The FAQs detail issues regarding the requirement for employers to provide coverage to full-time employees or be subject to a penalty assessment (the “employer shared responsibility provisions”).  The FAQs also provide guidance on how employers will determine whether employees are “full time employees” and how to use W-2 income rather than household income to determine whether coverage is “affordable coverage.”  The FAQs provide that the agencies will issue further guidance on the coordination of the employer shared responsibility provisions and the 90-day waiting period limitation (and even more specifically, the application of the waiting period limitation to part-time and seasonal employees).

This guidance provides specific examples that will assist companies in preparing for future compliance.  The agencies are accepting public comments on the guidance through April 9, 2012. 

Last week, at a Joint Meeting of the IRS's top officials with ERISA/tax attorneys and accountants from across the country, the IRS announced a pilot program that targets companies with at least 2,500 participants.  Colleen Patton, the IRS's Area Manager for the Pacific Coast, says the pilot program has rolled out in her region, and the IRS expects to expand the program across the nation's remaining four geographic areas (Northeast, Mid-Atlantic, Great Lakes, and Gulf Coast). 

Under this program, the IRS hones in on a large plan sponsor (greater than 2,500 participants), rather than one specific qualified retirement plan. Thus, whereas a company usually worried about whether the IRS would audit a qualified retirement plan it sponsored, that same company, if targeted, will now have to worry that the IRS will audit all of the company's qualified retirement plans in just one examination.  Indeed, it is not atypical for one company to sponsor several 401(k) plans and several defined benefit plans and perhaps an ESOP too . . . in this case and under this pilot program, the IRS would examine all those plans together.  

Large companies: brace for FULL IRS audit of all retirement plans at once

A targeted company should expect the IRS to conduct an extensive review of all of its qualified plans' procedures, processes, and systems (e.g., how various company payrolls feed data to plans; how the various TPAs coordinate testing across plans; how money moves from the employee paychecks to the plan trusts).  The IRS hopes that after reviewing these procedures, etc., it can then use data-driven factors to surgically target a company's compliance weaknesses. 

Based on recent exam and survey activities, it seems large companies confront these types of compliance weaknesses:

• control group issues,
• deficient plan amendments,
• employees who are not collectively bargained improperly participating in a plan,
• minimum distribution failures,
• improper loan provisions,
• failure to adjust actuarially if termination is after normal retirement age,
• misclassification of employees as higher- or lower-paid,
• misclassification of employees as part-time, temporary, foreign national, independent contractor, etc.

Large companies must brace for this super-enhanced IRS audit of retirement plans.  It will be thorough and comprehensive; indeed, an IRS audit can easily last over two years.  Consider the effect on in-house counsel, HR, and payroll personnel.

Employers should not rely on the annual TPA testing or annual accountant's audit to vet out   these compliance issues.  Many of the compliance problems identified above are outside the limited engagement of the TPA's end-of-year testing or the annual accountant's audit.  Employers who sponsor retirement plans should consider performing a very compliance review to determine if tax qualification failures exist (plan document? operational? demographic?) with each of their qualified plans. 

If failures are found, companies should consider applying under the IRS compliance program to voluntarily identify and correct them, with the hope that the plan would receive an IRS letter confirming continued tax qualification.  Self-correcting and/or applying under the IRS program might postpone an IRS audit and certainly would help ameliorate any sanctions that the IRS would impose if it were the IRS instead who vetted out these compliance issues on audit.   

BACKGROUND

With 2011 W-2s due right about now, the IRS is committing manpower and enforcement on compliance relating to 2011 compensation that a grower paid to its foreign agricultural workers admitted into the US on H-2A visas.  See most recent IRS guidance.  The IRS now mandates W-2 reporting of such compensation (and the grower must obtain the worker’s SSN or ITIN when reporting) and possible 28% backup withholding (where the worker fails to provide an SSN or ITIN).

ISSUES

Federal Tax Issues.

• What happens to the grower who filed 1099s for years prior to 2011? 
• What happens to the grower who filed a W-2 or 1099 for prior years, but did not enter a worker’s SSN or ITIN?
• What happens to the grower who filed neither a 1099 nor a W-2 for prior years?
• How real is the IRS-threatened penalty on the grower who failed to backup withhold and remit that 28% (that is, the grower overlooked withholding or wanted to withhold but did not obtain an SSN or ITIN)? 
• What happens to the (Mexican, Jamaican, for example) worker who was required, but never filed, a US tax return for prior years?
• What happens especially where that H-2A worker would have had enough exemptions such that the worker would not have owed any federal income tax?

Other Issues:  State Tax; Immigration; Agricultural Production in the US.

In addition to this federal tax exposure, both grower and worker have exposure with respect to possible state tax issues and immigration concerns.  Visas might be affected; farming operations across the US will suffer.

AN ODD, BUT UNIQUE, SHARED INTEREST?  

The natural stakeholders affected by this enhanced IRS tax compliance effort are the H-2 worker, the H-2A worker advocates, growers, grower associations, and their agents.

