Employee benefit plan operations, responsibilities, and liabilities should be part of the negotiated transaction. There is general guidance available for these circumstance and options available to the buyer and seller, which should be outlined along with other benefit plan decisions in the sale agreement. We recommend working with outside counsel to determine what is best for your specific circumstances.
With that said, the rules vary based on whether the transaction is a stock or asset sale. General guidance is discussed below for both scenarios.
In an asset purchase, the buyer usually purchases specific assets and certain agreed-upon liabilities of the seller. The employees of the seller are typically terminated from employment and rehired by the buyer. COBRA would be offered by the seller if the seller continues to maintain a group health plan, including the health FSA. This is true even if the employee is rehired by the buyer and eligible for the buyer's health insurance.
If a seller ceases to provide any group health plan and the buyer continues the business operations associated with the assets purchased without interruption or substantial change (aka successor employer), there is no obligation to offer COBRA to the employees who were immediately employed by the buyer after the sale because they are considered not to have experienced a COBRA triggering event.
However, IRS guidance provides two acceptable scenarios in which the health FSA coverage may continue for entities involved in an asset sale as an alternative to terminating the coverage and offering COBRA:
Coverage under seller’s FSA with salary reductions under buyer: The seller may maintain the health FSA and the buyer either has an FSA or will create one at a designated point in time (e.g., end of the plan year). The seller and buyer may agree to have the transferred employees continue to participate for an agreed-upon period. The seller and buyer may also agree on how original salary reductions will continue as if made under the buyer’s plan.
Coverage and salary reductions under buyer: The buyer agrees to cover the transferred employees under its health FSA for the rest of the plan year. After the asset sale, employee account balances are rolled over and all claims for reimbursement are submitted to the buyer’s FSA (even claims incurred prior to the sale but not yet paid). Then the transferred employees’ salary reductions continue for the remainder of the buyer’s plan year.
Note that under each scenario, no mid-year changes of election are permitted because eligibility is not lost as a result of the asset sale because the coverage continued. Consequently, existing FSA elections must remain for the remainder of the plan year unless there is some other qualifying event.
In a stock sale, a current employee of the seller who continues to be employed following the sale would not be offered COBRA coverage because they have not experienced a qualifying event.
Specific to the health FSA, IRS guidance provides that the buyer in a stock scenario could take advantage of the second option discussed above, available in asset sales. Another option would be for the buyer to arrange with the seller to offer COBRA-like coverage to transferred employees in order to avoid the use-or-lose rule (since COBRA is not required to be offered in a stock sale where there has been no termination of employment or other statutory COBRA trigger). Those not electing the COBRA-like coverage would still be able to submit claims for expenses incurred before the transaction during a run-out period.
Again, any decisions related to the FSA, COBRA, or health plan would need to be clearly outlined in the purchase agreement with corresponding amendments made to the Section 125 plan document and ERISA plan documents. Thus, due to the complexities inherent with mergers and acquisitions, the employers would want to work with outside counsel to ensure compliance.
January 7, 2020
Can an employee remove their spouse from coverage during open enrollment in anticipation of a divorce?
An employee may be allowed to drop their spouse from coverage during open enrollment; however, the employee should follow any court orders in place, and the employer should be mindful of the fact that there are COBRA implications when the employee does this in anticipation of divorce.
First, it’s important to note that divorcing spouses who provide health coverage to the soon-to-be ex-spouse are often ordered not to terminate that coverage until the divorce is finalized. Some state laws even require this continuation. Even in situations where an individual cancels their spouse’s coverage before they have filed for divorce, the court could seek to require the individual to either reinstate the coverage or pay for the spouse’s medical care. So the employee should discuss their desire to terminate the spouse’s coverage during open enrollment with their legal counsel or the court in which they are filing for divorce.
Second, when an employee’s spouse is covered by an employer’s health plan, the spouse is eligible for continued coverage through COBRA when a triggering event occurs, such as when the employee and the spouse divorce. As background, COBRA is required when qualified beneficiaries experience a loss of coverage due to a COBRA-triggering event. Those rules generally mean that qualified beneficiaries are only eligible for coverage if they had coverage on the day before the event. However, when a person who has coverage loses that coverage in anticipation of a triggering event, such as a divorce, the loss is disregarded in determining whether the event causes a loss of coverage. In other words, for purposes of determining whether the spouse qualifies for COBRA and when COBRA coverage starts, the spouse is treated as if they had coverage on the day before the triggering event even though they were dropped during open enrollment.
Upon receipt of notice of the divorce between the employee that dropped the coverage and their spouse, a benefit plan that is subject to COBRA must make COBRA coverage available to the divorced spouse as of the date of the divorce. This means the employer should send the COBRA election notice to the divorced spouse so that they can elect COBRA if they so choose.
So, the employee could presumably be free to drop the spouse during open enrollment as long as any court orders do not stipulate otherwise. It would be best for them to discuss their desire with legal counsel, though. Additionally, in anticipation of divorce there are COBRA issues to be mindful of. The client should consult with outside counsel regarding any additional issues that may arise in this situation, including possible disputes with the insurance carrier regarding the eligibility of the spouse for COBRA.
December 10, 2019
What benefit compliance considerations are there when large clients acquire smaller organizations? Is there a deadline by which a buyer must enroll acquired employees onto their plans?
Clients that are engaging in mergers and acquisitions should generally consult with legal counsel about the implications of the transaction on the two business entities involved. Counsel would be best suited to analyze the plans of the two clients and analyze obligations given the purchase agreement and benefits-related laws. However, we can provide some general considerations.
The initial step in determining what obligations the buyer in a transaction might have is to understand the legal structure of the transaction. The type of transaction is important because it determines whether the seller's rights and obligations are transferred by law to the buyer (although the parties can contract otherwise). With an asset purchase, any employees of the seller who will soon be working for the buyer would generally be considered terminated and rehired by a new employer (the buyer). With a stock purchase, the same employees would just continue to be employed by the same legal entity, soon to be owned by the buyer.
When it comes to the benefits plans of the buyer and seller, there is no one set transition timeframe. The timeframes would depend not only on the type of transaction and acquisition closing date, but on the type of benefits offered, applicable legal mandates, and the contractual agreements between the parties. Several considerations are outlined below. The buyer should discuss these with their counsel and work out the details prior to the transaction closing date.
First, the buyer should be cautious about an arrangement in which the seller agrees to continue to provide benefits for a transitional period after the closing date to former employees who are now newly hired employees of the buyer. This may result in the inadvertent creation of a MEWA, with additional compliance obligations and possible liability under both state and federal laws. Although some of those obligations are curtailed by law for certain transactions, the buyer will need to be sure of the implications of such a transitional period.
Second, there may be ACA considerations. If the buyer’s company had 50 or more full time or equivalent employees last year, it is an applicable large employer (ALE). As an ALE, the buyer is subject to the requirement to offer affordable minimum value coverage to full time employees.
It is not clear what the employer mandate would require if the acquired company is a non-ALE or an ALE. The general view is that if a non-ALE is acquired (via stock purchase) by an ALE group during a calendar year, the acquired entity becomes an ALE member beginning with the month in which the acquisition occurs. So, if the transaction occurs mid-month and the acquired entity was not previously an ALE that offered affordable minimum value coverage to full time employees, this could subject the buyer to potential penalties. If the acquired company was also an ALE complying with the ACA mandates, there are still issues concerning the measurement and stability periods that would need to be reviewed and addressed (particularly if the lookback method was used). If the acquired company used different measurement methods, an option may be available to continue using such methods for a transition period following the transaction closing date.
Third, there may be cafeteria plan issues. If the employees currently make pre-tax premium and other benefit payments through the seller’s cafeteria plan, will they now be offered participation in an existing cafeteria plan of the buyer? With an asset purchase, upon the closing date, the employees of the acquired business will cease to participate in the seller’s cafeteria plan and their elections would normally terminate at that time. New elections should be obtained from these employees for the buyer’s plan. If applicable, there may also be an option to transfer FSA balances from the seller’s plan to the buyer’s plan.
With a stock purchase, the buyer assumes sponsorship of the cafeteria plan covering the employees of the acquired business, and the elections under the plan could continue. Alternatively, the buyer may want to terminate the acquired business’ cafeteria plan at closing and enroll the employees in the buyer’s plan. A short plan year (for the acquired plan) would be allowed in this instance, provided the plan was amended and Form 5500 timely filed (which would be under an accelerated schedule). Although there is no direct regulatory guidance, new benefit elections for the acquired employees should also be permissible. However, if the transaction occurs mid-year and the cafeteria plan benefits include health or dependent care benefits, the employees should be given as much advance notice as possible so they can use their existing balances.
An additional and related issue is non-discrimination testing. Upon acquiring the stock (or assets) of a business, the buyer must determine the potential impact of including the employees of the acquired business in its benefit plans. Note that with respect to retirement plan coverage testing, there is a transition period from the closing date to the last day of the following plan year in which plans can be tested separately. Although it would seem reasonable to apply such a rule to Section 125 cafeteria plan testing, there is no direct regulatory guidance to that effect. A self-insured plan would also be subject to the Code Section 105 testing. Prior to the closing date, it would be advisable for the employer to assess the highly compensated versus non-highly compensated populations of the acquired employees and the effect upon testing results. This will help to prevent test failures and taxation of benefits for highly compensated employees.
COBRA may also be a consideration. If the seller maintains a plan after the sale, the seller would provide COBRA coverage to any COBRA qualified beneficiaries. However, if the seller ceases to maintain any group health plan in connection with the sale, then a group health plan maintained by the buyer must provide the COBRA coverage if 1) the buyer maintains a group health plan; and 2) in the case of an asset sale, the buyer is a successor employer. As with other issues, the parties can contract to allocate the responsibilities in a different manner.
Once these benefit decisions are determined, the plan document/SPD should be amended and employee disclosures and communications updated to reflect any changes.
To summarize, there is no one set period to transition the acquired employees to the new plans. It first should be determined whether the acquisition is an asset or stock purchase. Then, each benefit and its related compliance concerns would need to be reviewed. A brief summary of some potential issues are outlined above. Given the complexities and potential liabilities associated with benefit plans, it would be wise for the client to consult with counsel and develop a plan to address these issues well in advance of the transaction closing date.
November 26, 2019
If an employee or their dependent relocates to another city, state, or country, is that a qualifying event for the employee to change their election mid-year?
Assuming that the plan is subject to the Section 125 qualifying event rules (by virtue of employees being able to pay their premiums on a pre-tax basis), an employee or dependent simply moving would not allow the employee to make a mid-year change to their coverage. As background, Section 125 requires that employees be able to elect their coverage annually, and their elections cannot be changed mid-year without a qualifying event.
While there is a change in status qualifying event that includes a change in residence, that qualifying event is only permissible when that change in residence affects the participant’s or dependent’s eligibility for coverage. So unless the relocation makes the moving individual ineligible or newly eligible under the plan, the move would not be considered a change in status qualifying event.
On the other hand, there would likely be a qualifying event if the relocation resulted in the employee or dependent moving outside of a network that would provide service (for example if the plan were an HMO and the employee or dependent moved out of the HMO service area and therefore couldn't receive any coverage where they lived).
But if the employee or dependent is eligible under the plan before and after the move (which is often the case for PPO or HDHP plans with a national network), then change in residence is not a qualifying event. As such, the employer could not allow the employee to change their election mid-year absent some other qualifying event (like a marriage, birth, or divorce). Doing so would risk the disqualification of the entire plan (meaning that neither the employer nor employees could pay for their coverage on a pre-tax basis).
Now, there could be other qualifying events that would apply given the circumstances. For example, a cafeteria plan may permit a qualifying event for a loss of coverage under any group health coverage sponsored by a governmental or educational institution, including a foreign government group health plan. So if the relocating dependent has coverage through their government and will lose it by virtue of moving to the US, then that could make the move a qualifying event.
Keep in mind, though, that both the change in status and loss of coverage under a governmental health plan are permissible qualifying events, meaning that the plan document has to allow for them. Additionally, these events do not apply to health FSAs, so the employee could not change their health FSA election on account of either of those qualifying events.
November 12, 2019
We apply a premium contribution discount as a wellness program reward for employees who complete a biometric screening. How does that impact affordability under the employer mandate?
As background, large employers (those with 50 or more full time employees, including equivalents) must offer affordable coverage to all full time employees (those working 30 hours or more per week). The affordability rules say that incentives under a wellness program that reduce the amount employees have to pay for the employer's coverage are not treated as reducing the employee's required contribution for purposes of affordability, unless the incentive is related to tobacco use.
So, in this situation, since the wellness activity is not related to tobacco usage, the wellness incentives do not reduce an employee's required contribution (even if the employee actually receives the incentive). That means the employer will have to use the employee’s required contribution prior to the wellness incentive’s application, which likely makes it more difficult to achieve affordability.
As an example, if an employee’s required contribution is normally $100 per month, and the employer gives a $25 discount for employees who complete a biometric screening, the employer would still use the $100 per month contribution amount when calculating affordability (instead of using the $75 discounted rate). If the incentive were tied to tobacco use, the employer could use the $75 per month contribution.
As an aside, wellness programs raise many other issues under several different laws, including HIPAA, ERISA, ADA, and GINA. Employers that choose to connect their rewards with their employer-sponsored group health plans (such as through a premium discount or surcharge, a contribution to an HRA/HSA/FSA, or something similar) must consider the impact of those other laws as well.
October 29, 2019
Can I offer my employees a cash payment if they waive coverage under the medical plan?
Yes, an employer may provide a cashable waiver to employees who decline medical coverage. However, they have to be very careful with its design, particularly applicable large employers that are subject to the employer mandate.
Section 125 is the exclusive means by which an employer can provide employees with a choice between taxable cash and nontaxable benefits. Thus, any cashable waiver must be included in the written Section 125 Plan Document as a qualified benefit.
An employee can waive coverage under Section 125 for any reason — even if they have no other coverage. However, if the employer is subject to the employer mandate, then they should likely only allow employees to opt-out and take the cash if they certify that they have other MEC. This is called a conditional waiver. If any waived employee is provided with the cash-out regardless of whether they have other MEC, this is called an unconditional waiver and it can negatively impact a large employer’s affordability calculation.
Let’s look at an example. ABC company offers employees the opportunity to enroll in self-only coverage for $150 per month. If the employee waives coverage, they would receive $75 as a cash-out amount. The $75 is taxable income. Under a conditional waiver, the employee must certify that they have other MEC to receive the $75 per month. The cost of coverage for affordability and Section 6056 reporting purpose is $150 per month. Under an unconditional waiver, any employee waiving coverage receives $75 per month. The cost of coverage for affordability and reporting purposes in this case would be $225 ($150 plus $75), and the $225 is the amount the employer would have to use to determine affordability.
MEC includes Medicare, TRICARE, Medicaid, and other group coverage. It does not include individual coverage. It can sometimes be difficult to distinguish individual coverage from group coverage by simply looking at a health plan identification card. This is why it is best to simply have the employee self-certify whether they have other MEC.
Lastly, please note that this issue only applies to employers who implement a cashable waiver design on or after December 16, 2015. If the employer’s design was adopted before that date, they are not required to treat the opt-out payment as increasing the employee’s required contribution.
October 15, 2019
An employee became Medicare eligible in July, but continued to make pre-tax HSA deferrals and receive employer HSA contributions. How should this situation be addressed?
First, please note that simply turning age 65 does not make an individual ineligible for HSA contributions. The person only becomes HSA ineligible if he becomes entitled to (that is to say, enrolled in) Medicare. Enrollment in Medicare is not automatic for someone who turns 65, unless they start receiving Social Security.
If the employee actually enrolled in Medicare in July upon attainment of age 65, his Medicare would be considered impermissible coverage that would make him HSA-ineligible. Medicare is disqualifying coverage because it allows for cost sharing for medical expenses (other than preventive care) before the HDHP deductible is satisfied. In this situation, the employee would only be eligible to contribute for the first six months of the year. For self-only coverage, the 2019 annual HSA contribution maximum ($3,500) and 55 and older catch-up amount ($1,000) would need to be prorated; the result would be a 2019 maximum contribution of ($4500 x 6/12) or $2,250. So, the employee’s maximum 2019 contribution would be $2,250, and any funds contributed above this amount would be an excess contribution.
