Month: September 2019

What is Imputed Income?

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, imputed incomeLeave a comment

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In general, if an employer has adopted a cafeteria plan, their employees are not taxed on the cost of employer-provided benefits for the employee and their tax dependents. However, there are three benefits-related exceptions to this rule:

  1. Cost of group term life insurance – in certain situations
  2. Long-term disability (LTD) “gross up” amounts
  3. Benefits for domestic partners and other individuals who do not meet federal tax law definitions of “dependent”

In these situations, the cost of the benefits provided is considered “imputed income” to the employee and therefore the cost or “fair market value” of the benefits are added to the employee’s gross (taxable) income.  This non-cash taxable compensation (i.e. benefit) is treated as income and included in the employee’s form W-2 for tax purposes. Imputed income is subject to Social Security and Medicare tax and employment tax withholding.

Cost of Group Term Life Insurance 

An employer must impute income for:

  1. Life insurance coverage for any employee above $50,000
  2. Employer-paid coverage for spouses or dependents on amounts greater than $2,000
  3. If a plan is discriminatory, the cost of coverage in any amount for “key employees”

Life insurance coverage for any employee above $50,000

In 1964, Congress adopted Code §79 which begins by stating a general rule that the cost of group-term life insurance is included in gross income. It then carves out a limited exception for the cost of up to $50,000 of group-term life insurance coverage per employee.

If any employee (highly compensated or non-highly compensated) receives more than $50,000 of employer-provided life insurance, then employers are required to impute income on the cost of coverage in excess of $50,000.

IRS Publication 15-B “Employer’s Tax Guide to Fringe Benefits”, explains in detail how the calculation is determined, however, here is a high level overview:

 To calculate the value of the excess benefit coverage:

  1. Determine the excess of the life insurance (Value of life insurance – $50,000 allowable).
  2. Divide the excess amount by 1,000.
  3. Multiply the result by the age-appropriate value in Table 2-2 (page 14 of IRS publication 15-B (2019) table below)
  4. Multiply that result by the number of months of coverage.
  5. Subtract after-tax premiums paid by the employee.

Example: an employee is 40 years old and does not pay any of the premiums for life insurance for the whole year*. The value of the life insurance was $75,000.

  1. Determine excess (Value of life insurance – $50,000 allowable) – $75,000 – $50,000 = $25,000 (excess)
  2. Divide the excess amount by 1,000 – $25,000 /$ 1,000 = 25
  3. Multiply the result of #2 by the age value found in Table 2-2 (IRS pub. 15-B page 14 (2019) table below) – 25 x $0.10 = $2.50
  4. Multiply the result of #3 by the number of months of coverage – $2.50 x 12 (months) = $30.00

$30.00 is the amount to be added to the employee’s W-2 as income for the premiums paid by the company on the excess $25,000.

Table 2-2. Cost Per $1,000 of Protection for 1 Month
Age                                          Cost
Under 25 ……………………….  …. $ 0.05
25 through 29 ………………………… 0.06
30 through 34 ……………………….. 0.08
35 through 39 ……………………….. 0.09
40 through 44 ……………………….. 0.10
45 through 49 ……………………….. 0.15
50 through 54 ……………………….. 0.23
55 through 59 ……………………….. 0.43
60 through 64 ……………………….. 0.66
65 through 69 ……………………….. 1.27
70 and older ………………………… 2.06

(*Ideally, imputed income amounts are being taxed over the course of the year, but if they were not, at a minimum, the amount should be included on employees’ W-2 at the end of the year.)

Coverage in excess of $2,000 for spouses or dependents.

If an employer pays for life insurance coverage for an employee’s spouse or dependents in an amount more than $2,000, the entire premium amount is imputed income for the employee.

Note:  There is no imputed income for the employee if the coverage amount paid by the employer for the employee’s spouse or dependents is less than $2,000. In this case, it may be considered a  “de minimis” fringe benefit and excludable from income.  (See IRS Notice 89-110 for more details.)

If a plan is discriminatory, the cost of coverage in any amount for “key employees”

If the group life insurance plan favors either as to eligibility or as to the kind or amount of life insurance benefits to any “key employee” (as defined by paragraph (1) of section 416(i)) then all “key employees” covered under the plan must also include in taxable income the higher cost of the first $50,000 of coverage or Table I cost.

Long-term disability (LTD) “gross up” amounts

If an employer wants their employees to have a tax-free LTD benefit in the event the employee becomes disabled, the employer would need to “gross up” (i.e. increase) the employee’s salary by the amount of the employer-paid premium and report the premiums as taxable wages on the employee’s W-2.