Challenges; Logistical Hurdles.  The natural stakeholders affected by this enhanced IRS compliance effort are the H-2 worker, the H-2A worker advocates, growers, grower associations, and their agents.  Given the above interwoven risks/issues/exposures, these various stakeholders – typically on differing sides on H-2A matters – might find themselves aligned.  That is, there is uncertainty with respect to past federal tax issues that threaten the immigration program, staffing operations, and ultimately agricultural production; there are also logistical challenges where contact between grower and H-2A is typically limited to when the worker has entered the country.   

IRS Coordination?  Perhaps there is a need to coordinate at the national level (with IRS officials who drafted the recent H-2A guidance and exam agents), regional level (the regional IRS office that controls operations within each state), and the Taxpayer Advocate professionals.

Perhaps there's room for latitude for both grower and worker for the 2011 (after all, the IRS guidance came out in late 2011) and prior tax years?  It seems like any coordinated program might well involve politicians, the Department of Labor, the Department of Agriculture, the Mexican Consulate, Mexican Employment Agencies, Jamaican Employment Agencies, etc.

In any case, the new guidance is causing growers and their accountants huge consternation as W-2s are being issued for 2011, and perhaps the IRS or Treasury just needs to be apprised in the difficulty of immediate compliance when SSNs and ITINs still have not been obtained or confirmed. 

It's an invitation to the various stakeholders of the H-2A program to weigh in regarding the  enhanced focus on federal tax reporting of and mandatory withholding on H-2A worker compensation (where there is no SSN or ITIN). 

Why not have these employees instead contribute the $34.3 billion in vacation benefit into their retirement plan? 

I wrote about this plan design technique about 1 1/2 years ago, in my piece "How Employers Can Allow Employees to Contribute Unused Vacation Time Into a 401(k) Plan."  Sure, employers could simply allow employees to forfeit their unused vacation (and the dollar amount associated with such vacation), but if an employer chooses to allow an employee to contribute the dollar equivalent of what would have been forfeited into a 401(k) plan (and I think, reasonably, into a 403(b) plan), then the employer has that ability. . . and employees would likely view this option as a "gift" of sorts.  What they couldn't gain in a vacation, they get in retirement savings. 

Two IRS Revenue Rulings explain in more detail.  Revenue Ruling 2009-31 discusses amounts of leave that employees forfeit at year-end; Revenue Ruling 2009-32, unused leave at the time of an employee's separation from service. 

Note:  If an employer allows these types of paid time off/vacation/sick leave contributions into its retirement plan, it is likely that the employer cannot rely on a safe harbor plan.  The employer will have to test individual contribution limits. 

The Court will review several challenges that have worked their way through the federal appellate courts.  The actual case selected for review is State of Florida v. U.S. Dept of Health & Human Services, in which 26 states challenged the constitutionality of the individual insurance mandate, which beginning in 2014 will require individuals who do not have other health insurance (such as through their employers) to purchase individual insurance or pay a penalty.  The 11th Circuit Court of Appeals threw out the individual mandate as unconstitutional, concluding that it violated the commerce clause of the U.S. Constitution.

In addition to reviewing the constitutionality of PPACA's individual mandate, the Supreme Court will consider whether that mandate is severable from the other parts of the statute.  If it finds the mandate both unconstitutional, and also finds that it cannot be severed from the rest the statute, it will likely invalidate the entire PPACA.

The Supreme Court will also consider two other issues:  a challenge to PPACA's expansion of Medicaid coverage, and the question of whether the federal Anti-Injunction Act bars the states from challenging PPACA at this time because the individual mandate penalty is to be considered a "tax."

Given the large divisions in opinion at to the value of the health care reform legislation, the imminent political season leading up to the 2012 elections, and the significant impact that PPACA will have on virtually all employers, the Supreme Court's decision will be eagerly awaited.

Group health plan sponsors and health care providers should carefully review their HIPAA compliance programs.  Keep in mind that HIPAA mandates training of individuals who have access to protected health information.  Failure to train (and to properly document training) could result in significant liability.  

Similarly, failure to have compliant documents, notices, practices and procedures could subject the covered entity to substantial penalties and well as requirements to provide notification of breaches of the HIPAA requirements. 

HIPAA mandates training. . . audits begin immediately.

Plan sponsors should examine all business associate relationships.  They should ensure too that they have updated their documents and properly documented all relationships. 

First, the IRS is scrutinizing the employ/independent contractor issue -- and offering a very nice settlement program to encourage companies to prospectively classify as "employees" workers who they improperly classified as "independent contractor."  See our earlier blog piece about the IRS's new program at 2011 Voluntary Amnesty Employee Classification.pdf.

Second, the Department of Labor and 11 state governments (Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington) are working together to fight improper classification of workers as "independent contractors." 

And now, California -- who is NOT a state listed above -- has enacted legislation effective for the new calendar year that imposes as high as a $25,000 per violation penalty for companies  who willfully misclassify "employees" as "independent contractors."   See CA Penalties.pdf. 

The federal government and state legislatures send a clear message:  misclassification is wrong.  

