Month: May 2019

Not All Cafeteria Plans Are The Same

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, FSALeave a comment

different

A cafeteria plan is a mechanism that offers employees a choice between cash (i.e. their full salary as taxable income) or non-taxable qualified benefits (i.e. allows employees to pay with pre-tax dollars.)  All cafeteria plans are salary reduction plans based on Internal Revenue Code §125, however, there are many plan design variations and not all cafeteria plans are the same.

A Premium Only Plan (POP, also sometimes called a Premium Conversion Plan, PCP) is the simplest form of a cafeteria plan under IRS Code §125. It’s a “premium payment plan” and allows for employers to take certain employee paid premiums for insurance benefits pretax. (e.g. group health, dental, vision)

When you have a health and/or dependent care flexible spending account (FSA), that goes beyond the premium payment plan format because you are permitting employees to reduce their salaries before taxes to reimburse medical/childcare expenses.

In addition to the “rules” under IRS Code §125 found in a POP plan, FSAs are subject to special requirements contained in other IRS regulations.

Health FSAs are subject to requirements under Code §105 (self-insured medical reimbursement plans) Code §106 (the requirements for accident and health plans) and Code §125.

Dependent Care FSAs are subject to requirements under Code §129 (“Dependent care assistance programs”) and various special FSA requirements in Code §125 and IRS regulations. 

Therefore you need a more complex cafeteria plan document (often called a flexible spending plan) than a POP document to be in compliance when offering an FSA.  

The most complex form of a cafeteria plan, sometimes referred to as a “full flex” plan is where an employer provides employees “flex credits” to “spend” on qualified benefits. Depending on the plan design, the employee may be eligible to receive in cash, taxable compensation if the employee doesn’t “spend” all of his flex credits on benefits.

cafeteria

One requirement that every cafeteria plan must meet, is having a written plan document that includes all content specified in the IRS code. e.g. participation rules, election and election change procedures, manner of contributions, etc. 

While it is permissible to have separate cafeteria plan documents. i.e. a POP plan document for the insurance premiums and a separate cafeteria plan document for an FSA, for ease of administration most will include a POP component with in their flexible spending plan document.

According to the 2007 proposed cafeteria plan regulations (Treas. Reg. §1.125-1(c)(6))

(6) Failure to satisfy written plan requirements. If there is no written cafeteria plan, or if the written plan fails to satisfy any of the requirements in this paragraph (c) (including cross-referenced requirements), the plan is not a cafeteria plan and an employee’s election between taxable and nontaxable benefits results in gross income to the employee.

In simple terms, failure to have a written plan document employees would be treated as if they had a taxable benefit (e.g wages) even though they received a nontaxable benefit (e.g. health insurance).

The cafeteria plan document is what allows pretax salary reductions and contains the rules the IRS permits. It’s an important document to have and to understand.

 

 

 

REMINDER – PCORI Fees Due July 31, 2019

On By Michelle Turner, MBA, CEBSIn ACA, HRA, self-insuredLeave a comment

OLYMPUS DIGITAL CAMERA

Background:

The ACA imposes a Patient-Centered Outcomes Research Institute (PCORI) fee for all medical plans* ending on or after Oct. 1, 2012, and before Oct. 1, 2019.

If the plan is fully insured, the insurance carrier pays the fee on behalf of the plan sponsor (employer). If the plan is self-insured, the plan sponsor has the obligation to file Form 720 with the IRS by 7/31/2019.

NOTE: Health reimbursement arrangements (HRAs) are considered a self-insured health plan and are subject to PCORI fees. When an employer has an HRA with a fully insured medical plan, it’s considered two separate plans. The carrier pays the PCORI fee for the medical plan and the plan sponsor pays the fee for the HRA. When the employer has an HRA with a self-insured medical plan, they may be treated as one plan for purposes of calculating the PCORI fee.  

*PCORI Fees do not apply to

  • Plans providing HIPAA-excepted benefits e.g. stand-alone dental, vision, health FSAs (if other group health coverage is available and the employer contributes $500 or less)
  • Health Savings Accounts (HSAs)
  • Wellness programs, EAPs, disease management programs that do not provide significant benefits for medical care
  • Stop-loss insurance policies

Calculating the fee:

The amount of PCORI fees due for a self-insured medical plan is based upon the average number of covered lives (i.e. employees, dependents, COBRA participants, and covered retirees) under the self-insured medical plan and the applicable ERISA plan year (see table below).

