Frequently Asked Questions

January 22, 2020

Our company will sell one of its divisions this year. What will happen to employees’ health FSA elections, which run on the calendar year and have already been elected for 2020?

Expand/collapse the answer »

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.

Asset Sale

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.

Stock Sale

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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.

IRS Publication 969 »


October 1, 2019

What are the timing rules for employer and employee HSA contributions? What should be done if HSA contributions are submitted late?

Expand/collapse the answer »

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.

DOL information on the VFCP »


September 17, 2019

If an employer adds coverage mid-plan-year to allow employees to cover domestic partners, would that be a qualifying event and allow employees to change their elections?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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:

  1. 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.
  2. 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.
  3. 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).
  4. 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.

IRS Information on PCOR fees: »
IRS PCOR Questions and Answers »
Form 720: »
Form 720 Instructions: »


June 11, 2019

What is the appropriate correction when, due to an administrative error by the employer or COBRA vendor, a COBRA participant has been charged incorrect premium rates?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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).

For additional information regarding health FSAs, NFP has an informational webpage.


April 30, 2019

At what point would two merging companies that had fewer than 50 employees last year fall under the ACA’s employer mandate and reporting requirements?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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 coverage.

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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 imputed income?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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 willful neglect.

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?

Expand/collapse the answer »

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 requirement.

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.

If the employer continues to have questions, they should review their obligations under this requirement with their advisor. Additionally, the IRS has provided a Q&A (https://www.irs.gov/newsroom/employer-provided-health-coverage-informational-reporting-requirements-questions-and-answers) to assist employers in both determining whether they are subject to the reporting requirement and calculating the total cost of coverage. NFP has information as well. Please ask your advisor for more information.


November 28, 2018

Are shareholders (2% or more) of S-corporations eligible to pay for benefits on a tax-advantaged basis through the employer’s cafeteria plan?

Expand/collapse the answer »

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?

Expand/collapse the answer »

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 non-embedded/aggregate.

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 - $13,500 ($3,400).


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?

Expand/collapse the answer »

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 MEWA obligations.

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 non-HCIs).

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?

Expand/collapse the answer »

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?

Expand/collapse the answer »

In general, when maintaining group health plan records, an employer must consider ERISA, HIPAA and ACA guidelines.

ERISA
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 necessary.)
  • The system must maintain the records in a safe manner and should be backed up properly.
  • The system needs to be able to print a readily legible paper copy of the documents.

HIPAA
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.

ACA
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 filing.

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?

Expand/collapse the answer »

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)?

Expand/collapse the answer »

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:

  • Birth
  • Adoption
  • Marriage
  • 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
  • Exchange enrollment

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?

Expand/collapse the answer »

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 on).

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:

  1. 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 to file).
  2. 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 late filing.
  3. Acknowledge ALE status and promise to report within 90 days of the letter (and explain the reasons for the late filing).
  4. Claim they were not an ALE for the year in question.
  5. 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 counsel.


August 7, 2018

What is the General Data Protection Regulation (GDPR)? To whom does it apply and what does it require?

Expand/collapse the answer »

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’ interests.

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 and why;
  • Provide individuals with access to their personal data when requested;
  • Erase an individual’s personal data when requested (under certain circumstances); and
  • 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.

GDPR »
About the GDPR »
GDPR Fact Sheet »


July 24, 2018

We offer employees rewards for completing biometric screenings and health risk assessments. If the EEOC’s wellness program regulations are vacated, how will this affect our programs and incentives?

Expand/collapse the answer »

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 assessment.

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 counsel.


July 10, 2018

With the PCOR fee due date around the corner, can we get a refresher on the employer obligations?

Expand/collapse the answer »

Due Date
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.

Responsibility
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.

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, etc.). The IRS allows employers to use any one of four methods for calculating lives, as described below:

  1. 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.
  2. 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.
  3. 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).
  4. 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.

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 2017 the plan year ended). Employers should work with their advisors and tax advisers in ensuring proper filing and payment of the fee.

Penalties
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.

Here are some helpful IRS links:

IRS PCOR Fee Landing Page »
IRS PCOR Fee FAQs »
IRS Form 720 »
IRS Form 720 Instructions »


June 26, 2018

What are the latest enforcement efforts of the IRS in regard to the employer mandate and reporting requirements?

Expand/collapse the answer »

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 (FTEs).

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 gather documentation.

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?

Expand/collapse the answer »

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 to employees).

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 those employees/participants.

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?

Expand/collapse the answer »

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 year?

Expand/collapse the answer »

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 contributions).

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 employees.


May 1, 2018

Who’s eligible to participate in an HRA, and for whom can HRA reimbursements be used?

