Tag: Internal Revenue Code

Client Alert: Delay of Deadline to Furnish Forms 1095-B and 1095-C to Individuals & Related Relief

Statements to Individuals

The Internal Revenue Service (“IRS”) has extended the deadline for 2020 Information Reporting by employers (and other entities) to individuals under Internal Revenue Code sections 6055 and 6056 by just over a month. However, the deadline for these entities to file with the Internal Revenue Service (IRS) remains the same.

IRS Notice 2020-76 extends the due dates for the following 2020 information reporting Forms from January 31, 2021 to March 2, 2021:

  • 2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
  • 2020 Form 1095-B, Health Coverage

Please note that no further extension beyond the March 2, 2020 deadline is allowed. Therefore, this deadline for furnishing the Forms to individuals must be met. 

Reporting to IRS

However, the due dates for filing these Forms and their Transmittals with the IRS remains unchanged. Specifically, the due date for filing the following documents with the IRS is February 28 for paper filings; however, if filing electronically, the due date is March 31 (employers who are required to file 250 or more Forms must file electronically):

  • 2020 Form 1094-B, Transmittal of Health Coverage Information Returns, and the 2020 Form 1095-B, Health Coverage
  • 2020 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and the
  • 2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

Additional extensions may still be available for filing these Forms with the IRS.

Penalty Relief for Form 1095-B Statement to Responsible Individuals

The Notice addresses that as the individual shared responsibility payment was reduced to zero for months beginning after December 31, 2018, and because an individual will not need the information on Form 1095-B to compute his or her federal tax liability or to file an income tax return with the IRS, the Treasury Department and the IRS have determined that relief from penalties associated with furnishing a statement under section 6055 is appropriate. Therefore, the IRS will not assess a penalty under section 6722 against reporting entities who fail to furnish a Form 1095-B to responsible individuals if two conditions are met: 

  • First, the reporting entity posts a notice prominently on its website stating that responsible individuals may receive a copy of their 2020 Form 1095-B upon request, accompanied by an email address and a physical address to which a request may be sent, as well as a telephone number that responsible individuals can use to contact the reporting entity with any questions.
  • Second, the reporting entity furnishes a 2020 Form 1095-B to any responsible individual upon request within 30 days of the date the request is received.

This relief does not extend to the requirement that applicable large employers (ALEs) must furnish Forms 1095-C to full-time employees.  Those statements must continue to be provided.  However, the penalty relief will apply to employees enrolled in an ALE’s self-insured health plan who are not full-time employees for any month of 2020.

Last Year for Good-Faith Transition Relief

IRS Notice 2020-76 also extends the good-faith transition relief from Code section 6721 and 6722, which are the Code sections imposing penalties for filing incorrect or incomplete information on the return or statement. Specifically, entities showing that they have made good faith efforts to comply may avoid penalties for incorrect or incomplete information reporting.  However, relief is not available to entities who fail to file returns or furnish the statements, miss a deadline, or otherwise had not made good faith efforts to comply.  The Notice states that in determining good faith, the IRS “will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the Service and furnishing it to employees and covered individuals, such as gathering and transmitting the necessary data to an agent to prepare the data for submission to the IRS or testing its ability to transmit information to the IRS.” However, this is the last year the IRS and Treasury Department intend on providing this transition relief.

Indications this may be the Last Year for Statement Relief

Last, the IRS indicates that unless it receives comments explaining why the relief afforded in this notice continues to be necessary, no relief relating to the furnishing requirements under sections 6055 and 6056 will be granted in future years.  

  • Taxpayers and reporting entities are strongly encouraged to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS- 2020-0037” in the search field on the regulations.gov homepage to find this notice and submit comments).  
  • Alternatively, taxpayers and reporting entities may mail comments to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2020-76) Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044
  • Comments must be submitted by February 1, 2021.

You can find the full Notice here: https://www.irs.gov/pub/irs-drop/n-20-76.pdf.

