a violation of the comparable contribution requirements for HSAs and MSAs, a Form 8928 generally must be filed and the applicable excise tax generally must be paid by the due date for filing the federal income tax return for the applicable taxpayer. If a violation of the comparable contribution requirements for HSAs and MSAs occurs, a Form 8928 generally must be filed and the applicable excise tax generally must be paid by April 15th of the calendar year that follows the calendar year in which the violation occurred. Special requirements apply with respect to extensions, multiemployer plans, and multiple employer plans.

Exceptions To the Excise Tax Requirements

With respect to all violations described above other than a violation of the comparable contribution requirements for HSAs and MSAs, exceptions to the excise taxes apply:

if the responsible party did not know, and would not have known even if reasonable diligence had been exercised, that the violation existed; or

if the violation was due to reasonable cause and not willful neglect, and was corrected within 30 days after the first day the responsible party knew, or exercising due diligence, would have known that the violation had occurred (the violation will be considered corrected if the violation is retroactively undone to the extent reasonably possible and the affected individual is put in a financial position as beneficial as the individual would have been in had the violation not occurred).

If a violation of the comparable contribution requirements for HSAs and MSAs occurs, the IRS can waive the excise tax if it is excessive and the failure is due to reasonable cause and not willful neglect.

Penalties That Apply If These Filing and Excise Tax Requirements Are Not Satisfied

A failure to satisfy these filing and excise tax requirements could result in late penalties of up to 50 percent, and interest charges.

Effective Date of These New Filing and Excise Tax Requirements

These new filing and excise tax requirements apply to any Form 8928 that is due on or after January 1, 2010.

 
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Independent Contractor or Employee: An Old Question Continues to Haunt Employers

Posted on December 23, 2009 by John Ho

In recessionary times like these, employers often rely more heavily on independent contractors to avoid the personnel costs associated with hiring regular employees. Doing so, however, creates risks. Now is a good time to make the effort to determine whether your independent contractors are really independent contractors. Just don’t expect the answer to come easily.

The issue of who is properly classified as an independent contractor (as opposed to employee) has been giving employers headaches for decades. As the United States Supreme Court noted over 60 years ago: “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent entrepreneurial dealing.” N.L.R.B. v. Hearst Publication, 322 U.S. 111, 121 (1944). It is little wonder that even the Supreme Court is troubled by this legal issue given the difficulties involved in the analysis. For starters, courts and government agencies (both state and federal) use different legal tests to make this determination. As a result, a single set of facts can produce different legal conclusions. Moreover, none of the tests utilized relies on definitive factors. As the Internal Revenue Service (“IRS”) states on its website, “[T]here is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”

Although the issue is old, it has continued vitality. There has been a significant increase in litigation, government enforcement and legislation over the misclassification of independent contractors in recent years. It is equally clear that the focus on independent contractor misclassification, far from slowing down, will only continue to pick up steam. The remainder of this blog summarizes some recent developments demonstrating that employers need to be very careful when using independent contractors.
 

New York State’s Joint Enforcement Task Force on Employee Misclassification (“Task Force”), formed in 2007, continues to address, among other things, the problem of employers who inappropriately classify employees as independent contractors.  According to the Task Force’s most recent Annual Report, it has uncovered approximately 12,300 instances of employee misclassification resulting in more than $157 million in unreported wages. Partly in response to the Report, Senate Labor Committee Chairman George Onorato, D-Queens, and Senate Insurance Committee Chairman Neil Breslin, D-Albany, renewed their push for passage of a bill which would, among other things, levy fines of up to $5,000 per employee for any construction company that misclassifies its workers as independent contractors. The bill also creates a presumption of employment status in the construction industry unless certain factors are established.

On August 21, 2009, the Massachusetts Supreme Judicial Court held in Somers v. Converged Access, Inc. that an employee who has been misclassified as an independent contractor is entitled, under Massachusetts law, to recover any wages and benefits he proves he was denied because of his misclassification, including holiday pay, vacation pay, and overtime. In so doing, the Court rejected the employer’s argument that it should not have to pay any damages because had it known the individual was an employee instead of an independent contractor, it would have paid him a lower hourly rate than he received as an independent contractor.

New York Attorney General Andrew M. Cuomo, Montana Attorney General Steve Bullock, and New Jersey Attorney General Anne Milgram have announced their intent to sue FedEx Ground Package Systems, Inc. (“FedEx Ground”) for violations of state labor laws stemming from the Company’s alleged misclassification of its drivers as independent contractors. The Attorneys General claim that such misclassification deprives drivers of workers’ compensation and other labor and employment legal protections received by FedEx Ground’s employees.

In Mohel v. Commissioner of Labor, a decision dated November 17, 2009, the New York Industrial Board of Appeals found that drivers of a limousine service were employees as opposed to independent contractors under the “right to control” test used by the New York State Department of Labor.

Finally, Beginning in early 2010, the IRS will launch an audit initiative that will audit the federal tax returns of 6,000 companies to assess compliance with tax and labor regulations. As part of this audit, the IRS will examine independent contractor misclassification. The initiative was prompted, in part, by advice from the United States Government Accountability Office to the IRS and United States Department of Labor to step up efforts to reduce the misclassification of independent contractors.

 
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