With respect to the employer contribution, it is important to keep in mind that HSA contributions are generally non-forfeitable. This situation does not fit the very limited exceptions for an employer’s recoupment of excess contributions, which are if the employee was never HSA eligible or the employer contributed beyond the statutory maximum ($4,500 for 2019). Nor is this a case in which there was a clear process error (for example, the contribution was credited to the wrong employee).
So, the employer would not be able to recoup the employer contributions. IRS Notice 2008-59, Question 25, makes it clear that the excess contribution cannot be returned to the employer in this type of situation:
Example. Employee N was an eligible individual on January 1, 2008. On April 1, 2008, Employee N is no longer an eligible individual because Employee N’s spouse enrolled in a general purpose health FSA that covers all family members. Employee N first realizes that he is no longer eligible on July 17, 2008, at which time Employee N informs Employer O to cease HSA contributions.
Employer O’s contributions into Employee N’s HSA between April 1, 2008 and July 17, 2008 cannot be recouped by Employer O because Employee N has a nonforfeitable interest in his HSA. Employee N is responsible for determining if the contributions exceed the maximum annual contribution limit in § 223(b), and for withdrawing the excess contribution and the income attributable to the excess contribution and including both in gross income.
To correct the excess contributions, the employee would need to remove the excess from the account by completing the appropriate form provided by the HSA custodian. Provided that the correction is made prior to the employee’s 2019 tax filing deadline (April 15, 2020, or later, if he files for an extension), the employee would not be subject to a penalty tax. If the excess contribution is not included in Box 1 of Form W-2, the employee would report the excess amount as "other income" on his individual return.
The employee must also remove any earnings on the excess amount while in the HSA. The earnings typically are the interest earned. However, if the funds were invested (as in stocks or mutual funds), the earnings would be the appreciation in value. The employee will owe taxes on the earnings and will need to include this amount as "other income" on his income tax return in the year of withdrawal. Although the amount is normally small, the IRS has a special rule for calculating the earnings.
If the excess contribution is not removed prior to the employee’s tax filing deadline, then the employee would need to file an IRS Form 5329 to pay the 6% penalty tax, but would not need to remove the earnings. Of course, the employee should consult with his tax advisor regarding any tax questions related to the excess contribution and reporting. IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, may also be helpful.
There are some general rules pertaining to timeliness of HSA account contributions. While employer contributions to an HSA don't have a particular “due date,” the employer should sufficiently follow the plan terms. So if an employer communicates to employees that employer contributions will be contributed at a specific interval (such as per pay period), the employer should contribute based on that timetable. As an outside compliance limit, the IRS generally allows employers to contribute to employees' HSAs through the tax filing deadline for the year in which the HSA contributions were due.
On the other hand, participant contributions withheld from employee paychecks, including employee-deferred HSA contributions, are subject to the DOL's plan asset regulations governing welfare and pension benefits. Specifically, participant contributions become plan assets "as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but in no event later than 90 days after the payroll deduction is made." This generally means the outside limit for submitting contributions is 90 days, but this is not to be considered a safe harbor because contributions should nearly always be segregated in a matter of days rather than weeks.
This deadline applies to participant contributions coming into an employer's possession under the welfare benefit plan, including personal checks used to pay COBRA contributions, premiums during FMLA leave, retiree premiums, salary reductions under a cafeteria plan, and HSA contributions. As such, employers should contribute employee-deferred HSA contributions to their accounts as soon as the funds can be separated from the employer’s general account. In this way, the deadline for forwarding HSA contributions is similar to the deadline for forwarding employee 401(k) deferrals.
Keep in mind, though, that there is a safe harbor for small employers for this purpose. Employers with fewer than 100 participants can utilize a DOL "safe harbor" that gives them up to seven business days to deposit plan assets (including HSA contributions) to an employee's account.
When an employer has failed to forward participant contributions on a timely basis, there are procedures available to correct both the fiduciary breach and the prohibited transaction that has occurred. There is a DOL correction program available to employers that commit this failure. The Voluntary Fiduciary Correction Program (VFCP) allows employers to correct failures (such as failure to forward HSA contributions on a timely basis) by submitting an application for the program and filing a Form 5330, acknowledging the prohibited transaction. However, as with any compliance failure, an employer that fails to timely forward contributions should consult with legal counsel.
Yes, a change in eligibility mid-plan-year that makes domestic partners eligible as dependents under the plan constitutes a Section 125 qualifying event. As background, Section 125 applies to any benefits that can be paid for on a pre-tax basis and it allows for only election per year, unless the employee or covered dependent experiences a qualifying event.
The qualifying event that would apply to the change to cover domestic partners is “addition or significant improvement of a benefit package option.” That event allows employees to change their election if a plan adds a new benefit package or coverage option or if coverage is significantly improved during a period of coverage (the plan year). Unfortunately, the related rules contain no specific definition of “significantly improved”; employers are left to determine that on their own. The general barometer is whether a reasonable participant might think that the change is a big deal or not.
Adding an entire class of dependent eligibility would likely be considered a big deal for most participants (even if many participants aren't actually going to add a domestic partner). So, since most employees would consider that eligibility change as significant, an employer would be on solid ground in allowing an election change in that situation. However, employers would want to ensure that the election change is consistent with the change under the plan. The consistent change in this situation would be for the employee to add coverage for a newly eligible domestic partner.
Now, many of the Section 125 qualifying events (of which the addition/significant improvement of benefit package options is a part) are optional for employers. (We call these the permissible qualifying events.) Only HIPAA special enrollment rights are mandatory. So the Section 125 plan document should be reviewed to ensure it allows these types of election changes. Most employers allow all of the events allowed by Section 125 — they want to give employees flexibility to change elections in certain scenarios. But the permissible Section 125 qualifying events are not mandates: The employer does not have to allow them. So the employer would want to confirm that the Section 125 plan document allows the permissible Section 125 qualifying events; if so, employees could change their coverage mid-year to add coverage for a newly eligible domestic partner.
September 4, 2019
Not all of our employees have work computers. Is posting the SPD and other required notices on a shared training/time clock computer sufficient for distribution purposes?
No, posting required notices on a shared computer or kiosk is not sufficient to meet the DOL’s Electronic Disclosure rules. The preamble to the final 2002 regulations specifically state that merely posting documents to a shared computer kiosk in a common area at a workplace is not an appropriate means by which to deliver documents required to be furnished to participants.
An SPD, Employer CHIP Notice, HIPAA Special Enrollment Rights notice, Medicare Part D Disclosure Notice and other required notices may be sent via email to participants who have electronic access as an integral part of their job. The plan administrator must take the necessary steps to ensure that the email system "results in actual receipt of transmitted information" (which would be satisfied by return receipts or failure to deliver notices), protects the participant's confidential information, maintains the required style/format/content requirements, includes statement as to the significance of the document, and provides a statement as to the right to request a paper version.”
The documents may also be posted to an intranet, benefits admin portal, or HR information system, but the employees must still have electronic access as an integral part of their job. It is not enough to simply post the documents on the intranet; there must be a separate notification sent to each participant notifying them of the document’s availability, the significance, and their right to request a paper copy. The notice may be a paper document or it may be electronic (email). If it is sent via email, the above procedures must be followed.
If an employee does not have electronic access at work, then the employer may request a personal email address from an employee. The employee must give affirmative consent to receive benefit-related notices in such manner.
If the employee does not have electronic access as an integral part of their job, and they do not authorize the employer to send benefits documentation to a personal email address, there is really no compliant method other than delivering by paper (either by hand or mail). If the employer provides the documents in person, it is advisable for them to get the employee’s signature confirming receipt. Otherwise, the employer has no documentation that they have distributed the notices. If delivering by mail, the employer should document their procedures and the date that the documents were mailed to specific employees.
The employer should document and retain all methods of delivery used for each employee.
August 20, 2019
Can An Employer Provide Additional STD Benefits to Employees That Give Birth or Must They Provide the Same Amount of STD Benefits to All Employees?
Employers are generally free to determine the benefits available to employees, including the amount of any such benefit. Essentially, as long as there is no law that prohibits the employer’s benefit design, the employer could choose to offer additional benefits to certain employees. And we are not aware of any law that requires an employer to treat all forms of leave or disability the same. So, an employer could likely offer greater maternity benefits than are offered for parental leave or other disabilities.
The usual concern when an employer wants to offer a greater benefit for maternity leave is the idea that it could be discrimination based on gender (since only women would be able to receive such a benefit), which would run afoul of Title VII of the Civil Rights Act. With that said, there are common practices that allow employers to achieve the goal of providing additional wage replacement benefits to employees who take maternity leave. Specifically, many employers choose to subsidize short-term disability payments or pay a portion over and above the STD payments for employees who give birth.
If that is the employer’s goal, it would likely be better to structure this type of program by paying additional paid leave to women who have given birth to a baby. This is because the EEOC actually allows employers to distinguish between leave related to any physical limitations imposed by pregnancy or childbirth and leave for purposes of bonding with a child and/or providing care for a child.
Specifically, leave benefits related to pregnancy, childbirth, or related medical conditions can be limited to women affected by those conditions. However, parental leave must be provided to similarly situated men and women on the same terms (see the EEOC’s enforcement guide on pregnancy discrimination for more information). To the contrary, employers that simply offer baby bonding time should offer it equally to women and men (as underscored by the EEOC’s settlement with Estee Lauder).
So it’s possible for an employer to offer additional wage replacement or STD benefits to employees who give birth. We would just caution the employer to work with their legal counsel to ensure that their policy is compliant and to include the STD/wage replacement policy in the employee handbooks/communication to the employees, so that the policy is clear to everyone involved. The employer would also want to consider allowing all women employees who give birth the same level of benefits under the policy to avoid any arguments of disparate treatment or discrimination.
August 6, 2019
If an employer makes changes to their benefits in the middle of a plan year, what notice requirements apply?
There are actually a few different notice requirements in play when an employer makes a change to benefits. ERISA has the summary of material modification (SMM) requirement — any material change to the plan requires the employer to send an SMM within 210 days of the end of the plan year in which the change occurs. If it’s a “material reduction” to benefits, then the notice (SMM or a summary of material reduction of benefits) actually needs to be sent within 60 days of the change. So, those notices are generally after the change occurs.
However, the summary of benefits and coverage (SBC) rules (which came into play under the ACA) say that if there's a material change that impacts the information provided in the SBC, and that change occurs outside of open enrollment (it occurs mid-plan-year), then the employer must distribute an updated SBC (or a notice describing the change) 60 days in advance of the change. So, for modifications to the plan that occur mid-plan-year, that advance-notice SBC will likely need to be distributed. Keep in mind that providing the updated SBC will also meet ERISA’s summary of material modification and material reduction requirements.
Now, if the change or modification (even if it’s a reduction) is occurring as part of renewal or open enrollment (that is, changes that are taking effect for the new plan year), then those changes can be included in open enrollment materials (and a new SBC) that is distributed during open enrollment. So, in that case, there's no need to distribute an updated SBC/notice 60 days in advance. Instead, the employer could just include the updated SBC/notice in the open enrollment materials.
July 23, 2019
We offer employee-paid voluntary benefits. As the employer, we do not contribute to the cost of such benefits. Are we required to include them in the Form 5500 filing?
ERISA applies to group medical, dental, vision, health FSA, HRA, group disability, AD&D, and group term life. It can also apply to business travel accident plans, telemedicine, and employee assistance programs based on the program’s specific benefits. It does not apply to a dependent care assistance program (DCAPs/dependent care FSA), HSAs, transportation plans, and certain voluntary products.
Employee-paid voluntary products generally fall into that last category. ERISA contains an exception for voluntary plans, if they meet the voluntary safe harbor rules. They do so by meeting the following criteria:
100% employee contributions (no employer contributions).
Employee participation is completely voluntary.
The employer does not endorse the program. However, the employer may permit the insurer to publicize the program to employees and the employer may collect premiums through payroll deductions and remit premiums to insurer.
The employer receives no consideration for plan implementation. However, reasonable compensation (no profit) is allowable for administrative services rendered for the plan.
There is additional guidance on how employers can be involved without endorsing the program:
Plan documents, including an SPD/wrap document, should not indicate that the plan is sponsored by the employer.
The employer should not encourage or urge participation in the plan.
Insurance presentations in the workplace are permissible.
Employer may notify employees of the existence of the plan, but should refer plan questions to insurer.
Maintaining eligibility lists and submitting enrollment forms to the insurer are permissible.
Employees do not contribute to the cost of coverage on a pre-tax basis (not included in the Section 125 plan).
If the voluntary plans meet this criteria, they would be exempt from ERISA, which means they would not be included in the Form 5500 filing, not included in the SPD or wrap document, not subject to the DOL claims and appeal procedures, and the employer would not have fiduciary obligations associated with the plan.
If the only criteria that applies to the plan is that the premiums are taken pre-tax, that alone may be enough to subject the plan to ERISA. Thus, an employer needs to carefully consider whether to include voluntary products in its Section 125 cafeteria plan.
July 9, 2019
In light of DOL guidance on the coverage of ABA therapy and mental health parity, must plans cover ABA therapy?
There is currently no law federal law that would require a plan to cover ABA therapy. As background, the mental health parity rules generally require that mental health treatment (if it’s offered) must be provided in parity with medical surgical benefits. But mental health parity does not require plans to offer mental health treatment; it simply outlines what must happen if an employer does cover mental health treatment.
So let’s start there: A self-funded plan would likely be allowed to exclude mental health treatment altogether. They could also choose to exclude treatment for autism or simply for ABA therapy. However, some state laws mandate autism treatment and ABA therapy. So fully insured plans might be required to provide the therapy under state law.
Sometimes, self-funded plans do have to follow the state benchmark when it comes to essential health benefits (which are the benefits that must be covered under small plan insurance). This happens because the benchmarks are also used to identify the essential health benefits for purposes of determining whether lifetime or annual limits can be imposed on certain treatment. However, currently, only the state of Ohio and the District of Columbia seem to include ABA therapy as an essential health benefit.
This question has recently come up as some practitioners and employers are familiar with the DOL FAQ that discusses ABA therapy. However, it’s important to note that the DOL did not actually opine on whether or not ABA therapy must be covered. Instead, they answered the question of a hypothetical situation where an employer tries to deny coverage for ABA therapy as an experimental treatment. The problem is that ABA therapy is not considered experimental by professional guidelines. So the FAQ was prohibiting the hypothetical plan from excluding certain mental health treatments as “experimental” when there is not support for that under professional/industry guidelines. (See Q2 of the FAQ: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-39-proposed.pdf)
So in summary, plans are not necessarily required to offer ABA therapy sessions and can likely exclude them or seek to limit those sessions to a certain number unless they are subject to a state insurance mandate that requires the therapy. Keep in mind, though, that autism is an issue with increasing visibility; so it’s likely that we’ll see more guidance/regulations on it as parents and medical practitioners continue their advocacy.
June 25, 2019
Are PCOR fees required for self-insured plans this year?
Yes, employers of self-insured plans are still required to pay the Patient-Centered Outcomes Research (PCOR) Institute fee for all plan years ending in 2018. The fee is generally due on July 31 of the year following the plan year end date, so the deadline for a plan year that ended in 2018 is Wednesday, July 31, 2019. Unless there is a change to the law, this will be the last year an employer sponsoring a calendar year plan will pay the PCOR fee.
Responsibility As background, the PCOR fees are payable for plan years ending after September 30, 2012 and before October 1, 2019. If the plan is fully-insured, the insurance carrier is generally responsible for paying the fee. If the plan is self-insured, the plan sponsor is responsible for the fee. For this purpose, a plan sponsor is generally the employer for a single employer plan. Special rules apply for determining who is responsible in the situation of an association plan, MEWA, or VEBA. The IRS has a helpful chart to remind employers which types of plans are subject to the fee.
The PCOR fee generally does not apply to excepted benefits such as stand-alone dental and vision plans or most health flexible spending accounts (FSAs). However, the fee does apply to HRAs and retiree-only plans. There are four methods of calculation available (as detailed below).