If you should have questions regarding employer reporting requirements or other ACA mandates, the Employee Benefits Department at Fraser Trebilcock can assist.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Client Alert: IRS Relaxes Section 125 Mid-Year Change Rules & Increases Health FSA Carryovers

In two recently released Notices, the Internal Revenue Service (IRS) relaxes the irrevocability rule under Internal Revenue Code section 125 relating to cafeteria plans, increases carryover allowances for health flexible spending accounts (health FSAs), extends the period of time to “spend down” unused health FSA and dependent care FSA amounts, and expands previous guidance to provide that certain covered services will not affect high deductible health plan (HDHP) status… retroactive to January 1, 2020.

See: 

IRS Notice 2020-33 

IRS Notice 2020-29 

Section 125 Plan participants have found themselves in difficult situations as they had elected certain health and dependent care FSA amounts to use during 2020 only to find that certain medical procedures were delayed or canceled and that day care facilities were closed due to COVID-19. Moreover, group health plans are changing based on certain new coverage requirements, incomes are dropping, and layoffs are occurring. Employees are finding themselves in a position where they can no longer afford such coverage; however, IRS procedures in many of these situations would not support mid-year election changes. These are just a few examples of election issues currently occurring.

The IRS, therefore, is relaxing the typical rigid Section 125 rules. However, in order to take advantage of this leniency, employers must amend their Section 125 cafeteria plans.

Section 125 Irrevocability Rules Relaxed

Once an election is made under a Section 125 cafeteria plan, that election is irrevocable for the entire plan year, unless (1) one of the mid-year qualifying change in election events occurs as set forth in Treas. Reg. 1.125-4; and (2) the employer’s cafeteria plan incorporates the mid-year change rule.

However, IRS Notice 2020-29 relaxes these rules during calendar year 2020 relating to employer-sponsored health coverage, health FSAs, and dependent care FSAs, and the relief may be applied retroactively to periods on or after January 1, 2020.  These changes apply regardless of whether the basis for the election change meets the Treas. Reg. 1.125-4 requirements. A plan amendment is required.  

Specifically, Notice 2020-29 provides as follows:

  • For mid-year elections made during calendar year 2020, a section 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to:
    • with respect to employer-sponsored health coverage, 
      • make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; 
      • revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis, including changing from self-only to family coverage; and 
      • revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer; sample attestation language is provided in the Notice;
    • revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis; and 
    • revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care FSA on a prospective basis.

An employer does not need to adopt these more lenient rules and can continue with its current plan procedures. However, given that they could help a number of employees, it is something to consider.

Increase in Carryovers to Health FSAs

If an employer’s cafeteria plan has a health FSA with a carryover provision, another allowable change is permitted. IRS Notice 2020-33 allows, upon plan amendment, for the 2020 plan year carryover to be increased to $550. Previously, only a $500 carryover was allowed. And if the plan is amended correctly, the $550 will likely increase in future years. Please note that this is not for any plan years which started in 2019 and ended in 2020… that carryover remains $500.  

Specifically, IRS Notice 2020-33 increases the maximum carryover amount for plan years starting in 2020 to an amount equal to 20% of the maximum Section 125(i) salary reduction contribution for that plan year. Therefore, the maximum amount allowed to be carried over from a plan year starting in 2020 to the immediately following plan year beginning in 2021 is $550 (20% of $2,750). A plan amendment must be made on or before the last day of the plan year that adopts the carryover increase; however, a special amendment timing rule exists for the 2020 plan year under Notice 2020-29.

Moreover, for the remainder of 2020, employees are permitted to change their elections mid-year in order to increase their health FSA (including an initial election to fund a health FSA) due to the increased carryover under Notice 2020-29.  However, these changes must be applied prospectively only. 

Significantly, Notice 2020-33 provides as follows:

  • Although only future salary may be reduced under the revised election, amounts contributed to the health FSA after the revised election may be used for any medical care expense incurred during the first plan year that begins on or after January 1, 2020.

