Compliance in Motion – May 2025

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Texas District Court Determines IRS 226-J Penalty Letters Cannot Be the First Notice of Exchange Tax Credits to Employers

On April 10, 2025, the Northern District Court of Fort Worth ruled in Faulk Co., Inc. v. Becerra that the Department of Health and Human Services (HHS) must be the one to inform employers when a full-time employee qualifies for a public health insurance Exchange Marketplace Premium Tax credit (PTC).

WHO THIS APPLIES TO:

• Applicable Large Employers (ALE), which are generally those employers with 50 or more full-time and equivalent employees (FTE) the previous calendar year (with employers in a controlled group or affiliated service group having to combine their employee counts).

The Affordable Care Act (ACA) was written to require that HHS provide this notice immediately upon an employee being approved for PTC so the employer has time to appeal the decision. However, that action has largely not occurred. Instead, HHS delegated authority to the IRS to include the required notification in the employer’s ACA employer mandate penalty letter (which is often received two to three years after the employee’s PTC is provided).

Faulk is an ALE that failed to offer minimum essential coverage to some of its employees. They filed this case after being penalized by the IRS for their violation of the employer mandate. They argued that Congress did not authorize HHS to delegate the notification requirement to the IRS.

GO DEEPER:
https://today.westlaw.com/w-046-5664
https://today.westlaw.com/w-046-5664

PRACTICAL IMPLICATIONS TO EMPLOYERS:
While it remains to be seen if the new administration appeals this decision, it is expected that many more companies will bring similar cases. There is likely a long legal road ahead before the matter is settled. Until the Supreme Court or the government addresses this concept, an employer likely should not rely upon this case to evade an otherwise justified employer mandate penalty. However, employers subjected to employer mandate penalties may consult their legal counsel to determine whether the holding in this case could provide some relief.

Next Round of RxDC Submissions Due by Sunday, June 1, 2025

Section 204 of the Consolidated Appropriations Act, 2021 (CAA) requires group health plans and issuers to report detailed prescription drug data and also requires information related to healthcare spending. The next round of reports for data during the 2024 “reference year” must be submitted directly to CMS by Sunday, June 1, 2025.

WHO THIS APPLIES TO:

• All size employers sponsoring a group medical plan and prescription drug benefit.

• Exempt: Excepted benefits such as standalone dental, vision, FSA, HSA, HRA and ICHRA.

To comply with this requirement, employers must rely heavily on their claims administrators because these service providers possess the required data for reporting.

Any gaps in submissions should be addressed by either the employer submitting themselves in the government’s HIOS system or engaging with a third-party vendor to assist with coordinating submissions.

Typically, the claims administrator or carrier facilitates the full reporting, but two to three months before the June 1 annual deadline, they will ask the employer for key information needed to allow for complete reporting to CMS:

• They primarily need to know how much the employer paid vs. how much participants paid (including COBRA participants) for the previous calendar year’s medical/Rx coverage (even if the plan does not operate on a calendar year).

• If self-funded, the premium “equivalent” is actual fixed costs plus actual claims (choose either incurred claims or paid claims for the calendar year, and maintain that choice every year), less stop loss rebates and pharmacy rebates retained by the plan.

Employer plan sponsors, especially self-funded health plan sponsors, should continue to take necessary steps to prepare for the June 1 deadline. Visit the CMS RxDC webpage for helpful information and resources.

GO DEEPER:
https://www.cms.gov/marketplace/about/oversight/other-insurance-protections/prescription-drug-data-collection-rxdc
https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/2010-2409
https://www.sf.gov/information–health-care-security-ordinance
https://www.sf.gov/submit-employer-annual-reporting-form-olse

More Executive Orders

The President has signed many more executive orders in April, some of which could directly or indirectly impact employee benefits.

WHO THIS APPLIES TO:

• All employers sponsoring employee benefits.

