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February 10 2012

IRS Form 8928 - The Health Care Form You Never Want to File

By: Timothy J. Tornga

When dealing with their health care plans, clients often ask “What do I have to do to stay out of trouble?” This question appears more frequently as the rules applicable to health care plans become more and more complex. The IRS has taken a step to help answer the question, but not in a way that will please you. They have published a form that you never want to file. We recommend you review the instructions to it, so that you become familiar with the steps you must take to avoid filing it.

Historically, the IRS did not make health care plan audits a priority and so there was little enforcement of many of the mandates that have appeared in the past several years. At the beginning of 2010, the IRS published Form 8928 – Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code. Form 8928 provides a framework for evaluating many of a plan sponsor’s duties when operating a health care plan and a response to failure to live up to the requirements. The form itself is not very instructive. The instructions are slightly more helpful and can be found at http://www.irs.gov/pub/irs-pdf/i8928.pdf.

Form 8928 Compliance Failures

The compliance failures triggering penalties include the following:

  1. COBRA violations. These can occur at many different levels from initial notice to notice at the time of a qualifying event to overcharging for the premium and many other possible violations. A more complete description would take another newsletter at another time.
  2. HIPAA portability. These rules address failure to apply preexisting condition limitations properly (to the extent not eliminated by health care reform), discrimination on the basis of health status, failure to provide 48 or 96 hours of hospitalization under the Newborns and Mother’s Health Protection Act, coverage of dependent students on a medically necessary leave from school (to the extent not addressed by the new coverage of children until age 26 rule) and mental health and substance use disorder parity.
  3. Comparable contribution requirements for health savings accounts (HSAs) and Archer Medical Savings Accounts (MSAs). The comparable contributions requirement for HSAs can be avoided by having a simple flexible benefits (Section 125) plan in place. This will immunize an employer from comparable contribution problems. However, Section 125 discrimination compliance requirements remain.
  4. Health care reform mandates:
  • discrimination rules (temporary penalty nonenforcement)
  • coverage of adult children to age 26 and initial notice
  • elimination of lifetime and annual dollar limits on coverage and initial notice (phase-in complete in 2014)
  • prohibition of coverage rescissions
  • remove pre-existing condition limits for participants younger than 19 (applies to all participants beginning in 2014)
  • new claim and appeal rules, including external review requirement
  • requirement of the “4-page” summary of benefits and coverage (SBC) (effective with open enrollment for 2013)
  • preventative care with no co-payments or other charges
  • rules on access to primary care providers and emergency room (patient protections)
  • maximum waiting period of 90 days for eligibility (plan years beginning January 1, 2014 and later)
  • Shared responsibility (pay-or-play) mandate (plan years beginning January 1, 2014 and later).

Form 8928 provides a framework to report and pay the wide variety of penalties applicable for failure to satisfy these requirements. Penalty amounts vary, but a typical penalty is $100/day/individual affected. A plan in violation must also “make it right.” For example, if the plan failed to give the timely notice for COBRA, then it must give the notice at the time of discovery and give the individual a new 60-day election period. If the notice failure was the fault of the employer, the insurance company might not be willing to provide insurance. If the family consists of six members, the penalty could be $600/day. Ignoring the form 8928 requirement is not a solution as additional penalties pile on for late filing of the form.

Offering an insured plan rather than a self-insured plan does not avoid all of the risks and responsibilities. However, employers of less than 50 employees whose plan is insured will be excused from those violations that are exclusively due to a faulty insurance contract.

Fortunately, the instructions to the form make a point of saying that the penalty is not due in the case of “failures due to reasonable cause and not willful neglect” and if “the failure was corrected during the 30-day period beginning on the first date anyone liable for the tax knew, or exercising reasonable diligence would have known, that the failure occurred.”

How can an employer avoid an obligation to file Form 8928? Education, documentation and periodic review of practices are the keys.

Education

COBRA has been around long enough so that most employers know the basics. Many employers have contracted out the responsibility for compliance. Even if an employer has contracted for COBRA compliance service, the employer must have a thorough knowledge of COBRA, so that it can give the outside service the information necessary for it to do its job. COBRA remains the most likely area for errors and the consequences of private lawsuits can far exceed IRS penalties. This continues to be the area requiring the greatest education and effort.

Much of HIPAA portability is baked into health insurance contracts and into third party administrator practices in the case of self insured plans. Some of these requirements have been superseded by health care reform mandates. Nevertheless, a plan sponsor must learn the basics and make sure its health insurance carrier or third party administrator is satisfying these requirements.