Otherwise, if the disability premium is paid pre-tax, the LTD monthly benefit the employee receives if they become disabled and cannot work, will be taxed just like their income is taxed when they are working. e.g. disabled employee receives 60% of their monthly earnings less taxes.

Most carriers will offer a tax choice plan (will apply a slight load to the LTD rate) when the employer pays for the premium, the employer can either:

  1. Treat the premium payments as employee paid and include in W-2 income (taxable premiums but non-taxable benefits);
  2. Treat the premium payments as employer paid with no W-2 income (non-taxable premiums but benefits are taxable); or,
  3. Give employees the choice between options 1 and 2.

Benefits for Domestic Partners (DP) & Their Children

Most domestic partners do not meet the financial dependency criteria to qualify as an employee’s tax dependent for group health plan purposes. Under federal law, the fair market value of coverage for the cost of the non-tax code dependents (minus any after-tax contributions paid by the employee) would be included (i.e. imputed) in the employee’s gross income for federal (and most state) tax purposes and reported as taxable earnings on their W-2 Form. The imputed income is subject to federal income tax withholding as well as FICA and FUTA.

However, if a domestic partner (and their children) qualifies as the employee’s tax dependent, (something an employee needs to determine, not the employer**) there is no imputed income.

(**Best practice is for an employer to require a signed affidavit from the employee as to whether or not a domestic partner qualifies as a Tax Code dependent.)

This information is an overview and should not be considered tax or legal advice.

October 15th Deadline Drawing Near – Medicare Part D Notices

On By Michelle Turner, MBA, CEBSIn MedicareLeave a comment

Oct 15

All employers that offer prescription drug coverage to Medicare Part D eligible individuals–which may include active employees, disabled employees, COBRA participants, retirees, and their covered spouses and dependents who have coverage under Medicare Part A or B—are required to provide a Part D Notice of Creditable Coverage (the “Notice”) to Part D eligible individuals.** The purpose for the Notice is to let participants know whether the prescription coverage being offered is creditable. 

Creditable = prescription drug coverage that on average, pays out at least as much as the standard coverage available through a Medicare prescription drug plan.

**As a practical matter, employers do not know which employees, spouses or dependents are enrolled in Medicare Part A or Part B, nor will they know which individuals are considering enrollment in the employer’s plan. Therefore, employers generally provide the Notice to all employees. 

Why does it matter?

Disclosure of whether their prescription drug coverage is creditable allows individuals to make informed decisions about whether to remain in their current prescription drug plan or enroll in Medicare Part D during the Part D annual enrollment period.

Individuals who do not enroll in Medicare Part D during their initial enrollment period (IEP), and who subsequently go at least 63 consecutive days without creditable coverage (e.g., because they dropped their creditable coverage or have non-creditable coverage) generally will pay higher premiums if they enroll in a Medicare drug plan at a later date.

When must the notice be provided?

At a minimum, the Notice must be provided to individuals at the following times:

  1. Prior to the Medicare Part D annual election period—beginning Oct. 15 through Dec. 7 of each year;
  2. Prior to an individual’s IEP for Part D;
  3. Prior to the effective date of coverage for any Medicare-eligible individual who joins the plan;
  4. Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable; and
  5. Upon a beneficiary’s request.

If the Notice is provided to all plan participants annually, before Oct. 15 of each year, items (1) and (2) above will be satisfied.

“Prior to,” as used above, means the individual must have been provided with the Notice within the past 12 months.

Note:  One way to ensure this requirement is met is to provide the Notice annually at open enrollment to all participants and in plan enrollment materials provided to new hires.

Although there are no specific penalties associated with this Notice requirement, failing to provide the Notice may be detrimental to employees and cause employee relations issues.

Resources:

Model Notice Letters

Did you receive a Medical Loss Ratio (MLR) Rebate?

On By Michelle Turner, MBA, CEBSIn ACALeave a comment

check in the mail

Summary of Medical Loss Ratio (MLR) rebates

The ACA requires health insurers to spend a minimum percentage of their premium dollars, or MLR, on medical care and health care quality improvement. This percentage is:

  • 85 percent for issuers in the large group market; and
  • 80 percent for issuers in the small and individual group markets.