GO DEEPER:

On April 9, 2025, the President issued an Executive Order directing the repeal of unlawful regulations:

The President is directing federal regulators to identify “unlawful and potentially unlawful regulations” and identify a path to repeal them over the next 60 days without the usual notice and public comment rulemaking process. This is a second step from the first order 14219 issued on February 19 “rescinding unlawful regulations and regulations that undermine the national interest”.

The Executive Order specifically points to the Supreme Court’s 2024 decision in Loper Bright as impactful to analyzing the lawfulness of a regulation. The holding in that case indicated that courts do not have to defer to the expertise and judgment of a federal agency in determining the appropriateness of regulations that the agency issues, but should instead evaluate the merits and appropriateness of a regulation under the full scope of current law.

It is not yet clear which regulations the Departments of Labor, Treasury and Health and Human Services would target for immediate repeal over the 60 days, but we will keep an eye on this development. So far, the IRS has taken a couple of actions:

• Eliminating Unnecessary Regulations does not appear to impact benefits.

• IRS Notice 25-22 withdraws nine prior guidance documents. Two related to the §4980I “Cadillac Tax”. One, Notice 15-16, offered some ideas on how to price COBRA for HRAs. So, those ideas are all withdrawn and there is still not much guidance on how to properly price COBRA for HRAs beyond what is stated in Notice 2002-45.

April 15, 2025, Executive Order 14273 focused on prescription drug costs and transparency:

This order addresses a number of goals, a few of which may directly or indirectly impact employee benefits:

• “Encouraging the development of generic and biosimilar alternatives”;

• “Expand access to lower cost drugs imported from outside of the country”;

• “Modify the Medicare Drug Price Negotiation Program to align the treatment of small molecule prescription drugs with that of biological products”;

• “Conduct a survey under section 1833(t)(14)(D)(ii) of the Social Security Act to determine the hospital acquisition cost for covered outpatient drugs at hospital outpatient departments” and then make “adjustments that would align Medicare payment with the cost of acquisition”;

• “Accelerate approval of generics, biosimilars, combination products and second-in-class brand name medications, and improve the process through which prescription drugs can be reclassified as over-the-counter medications”;

• “Reduce anti-competitive behavior from pharmaceutical manufacturers”;

• “Propose regulations pursuant to section 408(b)(2)(B) of [ERISA] to improve employer health plan fiduciary transparency into the direct and indirect compensation received by pharmacy benefit managers”

As a reminder, the CAA-21 requires ERISA group health plan brokers/consultants to provide compensation disclosures under ERISA §408(b)(2). At the time the CAA passed, PBMs were largely considered to be exempt from the requirement to provide compensation disclosures. Interestingly, the new administration appears to believe PBMs should be subject to the compensation disclosure rules. A proposed rule is due within 180 days of the executive order.

PRACTICAL IMPLICATIONS TO EMPLOYERS:

No immediate changes have been instituted under these orders. However, the orders do provide more indication that the administration may make major changes. We will continue to monitor developments.

LINKS:
https://www.whitehouse.gov/presidential-actions/2025/04/directing-the-repeal-of-unlawful-regulations/
https://www.federalregister.gov/documents/2025/02/25/2025-03138/ensuring-lawful-governance-and-implementing-the-presidents-department-of-government-efficiency
https://www.federalregister.gov/documents/2025/04/15/2025-06353/eliminating-unnecessary-regulations
https://www.dropbox.com/scl/fi/2bxfrdbntltdsb6cdhz30/n-25-22.pdf?rlkey=ah71jv628w4klvuii2lkjg8ko&st=nndtgp85&dl=0
https://www.dropbox.com/scl/fi/mfkkycu3bppobuniuwq8s/n-02-45.pdf?rlkey=5hq8kbhwwevuf0kpw88dhokpn&st=grfyuzgr&dl=0
https://www.federalregister.gov/documents/2025/04/18/2025-06837/lowering-drug-prices-by-once-again-putting-americans-first

