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Federal File

Coverage of legislation and regulatory activity that affects higher education

Agencies Review Exempt Status, Health-Care Excise Tax

New Overtime Rules Raise Exempt Salary Threshold

Following the executive order signed by President Obama last year directing the Department of Labor to consider expanding overtime protections to more workers, on July 6, the department published a notice of proposed rulemaking that makes changes to the regulations implementing the overtime provisions of the Fair Labor Standards Act.

Current regulations set the threshold at $455 per week or $23,660 annually as the point at which an individual may qualify as a salaried "white collar" worker, exempt from overtime pay requirements. Under the proposed rule, the threshold will be raised to the 40th percentile of average weekly earnings for full-time salaried workers, which-based on 2013 data-totals $921 per week or $47,892 per year. The department estimates that the annual threshold for 2016 will be $50,440.  

Under the proposed rule, the threshold will be raised to the 40th percentile of average weekly earnings for full-time salaried workers, which—based on 2013 data—totals $921 per week or $47,892 per year.

The department also proposed an automatic annual increase of the minimum salary amount, either by tying it to the 40th percentile or indexing the weekly amount to the Consumer Price Index.

  • Other qualifications. The salary threshold is only one of several qualifying factors in determining which employ-ees are exempt from the overtime requirements. The Department of Labor did not include a specific proposal to modify the standard duties test for distinguishing executive, administrative, and professional employees, but seeks comments on whether those tests are working as intended to screen out employees who are not bona fide exempt employees.
  • Some exemptions remain unchanged. Existing exemptions to the overtime rules that apply to teachers and academic administrators would not be changed by the proposed rules. Teachers, including faculty and instructors at postsecondary institutions, fall under the exemption as do employees engaged in academic admin-istrative functions. This would include, for example, individuals responsible for the administration of an academic department, or academic counselors who perform work administering tests, assisting students with academic problems, or advising students about degree requirements. The exemption would not include individuals in nonacademic or business-related functions, such as campus staff who work as health or social workers, or grounds or facilities employees. 

Comments on the proposal were due by September 4. It is not anticipated that the administration will be persuaded to lower the proposed thresholds in the final regulations.

Additional Guidance on Affordable Care Act Excise Tax

The Internal Revenue Service (IRS) has issued additional guidance regarding the excise tax on high-cost, employer-sponsored health-care coverage. The guidance addresses more foundational issues related to payment of the tax: who pays it, how it is paid, and how to determine the employer. Notice 2015-52, released on July 30, is the second notification on this issue and comes in advance of proposed rules.

  • Background. Section 4980I of the Internal Revenue Code, enacted as part of the Affordable Care Act, imposes a nondeductible 40 percent excise tax on any "excess benefit" provided in employer-sponsored insurance. The so-called Cadillac tax, which goes into effect in 2018, will apply to the cost of coverage exceeding $10,200 for self-only coverage and $27,500 for all other coverage. Annual caps will be indexed for inflation in future years.

Earlier this year, the IRS published Notice 2015-16, which addressed the definition of "applicable coverage," the determination of cost of applicable coverage, and the application of the annual statutory dollar limit to the cost of applicable coverage. 

  • Continuing the regulatory process. In advance of developing and publishing proposed rules, which will invite public comment, the IRS is seeking input on the excise tax issues that were not raised in Notice 2015-16.

Another proposal in Notice 2015–52 is the IRS’s approach to the allocation of both employer and employee contributions to HSAs, Archer MSAs, FSAs, and HRAs, for purposes of determining the cost of applicable coverage.

  • Who pays the tax? Section 4980I(c)(1) states that the coverage provider is liable for the tax. This is the health insurer for coverage under group health plans, and the employer for flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement accounts (HRAs), and Archer medical savings accounts (MSAs).

For all other types of employer-sponsored coverage, the coverage provider is "considered to be the person that administers the plan benefits."

Notice 2015-52 also outlines two approaches for determining who will be liable for the excise tax. Under one approach, the person that administers the plan benefits would be "the person responsible for performing the day-to-day functions that constitute the administration of plan benefits, such as receiving and processing claims, responding to inquiries, or providing a technology platform for benefits information." Treasury and the IRS anticipate that this "person" generally would be a third-party administrator for benefits that are self-insured, except in the rare cases in which the employer or plan sponsor performs these functions, or employs the person that performs them. 

Under the second proposed approach, the person that administers the plan benefits would be the person with ultimate authority or responsibility under the plan with respect to the administration of the plan benefits, regardless of whether that person routinely exercises that authority or responsibility. With this method, relevant types of administrative matters over which the person that administers the plan benefits would have ultimate authority could include eligibility determinations; claims administration; and arrangements with service providers, including the authority to terminate contracts with service providers. The notice states that it is anticipated that the person with such ultimate authority under the plan would be identifiable based on the terms of the plan documents and often would not be the person that performs the day-to-day administrative functions under the plan.

The excise tax is not a deductible expense, regardless of who pays it. 

  • How will the excise tax be paid? At the end of the calendar year, the employer must calculate if any tax applies for each employee and must notify each coverage provider and the IRS of the excise tax amount each provider owes on its applicable share of the excess benefits with respect to each employee.

The IRS is considering designating Form 720, the Quarterly Federal Excise Tax Return, as the mechanism for payment of the tax. If so, a particular quarter of the calendar will be designated as the payment period.

  • Treatment of contributions to account-based plans. Another notable proposal in Notice 2015-52 is the IRS's approach to the allocation of both employer and employee contributions to HSAs, Archer MSAs, FSAs, and HRAs, for purposes of determining the cost of applicable coverage. Treasury and the IRS are considering an approach under which contributions to these account-based plans would be allocated on a pro-rata basis over the period to which the contribution relates-generally, the plan year-regardless of the timing of the contributions. Employers have voiced concerns that the full value of such contributions to those accounts would be counted each month when determining whether the applicable employer-based coverage provided an excess benefit.
  • Development of age and gender adjustment tables. To compare the employer's premium cost with the national premium cost-and thereby determine any excess benefit-it is necessary to establish the age and gender characteristics of the national workforce.

The notice outlines the IRS's approach to simplify the calculation of the age and gender adjustment by developing tables, noting that all age and gender adjustments would be determined separately for self-only coverage and for other than self-only coverage.

Comments on the issues raised in the notice, as well as any other aspects of the excise tax, were due by October 1.

NACUBO CONTACT Mary M. Bachinger, director, tax policy, 202.861.2581


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