An amendment must be made on or before December 31, 2021 and may be effective retroactively to January 1, 2020 (or the first day of the plan year in 2020 if later), provided that the employer informs all eligible individuals of the changes to the plan.

Extended Period to Spend Down FSAs

Many employees had elected amounts in dependent care and health FSAs and were (or are) unable to use them due to reasons such as closed day care facilities or canceled medical procedures.  Under the strict Code section 125, unused amounts in these accounts are forfeited at the end of the Plan Year, subject to any carryover provisions (applicable to health FSAs only) or grace periods.

Here, Notice 2020-29 provides flexibility and allows employees to “spend down” their accounts through December 31, 2020. As calendar year plans already allow expenses to be incurred through December 31, 2020, this Notice does not provide relief. It instead applies to plans with grace periods that end in 2020 or whose plan year ends in 2020. Upon amendment, participants in those plans may continue to incur eligible expenses through December 31, 2020 and submit requests for reimbursement consistent with plan terms.

Specifically, the Notice provides:

  • For unused amounts remaining in a health FSA or a dependent care assistance program under the section 125 cafeteria plan as of the end of a grace period or plan year ending in 2020, a section 125 cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.

Please see below for one of the examples listed in the Notice:

Example 1. Employer provides a health FSA under a § 125 cafeteria plan that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this notice and Notice 2020-33, Employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and also amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts from the 2019 plan year. 

Employee A has a remaining balance in his health FSA for the 2019 plan year of $2,000 on June 30, 2020, because a scheduled non-emergency procedure was postponed. For the 2020 plan year beginning July 1, 2020, Employee A elects to contribute $2,000 to his health FSA. Employee A is able to reschedule the procedure before December 31, 2020 and, between July 1, 2020 and December 31, 2020, incurs $1,900 in medical care expenses. The health FSA may reimburse Employee A $1,900 from the $2,000 remaining in his health FSA at the end of the 2019 plan year, leaving $100 unused from the 2019 plan year. Under the plan terms that provide for a carryover, Employee A is allowed to use the remaining $100 in his health FSA until June 30, 2021, to reimburse claims incurred during the 2020 plan year. Employee A may be reimbursed for up to $2,100 ($2,000 contributed to the health FSA for the 2020 plan year plus $100 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021 and June 30, 2021. In addition, Employee A may carry over to the 2021 plan year beginning July 1, 2021 up to $550 of any remaining portion of that $2,100 after claims are processed for the 2020 plan year that began July 1, 2020. A grace period is not available for the plan year ending June 30, 2021. 

Again, plan amendments will be required to accomplish the above and must be adopted on or before December 31, 2021. The amendment may be effective retroactively to January 1, 2020 as long as the above Notices are followed and the employees are informed.

Status of HDHPs

Last, the IRS extends certain previous relief for HDHPs retroactively, back to January 1, 2020.  Specifically, Notice 2020-29 separately expands Notice 2020-15 to provide that reimbursement of expenses for testing and treatment of COVID-19 incurred on or after January 1, 2020 will not result in an HDHP to fail to be an HDHP under Code section 223. Additionally, testing and treatment for COVID-19 includes “the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under … the CARES Act.”  

Moreover, telehealth and other remote care services provided on or after January 1, 2020 (applying only for plan years beginning on or before December 31, 2021) will not affect HDHP status.  The CARES Act previously applied only for services incurred on or after March 27, 2020.

Conclusion

As always, consultation is important to determine if these changes will be of benefit to employers and their employees. Many factors should be considered, such as nondiscrimination rules, adverse selection with allowing mid-year changes, whether extending health FSA reimbursement provisions will negatively affect health savings accounts, and additional required employee communications.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Client Alert: FSAs, HRAs, and HSAs Can Reimburse Over-the-Counter Medications

One of the many changes brought forth under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) includes allowing pre-tax reimbursement of over-the-counter (“OTC”) medications effective January 1, 2020.