Fee Calculation The general rule is that the PCOR fee is based on the average number of covered lives during the plan year. Importantly, this includes not only employees, but also dependents (spouses, children, and others) as well as former employees still receiving coverage under the plan (former employees on disability who are still covered, retirees, COBRA participants, and so on). However, for an HRA plan, the fee is payable only on employees (not spouses and dependents). The IRS allows employers to use any one of four methods for calculating lives, as described below:
Actual Count Method: Calculate the sum of the lives covered for each day of the plan year and divide that sum by the number of days in the plan year.
Snapshot Method: Add the total number of lives covered on any date (or more dates, if an equal number of dates are used for each quarter) during the same corresponding month in each of the four quarters of the benefit year (provided that the date used for the second, third, and fourth quarters must fall within the same week of the quarter as the corresponding date used for the first quarter). Divide that total by the number of dates on which a count was made.
Snapshot Factor Method: The calculation is the same as the snapshot method, except that the number of lives covered on a date is calculated by adding the number of participants with self-only coverage on the date to the product of the number of participants with coverage other than self-only coverage on the date and a factor of 2.35. For this purpose, the same months must be used for each quarter (for example, January, April, July, and October).
Form 5500 Method: The plan may use the data reported on the most recent Form 5500. A plan may only use this method if it filed the Form 5500 by July 31. A plan filing an extension for the Form 5500 would have to use another calculation method. If a plan covers only employees, then the plan sponsor would add the number of participants at the beginning of the plan year and at the end of the plan year and divide by two. If the plan covers dependents, the plan sponsor would add the number of participants reported for the beginning of the plan year and the number of participants at the end of the plan year, and report this total.
Employers may switch methods from one year to the next, and should calculate the average number of lives under all four methods and choose the one that is most favorable.
Payment The PCOR fee is filed and paid via IRS Form 720, Quarterly Federal Excise Tax Return. The PCOR fee is reported in Part II of that form, which also includes the amount of the fee (based on when in 2018 the plan year ended). For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39 per covered life. The fee for plan years ending on or after October1, 2018 through October 1, 2018 is $2.45 per covered life. Employers should work with their advisors and tax advisers in ensuring proper filing and payment of the fee.
Generally, if the plan documents and COBRA election notices clearly provide that COBRA premiums will be 102% of the applicable premium, and if there has been a clear or mathematical error which results in an undercharge for COBRA coverage, it is likely permissible to correct the error on a prospective basis.
Specifically, the IRS COBRA regulations state that if a plan is charging less than the maximum permitted amount, it may increase its rates to that level. Thus, it’s widely understood that the employer is allowed to make the change to increase the premiums going forward. That said, there isn’t specific guidance as to how the employer should specifically engage in such a correction. The intent would be to put the COBRA participants and beneficiaries back in the position that they would’ve been had the employer not made the mistake.
If a COBRA participant has already elected COBRA under the presumption of the incorrect amount, the conservative position would be to renotify each COBRA participant who was incorrectly informed so that they are made aware of the correct premium amount. They would then charge the appropriate amount going forward.
As for correcting the undercharge retroactively, there is no explicit guidance on collecting a shortfall (that is, retroactive collection). The regulations do not appear to specifically allow or prohibit it. The employer could explain the mistake to each impacted COBRA participant and ask for the shortfall payment. But if the COBRA participant refused and the employer wanted to demand retroactive payment, they would not likely have statutory grounds to collect it. So, collecting shortfalls as a result of a mistake may be problematic, both in success as well as the administrative burden on either the employer or the COBRA vendor. Thus, if an employer wants to proceed in retroactive collection, they’d be best served by speaking with outside counsel for guidance.
May 29, 2019
Can an employer choose not to allow mid-year changes to employees’ HSA contribution elections?
While an employer could choose to limit employees’ HSA contributions in some ways, they have to allow employees the chance to change their HSA contribution amount at least monthly.
As background, pre-tax HSA contribution election changes must be allowed at least monthly and upon a loss of HSA eligibility. This requirement correlates with the HSA monthly eligibility rules. Although an employer could choose to place other restrictions on HSA contribution elections under its cafeteria plan (such as only allowing one election change per month), the same restrictions must apply to all employees.
So the employer would essentially have to allow employees to change their HSA contribution elections on at least a monthly basis. Keep in mind, though, that many employers just allow open-ended prospective election changes to employees’ HSA contributions.
Ultimately, the circumstances under which mid-year election changes will be allowed for HSA contributions should be addressed in the cafeteria plan document and in participant communications.
May 14, 2019
What is required for FSA substantiation and what steps should the employer/administrator follow if substantiation is not provided?
The Section 125 health FSA regulations require all health FSAs offered through a Section 125 cafeteria plan to have adequate claims substantiation to ensure that it pays only for legitimate health and medical expenses. This means that reimbursements must: 1) Be substantiated by an independent third party (describing the service/product, the date of service/sale, and the amount of the expense), and 2) have a statement from the participant that the medical expense has not been reimbursed by any other health coverage (and that he/she won't seek reimbursement).
If the substantiation requirements are not satisfied, the IRS could potentially treat all health FSA reimbursements as taxable, whether or not they were properly substantiated. In addition, the health FSA and the Section 125 cafeteria plan that funds it could be disqualified, causing a loss of favorable tax treatment for the employer and the employees.
So, when an employee has not provided adequate claims substantiation (including claims that qualify for after-the-fact-substantiation but for which proper substantiation is not subsequently provided), employers and administrators should ensure that there are collection procedures in place to recoup these improper payments. These recoupment procedures should be addressed in the governing plan document. Most plan documents have general provisions regarding the powers of the employer, but the best practice is for the plan document to expressly provide for recoupment of improper benefit payments. The SPD should also explain that the employer will recoup improper payments from the participant.
As to the specific procedures to follow, the IRS guidance provides multiple steps for recoupment. These initial steps, outlined below, can be taken in any order, as long as they are consistently applied for all participants.
Step one, the administrator should first follow the debit card correction procedures (if applicable), and deactivate the debit card until the amount of the improper payment is recovered. This step ensures that no further violations will occur.
The next step is to attempt to correct the error by “demanding” repayment from the participant. This generally involves a letter being sent to the participant as soon as possible that identifies the amount to be displayed, the reasons for requiring repayment, and the timeframe in which repayment must be made. The participant can write a check to the employer (or to the plan, if the plan is funded) in the amount of the mistaken reimbursement, or if properly authorized and allowed under state law, the employer can withhold that amount from the participant’s pay or other compensation on an after-tax basis. If the employer seeks to withhold the amount from pay or other compensation, the plan document must provide for this action and the administrator must be mindful that the withholding is compliant with the applicable state wage withholding laws. It is also important to keep in mind that, if the amount to be recouped is large (or the participant’s pay rate is low), repayment may need to occur in installments to avoid a cash-flow hardship to the participant.
Alternatively, the administrator could apply a substantiation or offset approach against subsequent valid FSA claims, up to the amount of the improper payment. The IRS has informally commented (in the context of the debit card correction procedures) that improper health FSA payments can be offset against other health FSA claims. The recouped amounts can be used for other eligible expenses incurred before the end of the plan year (or other period of coverage).
If the above steps are unsuccessful, the IRS guidance states that the improper payment should be treated as any other business indebtedness. Under this step, the employer must request payment consistent with its collection procedures for other business debts (depending on the amount, this might even include a lawsuit). If the improper payment is not recovered, it should generally be treated as a forgiven debt and reported as wages on Form W-2 for the year in which the indebtedness is forgiven, so that the reported amount becomes subject to withholding for income tax, FICA, and FUTA.
Please keep in mind that the IRS has indicated that treating improper payment as uncollectible “should be the exception, rather than a routine process” and that repeatedly including such payments in participants’ income suggests the plan lacks proper substantiation procedures or may be cashing out unused health FSA amounts. So, the steps detailed above should be the normal practice for recoupment and treating the payment as a business debt a last resort.
If the improper payment occurred in a prior year, then guidance from the IRS and Treasury Department is conflicted as to the available options for recoupment. In 2010, a Treasury Department representative indicated that an improper health FSA reimbursement could be offset against future claims in the second plan year (in which the overpayment was discovered). However, in 2014, the Office of Chief Counsel issued an Advice Memorandum which indicated that if an offset of claims could not be accomplished in year one (the year the overpayment occurred), the offset could not be done in year two. So, in light of the conflicting guidance, the conservative position would likely be to treat the improper payment as business indebtedness and that, if forgiven, must be reported as wages and an amended Form W-2 be made for the year in which the debt is forgiven (as described above).
The ACA's employer mandate applies in the current year if an employer (or two companies that are commonly owned) has 50 or more full time employees (including equivalents) in the prior calendar year. Importantly, in counting “employees” the employer needs to calculate full-time equivalents, which include both full time (FT) employees (those working 30 or more hours per week) and part-time (PT) employees (for anyone who is not FT, add the total number of PT employee hours per month and divide by 120).
Also, only employees are included in the count, so owners would only be included in certain situations. For example, if owners are partners in a partnership, S-corp shareholders of more than 2%, or LLC owners where the LLC is taxed as a partnership, they would be considered “self-employed” and therefore wouldn't be included. If they were C-corp owners/employees (received W2 income) or LLC owners where the LLC is taxed as a C-corp and have owner/employee status (received W2 income), then they'd be considered employees and would be included in the count.
The ACA employer mandate count looks at the average number of employees working during the previous calendar year. The count also pulls in commonly-owned companies together, so that employees of both companies are included.
So, if two companies under common ownership hit 50 FT equivalents in 2019, then the mandate would apply in 2020. Assuming the two companies didn't have 50 employees/equivalents in 2018, they wouldn't have to comply with the mandate in 2019. Instead, they'd have to comply with the mandate in 2020. They would actually have until April 1, 2020 (there's a special rule that allows them a three-month “grace period” the first year that they're subject to the mandate).
That said, it might be easier to just comply beginning January 2020 (particularly if they have a calendar year plan). So 2020 would be the year that they'd have to identify and offer affordable coverage to all their FT employees (those working 30 hours or more per week); part-timers would not have to be offered coverage.
As for reporting, that attaches to the employer mandate's application. So if the mandate applies in 2020, the employer would have to report in 2021.The employer group would have to file Forms 1094-C and 1095-C (for each FT employee) with the IRS in early 2021 (by February 28 if filing by paper and by March 31 if filing electronically); and they would also have to distribute a copy of 1095-C to each FT employee by January 31, 2021. The IRS could potentially delay those due dates (they've done that in years' past), but those are the general deadlines.
April 16, 2019
Is an employer required to offer coverage to a temporary employee working full-time hours?
The answer depends on many factors. Specifically, the employer group’s size and the nature of the
temporary employees’ work will determine if coverage must be offered.
A small employer (with fewer than 50 full-time employees, including equivalents) must carefully
review its plan documents and insurance contract for the terms of eligibility. If they simply state
that employees working a certain number of hours per week are eligible, a temporary employee
satisfying the hour requirement would qualify and would need to be offered coverage. If the
intention is to exclude temporary employees, the small employer should work with outside counsel to
review its employment practices and draft appropriate plan language.
Under the ACA’s employer mandate, large employers with 50 or more full-time employees including
equivalents must offer coverage to employees working 30 hours or more per week. The only exceptions
are for variable hour employees whose hours fluctuate above and below 30 hours and seasonal
employees. These two categories of employees may be measured in a look-back measurement period and
offered coverage prospectively if they average full-time hours during the measurement period.
Part-time employees should also be measured and monitored. If any of the classified part-time
employees are in fact averaging full-time hours, they should be offered minimum value, affordable
medical coverage as are other full-time employees. If they are not offered such coverage, the
employer is at risk for an employer mandate penalty if one of the employees goes to the exchange,
purchases individual coverage, and receives a premium tax credit.
There is no exception under the employer mandate for non-seasonal temporary employees. If they are
regularly working 30 hours or more per week for more than three months, they should be treated as
any other full-time employee and offered minimum value, affordable coverage.
If the temporary employee is employed through a staffing agency, that adds another dimension.
Temporary employees who work multiple assignments with varying lengths are generally the common law
employee of the staffing agency. An employer would generally not need to offer such an employee
However, if the temporary employee is on a long-term assignment with the employer, the employee
could still be considered the employer’s common law employee even if the employee receives a
paycheck from the staffing agency. In this case, the employer would need to review its contract with
the staffing agency to see if the staffing agency is going to offer coverage to the employee and
include them in reporting on the employer’s behalf. If the staffing agency does not accept that
responsibility, the employer will need to offer coverage if the employee is working full-time hours
for the employer and include them in reporting.
April 2, 2019
Can self-funded plan sponsors, including religious organizations, choose not to cover same-sex spouses on their group health plan?
After the US Supreme Court decision in Obergefell v. Hodges, all states recognize same-sex marriages, and state insurance laws require that they be recognized by fully-insured health plans. While some make the argument that self-funded plans would not be subject to that requirement (since they aren’t subject to state insurance laws due to ERISA preemption), we are of the opinion that any self-funded employer seeking to limit coverage to opposite-sex spouses should seek counsel.
Since the Obergefell case did not speak to the application of the case to benefits, some are of the opinion that a self-funded plan that wishes to exclude coverage for same-sex spouses may do so. Keep in mind, though, that a self-funded plan that provides coverage to opposite-sex spouses, but excludes coverage for same-sex spouses risks litigation under Title VII of the Civil Rights Act of 1964. Specifically, some courts and the EEOC have contended that excluding coverage for same-sex spouses would be discrimination based on sexual orientation.
In one example of a case that was settled through the EEOC, the EEOC linked a press release that can be found here on the EEOC Newsroom page. The press release discusses a group health plan that specifically excluded coverage for same-sex spouses. One of the participants filed a complaint and the EEOC brought suit against the employer for Title VII discrimination. As part of the settlement, the employer had to reimburse health care expenses for the same-sex spouse and revise its policy.
Even religious organizations and religiously-affiliated institutions should consult with counsel before excluding same-sex spouses from coverage. While the EEOC does recognize a sort of “ministerial exception” available to churches under some laws, the exception doesn’t tend to allow churches the right to discriminate for every purpose. Instead, whether or not a religious institution could claim an exception under Title VII or any other federal law would likely involve a facts and circumstances-based determination. Additionally, there is always the risk of litigation of the matter.
So ultimately, while it seems that a self-funded plan sponsor could choose not to cover same-sex spouses, doing so would likely open the employer up to the risk of litigation. And courts and the EEOC have made it clear that they find a same-sex spouse exclusion to be discrimination. As such, an employer who wants to keep such an exclusion should work with their outside counsel (even if the client has a religious basis for excluding such coverage), and that counsel would be best suited to draft any documentation of the exclusion (if they move forward with one).
March 19, 2019
Is providing a COBRA Initial Notice in our enrollment packet for eligible employees sufficient to meet the distribution requirement?
No, distributing the COBRA Initial Notice (also known as the General Notice) to all newly hired eligible employees in an enrollment packet is not sufficient for several reasons. As a reminder, the notice must be distributed to all newly enrolled employees and spouses within 90 days after commencement of coverage.
First, the Initial Notice should only go to covered participants. The first paragraph of the notice begins, “You’re getting this notice because you recently gained coverage under a group health plan (the Plan). This notice has important information about your right to COBRA continuation coverage.” Providing the notice to all newly eligible employees before enrollment is providing them with inaccurate information of rights that they do not yet have and never will have if they waive coverage. A plan administrator is required to provide the notice within 90 days after the participant enrolls and coverage begins.
Second, the Initial Notice is required to be distributed to not only covered employees, but also covered spouses. An enrollment packet is distributed only to the employee. The spouse is not considered a recipient of an enrollment packet. As such, the notice should be mailed to the home address on file with the spouse indicated in some manner on the envelope, such as John Doe and Spouse, John and Jane Doe or Mr. and Mrs. John Doe. If the employee and spouse enrolled at the same time, a single notice is sufficient as long as they are not known to have separate addresses.