Companies should expect challenges not only from the federal and state governments, but plaintiffs' lawyers who can use "whistle blower" statutes to coax employers to confront the statutory penalties (at least in California), wage-and-hour liability, federal/state employment taxes, and ERISA obligations.  

Companies must grapple with the worker classification issue now.  To not do so is to take a big gamble, with very bad odds.

Prepare

            To prepare for the open enrollment period, sit down and develop a plan.  The plan should include the dates for the enrollment period, what resources are at your disposal and how to allocate them.  Work with your service providers to see what types of resources they have to assist you.  Develop a checklist that contains all of the tasks relating to open enrollment and the due dates for such tasks.  Take into consideration how long it will take to train any staff members that may have to answer benefits-related questions from employees.

Communicate Effectively 

            Communication is always an important part of HR’s job and is even more important during open enrollment.  Consider having open enrollment meetings to communicate all the healthcare reform changes to employees.  Try to notify employees of open enrollment meetings 3-4 weeks prior to the date of the meetings.  Schedule the meetings so that the you have time to submit enrollment changes to insurance providers and verify that employees are appropriately enrolled in their chosen benefits.  You may want to have benefit providers present for individual employee meetings.  In addition, provide enrollment kits to employees that provide comprehensive information about the benefits and their portion of the cost. Be sure to provide employees with an adequate time frame that they can review all of the materials and consult with family members in order to make decisions regarding their benefits.

            When developing the open enrollment materials, it may seem like the materials comply with disclosure laws.  Not true.  However, simply placing the disclosure into the open enrollment materials does not guarantee compliance. When it comes to plan-related disclosures, it is important for you to ensure that the form, content, timing, and delivery requirements are met. 

For example, it is common to find open enrollment materials that contain abbreviated HIPAA privacy notices or COBRA notices that fail to meet the content requirements.  The same types of violations can result from failure to provide required disclosures to COBRA participants or employees on leave of absence.  You should mail materials to the last known address and properly address the spouse and dependents in order to minimize the potential for violations. Disclosure failures can cost you not only substantial amounts of money in the form of excise taxes and penalties, but can also lead to claims from individuals harmed by any alleged lack of disclosure.

Summary Plan Descriptions

            If you are providing health and welfare benefits, you are subject to the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and are considered to be offering an ERISA plan.  Under ERISA, participants are entitled to a summary of the ERISA plan (known as a summary plan description, or "SPD").  For many employers, the health or welfare ERISA "plan" is actually no more than a collection of insurance policies, and the summary of that plan consists of a collection of insurance booklets and enrollment materials.  Under ERISA, the SPD format requirements are very specific and must accurately reflect the plan's contents.  In most cases, the plan’s enrollment materials coupled with the insurance contracts will not meet these requirements.

            If you want to continue to use insurance booklets and open enrollment materials as an SPD, you must have a "wrap" document that clearly identifies the materials (typically listed) to be included in the wrap plan.  Update these wrap documents and the attachments regularly.

            Note that, if there are significant changes to the benefits, the participants have a right to receive a summary of those changes within 210 days after the end of the plan year.  This summary is known as a summary of material modifications (“SMM”).  If those changes involve a material reduction in covered services or health benefits, the summary must be provided to participants within 60 days of the change. Therefore, in designing open enrollment materials, you must consider if the materials being used comply with the ERISA requirements and must ensure that the materials meet form, distribution and content requirements.

Cafeteria Plan Elections

            Your cafeteria plan will dictate open enrollment dates.  This is because employees must make cafeteria plan elections before the beginning of the plan year, with any changes in the ensuing year if there is a "qualifying change in status." You need to be aware of changes in the cafeteria plan rules and be able to communicate the changes to your employees.

            Because the guidance allowing correction for mistakes is informal and requires clear and convincing proof, you should take care to avoid mistakes.  The most frequent cafeteria plan problems that occur are below: 

• Failure to implement the employee’s changes in elections;
• Failure to allow change in status elections after the close of open enrollment;   and
• The employee’s mistaken elections.  Mistaken elections often occur due to the employee’s lack of understanding of the benefits being offered.  You can minimize the likelihood of this type of mistake using thorough communication.

Over Simplification (Electronic Enrollment Issues)

            Many employers find the idea of electronic enrollment appealing, as they view it as less paperwork, faster processing, and fewer errors.  However, it is important to remember that providing benefit information electronically is subject to significant regulations.  In 2002, the DOL issued a regulatory guideline that expanded electronic delivery methods and the parties who could receive the required information electronically.   The guideline accepts electronic delivery methods such as e-mail, e-mail attachments, and postings on the company Web site, provided that certain requirements are met.  In addition, the guideline permits electronic disclosure to employees both inside and outside the workplace, as well as non-employees.  However, the guidelines require more rigor when there are non-employees and employees lacking computer access. 

Post Open Enrollment

            Finally, many mistakes occur during the post-enrollment period.  Work with your service providers to audit the enrollment process to ensure that the employees’ elections have been implemented.  Work with your payroll department to ensure the proper amounts are being withheld from the employees’ paychecks.  Be sure that the amount being withheld matches the benefits and coverage that the individual has elected.