Expand/collapse the answer »

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 W2 income).

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 Arrangements.


April 17, 2018

Our SPDs are available on our intranet. Does that meet ERISA distribution requirements?

Expand/collapse the answer »

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 delivery method.

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 electronically.


April 3, 2018

What options do employers have when employees experience pay shortages, where employee wages don’t cover the health insurance premium?

Expand/collapse the answer »

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 FMLA leave:

  1. Prepayment with a special salary reduction
  2. Pay-as-you-go on an after-tax basis
  3. Catch-up salary reductions (or after-tax payment) upon return from the leave

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 insurer?

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 suspended.

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 offering benefits?

Expand/collapse the answer »

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 drop voluntarily.

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, eligible employee.

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?

Expand/collapse the answer »

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 comply.

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 General Notice in the workplace. Additionally, covered employers must include the language of the notice either in an employer handbook, if available, or as a separate notice distributed to new employees.

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 provision.

An employee is eligible if they meet all of the following service requirements:

  • Have worked for the employer for at least 12 months
  • Have at least 1,250 hours of service within the last 12 months
  • Work at a location where the employer has at least 50 employees within 75 miles of the employee's worksite

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 merger.

An eligible employee is entitled to leave for any the following qualifying reasons:

  • Birth of placement of a child for adoption or foster care
  • To bond with a child up to 1 year following birth or placement
  • 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 member
  • To care for next of kin who is a covered service member with a serious injury or illness

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 work-related.

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 leave. The combined Notice of Eligibility and Rights and Responsibilities Notice 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 timely return.

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 worked.

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 expense.

The DOL publication entitled "The Employer's Guide to the Family and Medical Leave Act" provides helpful guidance to employers. NFP has an FMLA Checklist, which also may be helpful. Please ask your advisor for a copy.


February 21, 2018

When identifying full-time employees for employer mandate purposes, does an employer include employees from foreign countries?

Expand/collapse the answer »

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 compensation constitutes foreign-source income. So, if the employees were in Canada receiving Canadian compensation (i.e., Canadian payroll and taxes) and not U.S. income, then they aren’t included in the count to determine whether the employee has 50 full-time-equivalent 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 purposes.

This determination is important because, if an employer has more than 50 full-time employees, 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 employer becomes 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 labor laws).


February 6, 2018

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 reporting requirements?

Expand/collapse the answer »

As a reminder, the ACA’s individual mandate was repealed as part of the 2017 tax reform bill. However, the individual mandate repeal doesn’t take effect until 2019. Therefore, the individual mandate 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 tax penalty.

Keep in mind, though, the individual mandate repeal doesn’t impact an employer’s obligation to offer affordable coverage to all full-time employees (and their dependents) under the ACA’s employer mandate. Similarly, the repeal doesn’t impact an employer’s obligation to report to the IRS (and provide forms to employees) under IRC Sections 6055 and 6056 (relating to IRS Forms 1094/95-B and 1094/95-C). So, employers must continue to comply with the employer mandate and reporting requirements (unless Congress makes broader changes in the future).

That said, there are a few bills to watch in Congress in 2018 regarding smaller changes to the employer mandate and reporting. On the employer mandate, a bill has been introduced that would change the definition of “full-time employees” to those that work 40 hours per week (as opposed to the 30 hours per week under current employer mandate rules). On reporting, a bill has been introduced that greatly simplifies and streamlines employer reporting requirements. Nevertheless, both obligations remain in place for now, and employers should continue their 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 individual mandate 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 healthy individuals drop coverage), which could increase enrollment in employer plans.

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 requirements.


January 23, 2018

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 reporting?

Expand/collapse the answer »

An employer is subject to the employer mandate and Section 6056 reporting if they have 50 or more full-time employees, including equivalents (FTEs), in the previous calendar year.

To calculate the employer’s size, an employer must first calculate the number of full-time employees for each month of the previous calendar 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 employees of related employers with common ownership must be included in the calculation. Thus, all employer members of a controlled group would be included in this calculation.

If seasonal employees working less than four months (or 120 days) would cause an employer to have 50 or more FTEs, they may be excluded from the calculation. The four months/120 days need not be consecutive. Any employee working more than four months would not qualify for the seasonal exception and would need to be included in the calculation. An employer may also exclude any employees from the calculation who have coverage under TRICARE or the Veterans Administration. Additionally, any owners that are treated as self-employed individuals (such as partners in a partnership, more than 2-percent S corp shareholders and sole proprietors) are excluded.

Next, the employer will calculate the hours of each non-full-time employee, total 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 a full-time employee and included in the initial step).