Lastly, this is one of the most difficult notices for a plan administrator in terms of compliance dates. Many employers only think of the notice as a new employee notice. However, the notice is required to be provided to any newly enrolled employee or spouse. Consider the following scenarios:
A newly hired employee waives enrollment when initially eligible, but enrolls in single-only coverage during the next open enrollment.
An employee is enrolled in single-only coverage. During the year, he gets married and adds his spouse.
A newly hired employee waives enrollment when initially eligible, but enrolls in family coverage midyear upon the loss of other coverage.
A COBRA Initial Notice is required to be distributed in all of these scenarios. If you have any questions or would like to request a copy of the model notice, please ask your consultant.
March 5, 2019
Does gaining eligibility for Medicare or Medicaid create a qualifying event that allows an employee to add or drop employer coverage?
If the group allows pre-tax salary reductions, then the Section 125 cafeteria plan regulations limit an employee’s ability to make changes to their elections midyear. They may only do so upon the occurrence of a qualifying event. There are two types of qualifying events: HIPAA Special Enrollment Rights (SERs) and the permissible Section 125 qualifying events.
Becoming entitled to Medicare or Medicaid is a permissible Section 125 qualifying event that may allow the employee to make a midyear election change. Individuals can become eligible for Medicare by virtue of turning age 65 or as a result of being diagnosed with various disabilities. Individuals can become eligible for Medicaid based on their state’s income threshold. However, becoming “entitled” to Medicare or Medicaid is not just reaching eligibility; instead, Medicare and Medicaid entitlement occurs when the individual is actually enrolled in either of those programs.
Now, if an entitlement to Medicare or Medicaid occurs midyear, then the regulations also require that any such change request comply with a special consistency rule. In other words, the change must be consistent with and on account of the qualifying event. For example, upon entitlement to Medicare or Medicaid, an election change request that is considered consistent would be a reduction in coverage or termination from the group plan with an accompanying salary reduction. The idea is that an individual that gains coverage under Medicare or Medicaid wouldn’t need as much coverage under the employer group plan. So, an employee becoming entitled to Medicare or Medicaid would be allowed to reduce or drop coverage, but a request to enroll or add to existing coverage likely would not be allowed.
This permissible qualifying event would also allow employees to reduce or cancel coverage through the plan’s FSA. However, it is not clear whether this qualifying event would allow employees to drop stand-alone dental or vision coverage. On one hand, dental and vision could be considered a group health plan. On the other hand, there is an argument that a change to dental or vision coverage would not be consistent since Medicare and Medicaid don’t cover dental or vision.
Please keep in mind that the permissible Section 125 qualifying events are not mandatory. So the plan document must be designed to allow for this qualifying event in order for the employee to make a midyear election change on account of enrolling in Medicare or Medicaid.
February 21, 2019
We have seasonal and temporary employees. When do we have to offer benefits to these employees?
Generally, an employee who is hired to work 30 or more hours per week is considered full-time and therefore must be offered coverage under the employer mandate. This would also include even a temporary, contract or short-term employee if they are working or are expected to work 30 hours or more per week.
If an employee’s hours vary above and below 30 hours per week and there is no reasonable expectation that they will always work full-time hours, then they could be placed in a look-back measurement period. But again, if an employee is reasonably expected to work full-time hours (based on determinative factors such as comparable full-time positions, how it was advertised in a job description and so on), they should not be placed in a look-back measurement period and instead should be offered coverage after completing the normal new hire waiting period.
Further, the rules expressly state that an employer may not consider that employment will end during the initial measurement period, even if the employee has a short-duration employment contract. For example, if an employee is hired to work 30 hours per week but is expected to be laid off at some point, the employee could not be treated as part-time.
However, the employer mandate allows for a limited non-assessment period, which basically means that the employer would not be penalized if coverage is not offered to a full-time employee for the first three months, as long as that employee is offered coverage by the first day of the fourth month following hire. In other words, the employer has about a three month break to offer coverage after a full-time employee is hired.
So, if an employee works less than three months, the employer would not have to offer those employees coverage (even if that employee is a full-time employee—working 30 hours per week). Beyond that third month, though, the employer would need to offer coverage to that employee. For example, if any temp employees who work 30 or more hours are employed for five months, the employer would need to offer coverage for that fourth and fifth month in order to avoid a penalty. So, if any temporary employees would be employed for more than a few months, they would need to be offered coverage by the first day of the fourth month following hire, and could not be placed in a look-back measurement period.
Keep in mind, though, that the client would still need to consider their plan document terms. Specifically, if the plan document indicates that employees are generally eligible for coverage immediately or first of the month following 30 or 60 days, then the employer should make all full-time employees eligible on that timeline (including temporary employees). So if an employer would like to take advantage of the full limited non-assessment period for certain classes of employees, they will need to ensure that their plan document reflects that. In other words, while there may not be a problem with waiting to offer coverage under the employer mandate, the employer still needs to administer the plan according to their plan terms.
Now, a “seasonal employee” under the employer mandate is specifically one whose customary annual employment does not exceed six months and whose work begins at approximately the same time each year. If the employees are not, in fact, seasonal for this purpose, the only way they could be placed in a look-back measurement period is if they were hired as working variable hours (as opposed to working 30 or more hours per week).
So, an employer would need to determine if their seasonal employees actually meet the definition of seasonal under the employer mandate. Otherwise, if they will be working 30 hours or more per week just for a short duration, they’re probably not actually variable hour employees, and they’re likely not seasonal employees either. As such, the employer would be at risk of an employer mandate penalty if they fail to offer full-time employees affordable, minimum value coverage by the first day of the fourth month.
If they are, indeed, seasonal employees (as defined under the rules), or if they leave employment before the limited non-assessment period is up and are not eligible, a 1095-C would not need to be generated for such employees. But, again, an employer would need to make sure these “temp” or “seasonal” employees are actually considered variable hour employees, and not full-time eligible employees.
February 5, 2019
Does the actual cost of group term life coverage matter when determining the amount of
No. If the aggregate death benefit payable on all employer-provided group term life
insurance (GTLI) during a period of coverage (usually one month) exceeds $50,000,
the actual cost of the coverage does not matter when calculating the imputed income
amount. If the coverage exceeds $50,000, then the imputed income amount is
determined using the IRS Table I rates.
As background, generally the cost of employer-provided GTLI is included in an
employee’s gross income. However, IRC Section 79 provides that an employee may
exclude the cost of up to $50,000 of employer-provided GTLI coverage from income on
his or her own life. The exclusion applies only to insurance on the life of the
employee, and not on the life of a spouse, dependent or any other person.
Importantly, the exclusion is determined on a calendar-month basis. So, for
purposes of determining the employee’s own tax liability, all employer-provided
GTLI provided during a month is considered when applying the $50,000 limit.
If the employee receives more than $50,000 of employer-provided GTLI coverage for a
period of coverage (a calendar month), then the cost of the insurance in excess of
$50,000, less any amount paid by the employee with after-tax contributions, is
included in the employee’s gross income for both federal income tax and FICA
purposes. The included amount as a result of the excess coverage is commonly
referred to as “imputed income.”
The cost of GTLI coverage taken into account in determining an employee’s imputed
income is determined using a uniform table of life insurance rates outlined in IRS
regulations, commonly known as the “Table I rates.” Table I establishes gradually
increasing rates based on age, which are generally structured in five-year age
brackets. For purposes of the table, an employee’s age is determined by his or her
age at the end of the taxable year.
For example, if an employee receives $250,000 in coverage from the employer-paid
group term life coverage, then $200,000 of excess coverage (250,000-50,000=200,000)
must be counted in the employee’s gross income using the rates from Table I. If the
employee is age 60, then the employer would first calculate .66 (Table I rate for
insured age 60) per $1,000 of excess coverage (200 x .66 = 132), then by number of
coverage months (132 x 12 = $1,584).
Any additional spouse/dependent coverage (let's say $20,000 of dependent coverage)
from the employer-paid GTLI must be counted in the employee’s gross income using
the rates from Table I. If the spouse is age 39, the employer would calculate .09
(Table I rate for insured age 39) per $1,000 of coverage (20 x .09 = 1.80), then
multiply by number of coverage months (1.80 x 12 = $21.60).
So, to be clear, the requirement to impute income for the spouse/dependent GTLI is
independent of the employee’s GTLI amount. All employer-sponsored spouse/dependent
GTLI is imputed income to the employee. As another example, the employee could have
$40,000 in GTLI and $20,000 on his/her spouse/dependent. The employee’s GTLI amount
would not need to be imputed because it is under $50,000, but the $20,000 in
spouse/dependent GTLI would need to be added to the employee’s gross income (again,
since it is employer-paid GTLI).
After determining the cost of coverage through the Table I rate, the aggregate cost
of the coverage for the employee’s taxable year is reduced by the amount, if any,
that the employee paid toward the purchase of all employer-provided GTLI. Employee
payments toward the purchase of such coverage do not include amounts contributed by
pre-tax salary reduction under a cafeteria plan, amounts paid for
non-employer-provided GTLI coverage or amounts paid for GTLI coverage during a
different taxable year. In other words, the Table I aggregate cost of coverage may
only be reduced by after-tax employee contributions; employer contributions and
employee pre-tax contributions do not reduce the aggregate cost.
Although an employee’s imputed income for GTLI is not subject to income tax
withholding, employers must report the income and must withhold FICA taxes on it.
Employers are responsible for determining imputed income only for that employer’s
GTLI coverage; employers are not required to take into account coverage provided by
an unrelated employer.
In addition, there is a “de minimis” amount for dependent coverage. In other words,
if the face value of the dependent coverage is $2,000 or less, then it isn’t
includable in the employee’s taxable income (see page 9 of Publication 15-B). For
example, if the employer-provided spouse/dependent GTLI is $20,000, this would not
fall under the de minimis amount allowed for dependent coverage.
Therefore, employers should review their GTLI benefit plan offerings, and determine
whether the employee coverage exceeds $50,000. If so, then the employer will have
to determine the aggregate cost of coverage that exceeds $50,000, and that cost
must be included in the employee’s gross income as imputed income. Any
spouse/dependent amounts (assuming they exceed the de minimis amount) would
generally be counted as taxable income to the employee subject to federal
withholding (although imputed income for employee’s group coverage would not be
subject to federal withholding). The employer will need to consult the Table I
rates to make that determination based upon the insured’s age, and engaging outside
tax counsel or an accountant may be necessary in some instances.
January 23, 2019
If an employee failed to establish an HSA in 2018, but was otherwise HSA-eligible in 2018,
can the individual (or the employer on their behalf) make 2018 HSA contributions in 2019?
The short answer is yes. Generally speaking, contributions can be made to an HSA up
until the due date of the individual's (employee's) federal income tax return for
that particular year. That means for 2018 contributions, individuals can contribute
to their HSA until April 15, 2019. Since employers (and other third parties) can
contribute to an individual’s HSA on their behalf, that rule includes both employer
and employee/individual HSA contributions. So, either the individual or the
employer on their behalf can make 2018 contributions up until April 15, 2019. The
individual (or the employer on their behalf) should notify the HSA trustee/bank
that the contributions relate to 2018. The general idea, though, is that the
contributions should be allocated to 2018 (and therefore counted towards the
individual’s 2018 HSA contribution limit)—the contributions would not impact the
individual’s 2019 HSA contribution limit.
Digging a bit deeper into employer obligations, if the employer’s HSA contributions
are running through the cafeteria plan (as are most employer HSA contribution
designs), then the employer’s contribution design must not favor highly compensated
employees per the Section 125 nondiscrimination rules. Making a 2018 contribution
in 2019 for an employee who did not timely establish their HSA would not by itself
favor highly compensated employees — it would just be giving the employee the
contribution they were otherwise entitled to in 2018. If the employer’s HSA
contributions are not running through the cafeteria plan, then the HSA
comparability rules apply. Those rules also allow 2019 funding for contributions
(plus interest) otherwise due in 2018, but the employer should have sent a notice
to the employee at the end of 2018 notifying the employee of their obligation to
open the HSA (by the last day of February 2019) before employer HSA contributions
can be made. The IRS has a model notice for this notice requirement.
Importantly, regardless of whether the employer’s HSA contributions are run through
a cafeteria plan or not, employees may not reimburse themselves from the HSA for
medical expenses incurred in 2018 since there was no HSA account set up. This
relates back to the general rule on HSA reimbursements (also called
“distributions”) — individuals may be reimbursed only for expenses that are
incurred after the HSA is established. An HSA is established per state law, so the
exact answer might vary. But generally speaking, an HSA is considered established
when the employee (or employer on their behalf) completes the proper paperwork or
application to create the HSA account and the HSA is funded (once money actually
goes into the HSA). So, an employee who failed to take appropriate steps to
establish the HSA in 2018 could not be reimbursed through an HSA for medical
expenses incurred in 2018. Once the HSA is established and funded in 2019, though,
the employee could use HSA reimbursements for any expenses incurred after the 2019
HSA establishment date.
January 8, 2019
With the ACA Section 6056 employer reporting deadlines fast approaching, what are some of
the most common reporting errors that employers make?
Large employers with 50 or more full-time employees in 2017, including full-time
equivalents, are required to comply with certain reporting requirements under
Section 6056 of the IRC for calendar year 2018. The employer must complete and
distribute a Form 1095-C by March 4, 2019, to each employee who was full-time for
at least one month in 2018. If filing by paper, the employer must file those forms
and the transmittal Form 1094-C with the IRS by Feb. 28, 2019; if filing
electronically, the deadline is April 1, 2019. Employers filing 250 or more forms
are required to file electronically.
As this is the fourth year of reporting and the IRS has begun enforcement, there
are some common errors made by employers that can be identified:
Failure to file. Remember that size is determined in the previous
calendar year and is based on the total size of all related employers. Thus, if a
small employer is part of a controlled group and the total number of full-time
employees across the group is 50 or more, then all employer members of a controlled
group are subject to the employer mandate and reporting requirements.
If an employer discovers that they were delinquent in a previous year, they should
work to correct the failure as soon as possible. This would include both filing the
late forms with the IRS and distributing the forms to full-time employees. Failure
to file can carry a penalty of $540 per form with possible increased penalties for
Qualifying Offer. The code 1A used on Line 14 of the Form 1095-C
and the related “Qualifying Offer Method” on Line 22 of the Form 1094-C are often
misunderstood. Many think that if they complied with the employer mandate by
providing minimum value and affordable coverage then they use this code and check
that box. But the term “qualifying offer” is very specific and most employers will
not qualify for this method. A qualifying offer means that the employer’s offer is
not only of minimum value but also that it is affordable per the federal poverty
level safe harbor. In order to qualify, the employee’s required cost for self-only
coverage must have been $96.71 or less per month in 2018. If the employee’s cost of
coverage was more, that does not necessarily mean that the coverage was not
affordable or that the employer did not comply with the mandate. It simply means
that the employer may need to use 1E on Line 14 and the cost of coverage may have
been affordable using one of the other two affordability safe harbors: rate of pay
or Form W-2.
Failure to review forms prior to submission. In Column (a), Part
III of the Form 1094-C, large employers must indicate whether they offered minimum
essential coverage to substantially all of their full-time employees for every
month in 2018. Substantially all means at least 95 percent of full-time employees.
In previous years, many employers who indeed complied with the requirement
indicated a “No” response in the column. In many cases, this error was due to how
data was processed either by the software or the vendor that was utilized for
reporting. Remember that even if there is a third party completing the reporting on
behalf of the employer, the employer is ultimately responsible for the accuracy of
the information and any associated penalties for failures.
A “No” response in Column (a), Part III of the Form 1094-C can result in Penalty A
being assessed against the employer by the IRS, which is $2,320 ($193.33 prorated
monthly) multiplied by the total number of full-time employees minus the first 30
employees. Thus, it is crucial for an employer to review all forms for accuracy
prior to filing with the IRS and distributing to employees.
NFP has many resources to assist employers with their filing requirements. Please
contact your consultant with any questions.
December 11, 2018
How does an employer determine if they are over the 250-form threshold for the Forms W-2
reporting requirement? And if over the threshold, what types of coverage must be reported?
