March 26, 2009 – New Health Insurance Premium Reporting Requirement Impacts Minnesota Employers
Authorized by Section 290.0678 of the Minnesota Statutes, enacted earlier this year, a new tax credit has been made available to certain individual taxpayers in Minnesota related to health insurance premiums paid through a Section 125 cafeteria plan. To facilitate individual taxpayers with claiming the credit, the new law imposes a significant new reporting requirement on employers with employees in Minnesota.
This new tax credit repealed the tax credits which were to be available to certain small employers as part of the Minnesota law (effective July 1, 2009) requiring certain employers to adopt Section 125 cafeteria plans to allow employees to pay the cost of individual health insurance policies on a pre-tax basis. Caution: Only the small employer tax credit portion of the Minnesota law (effective July 1, 2009) is repealed. The remainder of the law still goes into effect July 1, 2009. See Section 62U.07 of the Minnesota Statutes for additional information.
The Tax Credit. Section 290.0678 provides a tax credit equal to twenty (20%) percent of the “health insurance premiums” paid through a Section 125 cafeteria plan. A number of restrictions or limitations apply, including:
- The individual must have not been covered by a “health care plan” for at least one (1) year.
- The tax credit is available only with respect to premiums paid during the first twelve (12) months in which the taxpayer participates in the Section 125 cafeteria plan.
- The taxpayer’s household income for the taxable year must be within one of the following windows:
- if the taxpayer has dependents (as defined under Section 152 of the Internal Revenue Code), between 275% and 300% of the federal poverty guidelines for the applicable family size; or
- if the taxpayer has no dependents (as defined under Section 152 of the Internal Revenue Code), between 200% and 275% of the federal poverty guidelines for the applicable family size.
Note: The legislation does not define “health insurance premiums” or “health care plan.” As a result, the scope of the tax credit is unclear. For instance, it appears the tax credit is available with respect to health insurance premiums paid for both group health insurance policies and individual health insurance policies, provided the premiums for such health insurance were paid through a Section 125 cafeteria plan. It is not clear whether the credit is available with respect to premiums paid for self-insured group health plans. In addition, “health insurance” often includes not only medical insurance, but also dental and vision insurance. It is not clear whether the legislature intended the credit to extend to dental and vision types of health insurance premiums. The statute also does not address whether the health insurance premiums paid through the Section 125 cafeteria plan include just those paid on a pre-tax salary reduction basis or whether employer contributions allocated through the Section 125 cafeteria plan to pay health insurance premiums are included.
Employer Provided Statements. The statute states that “each employer must provide to each employee a statement that shows the amount of health insurance premiums paid from the Section 125 Plan for each month of the taxable year.” The employer must provide the statement by the deadline for providing a Form W-2 for the year (i.e., generally by January 31st of the following year, but possibly sooner for employees who terminate employment during the taxable year). The statute does not elaborate any further regarding this very significant obligation imposed upon employers.
Employer’s Business Decision. With so many important unanswered questions, if or until further guidance is provided, the employer is going to have to make a business decision regarding how to comply.
Less Risky Approach. One compliance approach, that would eliminate the need to resolve the issues created by the statute, is to provide statements in a manner that ensures compliance. Under this approach, the employer would provide an annual statement to each and every employee (regardless of income, prior health coverage, and current or prior participation in the cafeteria plan). The statement would itemize health benefits (of any type) paid through the cafeteria plan and would also itemize whether the benefits were attributable to employee salary reduction contributions or employer contributions. The employee would then be responsible, either on his or her own or with the assistance of a tax professional, to determine whether the credit is available, and if so, for which payments under the cafeteria plan.
Almost certainly, this approach results in providing more information to more employees than actually necessary. However, this approach basically ensures compliance, regardless of how the unanswered questions might be resolved. Once the systems are established to generate this type of comprehensive information, providing the statement involves little or no ongoing judgment decisions by the employer.
Other Approaches. An employer not wanting to take such a broad approach may narrow the information provided and the population to which it is provided by making any number of decisions. Remember, each juncture at which the employer inserts its judgment represents potential exposure for a wrong decision.
Barring clarification by the legislature or the State Department of Revenue, an employer may choose to resolve any of the following questions prior to formulating its compliance strategy:
- Must annual statements be provided if the employer does not sponsor a Section 125 cafeteria plan?
Caution: The only manner in which an employer may allow employees to pay health premiums on a pre-tax basis through salary reduction is through a Section 125 cafeteria plan.
- Must an annual statement be provided to employees who do not participate in the Section 125 cafeteria plan?
- What is the definition of “health insurance premiums” and if an employee does not have any of them paid through the Section 125 cafeteria plan, must an annual statement be provided?
- Must a statement be provided to employees who, at the beginning of the tax year, have been participating in the Section 125 plan for more than twelve (12) months? In that regard, must the twelve (12) months be consecutive?
- Must an annual statement be provided if the employer knows the employee has had coverage under a “health care plan” within the last year? In that regard, (1) what is the definition of “health care plan”, and (2) does “year” mean the last taxable year, the last contract year, the last plan year, etc.?
- Must an annual statement be provided to employees who clearly earn more than the income threshold contained in the statute (e.g., 300% of the federal poverty guidelines)?
- Is the credit available only for payments attributable to employee contributions or is it also available for payments attributable to employer contributions, including employer credits (a/k/a flex credits)?
- Is the credit available only for pre-tax payments made through the cafeteria plan, or is it also available for after-tax contributions or contributions deemed to be after-tax contributions because income has been imputed to the employee (e.g., the fair market value of coverage provided to domestic partners and non-tax dependent children)?
Incorrectly resolving any of these questions could result in the employer’s non-compliance with the statute.
Effective Date. Section 290.0678 is effective for taxable years beginning after December 31, 2008. As a result, employees will be first eligible for the credit with respect to health insurance premiums paid at any time during 2009. The employer statements required by the statute will need to cover the full 2009 calendar year.
Action Items. To comply with the law, we recommend employers take the following steps:
- Determine the approach you will take with respect to complying with the statement requirement, either: (1) provide statements to all employees with information regarding all payments made through the cafeteria plan, or (2) make judgment calls regarding the employee population to which the statements will be provided and the types of payments that will be reported in the statement;
- If the second approach is taken determine the appropriate employee population to which the statements will be provided and determine the appropriate scope of the tax credit (i.e., to what health insurance premiums the tax credit applies); and
- Establish a mechanism to track and generate a statement of the health insurance premiums paid through the employer’s Section 125 cafeteria plan(s). This may involve requesting the assistance of third party service provides such as outside payroll companies and cafeteria plan third party administrators.
If you have any questions regarding the continuation coverage premium subsidy issues, or need assistance using the DOL model notices (or preparing your own notices), please let us know.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.