Issuers that do not meet these requirements must pay rebates to the policyholder (employer) by Sept 30 of each year and the rebates are based upon aggregated market data in each state, not upon a particular group health plan’s experience. In other words, even if a particular employer’s plan’s MLR was below the applicable required standard, they will not receive a rebate unless the particular insurance product they purchased in their market size in their state qualifies for an MLR rebate.

NOTE: Carriers are required to mail out MLR (medical loss ratio) rebates by September 30.

Who does this apply to?

  • Fully insured health plans only. This does not apply to self-funded health plans or to polices for “excepted benefits” such as stand-alone dental or vision coverage.

How should employer handle MLR rebates?

>>Determine which plan or policy is covered by the rebate they received. (The issuer should include policy information as part of the rebate.)

>>Decide how much of the rebate must be paid to plan participants, and how much the employer may keep.

  • If the plan documents do not specify otherwise, the portion of the rebate that will be considered “plan assets” is the same percent of the total premium that was paid by participants. Under ERISA, the portion of the rebate considered “plan assets” can only be used for the exclusive benefit of plan participants and beneficiaries and therefore, must be paid to or used for the benefit of plan participants (more on this below).

  e.g. If ER contributes 55% of total premiums, EE contributes 45%, then 45% of  the MLR rebate are plan assets

>>Must or should the rebate be allocated to both prior year and current year participants?

  • If the employer finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the employer may decide to allocate the portion of a rebate attributable to employee contributions only to current participants using a “reasonable, fair, and objective” method of allocation.  (Technical Rel. 2011-04)

>>Decide how the rebate be paid or used

  • If distributing cash payments to participants is not cost-effective (for example, the payments would be de minimis amounts, or would have tax consequences for participants) the employer may apply the rebate toward future premium payments (e.g. premium reduction) or benefit enhancements.
  • An employer may also “weight” the rebate so that employees who paid a larger share of the premium will receive a larger share of the rebate.

Distribution examples:

        1. Pay the rebate to current employees by including the amount in their paychecks and withholding taxes.
        2. Reduce employees next month’s premiums (e.g. premium reduction) by the rebate amount or discount to all employees participating in the plan at the time the rebate is distributed.

>>When must the rebate be paid to participants?

  • The “plan asset” portion must be paid within 3 months of the date the employer receives the check from the insurer, or the employer must establish a trust to hold plan assets.

If an employer receives a rebate, and part of the rebate is “plan assets,” the employer is required to return the appropriate amount to participants. There is no minimum amount (de minimis exception) below which employers do not have to comply with the MLR rebate rules.

Therefore, employers should review all relevant facts and circumstances when determining how the rebate will be distributed and ensure they have procedures in place for determining the amount of any MLR rebate issued by an insurer that would be considered “plan assets” and required to be provided to participants.

 

Life Insurance – Portability & Conversion

On By Michelle Turner, MBA, CEBSIn eligibility, ERISALeave a comment

life insurance

When an employee goes out on a leave of absence or terminates employment, it is important for employers to have a dedicated process for notifying employees of critical changes to their benefits and what is required of an employee to continue their benefits.

Often employers remember to advise about COBRA eligible benefits but forget they are also responsible for providing information about life insurance, including portability or conversion information to employees who are losing benefit eligibility.

Background: Both the portability and conversion provisions allow the employee to continue life coverage that is lost due to an employment status change.  Policies may vary, so one needs to refer to their specific policy for clarification.

  • Portability –  When an employee ports coverage, they keep the group term life coverage offered by their employer along with some, but not all of the optional benefits that were included.
  • Conversion – When an employee converts coverage, they are converting to an individual whole life (or permanent life) insurance policy. The converted policy only provides life insurance and does not include the optional benefits such as Waiver of Premium, Accidental Death and Dismemberment.

In the case of, Erwood v. Life Insurance Company of North America and WellStar Health System, Inc., a federal district court awarded $750,000 in damages to Patricia Erwood, the wife of a deceased former employee of WellStar Health System whose life insurance lapsed while he was out on disability, and the employer failed to notify him of his conversion rights.

Even though the employer had sent the employee an FMLA leave packet that included information about it being possible to continue his life insurance benefits, the court noted that the FMLA packet did not include the materials necessary to convert, where to find the materials nor when the materials would be due if he was interested in continuing his coverage. 

This is just one of several cases which demonstrates relying on the benefit plan documents or a generalized communication may not be sufficient. Employers need to be mindful they have an ERISA fiduciary duty to adequately inform participants of their benefits and provide complete information regarding the steps necessary to keep their insurance benefits, including portability and conversion.