Generally, the count is based on the number of Forms W-2 filed under each separate
EIN for the previous calendar year. To determine if an employer must provide the
cost of coverage for 2018, the employer would look back and determine if they filed
fewer than 250 Forms W-2 under their EIN in 2017. If less than the 250-form
threshold, then they wouldn’t be subject to the Form W-2 cost of coverage reporting
for 2018, even if they are self-insured.
Please note that the aggregation/controlled group rules don't apply when it comes
to the 250 threshold for the Forms W-2 reporting requirement. This means that if
there are entities that have different EINs and that separately file their Forms
W-2, their employees can be counted separately. So, if each EIN corresponded to
less than 250 Forms W-2 in the prior year, the reporting requirement would not
apply. However, if the entity is set up with different divisions within the same
EIN, then they would have to look at the entire employee count for this reporting
If an employer did file more than 250 Forms W-2 during the previous year, what
coverage costs are included within the report? The total cost of coverage to be
included is the employee and employer contributions that are excludable from the
employee’s gross income under IRC Section 106 (or that would be excludable if it
were paid by the employer). This includes employer-sponsored major medical
coverage, both fully and self-insured (e.g., PPO, POS or HDHP). It would also
include prescription drug coverage and any dental/vision coverage that is combined
with major medical coverage.
An employer would not report any “excepted benefits” (those not subject to HIPAA,
and thereby exempt from ACA), including stand-alone dental or vision plans,
non-coordinated and independent benefits (such as hospital indemnity or
specific-illness plans), and health FSA salary reduction elections (but there are
special rules regarding optional employer flex credits that could be used to
contribute to an FSA). HRAs, HSA contributions, long-term care and coverage under
Archer MSAs also are not included.
Employers will also want to review their EAP, wellness and on-site medical clinic
arrangements and programs. If COBRA applies to those plans, then the cost of these
programs will need to be included in the reportable cost. Whether COBRA applies is
a bit trickier analysis, but it basically comes down to whether the EAP, wellness
program or on-site medical clinic is providing medical care. Employers should work
with outside counsel in making that determination.
A more than 2% S-corporation shareholder is not considered an employee for IRC
Section 125 purposes. They are considered self-employed. Only employees can
participate in pre-tax benefits through a Section 125 cafeteria plan. This means
that individuals who are considered self-employed are not eligible to participate
on a tax-advantaged basis. So, the health FSA and dependent care FSA (DCAP) options
become less valuable because their only purpose is the tax savings. Once that is
taken away, there really isn’t a point to participating.
On the other hand, they can still continue participation in the underlying health
plans through a Section 125 plan (medical, dental, vision), but cannot make premium
contributions on a pre-tax basis. The same would be true for any qualified benefit
offered through the cafeteria plan. So, owners may generally participate in the
plan, but certain owners cannot participate on a pre-tax basis under Section 125.
In other words, self-employed owners are allowed to participate in the plan itself
(assuming they are otherwise eligible per the terms of the plan), but self-employed
owners are not allowed to participate on a tax-favored basis under Section 125,
whether the plan is a fully insured plan or a self-insured plan. So, if the owner
is not an employee, they would just have to participate by paying premiums
post-tax. C-corporation owners are generally treated as employees and eligible to
participate on a pre-tax basis.
In regards to an HSA, they may make post-tax contributions and then claim them as a
deduction on their individual tax return. See IRS Form 8889 instructions, page 3.
Since they are not employees, they also cannot receive pre-tax employer
contributions to their HSAs.
In regards to an HRA, the IRS has stated that 2% S-corporation shareholders, sole
proprietors, and partners in a partnership are treated as self-employed and are not
eligible for the tax-free benefits of an HRA. Further, the IRS has informally
stated that such individuals would not even be eligible for the HRA on a taxable
basis. Conversely, C-corporation owners are typically considered employees and
could participate in the HRA and receive tax-free benefits.
Lastly, these rules not only apply to the S-corporation shareholder but also to the
shareholder’s children, parents, and grandparents due to ownership attribution
rules contained in the IRC. Specifically for S-corporation shareholders, the
Section 125 rules refer to 2% shareholder ownership as incorporating the family
attribution rules (found in IRC Section 318). Section 318 basically says that
someone that has a certain relationship with the owner is treated as having the
same ownership interest as the owner. Specifically, an individual is deemed to own
the interest held by his or her spouse, children, grandchildren and parents.
November 13, 2018
We offer a high deductible health plan with an HSA to our employees. If the deductible is
embedded, how does this impact the HDHP’s limits for 2019?
In order for an individual to be eligible to open and contribute to an HSA, they
must be enrolled in a qualified HDHP and in no other disqualifying coverage (no
“first-dollar coverage”). A qualified HDHP cannot pay any benefits before the
minimum statutory deductible is met ($1,350 for self only HDHP and $2,700 for
family HDHP in 2019). There is also a maximum out of pocket (OOP) limit for QHDHPs
($6,750 and $13,500 for 2019, respectively).
There is a special rule regarding embedded deductibles for individuals with family
HDHP coverage. In order for the health plan to remain an HSA-qualified HDHP, the
plan cannot pay benefits for an individual under the family tier of coverage until
the minimum statutory family deductible has been met. This is tied to the statutory
family deductible, not the plan’s family deductible. So, benefits could not be paid
for an individual with family HDHP coverage in 2019 before the insured has met at
least $2,700 of the deductible.
For example, Pat is enrolled in self-only HDHP; his deductible is $1,500. All
covered expenses are paid 100 percent after he has met his deductible.
John, Jane and Junior are enrolled as family on an HDHP. The whole family has to
meet $3,000 deductible for everyone’s expenses to be paid 100 percent for the rest
of the year. If any one individual in the family has $2,700 in expenses, that one
person has met the individual embedded deductible and has their own covered
expenses paid 100 percent while the other family members continue to accumulate up
to $3,000. Typically, one person in the family tends to meet their full deductible
in the year. So, the scenario could be Jane has $2,700 in expenses and meets her
embedded individual deductible, John has $100 and Junior has $200. Then claims
would be paid 100 percent for all members going forward. Another way they could
meet the family deductible would be if Jane incurs $1,000, John incurs $1,500 and
Junior incurs $500. In this case, the embedded deductible was never triggered, but
would still be a qualified HDHP.
Additionally, there are separate ACA rules to consider. The ACA OOP max for 2019 is
$7,900 for individual coverage and $15,800 for family (for 2019). Non-grandfathered
plans must have embedded individual max OOPs with family coverage. HHS guidance
confirms that the ACA’s self-only annual cost-sharing limit acts as an embedded
limit when an HDHP provides coverage other than self-only coverage (that is, family
HDHP coverage). In other words, if an individual stays in-network, then under no
circumstances should that individual pay more than $7,900 (in 2019), even if it is
Therefore, putting these rules together (the embedded minimum deductible under
QHDHP and embedded max OOP under ACA), this could result in an individual embedded
maximum OOP being less than the plan’s family deductible. For example, if a carrier
says that an individual must meet $10,000 in OOP (to match the family deductible),
that design would be out of compliance with the ACA requirement.
So, the embedded OOP for an individual with QHDHP family coverage in 2019 must meet
both of these conditions:
At least $2,700 (the statutory family deductible for QHDHPs)
Equal to or less than $7,900 (the statutory ACA individual max OOP)
As another example, four individuals (A, B, C and D) are enrolled in family
coverage with an OOP max of $13,500. A incurs $10,000 in covered expenses, and B, C
and D each incur $3,000 in covered expenses. Since the self-only max OOP applies to
each person ($7,900 in 2019), A’s cost sharing is limited to $7,900, and the plan
has to pay the difference ($10,000 - $7,900). With respect to cost-sharing incurred
by all four individuals, the aggregate is limited to $13,500, so the plan has to
pay the difference ($7900 + $3000 + $3000 + $3000 = $16,900), which is $16,900 -
October 30, 2018
For companies under common ownership, is there a requirement to offer only one plan to the
different companies, or can the different companies sponsor their own separate plans?
Companies under common control are considered a ‘single employer’ for purposes of
ERISA, the Internal Revenue Code (IRC) and for benefit offerings. That means one
plan can be offered to the employees of all of the companies under common control.
That said, there’s no requirement to offer the same plan to employees of all the
commonly-controlled companies. It’s really up to the companies—and perhaps the
parent company, if there is one—to decide how to offer benefits among the different
companies. However, there are several compliance considerations.
First, the group of employers needs to consider the ACA’s employer mandate. All
employees of all companies under common control must be included in the full-time
employee/equivalent count in determining if the mandate applies. This means a
smaller company that’s owned by a larger company may be subject to the mandate,
even though on their own they may have fewer than 50 full-time
employees/equivalents. In addition, the plans offered to full-time employees for
all members of the controlled group would need to meet the minimum value and
affordability standards under the mandate. Otherwise, the employer may be risking
mandate penalties. Also, while each member of the controlled group is separately
liable for such penalties, the group could come together and have one company offer
the plan and perform reporting on behalf of the other controlled group members. But
whatever the approach, the commonly-held companies would need to review their
compliance obligations under the employer mandate.
Second, careful review of controlled group status should be made to avoid multiple
employer welfare arrangement (MEWA) status. A MEWA is a plan that covers the
employees of two or more separate (non-controlled group) companies. While MEWA
status isn’t necessarily prohibited, it brings additional (and in some instances
onerous) compliance obligations (such as Form M-1 filings and state requirements).
Employers should ensure there’s sufficient common ownership before offering a
single plan to companies within a controlled group in order to avoid additional
Third, if the group of commonly-owned companies offers different plans to different
companies, there may be nondiscrimination testing required. The nondiscrimination
rules prohibit a plan design that somehow favors highly compensated individuals
(HCIs). There are two sets of rules that may apply: IRC Section 105 (if one of the
offerings is self-insured) and IRC Section 125 (if employees can pay their portion
of the premium pre-tax through salary reduction). While employers can vary plans
(and employer contributions, among other things) by company (that is to say,
different tax ID numbers/business lines within a controlled group), the result must
not favor HCIs (which could happen if one of the companies had a much richer plan
in place and that company had a disproportionate number of HCIs as compared to
Fourth, whether the group offers one or multiple plans, arrangements should be
outlined in related plan documents. Employers as plan sponsors have the ERISA
obligation to create written plan documents and SPDs, and those should describe
which company is sponsoring the plan and which companies’ employees are eligible to
participate. So, after deciding to offer one plan versus multiple plans, the group
should appropriately and sufficiently document their arrangements and offerings.
They will also have to comply accordingly with other ERISA obligations (such as the
Form 5500 and SAR reports).
Finally, the group of employers should work with outside counsel in running through
the different considerations. Not only is the determination of actual controlled
group status a tax and legal issue, but it also has consequences beyond benefits
(primarily, employment tax and labor/employment law issues). Outside counsel would
be in the best position to access and understand all of the facts and
circumstances, and to advise the group of companies accordingly.
October 16, 2018
When an employee takes sick leave that isn’t covered under FMLA, how long must the employer
allow the employee to stay on the health plan?
When FMLA isn’t an issue – either because the employer isn’t subject to it or
because the employee isn’t eligible – there is no federal requirement to continue
an employee’s health benefits while the employee is out on the non-FMLA leave.
However, sometimes there are state laws that will mandate certain leave be
provided, and require that health coverage be continued.
Generally, insurance contracts include “actively at work” policies that stipulate
how long an employee can be on non-FMLA leave before they becomes ineligible for
health coverage. Many insurance contracts make employees ineligible for coverage
once they have been out on non-FMLA leave for a period of 30 days or more. The
employer should keep that in mind for these employees as well, because the
employees’ coverage could be limited by the eligibility terms of the insurance
contract (or self-insured plan document).
If the insurance contract and plan document don’t include such an “actively at
work” clause, then the employer should review their policies to be consistent with
what’s provided to employees on other types of unpaid leave. For example, if
benefits continue for employees on sabbatical or personal leaves of absence, then
the employer would probably want to do the same thing with employees who take
non-FMLA medical leave. This is especially the case if the employee is taking leave
due to a disability. The employer wouldn’t want to be at risk of violating the
Americans with Disabilities Act or HIPAA’s nondiscrimination rules related to
medical conditions and disability.
The employer should also consider any state or local requirements to continue
coverage. While many states don’t give any additional protection outside of FMLA,
other states do.
Finally, an employer who ceases to offer coverage to an employee taking leave
should be sure to offer COBRA when the employee’s coverage is terminated (assuming
the employer is subject to COBRA). Since the employee would be experiencing a
reduction in hours and a loss of coverage, they would be eligible for COBRA. As
such, the employer would need to send the employee a COBRA election notice once
their coverage was terminated. This would give the employee the opportunity to
elect COBRA for the maximum coverage period.
October 3, 2018
How should we maintain group health plan documentation? How long are we required to keep
group health plan documents?
In general, when maintaining group health plan records, an employer must consider
ERISA, HIPAA and ACA guidelines.
The recommendation is to maintain ERISA related documents for eight years. Based
upon DOL rulings and statute, records required to be maintained under ERISA include
vouchers, worksheets, receipts, and applicable resolutions, claims records, plan
documents, summary plan descriptions, copies of filed Form 5500s and Schedules,
accountants' reports, enrollment materials, requests for reimbursement for health
FSA plans, lists of covered employees, and records of payroll deductions. The ERISA
retention period for group health plans is six years and is measured from the date
of filing a Form 5500. Because Form 5500 is often filed many months after the end
of the plan year, the six year retention period is actually closer to seven years
when measured from the end of a plan year. When adding in the possibility of a
filing extension, many group health plans use eight years as a rule of thumb for
ERISA document retention.
Many items may be able to be kept electronically rather than in paper form.
According to DOL regulations, records may be maintained electronically if the
electronic recordkeeping system meets certain requirements:
The system must have reasonable controls to ensure the integrity, accuracy,
authenticity and reliability of the records — and should not allow the
modification of documents.
The system must maintain the records in a reasonable order. (It should have
some type of filing system so the records could be retrieved or inspected as
The system must maintain the records in a safe manner and should be backed up
The system needs to be able to print a readily legible paper copy of the
With regard to HIPAA, covered entities and business associates must retain
documentation for the privacy rule for six years from the date the documentation is
created or the date it was last in effect, whichever is later. The documentation
under the privacy rule includes any action, activity or designation that the
privacy rule requires to be documented. Group health plan brokers and employers of
fully-insured plans are generally considered to be business associates.
If the documents include protected health information (PHI), HIPAA requires that
the information be safeguarded. Any PHI should be kept in files separate from the
personnel or files with expanded staff access. Only those who need the information
to perform the duties of their job should be granted access.
The PCOR fee is considered an excise tax under the Internal Revenue Code. As such,
the Form 720 instructions indicates that tax returns, records, and supporting
documentation must be maintained for at least four years from the date the tax
became due, the date the claim was filed, or the date the tax was paid, whichever
was later. However, with respect to the documents and records substantiating the
enrollment count that was reported, those records must be maintained for at least
10 years. The IRS generally accepts electronic records. However, they retain the
right to examine any books, papers or records which may be relevant to a filing.
With regard to the employer mandate, this isn’t specifically addressed in the
regulations or instructions, but it appears that the same IRS rule that applies to
the PCOR filing may also apply here. In other words, records regarding enrollment
and offers related to the medical plan must generally be kept for four years, and
the IRS retains the right to examine books, papers or records relevant to the
Storage and retention of SPDs, enrollment information, claims information and so on
would likely fall under ERISA and HIPAA’s requirements to maintain claims records
and PHI (and to properly safeguard if documents include PHI). Therefore, the most
conservative time frame would be to retain group health plan records for at least
eight years measured from the date of filing Form 5500. In other words, an employer
would need to retain past documents for at least eight years based upon the date of
filing Form 5500. Additionally, retention of PCOR fee filings and employer mandate
forms and records likely falls under the IRS’s requirements to maintain records for
at least four years, but records substantiating those filings should be kept for at
least 10 years.
September 18, 2018
What should employers consider with respect to the Summary Annual Report (SAR)? To whom and
how must it be distributed, and when is it due?
