Minnesota recently enacted Senate File No. 49 (2009 Session Laws Chapter No. 3 – “Chapter 3”) requiring employers to annually provide each employee with a statement that shows the amount of health insurance premiums paid on a pre-tax basis each month. This change is effective for tax years beginning after December 31, 2008 for all premiums paid in 2009. Employers generally do not track or report pre-tax premiums on a monthly basis, so this will likely impose an administrative burden on employers. It is not clear that the scope of this burden was understood when Chapter 3 was enacted. Hopefully, there will be an opportunity to amend the change to limit its impact.

Background

Chapter 3 is short and addresses two unrelated issues:

  • Providing a tax credit to certain individuals whose family income is below 300% of the federal poverty guidelines (but at or greater than 200% of the federal poverty guidelines).
  • Removing provisions requiring maintenance of effort by governmental units.

Chapter 3 adds a new statute, section 290.0678, that provides for the tax credit equal to 20% of the health insurance premiums paid from a section 125 plan (a plan under section 125 of the Internal Revenue Code; also referred to as a cafeteria plan). The credit is only available if both of the following are satisfied:

  • For the first 12 months in which the individual participates in the section 125 plan.
  • The individual did not have health coverage under a health care plan for at least one year.

In addition the credit is only available for individuals with household income between:

  • 275% to 300% of the federal poverty guidelines for applicable family size if the individual has dependents; or
  • 200% to 275% of the federal poverty guidelines for applicable family size if the individual has no dependents.

Finally, section 290.0678 imposes on employers the reporting requirement described above.

The text of Chapter 3 (including section 290.0678) is available at the following link: https://www.revisor.leg.state.mn.us/bin/bldbill.php?bill=S0049.0.html&session=ls86.

Purpose and Impact

The purpose of section 290.0678 is to encourage individuals at lower income levels to purchase health insurance. It is not clear if this was intended to be tied to the section 125 plan requirements Minnesota adopted in 2008 (discussed in the paragraph below) or if it is meant to be a broad-based program.

In 2008, Minnesota adopted section 62U.07, which provides that effective July 1, 2009, all employers with 11 or more current full-time equivalent employees are to establish a section 125 plan to allow their employees to purchase individual market or employer-based health coverage with pre-tax dollars. The section exempts employers that offer a group health plan (either insured or self-insured). Section 62U.07 also provides that covered employers may opt out and that the commissioner of commerce is to create a check-box form for employers to opt out. See the following link: https://www.revisor.leg.state.mn.us/statutes/?id=62U.07. In 2008, Minnesota also enacted a statute providing a credit for employers to assist them in adopting section 125 plans (see section 62U.071).

Section 290.0678 limits the tax credit to health insurance purchased through a section 125 plan (rather than including health insurance paid for on an after-tax basis by the employee) and limits participation to individuals who have been in the section 125 for less than 12 months. This and the repeal of the credit under section 62U.071 indicate that section 290.0678 may only have been intended to apply to employers subject to section 62U.07.

Section 290.0678, however, does not limit its reach to employers subject to section 62U.07. As noted above, section 290.0678 states that the reporting obligation is imposed on all employers for each employee. Even if section 290.0678 is meant to have broader application, the burden it imposes on employers is too great because (i) employees with employer-provided health insurance are not eligible for the tax credit, and (ii) employees who have participated in a section 125 plan for more than 12 months are not eligible for the tax credit.

Employers generally do not track or report pre-tax premiums on a monthly basis. Employers are not required to report these amounts on Form W-2. Therefore, section 290.0678 will likely require employers to review payroll systems and modify them in order to be able to generate the statement required under subdivision 4 of that section.

The Need for Quick Action if the Statute is to be Amended

As noted above, it does not appear that the impact of section 290.0678 was understood at the time of enactment. This and the lack of certain information the state will need to limit the credit to the intended individuals means it may be possible to amend section 290.0678. Note, however, that the legislature is scheduled to adjourn in late May and then is not likely to re-convene until February of 2010, after employers are required to provide the first statements to employees. Thus, quick action is required to change the statute.

The legislature may wish to review section 290.0678 or provide clarifying guidance on the scope of the requirements under section 290.0678. Two possible forms of clarification:

  • The legislature could amend subdivision 4 to state that it applies to “Each employer subject to section 62U.07 . . .”
  • The legislature could amend subdivision 4 to provide that an employer does not need to provide the statement if the employer provided the employee with health insurance or the employee has been eligible to participate in a section 125 plan for more than 12 months. (Note: This second option still imposes an administrative burden on employers because they will need to review their employees during the year and determine whether a statement is required. It would, however, reduce the number of statements that would need to be produced and distributed.)

Conclusion
If you wish to discuss the reporting requirement under section 290.0678 or the section 125 plan requirement under section 62U.07, please contact the attorney in the Benefits and Compensation practice group with whom you work.