Specifically, the CARES Act amended Internal Revenue Code (the “Code”) sections 223(d) and 106(f) to remove the restriction that reimbursable medications are limited to prescribed drugs and insulin. Additionally, the CARES Act provides that expenses incurred for menstrual care products (as defined in Code section 223(d)(2)(D)) shall be treated as incurred for medical care. Affected reimbursement accounts include health flexible spending accounts (“health FSAs”), health savings accounts (“HSAs”), and health reimbursement accounts (“HRAs”).

This marks another change in course as to how to handle OTC medications. While OTC drugs were previously allowed under the Code, beginning January 1, 2011, the Affordable Care Act limited reimbursable medications to prescriptions and insulin. The CARES Act once again changes that, and while many of the CARES Act provisions include sunset dates, there is no expiration date for OTC reimbursements. With respect to HSAs, this change is effective for amounts paid after December 31, 2019. For health FSAs and HRAs, it is effective for expenses incurred after December 31, 2019.

Most health FSA and HRA plan documents specifically restrict reimbursement to prescription drugs and medications, including insulin. Therefore, if an employer chooses to allow reimbursements of OTC and menstrual care products from health FSAs and HRAs, plan amendments will most likely be required. HSAs are generally not employer sponsored products and, as such, would require no amendments.

While these are permissive changes, employers wanting to share some positive news to employees may want to allow them. Employee communication, as always, is of paramount importance, especially summaries of material modifications for ERISA plans.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions. 

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana, Attorney Fraser TrebilcockElizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Client Alert: IRS Releases Final 2019 ACA Employer Reporting Forms and Instructions

The Internal Revenue Service (“IRS”) has just released the Final Forms and Instructions for 2019 information reporting by employers and other entities under Internal Revenue Code sections 6055 and 6056. The links to the Final Forms and Instructions are below:

2019 Forms for Applicable Large Employers (Code section 6056):

2019 Forms for Employers who Self-Fund (Code section 6055):

These instructions and forms reflect only minor changes, such as a few formatting modifications and the reflection of indexed penalty amounts for reporting failures. The instructions also reflect the extension of due dates for furnishing statements from January 31, 2020 to March 2, 2020, as well as the extension of good faith relief for reporting and furnishing as reflected in our most recent Client Alert. Additionally, the IRS will not impose a penalty for failure to furnish Form 1095-C to any employee enrolled in an Applicable Large Employer member’s self-insured health plan who is not a full-time employee for any month of 2019 if certain conditions are met. The IRS will also not impose a penalty for failure to furnish Form 1095-B to individuals if certain conditions are met. See Notice 2019-63 at https://www.irs.gov/pub/irs-drop/n-19-63.pdf.

The increased penalties are now as follows for 2019 tax year returns (and may be waived in certain circumstances):

  • The penalty for failure to file a correct information return is $270 for each return for which the failure occurs, with the total penalty for a calendar year not to exceed $3,339,000.
  • The penalty for failure to provide a correct payee statement is $270 for each statement for which the failure occurs, with the total penalty for a calendar year not to exceed $3,339,000.
  • Special rules apply that increase the per-return and per-statement and total penalties with no maximum limitations if there is intentional disregard of the requirement to file the returns and furnish recipient statements.

Additionally, the instructions for Forms 1094-B and 1095-B state that health insurance issuers and carriers are encouraged (but not required) to report coverage in catastrophic health plans enrolled in through the Marketplace for months in 2019.

The remainder of the provisions remain intact, including the mandatory electronic filing for Forms reaching the 250-return threshold.

If you should have questions regarding employer reporting requirements or other ACA mandates, the Employee Benefits Department at Fraser Trebilcock can assist.

Elizabeth H. Latchana, Attorney Fraser TrebilcockElizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Client Alert: Delay of Deadline to Furnish Forms 1095-B and 1095-C to Individuals

Statements to Individuals

The Internal Revenue Service (“IRS”) has extended the deadline for 2019 Information Reporting by employers (and other entities) to individuals under Internal Revenue Code sections 6055 and 6056 by just over a month. However, the deadline for these entities to file with the Internal Revenue Service (IRS) remains the same.