The SAR is an annual summary of the latest Form 5500 for a group health plan. So, a
SAR is required only where the plan is subject to Form 5500 filing requirements. If
a plan isn’t required to file a Form 5500, then a SAR is not required. Under the
DOL SAR regulations, a totally unfunded welfare plan, regardless of size, need not
provide SARs (even though large, unfunded welfare must file a Form 5500). In
contrast, large insured plans are subject to the SAR requirement. Employers with
self-insured plans should work with outside counsel in determining if they are
funded because large funded self-insured plans are subject to the SAR requirements.
Generally, an unfunded plan means that benefits are paid out of general assets and
that no plan assets are maintained. Segregating participant contributions from an
employer's general assets could result in plan assets and thus a funded plan.
For those subject to the SAR requirement, the plan administrator must distribute a
SAR to all plan participants covered under the plan within nine months of the end
of the plan year. The SAR is only required to be distributed to plan participants
who are enrolled at the time of the SAR distribution. For this purpose, a
participant is defined as an employee or former employee (e.g., retiree, COBRA
beneficiary) who’s actually enrolled on the plan — not terminated employees who are
no longer covered. Also, it doesn’t include the participant’s beneficiaries
(spouses or dependents).
SARs must be distributed two months after the Form 5500 filing deadline. For
calendar year plans with a July 31 Form 5500 deadline, the SAR must be distributed
by Sept. 30, which is fast approaching. If an extension of time to file the Form
5500 was granted, then the SAR deadline is two months after the extension date.
As far as the distribution method, mail is always an acceptable form of delivery.
Email is also generally acceptable, so long as the DOL safe harbor on electronic
distribution is followed. Essentially, employees must have computer access (e.g., a
work email or a work computer station) as an integral part of their job, or they
must give permission to receive communications at a separate email address. The
employee also needs to have the ability to receive a hard copy of the SAR without
additional cost. Employers using email delivery should use return-receipt features
to maintain proof of delivery.
Lastly, the SAR can’t simply be posted on a company internal website; the employer
must also send an email explaining what the document is, the importance of the
document, where it can be located on the internal website, and the right for the
employee to request a paper copy (and how to make that request).
September 5, 2018
If an employee experiences a qualifying event, do they have the right to switch benefit
plan options (for example, from HMO to HDHP)?
The answer depends upon which qualifying event is involved, but yes, the employee
has the right to switch benefit plan options under certain circumstances.
As a reminder, when an employer offers coverage through a Section 125 cafeteria
plan, employee elections cannot be changed mid-year without a permissible
qualifying event. It’s called the irrevocable coverage rule and applies any time
employees contribute to the cost of health coverage on a pre-tax basis with salary
reductions. There are two types of qualifying events: HIPAA Special Enrollment
Rights (SER) and the optional Section 125 qualifying events.
The HIPAA SER events are:
Loss of eligibility for other group coverage
Loss of Medicaid or CHIP
Gain of eligibility for Medicaid or CHIP premium assistance program
Employees currently enrolled in the group medical plan who experience a HIPAA SER
have the right to switch benefit plan options. For example, if an employee is
enrolled in HDHP single coverage and gets married, they have the right to add the
spouse and switch to a different medical plan option (such as an HMO plan). This is
an entitlement under HIPAA. Neither the employer nor the insurer may deny the
employee the right to switch plans under these circumstances.
Please note that the HIPAA SER rules don’t apply to stand alone dental or vision
plans, which are generally excepted from HIPAA portability governance.
The second type of qualifying events are the optional events under Section 125:
Change in status (employment, marital status, number of dependents, residence)*
Change in cost (significant* and insignificant)
Significant coverage curtailment*
Addition or significant improvement of benefits package option*
Change in coverage under other employer plan
Loss of coverage sponsored by governmental or educational institution
Certain judgments, orders or decrees
Medicare or Medicaid entitlement
FMLA leaves of absence
Reduction of hours without loss of eligibility
These events are optional for both an employer and an insurer. If an employer
intends to permit mid-year election changes based on these events, their written
Section 125 Plan Document would need to provide for such and the insurer’s policy
would need to be in agreement. Those events identified with an asterisk allow for
an employee to switch benefit plan options (including not only medical, but also
dental and vision) based on the employer and insurer election rules. Where there’s
overlap between the HIPAA SER and optional Section 125 rules (for example, between
the HIPAA SER event of marriage and the Section 125 event of change in marital
status), remember that the HIPAA SER events along with the right to switch medical
plan options are an entitlement to an eligible employee and cannot be denied by
employer or insurer practice.
Lastly, remember that employers must operate the plan in accordance with the
Section 125 rules and their written Section 125 Plan Document. Allowing employee
election changes outside of those guidelines would put the employer at risk for
disqualification of the plan’s tax status. On the other hand, denying an employee a
HIPAA SER could result in DOL enforcement, an IRS excise tax penalty or legal
action against the plan.
August 21, 2018
What is IRS Letter 5699, and what are the penalties for not filing appropriate reports
(Forms 1094-C and 1095-C) with the IRS?
Some employers have been receiving IRS Letter 5699, which is a letter from the
IRS inquiring about an employer’s informational reporting forms (Forms 1094-C
and 1095-C), which may have been due in past years. As background, under the
employer mandate and the related reporting, applicable large employers
(ALEs—those with 50 or more full time employees, including equivalents) are
required to identify and offer affordable coverage to all full time employees
(those working 30 hours or more per week) and to file Forms 1094-C and 1095-C
(which detail the offer of coverage) with the IRS. ALEs were generally required
to offer coverage beginning in 2015, and are required to file informational
reporting forms regarding the prior year’s compliance (that is, file reports in
2016 reporting on 2015 compliance, in 2017 reporting on 2016 compliance, and so
The IRS sends Letter 5699 to employers that may have failed to submit their
informational reports. In other words, if the IRS doesn’t have a record of a
company’s Forms 1094-C and 1095-C, and the IRS believes the company should have
submitted those reports, the IRS could send Letter 5699 to that company. Letter
5699 identifies the year of the alleged failed reporting, and provides the
employer with five options for responding. Specifically, employers who receive
this letter can:
Acknowledge they were an ALE for the year indicated, and that they actually
did file the appropriate forms (and identify the date and employer EIN used
Acknowledge they were an ALE for the year indicated, but that they didn’t
file appropriately or on time for the year. The employer would also include
in their response the appropriate forms and explain the reasons for the
Acknowledge ALE status and promise to report within 90 days of the letter
(and explain the reasons for the late filing).
Claim they were not an ALE for the year in question.
Categorize their response as “Other,” which is a catch-all option for the
employer to explain why they didn’t file and any actions they plan to take
to fix the failure.
The letter reminds the employer that there are penalties for failing to file
the appropriate informational returns. Although the letter does not list
specific penalty amounts, the IRS has previously indicated that the penalty
amount for tax filings made in 2017 or after is $260 for each return to which a
failure relates (capped at $3,218,500 — although there’s a lower cap for
employers with $5 million or less in annual gross receipts). For failures in
2016, the penalty is $250 (with a $3 million cap). Keep in mind that the
failure to provide a form to the IRS and to a given participant is considered
two separate failures.
Employers that receive IRS Letter 5699 should review the letter closely and
review their filing for the year indicated in the letter. Employers are
required to respond to the letter within 30 days. The first page of the letter
contains IRS contact information and employers should reach out to that IRS
contact to let them know they’ve received the letter and are working towards
its resolution. After reviewing and assessing whether the filings were made in
the year in question, the employer should check the box relating to their
response (under one of the five options above). The employer may also need to
provide an explanation of the situation or the reasons for the failure, as well
as any corrective action they plan on taking. Working directly with the IRS
agent, the employer may also want to attach additional documentation or
substantiation relating to the informational reports. If the employer has
specific questions or needs exact advice, they should work with outside
August 7, 2018
What is the General Data Protection Regulation (GDPR)? To whom does it apply and
what does it require?
The General Data Protection Regulation (GDPR) is a law adopted in the
European Union (EU) which took effect on May 25, 2018. GDPR seeks to
protect the personal data of EU data subjects (citizens and residents) and
affords privacy protection for such individuals. The regulation broadly
defines personal data as any information that relates to an identifiable,
living human being, which can include the person’s name, address, phone
number, location, health records, income and banking information, etc.
Essentially, if one can use the data to identify a person in any way, it is
likely personal data that would render an entity receiving that data
subject to the law.
Specifically, the law imposes requirements on entities that collect, use
and process personal data of EU data subjects. Since the law does not limit
its scope to EU-based companies, companies all over the world that employ
individuals in the EU, offer goods and services to individuals in the EU,
or track or profile individuals in the EU are impacted by this regulation.
The GDPR also recognizes two different roles that determine an entity’s
responsibilities under the regulation – data controllers and data
processors. Data controllers determine the purpose and means of processing
personal data. Data processors process the data on behalf of the data
controller. As an example, a US-based company with EU employees would
likely be a data controller since as an employer it collects personal data
on those EU employees for business/employment purposes. That same company
with EU employees might contract with a health and welfare broker who takes
some of that personal data and processes it to enroll the employees in the
company’s health plan. The broker would likely be a data processor in this
instance, as they are processing that information on behalf of a data
controller (i.e., the employer company).
If an entity is a data controller, then they are subject to the GDPR’s
requirement that data processing be fair and transparent, for a specified
and legitimate purpose, and limited to the data needed to fulfill that
processing purpose. The regulation also gives specific legal grounds under
which a controller can process personal data, including if the person gives
his/her consent, if there is a contractual or legal obligation, if doing so
will protect the vital interests of the person, or if it is to carry out a
task that is in the public interest or in the company’s legitimate
interest. Keep in mind, though, that the regulation makes it clear that an
individual’s right to their personal data will often trump the business’
Even if a company has the legal grounds to process certain personal data,
they are still obligated to protect the individuals whose data they
possess. Specifically, companies must:
Provide individuals with information on who is processing their data
Provide individuals with access to their personal data when requested;
Erase an individual’s personal data when requested (under certain
Correct incorrect information or complete incomplete information when
necessary or stop processing that data if the individual objects.
Data controllers are also required to ensure that any data processor they
use offers sufficient privacy and data protection guarantees through a
written contract between the controller and processor. This contract must
specify, among other things, that the data processor will only process data
as directed by the controller.
Ultimately, this regulation is aimed at allowing EU data subjects more
rights and control over their personal data in an increasingly
technological world. Keep in mind, though, that this regulation is much
more detailed and complex than what we can summarily provide in this FAQ.
The potential fines and costs associated with noncompliance of this
regulation can be significant, up to twenty million euros or 4 percent of
an entity’s worldwide revenue (in addition to any court proceedings or
damage to an entity’s reputation). As such, companies that feel they might
be subject to the GDPR should work with legal counsel to review and assess
compliance with the regulation.
As background, employer wellness programs involving a
disability-related inquiry (e.g., a health risk assessment) or a
medical examination (e.g., a biometric screening) are limited to a 30
percent wellness reward under the EEOC’s final wellness rules. A
financial incentive may be provided to individuals who voluntarily
provide genetic information as long as certain requirements are met.
Additionally, a notice must be provided to participants prior to the
inquiry or examination. Pursuant to the judge’s decision in AARP v.
EEOC, those rules would be vacated effective 2019, if the EEOC
fails to finalize new regulations in 2018. (We discussed that ruling in
the Jan. 9, 2018 edition of Compliance Corner.)
Specifically, this means that if the EEOC doesn’t reissue their
regulations by Jan. 1, 2019, then the 30 percent inducement might no
longer be permitted. If this happens, then it’s presumed that things
would revert back to the ambiguous language of the EEOC’s requirement
that a plan be voluntary if it offers an incentive. Thus, an employer
with a 30 percent inducement under the HIPAA wellness rules with a
health screening or disability inquiry could be in violation of the
EEOC’s previous guidance.
In addition, if the EEOC doesn’t issue new rules, this impacts the
ability to have a spouse complete a health risk assessment. This
information is generally considered genetic information, but there was
a specific exception in the EEOC GINA rules that allowed for it as long
as it was up to 30 percent, only considered the spouse’s previous or
current manifestation of a condition and the reward/inducement was
separate from the employee’s reward. This is another part of the
inducement rule that would be vacated. In other words, employers likely
couldn’t provide a reward for a spouse’s completion of a health risk
However, this is all still speculation. We don’t know if the EEOC is
going to promulgate new rules or impose some type of non-enforcement
policy on plans that rely on their rules after Jan. 1, 2019. For now,
nothing has changed, and the EEOC’s rules remain in place. We’ll report
any updates in Compliance Corner and other resources as soon
as the EEOC issues new rules or if the rules do become vacated. Also,
it’s unlikely that there wouldn’t be some type of transition relief for
any plans to come into compliance (in other words, we don’t believe the
rules would be vacated automatically, making everyone offering this
type of program out of compliance on Jan. 1, 2019).
It’s ultimately up to employers to determine how they’ll proceed in
light of the EEOC rules possibly becoming vacated. Some may choose to
rely on the EEOC’s rule in the future (especially when you consider the
30 percent reward allowed under HIPAA wellness program regulations).
Others may instead choose to take a more conservative route and not
offer any incentive to provide disability-related information. Either
way, we could not advise on a specific course of action due to lack of
guidance and would recommend employers discuss the issue with outside
July 10, 2018
With the PCOR fee due date around the corner, can we get a refresher on the
The PCOR fee is due Tuesday, July 31, 2018, for all plan years that
ended in 2017. The fee is generally due on July 31 of the year
following the plan year end date. Please keep in mind that the PCOR
fee applies to plan years ending on or after Oct. 1, 2012, and
before Oct. 1, 2019. So, the end of the PCOR fee era is near.
Insurers are generally responsible for the PCOR fee payment and
filing for fully insured plans; whereas the employer is generally
responsible for the PCOR fee payment and filing for self-insured
plans. Special rules apply for determining who is responsible in
the situation of an association plan, MEWA or VEBA. The IRS has a
helpful chart to remind employers which types of
plans are subject to the fee. The requirement to pay the fee will
remain in place until the plan years ending before Oct. 1, 2019.
The general rule is that the PCOR fee is based on the average
number of covered lives during the plan year. Importantly, this
includes not only employees, but also dependents (spouses, children
and others) as well as former employees still receiving coverage
under the plan (former employees on disability who are still
covered, retirees, COBRA participants, etc.). The IRS allows
employers to use any one of four methods for calculating lives, as
Actual Count Method: Calculate the sum of the lives
covered for each day of the plan year and divide that sum by
the number of days in the plan year.
Snapshot Method: Add the total number of lives covered
on any date (or more dates, if an equal number of dates are
used for each quarter) during the same corresponding month in
each of the four quarters of the benefit year (provided that
the date used for the second, third and fourth quarters must
fall within the same week of the quarter as the corresponding
date used for the first quarter). Divide that total by the
number of dates on which a count was made.
Snapshot Factor Method: The calculation is the same as
the snapshot method, except that the number of lives covered on
a date is calculated by adding the number of participants with
self-only coverage on the date to the product of the number of
participants with coverage other than self-only coverage on the
date and a factor of 2.35. For this purpose, the same months
must be used for each quarter (for example, January, April,
July and October).
Form 5500 Method: The plan may use the data reported
on the most recent Form 5500. A plan may only use this method
if it filed the Form 5500 by July 31. A plan filing an
extension for the Form 5500 would have to use another
calculation method. If a plan covers only employees, then the
plan sponsor would add the number of participants at the
beginning of the plan year and at the end of the plan year and
divide by two. If the plan covers dependents, the plan sponsor
would add the number of participants reported for the beginning
of the plan year and the number of participants at the end of
the plan year, and report this total.
Employers may switch methods from one year to the next, and should
calculate the average number of lives under all four methods and
choose the one that is most favorable. For example, a plan that has
many covered dependents (employees generally cover three or more
dependents) may find that the snapshot factor method is
advantageous, since it allows employers to disregard actual
dependent count and instead assume 2.35 lives per covered employee.
Similarly, if the employer hires more individuals at the end of
quarters, the snapshot method may allow an employer to use a date
early in each quarter to make a count, which may be advantageous.
