Don’t be fooled by the Affordable Care Act’s (ACA) governing Agencies (i.e. Internal Revenue Service and Departments of Labor and Health and Human Services) history of transitional relief. We anticipate that Congress will welcome the assessment of penalties at this time. Certainly, we have some unknowns regarding the fate of numerous ACA provisions. In the meantime, we recommend that plan sponsor (or their related vendors) preserve all ACA reporting data and its supporting documentation.
Why It Matters
ERISA Compliance: Benefit Disclosures. The Employee Retirement Income Security Act (ERISA) requires ERISA plan documents to describe the plan’s terms and conditions, including eligibility rules. Department of Labor (DOL) regulations require that an ERISA plan’s Summary Plan Description (SPD) include a statement of the eligibility requirements for participation and any conditions that must be met in order to receive benefits, in a language easily understood by the average plan participant. At $147/day per plan participant (ERISA penalties increased effective August 1, 2016), the penalties can be significant. We expect the same range of penalties for ACA compliance failures.
IRS Audits and Appeals. ACA imposes potential penalties on applicable large employers (ALEs) that do not offer affordable minimum value health care benefits to most full-time employees and their dependent children (Sections 4980H(a) and (b)) and requires the annual reporting of such benefits on Forms 1094-C/1095-C. Now that the IRS has collected its first year of 1094/1095 Forms, the agency is tasked with finding employees on those Forms who are also receiving subsidized health care coverage through an Exchange. The Internal Revenue Service (IRS) has already begun sending out letters to plan sponsors implying potential penalties for noncompliance. ALEs should be ready to appeal the IRS’s penalty determination, which will include the production of documents showing the ALE’s compliance with the ACA Large Employer Mandate.
Documentation Methods and Recordkeeping
ERISA Recordkeeping Rule. ERISA requires records to be kept and made available to the Agencies for examination for a period of not less than six years. Generally, under ERISA rules, the plan administrator is responsible for ERISA plan recordkeeping (ledgers, checks, invoices, bank statements, contracts, agreements, administrative guidelines, plan documents, insurance policies and documentation, documents evidencing participant notice distribution processes, open enrollment materials, etc.). DOL regulations regarding electronic retention are designed to ensure that electronic records are as secure, legible, and as usable as paper copies.
ACA Potential Applicability. ACA regulations do not provide any specific rules on ACA-compliance documentation procedures; however we expect the Agencies to implement the six-year rule on recordkeeping. Since many plan sponsors rely on third parties (insurance carriers, TPAs, payroll administrators, 1094/1095 and 5500 preparers, etc.) for the day-to-day management of a plan, it may be a good idea to check with any applicable vendors holding plan records to make sure they maintain the complete documentation, not just summaries, for six years and agree to release the documentation upon termination of its relationship with the plan sponsor.
Documenting ACA Compliance
- ALE Status. ALEs are employers with an average of 50 or more full-time/Full Time Equivalents (FTE) in the prior calendar year. ALEs must comply with the ACA’s Large Employer Mandate or face potential penalties. Employers close to or over the 50-employee count, especially, should document the method used to determine ALE or non-ALE status.
- Tracking Hours Worked. For ALEs, tracking and documenting each employee’s hours of service is essential for determining ALE status as well as to fulfill the health care coverage requirements of the Large Employer Mandate. ALEs should be ready to show the IRS that the internal policy used to determine an employee’s hours of service is in compliance with ACA regulations, along with specific data for each employee (i.e., start date, hours worked monthly, time off, termination date). ALE’s tracking the hours of service of variable hour employees using the Look-Back Measurement methodology should also document each variable hour employee’s Measurement, Administrative, and Stability Periods.
- Plan Eligibility Rules. In order to comply with ACA’s Large Employer Mandate, ALEs must offer health care coverage to full-time employees that work on average 30 or more hours per week (130 hours or more per calendar month). ALEs that hire employees who are not reasonably expected to work full-time will need to document the method they use to determine the full-time status of “variable hour employees,” in compliance with the final regulations (i.e. Look-Back and Monthly Measurement Methods). Even though the ACA does not explicitly require written documentation of these eligibility rules, ERISA does. Plan sponsors should have a written policy that accurately documents how eligibility (including variable hour employee eligibility) for health care coverage is determined (i.e. Summary Plan Descriptions, Employee Handbook, etc.).