Many of the new health care reform requirements have already been rolled out and the January 1, 2014 date (for calendar year plans) is approaching with additional requirements. Many of these mandates will be addressed by health insurance plans and TPAs. Other rules that require more employer involvement include the participation discrimination rules, previously applicable only to self insured plans; claim, appeal and external review requirements; SBC preparation and delivery; and the 90-day waiting period limit. These can be addressed by the employer in the documentation and review stages.

Ignorance of these requirements becomes a less viable strategy with each passing day. We urge you to become familiar with all these requirements. Participating in the exercise of adopting plan documents, review of documents or updating of plan documents will help educate yourself and your organization.

Documentation

The first stage of documentation is to simply satisfy the ERISA requirement of operating your plan pursuant to a written plan document and distribution of a summary plan description (SPD). Preparing and updating of plan documents is a first step in reviewing the various ERISA and health care requirements. Current plan documents and SPDs are particularly important in the claim, appeal and external review requirements; the insured plan discrimination rules; and the 90-day maximum waiting period. The distribution of a Summary of Benefits and Coverage (SBC) is a requirement in addition to the SPD. This will originate at the insurance company for an insured plan. Preparation of the SBC may highlight noncompliance or an opportunity for improved compliance in the substantive areas.

Plan documents help avoid the problems that expose plans to these penalties. Up-to-date plan documents are evidence of intent to comply with the law. The exercise of creating and updating the documents heightens awareness of plan administrator responsibilities (education) and is the most effective step you can take to avoid filing Form 8928.

Periodic Review

No one and no organization is perfect. Mistakes will happen. Avoidance of penalties for these mistakes depends on the phrase in the instructions to the form “no one liable for the tax knew, or exercising reasonable diligence would have known, that the failure occurred.” Your office safe is not the best place for your plan documents. Your desktop or a handy shelf is better. You will then be in a position to check your plan documents as events arise and to periodically review the documents and compare to recent operating history. There is some latitude in determining whether reasonable diligence in your organization requires annual or quarterly review or review on some other basis. Returning to documentation for a moment, it is not enough to do a good job; you must also keep a record of doing a good job. One way to improve employee benefit administration is to appoint an internal committee to oversee plan operations. You can address the periodic review (reasonable diligence) requirement by having annual or quarterly meetings of the committee. By keeping simple minutes of the meeting, you will keep a record showing that your organization has been exercising reasonable diligence.

Beyond Form 8928

Problems and penalties can arise in areas not described in Form 8928. Even though a plan may be able to avoid government penalties under the “no one knew” excuse, many of these compliance obligations are found in ERISA, which provides a private right of action. For example, even though the IRS will not yet impose a penalty on discriminatory health insurance plans, the ERISA provisions incorporating the health care reform mandates have not been delayed leaving the plan exposed to a suit by an impermissibly excluded employee.

ERISA also imposes a penalty of $110/day penalty for failure to timely provide requested plan documents to participants. A similar penalty applies for plans failing to provide the Children’s Health Insurance Plan (CHIP) notice to employees living in states offering a premium assistance program (not Michigan as of this writing). A similar penalty applies for violations of the Genetic Information Nondiscrimination Act (GINA). ERISA applies additional penalties for misuse of plan assets (uncommon in health care plans as they are typically not “funded”). There are also civil and criminal penalties for willful failure to comply with various other ERISA requirements.

Another area that can cause penalties and headaches is failure to timely file the annual report on form 5500, applicable to health and other unfunded welfare benefit plans having 100 or more participants. This is often overlooked by growing companies. Fortunately, if identified by the sponsor instead of the IRS or DOL, this failure can be corrected with a much smaller penalty.

Response

We have prepared a questionnaire-driven document package that includes the necessary plan documents for which you, rather than your insurance company, are responsible. This includes various notices and sample policies and an administrative procedures memo expanding on responsibilities described above. We can give you an estimate of costs for adopting this to your plan.

If you have any questions about how you can avoid filing form 8928 (or if it looks like you might be obligated to do so, whether there are alternatives), please call Tim Tornga or any other lawyer at Mika Meyers.

Updates

  • There are still no regulations on nondiscrimination in participation in health insurance plans.
  • The new date for distribution of the health plan SBC is the first open enrollment period beginning after September 23, 2012.
  • The distribution deadline for the first (ERISA regulated) retirement plan participant fee disclosure reports has been delayed from May 31, 2012 until August 30, 2012.

Related Newsletters
"IRS Form 8928 - The Health Care Form You Never Want to File," 2/15/2012