The PCOR fee is filed and paid via IRS Form 720, Quarterly Federal
Excise Tax Return. The PCOR fee is reported in Part II of that
form, which also includes the amount of the fee (based on when in
2017 the plan year ended). Employers should work with their
advisors and tax advisers in ensuring proper filing and payment of
The PCOR fee is treated as a tax. As such, it is generally
assessed, collected and enforced in the same manner by the IRS as
other taxes. We know of no amnesty or leniency for noncompliance
with the PCOR fee filing.
Specifically, the fee is found in the excise tax portion of the
IRC, and since the fee is reported on IRS Form 720, there are
general penalties that apply for failure to file a return or pay a
tax. Those are found in IRC Section 6651 and the penalties vary
based on the amount failed to be reported or paid.
The general penalty would be up to 25 percent for a failure that is
beyond five months. Like any other tax payment failures, there is
also the risk of interest on top of the required amount. There are
additional penalties if the failure was due to willful neglect,
which means that the employer knew about the requirement but did
nothing about it. So, there is definitely a risk involved with not
filing and paying the PCOR.
There is no specific guidance on how to correct a failure.
Ultimately the employer will want to consult their tax advisor as
soon as the problem has been identified. However, as with other tax
form and payment failures, it seems prudent and appropriate to come
into compliance as soon as possible. Most likely, the employer
could start by filing a Form 720 for past years as soon as
possible. Generally speaking, the employer needs to file a separate
Form 720 for each year, but could file multiple at the same time.
Ideally, the employer should consult their tax adviser for advice
on precisely how to proceed.
As a reminder, the employer mandate (also known as the employer
shared responsibility) only applies to employers with 50 or
more full-time employees, including full-time equivalents
In November 2017, the IRS began enforcement of the employer
mandate. Their efforts thus far have focused only on
calendar year 2015. In 2015, most small employers with 50
to 99 FTEs qualified for transition relief. This transition
relief exempted them from employer mandate penalties for
that year, but they were still required to comply with
Section 6056 reporting (Forms 1094-C and 1095-C).
The method of enforcement used by the IRS involves issuing
a Letter 226J to the employer. The letter will identify the
total assessment that the IRS believes the employer owes,
the reasoning for the assessment, including a listing of
the employees who received a premium tax credit, and
instructions for appealing the assessment.
To our knowledge, the first round of letters sent by the
IRS assessed Penalty A for failure to offer minimum
essential coverage (MEC) to substantially all full-time
employees (70 percent in 2015). Almost all of the letters
we’ve seen were due to a reporting mistake rather than
actual failure to comply with the employer mandate. In
other words, the employer indeed offered MEC to
substantially all full-time employees, but their Form
1094-C didn’t indicate that fact. Specifically, column (a)
of the Form 1094-C was incorrectly marked “No” in response
to whether they offered MEC to full-time employees.
The most recent letters we’ve seen seem to assess Penalty B
for an employer’s failure to offer minimum value,
affordable coverage to specific employees who received a
premium tax credit. Again, the penalties are generally due
to erroneous reporting. A common scenario is that the
employee was indeed not offered coverage, but the employer
had a valid reason for not offering it. For example, the
employee was in an initial measurement period, part-time or
not employed for that month. The employer entered 1H on
line 14 of the Form 1095-C, but failed to claim the correct
safe harbor code on Line 16.
In most cases, the IRS has been cooperative with employers.
They have advised employers as to what documentation is
necessary to eliminate or reduce the penalty assessment. In
some cases, the IRS representative granted a 30-day
extension to give the employer more time to respond and
The letters are still being sent out on a regular basis. We
saw several employer letters just last week. So, just
because you haven’t seen one yet doesn’t mean you’re in the
clear. And remember, so far, they’ve only focused on 2015.
We haven’t seen any enforcement action related to 2016 or
2017 yet. However, several IRS representatives have told
employers that if the employer has knowledge that their
2016 or 2017 Forms 1095-C or 1094-C are incorrect, they
encourage them to file a correction as soon as possible.
For now, the employer mandate is still in effect with no
immediate changes expected. Large employers should continue
to offer minimum value, affordable coverage to full-time
employees. And just as important as the offer, an employer
must have records documenting the offer, the cost of
coverage for affordability purposes, and employee hours. An
employer just might need these records to successfully
appeal a potential assessment from the IRS.
June 12, 2018
Carriers have been making adjustments to past years' MLR rebates,
which in some instances have resulted in additional MLR rebate
checks to employers. What are those employers' responsibilities
with regard to the additional MLR rebate amounts? Must they
distribute those out to current and/or past participants, or is
there some type of de minimis exception?
Generally, employers will have to decide how to handle an
adjusted MLR rebate check received from an insurance
carrier. This can be somewhat confusing for employers,
since the adjustments generally relate to prior years.
Overall, though, the employer's MLR rebate distribution
responsibilities hinge on whether there's a portion of the
rebate that's attributable to employee contributions (which
makes them “plan assets,” a status that places some
stricter rules on whether and how they should be refunded
If the entire rebate is attributable to employer
contributions (e.g., the employer contributed 100 percent
of the premium), then the employer can generally keep the
rebate. If, however, employees contributed toward the cost
of coverage, the portion of the MLR rebate that's
attributable to employee contributions is considered plan
assets, meaning it must be used in a way that benefits
There are basically three ways an employer can use the plan
assets portion of the MLR rebate to benefit
employees/participants: providing a taxable cash refund,
allowing a premium reduction (sometimes called a “premium
holiday”), or adding some type of benefit enhancement (such
as coverage for an additional service, an additional
contribution to an HRA or something similar) to the overall
plan design. Most employers settle on using a cash refund
or premium holiday to benefit participants. One reason is
that the MLR rules require the rebate to be used within 90
days and only on behalf of that specific plan's
participants. So, for example, the amount couldn't be used
to provide a wellness program that benefits all employees.
If the employer instead chooses a premium reduction, the
employer could limit the distribution to only those who are
currently participating in the plan. Further, the employer
could limit the distribution to only those who are
participating now AND were also participating in that same
plan in the relevant year.
With regard to former participants, the DOL provides
employers a bit of flexibility. Since a benefit enhancement
or premium holiday wouldn't help a former participant, the
only method that would be appropriate for former
participants is a cash refund. If the cost of distributing
rebates to former participants is approximately equal to or
greater than the amount of the rebate, then the employer
may decide to limit rebates to current participants. It's
unclear what can be taken into consideration in determining
cost. While it may include the time to track down
individuals, the more conservative approach is that the
employer should look only at “hard” costs (e.g., postage,
cost of having check cut, locator fees, etc.). Ultimately,
since the employer is the fiduciary of the plan assets,
they'll have to decide the overall cost-effectiveness of
distributing to former participants (but couldn't do the
same for current participants).
In addition, there isn't a de minimis threshold.
The only consideration is the one outlined above regarding
the cost of including former employees compared to the
distribution amount. The proportionate amount related to
plan assets must be distributed to current participants
even if it's a small amount.
Lastly, there's one exception to the general rule that plan
assets must be distributed to participants in one of the
three ways outlined above. Specifically, if the employer
placed specific language in the plan document to retain the
rebate amount (which is extremely rare), it's possible they
could retain it. Employers relying on that exception should
work with outside counsel to ensure compliance with the MLR
rules in that situation.
In summary, if employees originally contributed towards the
cost of coverage, an employer couldn't keep the entirety of
an adjusted MLR rebate. This is because a portion of the
rebate is attributable to plan assets and must be handled
accordingly. If the rebate is an insignificant amount, the
employer may be able to exclude former participants, but it
would be required to include current participants in one of
the three distribution methods outlined above.
May 30, 2018
Must we continue to offer health coverage to employees who take
leave to serve in the U.S. armed forces?
The Uniformed Services Employment and Reemployment
Rights Act (USERRA) provides certain protections for
employees who must be absent from work due to uniformed
service. These protections include re-employment
rights, protection from discrimination and the right to
the continuation of group health coverage.
Specifically, when an employee is absent due to
uniformed service, the employer must satisfy USERAA
obligations for continuation of group health coverage
with respect to that employee. Namely, an employee who
is absent from work due to uniformed service is
entitled to continue his/her group health coverage for
a period of 24 months.
If the leave of absence is to be 30 days or less, the
employer should pay its normal share of premiums. If
the leave of absence is expected to be 31 days or more,
the employer isn't required to pay its normal share of
premiums (not even for the first 30 days). However, the
applicable premium cannot be more than 102 percent of
the normal cost of coverage.
If the employer is also subject to COBRA, then a leave
of absence to serve in the armed forces would likely
also be considered a COBRA triggering event. So, when
an employee leaves for deployment, the employer should
offer the employee continued coverage under USERRA and
COBRA. To that end, the COBRA election notice can be
modified to include USERRA language.
Also keep in mind that if the employee returns and is
rehired after his or her service, USERRA requires that
the employer allow the employee to re-enter the group
health plan. This is true whether the employee
continued coverage under COBRA or USERRA or not.
May 15, 2018
Can an employee have an FSA and an HSA in the same calendar
HSA eligibility is determined on a monthly basis
and not on a plan year or calendar year basis. An
individual is only allowed to establish and
contribute to an HSA if they’re enrolled in a
qualified HDHP and have no other disqualifying
coverage (e.g., general purpose health FSA or HRA,
copay-type medical plan, Medicare, TRICARE, etc.)
for that same month. For example, if an employee
enrolls in a general purpose FSA or a copay-type
medical plan, the individual wouldn’t be eligible
to make contributions into an HSA for that same
month or for any other months while still enrolled
in disqualifying coverage.
However, health FSA elections are generally
irrevocable for the full plan year unless there’s a
qualifying life event that would allow the
employee’s FSA election to be revoked. So, if an
employee enrolls in an FSA as of Jan. 1, for
example, the individual couldn’t also establish or
contribute to an HSA while enrolled in the FSA and
couldn’t decide to change their FSA election later
without experiencing a qualifying event. However,
an employee could wait until open enrollment to
waive health FSA participation and contribute to
the HSA after the end of the FSA plan year.
Lastly, an individual is generally responsible for
IRS compliance with an HSA because they’re the
account holder. However, if the employer sponsors
an HSA and HDHP, then they also have a
responsibility to determine whether individuals’
HSA contributions are excludable from income. IRS
guidance says that the employer who sponsors the
non-HDHP coverage has the responsibility to confirm
that an employee is covered under the HDHP and
isn’t covered under any other disqualifying
coverage sponsored by that employer if an employee
is contributing to an HSA. In other words, if an
employer sponsors a health FSA, they have an
obligation to make sure employees are actually
eligible to make HSA contributions if they offer an
HSA and HDHP (including any employer HSA
Thus, once non-HDHP coverage ends and an individual
enrolls in a qualified HDHP, even if it’s in the
same calendar year or plan year, they could
generally contribute to an HSA for the remaining
months. Importantly, though, employers must keep in
mind their responsibly to determine whether an
employee’s HSA contributions are excludable from
income and clearly communicate HSA-eligibility to
May 1, 2018
Who’s eligible to participate in an HRA, and for whom
can HRA reimbursements be used?
Generally speaking, employees and former
employees may participate in an HRA. If the HRA
is a general-purpose HRA for active employees,
the ACA requires that the HRA be integrated
with group health coverage. Very generally,
“integrated” means that the HRA covers expenses
relating to the group coverage (i.e.,
deductibles, co-insurance, etc.). The
participating employees must be enrolled in a
group health plan (either directly through the
employer or through outside coverage, such as
through a spouse’s employer). If the HRA is a
limited-purpose (reimburses only dental and/or
vision expenses) or a stand-alone retiree-only
HRA, it isn’t subject to the ACA (and therefore
doesn’t have to be integrated with group
coverage). So, an employer could make all
former employees eligible for a retiree-only
HRA (even if they didn’t have group coverage).
Because HRAs are only for employees or former
employees, self-employed individuals are
generally not eligible to participate in an
HRA. A self-employed individual includes a sole
proprietor, partner in a partnership (sometimes
also called a “K-1 earner”) and a more-than-2%
S corporation shareholder. For LLCs, if the LLC
is taxed as a partnership, the owners will
generally be considered self-employed. On the
other hand, if the LLC is taxed as a
corporation, and for C corporation owners, the
owner may participate as long as they are
otherwise treated as an employee (i.e., receive
As for distributions from the HRA, employees
and former employees may use HRA funds to pay
or reimburse medical expenses of their federal
tax dependents. That generally includes a
spouse and a child (step/adopted child
included). Expenses for children can be
reimbursed up until the end of the year in
which the child turns age 26, regardless of
whether the child is a tax dependent of the
employee. A “child” may also include an
eligible foster child (one placed by an
authorized agency or by judgment or other
decree/order of a court). An employee may use
HRA funds for a domestic partner’s expenses
only if the domestic partner is the federal tax
dependent of the employee.
Employers are generally free to determine
eligibility and restrict distributions to
certain expense types (such as a
dental/vision-only HRA) as they see fit.
Because an HRA is considered self-insured and
therefore subject to the Section 105
nondiscrimination rules, employers shouldn’t
favor their more highly compensated individuals
(such as a management or executive group) in
their HRA eligibility and benefit/reimbursement
design. Beyond that, employers should document
eligibility and plan design in the related plan
documents and communicate them to employees.
Please ask your advisor for a copy of our white
paper HRAs and Other Employer Reimbursement
April 17, 2018
Our SPDs are available on our intranet. Does that
meet ERISA distribution requirements?
No. Simply posting the SPDs on your
intranet is not enough. Employers must
ensure the intended recipients receive the
SPDs. For example, merely providing
employees with access to a computer in a
common area (e.g., a computer kiosk) is not
a permissible means to electronically
furnish ERISA-required documents.
As background, ERISA requires a plan
administrator to obtain written consent
prior to electronically delivering ERISA
disclosures to beneficiaries and other plan
participants who do not have work-related
access to a computer. Plan administrators
are required to use measures reasonably
calculated to ensure actual receipt of the
material by plan participants and
beneficiaries (e.g., the plan administrator
must make use of electronic mail features
such as return-receipt or notice that the
email was not delivered). The plan must
also conduct periodic reviews to confirm
receipt of the transmitted information.
In general, the regulations recognize two
groups of employees when determining
whether electronic distribution is
sufficient: those who have electronic
access as an integral part of their job and
those who don’t. These categories are
determined by whether the employee can
access electronic documents at a location
where they are reasonable expected to
perform their job duties.
Importantly, the first group are not just
employees with a work email or who have
access to a computer station at work
(clock-in locations/kiosks included).
Instead, they actually have to have the
ability to access electronic documents at a
location where they normally work. Thus, an
employer should consider their workforce
and determine which employees (if any) fit
into the first category.
So, if an employee does not have access as
an integral part of their job, the employee
may provide the employer with an email
address to send the notices, but the
employee must affirmatively give consent to
receiving electronic notices before the
documents are distributed with that
personal email. The email must explain what
documents will be provided electronically,
that their consent can be withdrawn at any
time, procedures for withdrawing consent
and changing the email address, the right
to request a paper copy of the document and
if there is an applicable fee, and what
hardware or software would be required. If
an employee doesn’t give consent, then the
employer should mail them a hard copy or
provide it through another verified
Further, whenever an email is sent to the
employee with the notice (e.g., SPD), the
employer must also explain what the notice
is, explain the importance of the document,
and advise on the ability to access and
obtain a paper copy. So there is
supplementary language that should be
included in the email with the notice the
employer should be aware of.
Finally, some notices are not appropriate
for electronic disclosure. For example, the
COBRA initial and election notices must be
sent to covered spouses as well as to
covered employees upon enrollment in the
plan. Thus, the group should deliver these
documents through another verifiable method
if not included under the DOL safe harbor.
Please ask your advisor for a copy of our
white paper (Required Group Health Plan
Notifications for Employees) that
describes which documents should be
included in the eligibility/enrollment
packet, which documents should be
distributed upon enrollment, and which
documents should be distributed upon
termination from the plan. It identifies
the required notices that may be provided
electronically (indicated by an asterisk).