The amount of PCORI fees due for an HRA is based upon the average number of covered employees (not belly buttons) under the HRA and the applicable plan or policy year.

Plan Year

Fee per average covered life

When fee must be paid

February 1, 2017 through January 31, 2018

$2.39

July 31, 2019

March 1, 2017, through February 28, 2018

$2.39

July 31, 2019

April 1, 2017 through March 31, 2018

$2.39

July 31, 2019

May 1, 2017 through April 30, 2018

$2.39

July 31, 2019

June 1, 2017 through May 31, 2018

$2.39

July 31, 2019

July 1, 2017 through June 30, 2018

$2.39

July 31, 2019

August 1, 2017 through July 31, 2018

$2.39

July 31, 2019

September 1, 2017 through August 31, 2018

$2.39

July 31, 2019

October 1, 2017 through September 30, 2018

$2.39

July 31, 2019

November 1, 2017 through October 31, 2018

$2.45

July 31, 2019

December 1, 2017 through November 30, 2018

$2.45

July 31, 2019

January 1, 2018 through December 31, 2018

$2.45

July 31, 2019

There are 3 acceptable methods for calculating the average number of covered lives:

  1. Actual Count Method – A plan sponsor may determine the average number of lives covered under a plan for a plan year by adding the totals of lives covered for each day of the play year and dividing that total by the total number of days in the plan year.
  2. Snapshot Method – A plan sponsor may determine the average number of lives covered under an applicable self-insured health plan for a plan year based on the total number of lives covered on one date (or more dates if an equal number of dates is used in each quarter) during the first, second or third month of each quarter, and dividing that total by the number of dates on which a count was made.
  3. Form 5500 Method – An eligible plan sponsor may determine the average number of lives covered under a plan for a plan year based on the number of participants reported on the Form 5500, Annual Return/Report of Employee Benefit Plan, or the Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.

Once the average number is calculated, Form 720 is what is used to report and pay to the IRS the amount of the PCORI fee due.

Some tips for completing Form 720 for PCORI fees:

An employer/plan sponsor needs to complete:

  • Company information and quarter ending “June 2019” (e.g. for 2018 plan year filing) – although the fee is paid annually, the tax period for the fee is the 2nd quarter of the year
  • Part II, IRS No. 133 Applicable self-insured health plans
    • Column (a), row (c) if plan ended before October 1, 2018, – enter “Avg. number of lives covered for self-insured health plans”

OR

    • Column (a) row (d) if plan ended on or after October 1, 2018 and before October 1, 2019 – enter “Avg. number of lives covered for self-insured health plans”

AND

    • Column (c) – enter total Fee (lives x $)
  • Part II, Line 2 – enter Total Tax (from calculation in IRS No. 133)
  • Part III, Line 3 – enter Total Tax (from Part II, Line 2)
  • Part III, Line 10 – enter Balance Due (from Part III, Line 3)
  • Signature section
  • Payment voucher with “2nd Quarter” checked,
    • Send the form, payment voucher, and check to:
      Department of the Treasury
      Internal Revenue Service
      Cincinnati, OH 45999-0009

July 31, 2020 will be the final year for paying PCORI fees under the current ACA Risk & Market Stabilization Programs for plan years ending before October 1, 2019.

e.g.

Plan Year Fee per average covered life When fee must be paid
February 1, 2018 through January 31, 2019 $2.45 July 31, 2020
March 1, 2018, through February 28, 2019 $2.45 July 31, 2020
April 1, 2018 through March 31, 2019 $2.45 July 31, 2020
May 1, 2018 through April 30, 2019 $2.45 July 31, 2020
June 1, 2018 through May 31, 2019 $2.45 July 31, 2020
July 1, 2018 through June 30, 2019 $2.45 July 31, 2020
August 1, 2018 through July 31, 2019 $2.45 July 31, 2020
September 1, 2018 through August 31, 2019 $2.45 July 31, 2020
October 1, 2018 through September 30, 2019 $2.45 July 31, 2020
November 1, 2018 and all following renewals Fee expires for plans ending before 10/1/2019. No further payments required.