Lastly, the employer will add up the number of full-time employees plus the number of full-time equivalents and divide by 12. If the employer has 50 or more FTEs, they are subject to both the employer mandate and Section 6056 reporting for the following calendar year. The employer should not round up. If the employer’s calculation equals 49.9, they are still considered to have fewer than 50 FTEs.

Let’s look at an example. ABC Company has always been a small employer with fewer than 50 employees. In 2017, the company grew and hired many new employees. When completing the above calculation, the employer determines that they had 53 FTEs in 2017. They will be subject to the employer mandate 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 quarter 2018.


January 9, 2018

What can an employer do if an employee is HSA-ineligible but has withdrawn contributions? Can the employer attempt to be reimbursed? Are there any tax consequences for either party?

Expand/collapse the answer »

As background, in order to be eligible to establish and contribute to an HSA, an individual must have qualifying HDHP coverage and must have no 'impermissible' coverage. Impermissible coverage is defined as coverage that pays for medical expenses below the statutory minimum deductible for the HSA--also known as 'first dollar' coverage. Impermissible coverage can include general purpose FSAs, HRAs, Medicare, or telemedicine. This FAQ addresses the corrective options available if an employer or employee discovers that the employee was ineligible for HSA contributions.

First, this employer should seek help from outside tax counsel or their accountant, as the contributions they made could lead to tax consequences. They should also encourage the employee to seek tax advice from an experienced tax preparer. This is because the employee may need to amend their individual tax filings to correct the situation, and they’ll most likely need an expert to assist them with this. Ultimately, all HSA contributions are distributions that must be substantiated by the individual employee with the IRS.

Next, an HSA-ineligible employee won’t be able to take a tax deduction for any contributions attributable to the period of ineligibility. The employee may also be subject to a 6 percent excise tax if the impermissible contributions and any attributable earnings aren’t removed from the employee's HSA within the timeframe allowed for correcting excess contributions (generally, by the tax filing deadline of the year following the impermissible contribution). Employer contributions to employees' HSAs that are made between January 1 and the date for filing the employee's federal income tax return without extensions (i.e., April 15 for most individuals) may be allocated to the prior taxable year. Since HSAs are individual accounts, the corrective action primarily will be on the employee, who will have to correct the issue or answer to the IRS (although in some cases the employee will likely be frustrated with the employer — even though there may have just been a lack of information on the employee’s eligibility status).

If an employer makes contributions to an employee’s HSA when the employer has knowledge that the employee is ineligible, the employer could also be subject to penalties under tax withholding laws, since an employer is authorized to exclude from compensation only those amounts that it reasonably believes an employee will be able to exclude from income. If the employer doesn’t have knowledge of the impermissible coverage, then the employer wouldn’t likely be liable for any penalties. That said, there are some difficulties for the employer in having the mistaken HSA contributions it has made refunded by the employee. This is because HSA contributions aren’t forfeitable, meaning that once a contribution has been made to the employee’s HSA account, the HSA account owner has a non-forfeitable right to receive them.

We then would look to the employer's corrective action. If the employer recognized the mistake and is trying to fix it as quickly as possible, the employer may be able to request a return of the contributions from the trustee or custodian of the account if it happens in the same calendar year (because there’s a non-forfeitable exception in circumstances where the employee was never HSA eligible). Generally, the trustee or custodian can choose whether they want to send money back to the employer or just cure it through a distribution. Some trustees or custodians won’t actually return it to the employer (they treat every contribution as non-forfeitable). But all custodians should allow a curative distribution (which results in a Form 1099-SA).

The above resolution becomes more difficult if the problem has been going on for a while. In these instances, the HSA account balance is frequently depleted and the funds are no longer available. In that case, the only alternative for the employer is to include the contribution amount for the period during which the employee was ineligible as gross income on the employee's W-2, and the employee will be subject to the excise tax as noted above. In some situations, this means the employer may have to file corrected W-2s related to the year the contribution was made, which would necessitate amended filings from the employee as to those years. Again, the affected employee is usually the one who ends up very unhappy in these situations.

In summary, this situation could result in the 6 percent excise tax if HSA funds were spent and the employee (or employer on their behalf) doesn’t repay them. However, the employee could avoid the penalty if any of the following occur:

  • The funds are repaid before the employee’s tax filing deadline
  • The funds are still available (unspent) and are either repaid to the employer or accounted for on employee’s W2 as taxable income
  • The funds are distributed directly to the employee (via 1099-SA curative distribution)

Finally, as mentioned up front, because of the potential tax consequences, we would encourage the employer to seek the assistance of outside tax counsel or their accountant in these situations. They should also encourage the employee to seek tax advice from an experienced tax preparer.