Additionally, to assist with understanding
the electronic disclosure requirements, take a look at this
helpful chart regarding the DOL’s
electronic disclosure safe harbor
describing the requirements for certain
employee groups to receive (or provide
consent to receive) documents
April 3, 2018
What options do employers have when employees
experience pay shortages, where employee wages
don’t cover the health insurance premium?
Employers are often faced with
situations that result in employees’
inability to pay insurance premiums.
Whether the employee has experienced a
reduction in hours, is on unpaid leave,
is a tipped employee or must be offered
coverage due to being in a stability
period under the employer mandate,
there are different times that the
employee’s wages may not be enough to
cover their health insurance premiums.
Unfortunately, the IRS hasn’t provided
specific guidance regarding situations
where there’s a pay shortage due to
employees working fewer hours during
certain periods of the year. However,
we believe that we can look to the
regulations that address how to finance
employees’ benefits during FMLA leave
for guidance on pay shortages.
These regulations provide three options
for handling the contribution
obligations of employees who continue
group health coverage during an unpaid
Prepayment with a special salary
Pay-as-you-go on an after-tax basis
Catch-up salary reductions (or
after-tax payment) upon return from
Thus, the IRS has indicated that salary
reduction elections for group health
coverage, at least in the context of
FMLA leave, can be accelerated,
deferred or paid on an after-tax basis
when there is no pay. It seems
reasonable to apply similar concepts in
the non-FMLA context, as well.
Moreover, there’s no requirement that
salary reduction contributions be made
in equal amounts every pay period. Keep
in mind, though, that the plan document
should contain language flexible enough
to accommodate the employer's method
for handling pay shortages.
The first option under the FMLA
regulations – prepayment by
acceleration of the salary reduction –
isn’t likely to be useful unless the
pay shortage is predicted, perhaps as
in the event of a planned leave or an
annual slow time for a commissions-only
salesperson. It’s worth noting,
however, that the FMLA regulations
don’t allow prepayment to be the sole
option made available to employees on
FMLA leave. Further, the prepayment
option cannot be used to pay for
benefits in a subsequent plan year.
The second option – pay-as-you-go on an
after-tax basis – will only be useful
for participants that have additional
resources to pay the amount
out-of-pocket (like a workers’ comp or
disability policy). The employer will
also need to notify any such
participants of how they will pay the
premiums while out. For example, will
they direct payment to the employer or
The third option – catch-up salary
reductions – is most likely to work
when the pay shortage is unexpected.
This option allows the employer and
employee to agree that the employer
will advance payment of the premiums
and that the employee will pay the
employer back upon their return. If it
seemed that a given employee was going
to go back to working full-time hours,
then the catch-up salary reductions may
be an option.
However, the risk in allowing catch-up
salary reductions is that the employer
may not be able to recoup the deferred
salary reductions. So an employer
permitting this option might consider
establishing an outside limit for the
deferral (e.g., 30 or 60 days) and then
stopping or reducing coverage at the
end of the time period if the catch-up
salary reduction isn’t made or is
insufficient to cover the amount due.
Note that there’s added risk in using
this method under a health FSA, because
the uniform coverage requirement isn’t
So, although there’s no specific
guidance on what to do when an
employee’s paycheck doesn’t cover the
health premiums, the employer could
explore the options provided for unpaid
FMLA leave, as long as the plan
document reflects the method that’s
chosen. The employer ultimately may
also want to seek outside legal counsel
on this issue, since the IRS hasn’t
provided specific guidance.
March 20, 2018
We have an employee moving from full-time
to part-time. Do we need to continue
An employee who regularly works 30
or more hours per week is
considered full-time and,
therefore, must be offered health
coverage by an employer, subject to
the employer mandate. If an
employee is reasonably expected to
work full-time hours, based on
determinative factors such as
comparable full-time positions, how
it was advertised in a job
description, etc., the employee
should be offered coverage no later
than the first day of the fourth
month and shouldn't be placed in a
look-back measurement period. In
other words, the normal new-hire
waiting period would apply and
coverage would be effective
following the waiting period.
However, if an employee's hours
vary above and below 30 hours per
week and there's no reasonable
expectation that they'll always
work full-time hours upon hire,
they should be placed in a
look-back measurement period.
Importantly, employees shouldn't be
moved back and forth from variable
hour to full-time just because they
start working more or fewer hours.
If an employer is using the
look-back measurement method for
variable-hour employees and if the
employee was determined to be
full-time and eligible for benefits
during the defined standard
measurement period, the employee
should remain eligible through the
end of the corresponding stability
period, regardless of the number of
hours worked during the stability
period. In other words, when an
employee earns full-time status
during the measurement period,
their status as an eligible
full-time employee is essentially
locked in for the entire stability
period, even if their hours drop
below 30 hours per week. This is
true even if the employee's hours
In addition, there's an exception
that says if an employee transfers
to a position that would have been
considered part-time if originally
hired into that position, the
employer can switch to the monthly
measurement period starting on the
first day of the fourth full month
following the month of transfer,
However, this only applies if both
of these conditions are met: 1) The
employee actually averages less
than 30 hours/week for the full
three calendar months after the
transfer and 2) the employer has
continuously offered minimum value
coverage starting no later than the
first day of the month after the
employee's first three months of
employment through the calendar
month in which the transfer occurs.
This means the second condition
would only apply if the employee
was offered minimum value coverage
after their first three months of
employment. This condition wouldn't
apply if the employee were offered
coverage after meeting the
measurement period. Thus, both
conditions listed above would need
to be satisfied for this exception
to apply. If this exception doesn't
apply, the employer would need to
offer coverage for the full
stability period for which it was
determined they were a full-time,
Importantly, though, COBRA must be
offered whenever there's a loss of
eligibility and a triggering event.
The triggering events include
reduction of hours, termination of
employment, divorce, death of the
employee, and child ceasing to be
eligible under the terms of the
plan. So, if an employee was
previously eligible because they
averaged 30 hours or more per week
and are now ineligible because they
didn't average at least 30 hours
during the corresponding standard
measurement period (i.e., at the
end of the stability period), then
they've lost eligibility due to
reduction of hours. COBRA would
then be offered for the plan that
the employee (and covered
dependents and spouse) had before
the COBRA event.
March 6, 2018
What are the most common mistakes
employers make when administering FMLA?
FMLA was enacted on Feb. 5,
1993, which means it celebrated
its 25th anniversary last
month. Even after all these
years, it can still be one of
the more complex laws with
which an employer needs to
First, it's important to first
understand to whom FMLA
applies. FMLA applies to
governmental agencies and
schools (public school boards,
public and private elementary
and secondary schools) of any
size. It also applies to
private employers with 50 or
more employees in 20 or more
workweeks in the current or
previous calendar year.
Covered employers must post the
Notice in the
covered employers must include
the language of the notice
either in an employer handbook,
if available, or as a separate
notice distributed to new
It's a common misconception
that FMLA only applies to
employers with 50 or more
employees within a 75-mile
radius. The mileage provision
is related to which employees
are eligible for leave — not
which employers are subject to
FMLA. This means that all
covered employers, discussed
above, must comply with the
posting requirement regardless
of whether they would actually
have any employees eligible for
FMLA under the mileage
An employee is eligible if they
meet all of the following
Have worked for the
employer for at least 12
Have at least 1,250 hours
of service within the last
Work at a location where
the employer has at least
50 employees within 75
miles of the employee's
An employee without a specific
worksite (such as a salesperson
or a telecommuter) is
considered to work at the home
base from which they are
assigned work or to which they
report. When determining
whether an employee meets the
service requirements, it's
important for an employer to
consider the service time
performed for a predecessor
employer when there's been a
corporate restructure or
An eligible employee is
entitled to leave for any the
following qualifying reasons:
Birth of placement of a
child for adoption or
To bond with a child up to
1 year following birth or
To care for the employee's
family member who has a
serious health condition
For the employee's own
serious health condition
For qualifying exigencies
related to the deployment
of a military member who is
the employee's family
To care for next of kin who
is a covered service member
with a serious injury or
Another common mistake made by
employers is failure to
recognize an employee's leave
for a work-related injury or
illness under FMLA. If an
employee is absent from work
due to their own serious health
condition, FMLA applies
regardless of whether the
injury or illness is
FMLA is generally unpaid leave.
While on leave, though, an
employee has the right to
continue health plan coverage
at the same cost as an active
employee. They cannot be
charged more than the normal
required contribution. If the
employee is receiving
compensation (such as accrued
paid time off), health plan
deductions would be taken as
normal. However, if the
employee isn't receiving
compensation, the employer will
need to make other arrangements
for the employee's
contributions. The employee may
choose to prepay the
contributions if the leave is
foreseeable, the employer may
require the employee to pay
during the leave or the
employer may permit the
employee to pay upon return.
It's important for the employer
to communicate the employer's
payment policy as soon as
possible upon designating the
combined Notice of
Eligibility and Rights and
includes language related to
payment of contributions.
Employers should make sure that
the language accurately
reflects their policy and
procedures. Further, an
employee may choose to
terminate coverage during the
leave and be reinstated upon a
Finally, there's often
confusion as to when health
plan coverage would terminate
if an employee doesn't return
to work within 12 weeks. There
are many considerations with
this issue. The employer should
first determine whether the
employee is eligible for
continuation of coverage under
any other leave entitlement,
including state law and
employer policy. Next, the
employer should review its
terms of eligibility in the
plan documents. Often the plan
document states that employees
remain eligible if they work a
specified number of hours per
week or are on a specific type
of leave. Applicable large
employers need to also consider
their look-back measurement
method procedures under the
ACA's employer mandate, if
applicable. If an employee was
determined to be an eligible
full-time employee during the
most recent measurement period,
they'll remain eligible during
the entire stability period
regardless of current hours
Once the employee no longer
meets the terms of eligibility,
health plan coverage should be
terminated and COBRA offered. A
common mistake is that
employers continue eligibility
for employees who have
exhausted all leave and no
longer meet the terms of
eligibility. This exposes the
employer to risk, as an insurer
or stop-loss provider may deny
claims for the ineligible
employee, leaving the employer
to possibly self-insure the
To determine size for
employer mandate and
reporting purposes, an
employer would only count
the employees (and service
hours) of those who receive
U.S.-source income. They
wouldn’t include hours of
service for which the
foreign-source income. So,
if the employees were in
Canada receiving Canadian
Canadian payroll and taxes)
and not U.S. income, then
they aren’t included in the
count to determine whether
the employee has 50
employees. But if a
Canadian is working in the
U.S. and, thus, receiving
U.S.-source income, then
that time counts as hours
of service for employer
mandate and reporting
This determination is
important because, if an
employer has more than 50
including equivalents, then
the employer mandate
applies. Once it’s
determined that the mandate
does apply, the employer
will be evaluated and
potentially penalized for
not properly following the
law. That means the
responsible for offering
coverage, ensuring that
it’s affordable and
reporting their compliance
to the IRS.
To summarize, the
regulations state that an
“hour of service” doesn’t
include any hour for
services to the extent the
compensation for those
services constitutes income
from sources outside the
U.S. If an employee has
U.S. source income, then
they would need to be
offered coverage and be
included in the annual
reporting (assuming the
employer is subject to the
mandate and assuming the
employee is working 30
hours or more per week).
Finally, this determination
of whether the income is
U.S. or foreign source
needs to be made by the
employer’s tax counsel or
CPA, since it could be
construed as legal and/or
tax advice (and since it
matters for other reasons,
such as employment tax and
How does the repeal of the
ACA's individual mandate impact
employer group health plans and
employer obligations under the
ACA's employer mandate and
As a reminder, the
mandate was repealed as
part of the 2017 tax
reform bill. However,
the individual mandate
repeal doesn’t take
effect until 2019.
remains in effect for
2018, meaning generally
that all U.S. citizens
must have health
insurance coverage or
risk a tax penalty.
Beginning in 2019,
though, individuals may
forego health insurance
without risking that
Keep in mind, though,
the individual mandate
repeal doesn’t impact
obligation to offer
affordable coverage to
all full-time employees
(and their dependents)
under the ACA’s
Similarly, the repeal
doesn’t impact an
to report to the IRS
(and provide forms to
employees) under IRC
Sections 6055 and 6056
(relating to IRS Forms
employers must continue
to comply with the
employer mandate and
(unless Congress makes
broader changes in the
That said, there are a
few bills to watch in
Congress in 2018
changes to the employer
mandate and reporting.
On the employer
mandate, a bill has
been introduced that
would change the
to those that work 40
hours per week (as
opposed to the 30 hours
per week under current
rules). On reporting, a
bill has been
introduced that greatly
obligations remain in
place for now, and
compliance efforts to
comply with both.
In the meantime,
there’s debate on how
the individual mandate
repeal might impact
employer group health
plan participation. On
the one hand,
elimination of the
penalty tax could
reduce enrollment in
employer plans if
participants opt out
(i.e., decide they
don’t want or need
coverage). On the other
hand, the repeal could
result in a rise in
premium costs in the
individual market (as
drop coverage), which
enrollment in employer
Although it remains to
be seen how this will
all play out, employers
should ensure that they
comply with the law as
it is currently. For
now, that includes
continuing to comply
with the employer
mandate and reporting
If an employer has been a
small employer but has
recently increased the
number of employees, when
will the employer become
subject to the employer
mandate and Section 6056
An employer is
subject to the
and Section 6056
reporting if they
have 50 or more
in the previous
To calculate the
employer’s size, an
employer must first
number of full-time
employees for each
month of the
year. A full-time
employee is one who
works on average at
least 30 hours of
service per week
for a calendar
month (or 130 hours
per month). Please
note that the
ownership must be
included in the
members of a
would be included
less than four
months (or 120
days) would cause
an employer to have
50 or more FTEs,
they may be
excluded from the
days need not be
more than four
months would not
qualify for the
and would need to
be included in the
employer may also
employees from the
have coverage under
TRICARE or the
owners that are
as partners in a
than 2-percent S
Next, the employer
will calculate the
hours of each
them and divide by
120. The employer
should not include
more than 120 hours
of any one
individual in this
step (because they
would be considered
included in the
employer will add
up the number of
plus the number of
divide by 12. If
the employer has 50
or more FTEs, they
are subject to both
mandate and Section
6056 reporting for
calendar year. The
employer should not
round up. If the
49.9, they are
still considered to
have fewer than 50
Let’s look at an
Company has always
been a small
employer with fewer
than 50 employees.
In 2017, the
company grew and
hired many new
they had 53 FTEs in
2017. They will be
subject to the
beginning in 2018.
They will also be
subject to Section
6056 reporting in
2018, with the
initial Form 1095-C
forms due to
employees and the
IRS in first
quarter 2019. They
will not be subject
to the reporting
due in first
What can an employer do
if an employee is
HSA-ineligible but has
contributions? Can the
employer attempt to be
reimbursed? Are there
any tax consequences
for either party?
in order to be
an HSA, an
and must have
known as 'first
available if an
seek help from
they made could
lead to tax
the employee to
seek tax advice
is because the
need to amend
likely need an
that must be
be able to take
a tax deduction
the period of
may also be
subject to a 6
tax if the
HSA within the
the tax filing
deadline of the
HSAs that are
January 1 and
the date for
(i.e., April 15
Since HSAs are
be on the
will have to
issue or answer
to the IRS
some cases the
the employer —
there may have
just been a
If an employer
the employee is
also be subject
laws, since an
amounts that it
be able to
income. If the
be liable for
there are some
it has made
refunded by the
is because HSA
has been made
owner has a
We then would
look to the
action. If the
mistake and is
trying to fix
it as quickly
may be able to
return of the
the account if
it happens in
they want to
send money back
to the employer
or just cure it
return it to
should allow a
in a Form
the problem has
been going on
for a while. In
the funds are
that case, the
the employer is
to include the
amount for the
gross income on
W-2, and the
be subject to
the excise tax
as noted above.
this means the
have to file
related to the
was made, which
employee as to
usually the one
who ends up
very unhappy in
could result in
the 6 percent
excise tax if
HSA funds were
spent and the
could avoid the
penalty if any
the employee to
seek tax advice