- Offers of Coverage by the ALE. ALEs should maintain detailed records to demonstrate that an offer of coverage was made and to whom. Importantly, these records will substantiate the information reported by ALEs on the 1094/1095 B and C Forms, subject to the following rules:
- The employee to whom the offer was made had an effective opportunity to elect to enroll in the coverage at least once with respect to the plan year. Such records may include records showing that the employee had adequate notice of the availability of the offer of coverage and the period of time during which the offer could be accepted.
- The employee to whom the offer was made had an effective opportunity to decline to enroll in the coverage.
- verage for a calendar month was available to the employee for every day of the month (or, in the case of a calendar month in which a full-time employee terminated employment, coverage would have been available for the entire month had the employee been employed for the entire month).
For example, if an ALE makes offers of coverage during its open enrollment period by mail or electronically to each eligible employee, these offers of coverage might be documented by (a) retaining a copy of the enrollment package or online enrollment materials; (b) attaching a description of the employer’s procedures for distributing the enrollment packages, and if sent electronically, a copy of the email notifying employees of the availability of enrollment materials; (c) attaching a list of the employees to whom the packages were distributed or received email notifications, including their mailing/emailing addresses; (d) attaching a contemporaneous declaration from the responsible employee stating that the regular procedures were followed; and (e) attaching signed waiver forms from employees who declined coverage.
- Offers of Coverage by Other Entities. In the case of an ALE member that is relying on an offer of coverage being made on its behalf by another organization, such as a PEO or as a member of an aggregated ALE group, the ALE member should obtain records from that other organization, on a timely basis, that demonstrate that the other organization made the offer of coverage.
In addition, in the case of an offer of coverage made by a staffing firm on behalf of a client employer, the client employer should maintain records demonstrating that the fee the client employer paid to the staffing firm for an employee enrolled in health coverage through the staffing firm was (or would have been) higher than the fee the client employer paid (or would have paid) for the same employee if that employee did not enroll in health coverage through the staffing firm. Such records might include a fee schedule or invoice from the staffing firm to the client employer reflecting the additional charge for coverage through the staffing firm.
- Limited Non-Assessment Periods. For purposes of reporting on Forms 1094/1095, an employee in a Limited Non-Assessment Period is not considered an employee during that period, relieving the ALE from assessable penalties under 4980H. ALEs should document these penalty-free periods:
- January through March of the first calendar year in which an employer is an ALE, but only for an employee who was not offered health coverage during the prior year.
- Waiting period for eligibility of benefits under the group health plan for full-time employees.
- Initial Measurement Period and Associated Administrative Period used to track a new Variable Hour Employee under the Look-Back Measurement method.
- The period beginning on the date a new employee in his or her Initial Measurement Period under the Look-Back Measurement method moves from a part-time/seasonal position to a full-time position and ending no later than the end of the third full calendar month following the change in employment status.
- If the employee’s first day of employment is a day other than the first day of the calendar month, then the employee’s first calendar month of employment.
- ACA-Compliant Health Care Coverage. The plan sponsor must maintain records for each individual offer of coverage regardless of the type of plan offered.
- Minimum Essential Coverage (MEC) and Minimum Value (MV). The ALE should maintain records demonstrating that coverage offered to a full-time employee was MEC and MV. Such records might include a copy of the Summary of Benefits and Coverage (SBC), which must contain a statement declaring MEC and MV status.
- Offered to Enough Full-Time Employees and Dependents. The ALE should maintain records demonstrating the percentage (ACA requires 95%) of full-time employees who received an offer of coverage for each month and whether that offer included coverage for dependents. Although an offer of coverage is not required to be made to an employee’s spouse for purposes of Code 4980H penalties, an ALE should maintain records demonstrating that the employee’s spouse was eligible to enroll in coverage as required by 1094/1095 reporting.
- Affordability. An ALE offering coverage that is intended to be affordable, should maintain records supporting its determination that the coverage was affordable. This will include records relating to both the amount the employee was required to pay (payroll data) and the relationship of that amount to any affordability safe harbors the ALE member is utilizing.
- Reliance on Transition Relief. An ALE that relies on one or more types of transition relief made available under IRS guidance should maintain records demonstrating that it has satisfied all of the criteria that enable it to rely on the transition relief. Transitional relief includes (1) employers that offer MEC to at least 70% of their full-time employees during 2015 (rather than 95%); (2) employers with non-calendar-year plans; (3) employers that have not previously offered dependent coverage; and (4) employers that contribute to multiemployer arrangements).