IRS Notice 2019-63 extends the due dates for the following 2019 information reporting Forms from January 31, 2020 to March 2, 2020:

  • 2019 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
  • 2019 Form 1095-B, Health Coverage

Please note that no further extension beyond the March 2, 2020 deadline is allowed. Therefore, this deadline for furnishing the Forms to individuals must be met. 

Reporting to IRS

However, the due dates for filing these Forms and their Transmittals with the IRS remains unchanged. Specifically, the due date for filing the following documents with the IRS is February 28, 2020 for paper filings; however, if filing electronically, the due date is March 31, 2020 (employers who are required to file 250 or more Forms must file electronically):

  • 2019 Form 1094-B, Transmittal of Health Coverage Information Returns, and the 2019 Form 1095-B, Health Coverage
  • 2019 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and the
  • 2019 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

Additional extensions may still be available for filing these Forms with the IRS.

Good-Faith Transition Relief

IRS Notice 2019-63 also extends the good-faith transition relief from Code section 6721 and 6722, which are the Code sections imposing penalties for filing incorrect or incomplete information on the return or statement. Specifically, entities showing that they have made good faith efforts to comply may avoid penalties for incorrect or incomplete information reporting.  However, relief is not available to entities who fail to file returns or furnish the statements, miss a deadline, or otherwise had not made good faith efforts to comply.  The Notice states that in determining good faith, the IRS “will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the Service and furnishing it to employees and covered individuals, such as gathering and transmitting the necessary data to an agent to prepare the data for submission to the Service or testing its ability to transmit information to the Service.”

Penalty Relief for Form 1095-B Statement to Responsible Individuals

Last, the Notice addresses that as the individual shared responsibility payment was reduced to zero for months beginning after December 31, 2018, the IRS and Department of Treasury are continuing to analyze if and how the section 6055 reporting requirements should change in the future.  Comments are requested.  However, because an individual will not need the information on Form 1095-B to compute his or her federal tax liability or to file an income tax return with the IRS, the Treasury Department and the IRS have determined that relief from penalties associated with furnishing a statement under section 6055 is appropriate.  Therefore, the IRS will not assess a penalty under section 6722 against reporting entities who fail to furnish a Form 1095-B to responsible individuals if two conditions are met: 

  • First, the reporting entity posts a notice prominently on its website stating that responsible individuals may receive a copy of their 2019 Form 1095-B upon request, accompanied by an email address and a physical address to which a request may be sent, as well as a telephone number that responsible individuals can use to contact the reporting entity with any questions.
  • Second, the reporting entity furnishes a 2019 Form 1095-B to any responsible individual upon request within 30 days of the date the request is received.

This relief does not extend to the requirement that applicable large employers (ALEs) must furnish Forms 1095-C to full-time employees, whether or not self-insured health plans.  Those statements must continue to be provided.  However, the penalty relief will apply to employees enrolled in an ALE’s self-insured health plan who are not full-time employees for any month of 2019.

You can find the full Notice here: https://www.irs.gov/pub/irs-drop/n-19-63.pdf.

If you should have questions regarding employer reporting requirements or other ACA mandates, the Employee Benefits Department at Fraser Trebilcock can assist.

Elizabeth H. Latchana, Attorney Fraser TrebilcockElizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Up in Smoke – Section 280E’s Buzz not Harsh by Excessive Fines Clause: Northern California Small Business Assistants, Inc. v Commissioner

A tax provision that blocks marijuana companies from claiming federal business tax deductions is constitutional ruled the U.S. Tax Court on October 23rd. Northerner California Small Business Assistants, Inc. v Commissioner, 153 TC No. 4 (No. 26889-16, October 23, 2019).

Northern California Small Business Assistants, Inc., a California medical marijuana business, claimed $1.5 million in ordinary and necessary business expenses for its 2012 tax year. The IRS disallowed the company’s tax deductions under Section 280E of the Internal Revenue Code. That provision blocks companies that are involved in drug trafficking from claiming business deductions and credit that are available to businesses not engaged in trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).

