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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.

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.

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.

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.

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 »

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 »

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.

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.

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.

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.

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.

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.

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: »

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.