The $1.8 trillion, 887-page spending bill enacted by Congress this month, the Consolidated Appropriations Act, 2016 (the Appropriations Act), became law on Dec. 18, 2015. Below is a summary of the principal provisions of the Appropriations Act affecting employee benefit plans.
Changes to the “Cadillac” Tax
One of the funding mechanisms in the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the ACA), is a 40 percent excise tax, the so-called “Cadillac” tax, on the cost of employer-sponsored health coverage provided to an employee that exceeds a statutory dollar limit.
In part as the result of intensive lobbying by both business and labor groups, and with bipartisan support, the Appropriations Act made the following changes to this tax:
- The tax will take effect in 2020 rather than in 2018 (as had been provided in the ACA). Efforts to repeal the tax completely are expected to continue.
- Under the ACA as enacted, the tax, which is payable by employers sponsoring self-funded health plans and insurers providing insured coverage, was non-deductible. The Appropriations Act allows a deduction for the tax.
- The House Ways and Means Committee is to receive a report from the Comptroller General as to the suitability of the use of the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan as a benchmark for the age and gender adjustment of the dollar limit, as well as recommendations as to any more suitable benchmarks for such adjustment.
Moratorium on Annual Fee on Health Insurance Providers
The ACA imposes a fee on each “covered entity” that is engaged in the business of providing health insurance and that has, for the fee year, net premiums written for health insurance for United States health risks. Covered entities include health insurance issuers, health maintenance organizations and non-fully insured multiple employer welfare arrangements, but do not include employers providing self-funded health coverage.
The Appropriations Act imposes a moratorium for 2017 on the collection of this fee. Time will tell whether the moratorium will result in lower premiums payable by employers and employees for coverage under insured health plans during that year.
Under Section 132(a) of the Internal Revenue Code of 1986 (the Code), gross income does not include “qualified transportation fringe” benefits. The dollar limit on “qualified parking” benefits specified in Section 132(f)(2) is $175 per month. By contrast, the specified combined dollar limit for transportation in a commuter vehicle and a mass-transit pass is $100. Employees typically pay for these benefits through payroll deductions, which are treated as pre-tax up to the Section 132(f)(2) limits.
Supporters of mass transit have tried for years to remove the disparity between the higher limit on qualified parking benefits and the lower limit on commuter vehicle/transit benefits. In 2013, Congress provided parity, but only for 2012 and 2013. The Appropriations Act finally makes parity permanent by raising the limit on the commuter vehicle/transit benefit specified in the Code to $175, the same as the qualified-parking limit, retroactive to the beginning of 2015.
However, as a result of cost-of-living adjustment (COLA) increases over the years, the limits specified in the Code are no longer the actual limits. Due to COLA increases, for 2015 the actual monthly limit on qualified parking is $250 and the limit on commuter vehicle/transit benefits, before the Appropriations Act, was $130. As a result of the Appropriations Act, the 2015 actual monthly limit on commuter vehicle/transit benefits has increased to $250 as well. For 2016, a COLA adjustment increases the monthly limit on both commuter vehicle/transit benefits and qualified parking benefits to $255.
The Appropriations Act’s retroactive increase of the commuter vehicle/transit benefit limit causes administrative issues as to employees who have purchased such benefit in 2015 in monthly amounts above $130, and up to $250, on an after-tax basis in accordance with the pre-Appropriations Act limit on pre-tax benefits for 2015. This same situation occurred for the year 2012, when Congress in fact waited until the beginning of 2013 to increase the commuter vehicle/transit benefit limit retroactive to the beginning of 2012. In mid-January of 2013, the Internal Revenue Service (IRS) issued transitional guidance for employers as to how to deal with that retroactive increase. We can therefore expect to receive guidance from the IRS within the next few weeks as to how employers should deal with the Appropriations Act’s retroactive increase to the beginning of 2015 in the commuter vehicle/transit benefit limit.
Rollovers from Employer-Sponsored Retirement Plans to SIMPLE Retirement Accounts
The Appropriations Act allows a participant in a qualified retirement plan, Section 403(b) plan or a state or local governmental Section 457 plan to roll over his or her distribution from that plan to a SIMPLE* retirement account (an individual retirement account established in connection with a SIMPLE retirement plan). Before this change, a SIMPLE account could only accept contributions under a “qualified salary reduction arrangement,” meaning a SIMPLE plan. The change is effective as to rollovers made after the Appropriations Act’s enactment and applies only to rollovers after the two-year period beginning on the date a participant in such an employer plan first participated in the SIMPLE plan sponsored by his or her employer.
The administrator of an employer plan with a participant who requests such a rollover to a SIMPLE account will have to verify that the two-year period has been satisfied before making the rollover.
It is not clear whether all such employer plans will have to be amended to permit rollovers to SIMPLE accounts, or whether amendments will be needed only as to plans whose sponsors wish to permit such rollovers. Guidance on this issue will have to come from the IRS.
Additional Exceptions to 10 Percent Additional Income Tax on Early Retirement Plan Distributions
Code Section 72(t) generally imposes a 10 percent additional income tax on a distribution from a qualified retirement plan or Section 403(b) plan to a participant who has not attained age 59½. There is an exception if the distribution is made to an employee after separation from service following attainment of age 55. However, in the case of a distribution from a governmental plan made to a qualified public safety employee, the exception applies to a distribution made after separation from service following attainment of age 50.
The Appropriations Act has expanded the term “qualified public safety employee” to include various additional government-worker categories, including nuclear materials couriers. For the curious, 5 U.S.C. Section 8331(27) defines a “nuclear materials courier” as “an employee of the Department of Energy, the duties of whose position are primarily to transport, and provide armed escort and protection during transit of, nuclear weapons, nuclear weapon components, strategic quantities of special nuclear materials or other materials related to national security.”
For further information, please contact the author of this article, Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.
* “SIMPLE” stands for “Savings Incentive Match Plan for Employees of Small Employers.”