Cannabis companies that are organized and operated legally under state law, face what amounts to a federal income tax on their gross receipts – with effective tax rates as high as 70% because for federal purposes, those companies are considered to be trafficking in the illegal drug trade. Some types of marijuana businesses are able to reduce the amount of their income subject to tax based on their inventory costs.

The Company claimed that Section 280E violated the prohibition on excessive fines contained in the Eighth Amendment. The Excessive Fines Clause guards against abuses of the government’s ability to punish civil or criminal infractions. Specifically the company argued that:

  • The Eighth Amendment applied to corporations,
  • That Section 280E operates as a penalty through the tax laws on the company’s gross receipts, and
  • That this “penalty” is excessive.

The Tax Court held, however, that Section 280E does not violate the Constitution because it is not a penalty provision. “Despite efforts by several States to legalize marijuana use to varying degrees, it remains a Schedule 1 controlled substance within the meaning of the Controlled Substance Act,” wrote Judge Joseph Goeke. “Unlike in other context where the Supreme Court has found a financial burden to be a penalty, disallowing a deduction from gross income is not a punishment,” said the Court. The court noted its holding was consistent with the only Circuit Court of Appeals decision on this point.

The company also argued that, assuming Section 280E is constitutional, that it should be applied more narrowly than as interpreted by the IRS.  According to the taxpayer, while Section 280E may be appropriately applied to limit ordinary and necessary business expenses, other provisions, such as depreciation deductions, and the deductions for state and local taxes should be excluded from Section 280E’s reach. The Tax Court declined this invitation, stating, “Congress could not have been clearer in drafting this section [280E] of the Code.”

Perhaps most interesting, is that there were two dissenting opinions. Judge Gustason, dissenting in part, wrote that he believed Section 280E unconstitutionally exceeded Congress’ power to impose an income tax under the Sixteenth Amendment. “I would hold that this wholesale disallowance of all deductions transforms the ostensible income tax into something that is not an income tax at all, but rather a tax on an amount greater than the taxpayer’s ‘income’.”

Judge Copeland, agreeing with Judge Gustafson’s dissent, also wrote a partial dissent of her own, insisting that Section 280E is a penalty and urging further analysis of whether it violates the Eighth Amendment.

Read full opinion here.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Client Alert: IRS Announces 2020 Increases for HSAs

The IRS has released its 2020 annual inflation adjustments for Health Savings Accounts (HSAs) as determined under Section 223 of the Internal Revenue Code. Specifically, IRS Revenue Procedure 2019-25 provides the adjusted limits for contributions to a Health Savings Account (“HSA”), as well as the high deductible health plan (“HDHP”) minimums and maximums for calendar year 2020.

The 2020 limits are as follows:

  • Annual Contribution Limit
    • Single Coverage: $3,550
    • Family Coverage: $7,100
  • HDHP-Minimum Deductible
    • Single Coverage: $1,400
    • Family Coverage: $2,800
  • HDHP-Maximum Annual Out-of-Pocket Expenses (including deductibles, co-payments and other amounts, but not including premiums)
    • Single Coverage: $6,900
    • Family Coverage: $13,800
  • The catch-up contribution for eligible individuals age 55 or older by year end remains at $1,000.

Plans and related documentation, including employee communications, should be updated to reflect these new limits for 2020.

As always, please keep in mind that participation in a health FSA (or any other non-HDHP) will result in HSA ineligibility, unless the health FSA is limited to: (1) limited-scope dental or vision excepted benefits; and/or (2) post-deductible expenses.

This alert serves as a general summary of lengthy and comprehensive new provisions of the Internal Revenue Code. It does not constitute legal guidance. Please contact us with any specific questions.