CMS Updates Medicare Part D Benefit Parameters and Simplified Creditability Determination for 2026

The Centers for Medicare and Medicaid Services (CMS) published 2026 updates to Medicare’s Part D benefits parameters. Each year, employers sponsoring a plan that provides or reimburses prescription drugs must disclose to employees and their beneficiaries, including those on COBRA or retiree coverage, whether their prescription drug coverage is creditable compared to Medicare Part D (i.e., whether it expects to pay as well as Part D pays on average). The Part D parameters are needed each year to help employers determine whether their plans are creditable or non-creditable so they can provide the correct notice.

WHO THIS APPLIES TO:

• All size employers sponsoring a plan that provides or reimburses prescription drugs.

GO DEEPER:

CMS’s announcement and two fact sheets (here and here) lay out the updates for 2026, including the following:

• Deductible increasing from $590 to $615

• Out-of-pocket maximum increasing from $2,000 to $2,100

• A revised simplified determination methodology that updates how much a creditable group health plan must be expected to pay toward prescription drug claims from the current 60% to 72% (to more accurately reflect enhancements brought by the Inflation Reduction Act)

PRACTICAL IMPLICATIONS TO EMPLOYERS:

Employers working on their 2026 benefit plans now have Part D benefit parameters and revised simplified determination methodology to help determine whether their prescription drug coverage is creditable or non-creditable. While the carrier or pharmacy benefit manager (PBM) will typically determine creditability for employer plans, there are times an employer must hire an actuary to certify creditable coverage status. So, the revised simplified determination methodology can help in submitting plan designs as compatible as possible rather than going back and forth making adjustments with the actuary.

LINKS:
https://www.dropbox.com/scl/fi/dira12wyfja9vylrrxinl/announcement-of-calendar-year-cy-2026-medicare-advantage-ma-capitation-rates-and-part-c-and-part-d-payment-policies_0.pdf?rlkey=ri2mgluwl828qibd63d7tb12l&st=3o5g4oyh&dl=0
https://www.cms.gov/newsroom/fact-sheets/2026-medicare-advantage-and-part-d-rate-announcement
https://www.cms.gov/newsroom/fact-sheets/final-cy-2026-part-d-redesign-program-instructions
https://www.cms.gov/newsroom/fact-sheets/final-cy-2026-part-d-redesign-program-instructions#:~:text=With%20the%20enhancements,the%20existing%20methodology.

HIPAA Settlement Reached with Wellness Provider

HHS recently started a Risk Analysis Initiative to highlight the importance of covered entities and business associates needing to conduct a thorough Risk Analysis to identify and secure protected health information (PHI). Their fifth action under this enforcement initiative resulted in a settlement with Health Fitness Corporation (owned by Trustmark), a HIPAA business associate that provides wellness plans for employers.

By failing to conduct a risk analysis, Health Fitness failed to identify a system configuration that mistakenly left PHI accessible to web crawlers. As a result of this failure, they must pay a settlement fee of $227,816 and must commit to a corrective action plan to comply with HIPAA.

PRACTICAL IMPLICATIONS TO EMPLOYERS:

Most compliance checkups reveal that HIPAA privacy and security requirements are not properly completed (To this day, nationally, less than 20% of covered entities and business associates do the work necessary to comply with HIPAA requirements). HHS’s new enforcement initiative aims to change that in 2025 by focusing on the foundational element upon which HIPAA compliance is built: the risk analysis that identifies what PHI exists and all the vulnerabilities to that PHI in operating the health plan throughout the years.

Employers sponsoring a level funded or self-insured health plan, health reimbursement arrangement (HRA), health flexible spending account (health FSA), limited purpose FSA, a carve-out or bolted on health plan that must integrate with their medical plan and/or a fully insured plan that provides the employer with claims analytics data will want to take note of this new enforcement initiative and determine whether it is time to start or update their risk analysis. Since this settlement was with a business associate providing employer wellness plans, this is also a good reminder for such employers to monitor their service providers for ongoing compliance with HIPAA (including the requirement to obtain a business associate agreement).