Intern is not synonymous with seasonal employee

On By Michelle Turner, MBA, CEBSIn ACALeave a comment

summer

It’s important for employers to classify their employees correctly – especially Applicable Large Employers (ALEs) who must comply with the “pay or play” employer mandate.

The ACA does not require an ALE to offer coverage to a “seasonal” employee, however it’s imperative to understand how the ACA defines seasonal, to avoid exposure to penalties.

Per Treas. Reg. 54.4980H-1(a)(38) the term seasonal employee means “an employee who is hired into a position for which the customary annual employment is six months or less”. 

“Customary” means “that by the nature of the position an employee in this position typically works for a period of six months or less, and that period should begin each calendar year in approximately the same part of the year, such as summer or winter”

Examples:

  • Ski resort instructor hired each year from November until March
  •  A cattle ranch who hires extra ranch hands during foaling season, April – Sept.

However, there are no special pay or play rules for internships. Therefore, when deciding how to classify an “intern”, a key part of the seasonal definition that needs to be considered is “approximately the same part of the year”.

An employer who only hires temporary, full-time positions (i.e. interns) at a specific time of the year (e.g. summer) and they work for less than six months, it may be possible to classify them as seasonal. However an employer who hires interns at various times of the year, those interns may not satisfy the seasonal definition.

Why does it matter?

An employer mislabeling their interns as seasonal and not offering coverage for any month in which they were required to be treated as full time, may face ACA noncompliance penalties. i.e.  If the interns are less than 5% of the employee population, $312.50 per month. If they make up more than 5%, there is exposure to the §4980Ha penalty, 1/12($2,500) per month x total number of full-time employees minus 30.

Intern is not synonymous with seasonal employee but it is possible under the right circumstances for an intern to be seasonal.

 

 

Healthcare FSAs Uniform Coverage Rule – an Employer’s Risk

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, FSA2 Comments

Risk

Under the uniform coverage rule, the full amount an employee elects under a health flexible spending account (health FSA), must be available from the first day of the plan year and must remain available at all times during the coverage period. It requires employers to reimburse expenses up to the full employee health FSA election amount, even if such reimbursements exceed the employee’s year-to-date contributions.

This means an employee can potentially terminate employment having been reimbursed under the health FSA for more than they contributed up to the time of their termination.

EXAMPLES:

  • Tom enrolls for the first time in his employer’s health FSA, electing the full 2019 IRS limit of $2,700 for their April 1, 2019 – March 31, 2020 plan year.  Tom resigns effective April 30, 2019. By the end of that month, he has paid $225 into his health FSA account via salary reductions. On his last day of work (April 30, 2019), Tom submits a claim to be reimbursed for $1,900 of medical expenses that he incurred for his sons recent surgery on April 22, 2019. Tom’s employer must reimburse the full $1,900, even though he only contributed $225 before his employment ended (assuming the expenses are adequately substantiated) and the employer may not recoup the difference. 
  • Mary enrolls in her employer’s calendar year (1/1- 12/31) health FSA, electing the full 2019 IRS limit of $2,700. Mary is paid semimonthly. Throughout the year, Mary submits medical expenses totaling the full amount of $2,700.  Mary resigns effective 11/15, leaving her health FSA overspent (i.e. more was reimbursed than contributed via payroll deduction) by $337.50. Mary’s employer may not withdraw the balance from her last paycheck. 

The uniform coverage rule is part of the risk an employer takes when establishing a health FSA.  The point of the rule is that the employer must bear the risk of loss (i.e. operate like an insurance plan, rather than a mere reimbursement account) in order for the arrangement to qualify as a health FSA.

Although the uniform coverage rule is a risk, in my experience, most employers with health FSAs when looking at the plan year as a whole, do not pay out more in claim reimbursements than they receive in employee contributions. In fact, because of the risk of the  ‘use it or lose it rule’ for employees which generally requires employees forfeit to the employer any unused amounts left in their accounts at the end of the plan year, most employers total contributions exceed total reimbursements for the year.