Elizabeth H. Latchana, Attorney Fraser TrebilcockElizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Client Alert: Delay of Deadline to Furnish Forms 1095-B and 1095-C to Individuals

Delay of Deadline to Furnish Forms 1095-B and 1095-C to Individuals

The Internal Revenue Service (“IRS”) has extended the deadline for 2018 Information Reporting by employers (and other entities) to individuals under Internal Revenue Code sections 6055 and 6056 by just over a month. However, the deadline for these entities to file with the Internal Revenue Service (IRS) remains the same.

IRS Notice 2018-94 extends the due dates for the following 2018 information reporting Forms from January 31, 2019 to March 4, 2019:

  • 2018 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
  • 2018 Form 1095-B, Health Coverage

Please note that no further extension beyond the March 4, 2019 deadline is allowed. Therefore, this deadline for furnishing the Forms to individuals must be met.

However, the due dates for filing these Forms and their Transmittals with the IRS remains unchanged. Specifically, the due date for filing the following documents with the IRS is February 28, 2019 for paper filings; however, if filing electronically, the due date is April 1, 2019 (employers who are required to file 250 or more Forms must file electronically):

  • 2018 Form 1094-B, Transmittal of Health Coverage Information Returns, and the 2018 Form 1095-B, Health Coverage
  • 2018 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and the 2018 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

Additional extensions may still be available for filing these Forms with the IRS.

As a result of these extensions, individuals might not receive a Form 1095-B or Form 1095-C by the time they file their 2018 tax returns. In such case, IRS Notice 2018-94 explains that individual taxpayers may instead rely on other information received from their employers or other coverage providers for purposes of filing their tax returns and do not need to wait to receive Forms 1095-B and 1095-C before filing. Once they do receive their forms, the individuals should keep it with their tax records. You can find the full Notice here: https://www.irs.gov/pub/irs-drop/n-18-94.pdf.

IRS Notice 2018-94 also extends the good-faith transition relief from Code section 6721 and 6722 (which are the Code sections imposing penalties for failing to timely file an information return, filing incorrect or incomplete information, failing to timely furnish an information return, or furnishing an incorrect or incomplete information statement). Specifically, entities showing that they have made good faith efforts to comply may avoid penalties for incorrect or incomplete information reporting.  However, relief is not available to entities who fail to file returns or furnish the statements, miss a deadline, or otherwise had not made good faith efforts to comply.  The Notice states that in determining good faith, the IRS “will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the Service and furnishing it to employees and covered individuals, such as gathering and transmitting the necessary data to an agent to prepare the data for submission to the Service or testing its ability to transmit information to the Service.”

Last, the Notice addresses that as the individual shared responsibility payment is being reduced to zero for months beginning after December 31, 2018, the IRS and Department of Treasury are analyzing if and how the section 6055 reporting requirements should change in the future.

The links to the Final Forms and Instructions are below:

2018 Forms for Applicable Large Employers (Code Section 6056):

2018 Forms for Employers who Self-Fund (Code Section 6055):

These instructions and forms reflect only minor changes, such as a few formatting modifications and the reflection of indexed penalty amounts for reporting failures.  The increased penalties are now as follows for 2018 tax year returns (and may be waived in certain circumstances):

  • The penalty for failure to file a correct information return is $270 for each return for which the failure occurs, with the total penalty for a calendar year not to exceed $3,275,500.
  • The penalty for failure to provide a correct payee statement is $270 for each statement for which the failure occurs, with the total penalty for a calendar year not to exceed $3,275,500.
  • Special rules apply that increase the per-return and per-statement and total penalties with no maximum limitations if there is intentional disregard of the requirement to file the returns and furnish recipient statements.

Additionally, the instructions for Forms 1094-B and 1095-B also now state that health insurance issuers and carriers are encouraged (but not required) to report coverage in catastrophic health plans enrolled in through the Marketplace for months in 2018.

The remainder of the provisions remain intact, including the mandatory electronic filing for Forms reaching the 250-return threshold.

If you should have questions regarding employer reporting requirements or other ACA mandates, the Employee Benefits Department at Fraser Trebilcock can assist.

Elizabeth H. Latchana, Attorney Fraser TrebilcockElizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2018 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.