LINK:
https://www.hhs.gov/press-room/ocr-settles-hipaa-security-rule-investigation-health-fitness-corporation.html

FAQ: What compliance obligations apply to Individual Coverage Health Reimbursement Arrangements (ICHRAs)?

Introduced in 2018 during President Trump’s first term, ICHRAs have gained in popularity over the years. The basic premise of an ICHRA is the employer can provide employees tax-favored money to buy their own individual market health plan or Medicare.

Final ICHRA rules from 2019 and additional guidance/tools can be found here:

• 🔗 General ICHRA Rules

• 🔗 ALE and Nondiscrimination Rules

• 🔗 Guidance and Tools (Model Notices, Premium Look-Up Table)

Key Rules and Features:

• How ICHRAs work in a pass-through entity like an S-Corp. or LLC.

• ICHRAs can only benefit those with substantiated Medicare or qualified individual health plans (not other employer group plans, health sharing ministries, TRICARE, VA, or student plans).

• ICHRAs can meet ALE requirements under §4980H.

• Employers must provide a model notice 90+ days before plan start each year.

• §105(h) nondiscrimination testing is not required if only reimbursing premiums—but is required if reimbursing medical expenses too.

• ACA reporting is required:

  • Forms 1094-B/1095-B for non-ALEs

  • Forms 1094-C/1095-C for ALEs

Legal Requirements:

ICHRAs are considered group health plans and must comply with ACA, COBRA, ERISA, HIPAA, and other federal regulations.

ACA Requirements:

• Must be described in a Summary of Benefits and Coverage (SBC).
  🔗 ICHRA SBC Guidance

• Cannot impose pre-existing condition exclusions.

• Must limit waiting period to first of the month following 60 days.

Employer Mandate:

• ALE rules apply (e.g., waiving waiting period for rehires, allowing ICHRA to continue during a full-time stability period even if hours fall below 30/week).

COBRA:

• ICHRAs must comply with COBRA rules.

• Pricing COBRA is complex; suggested method:

  • Estimate expected plan cost (e.g., percentage of funds used)

  • Multiply available ICHRA amounts by that percentage and add 2%

  • Especially important if unused funds can roll over.

🔗 COBRA Compliance for ICHRAs

ERISA:

• Requires a plan document and SPD.

• SPD must state the individual’s Medicare or health plan is not part of the employer’s ERISA plan.

• Claims and appeals rights apply.

• 5500 reporting may be required (Code 4A) if not exempt.

• Government or church plan sponsors should still adopt explanatory documents.

🔗 ERISA SPD Guidance

HIPAA:

• Special enrollment rights must be honored.

• “Actively at work” clauses delaying eligibility cannot be enforced for someone out on health leave.

• If not fully insured, employers must comply with privacy/security rules and provide a Notice of Privacy Practices (NPP).

Medicare Part D:

• ICHRAs that only reimburse premiums are not subject to Part D creditability disclosure.

• ICHRAs that also reimburse out-of-pocket Rx expenses are subject to Part D creditability disclosure.

🔗 [Part D Disclosure Rule](https://www.ecfr.gov/current/title-42/part-423/section-423.56#p-423.56(b)(3)

Additional Considerations:

• Must comply with MHPAEA if reimbursing a full scope of §213(d) expenses.

• Not subject to RxDC reporting (HRAs are excepted).

• Subject to PCORI fees based on covered individuals.

• Not subject to gag clause prohibition attestation (GCPCA) unless tied to a provider network.

• Hawaii exception: Cannot offer ICHRAs to employees covered under Hawaii’s Prepaid Health Care Act.

🔗 ICHRA COBRA Guidance Extended
🔗 ERISA SPD Summary
🔗 ECFR Medicare Disclosure Rule