‘Tis the Open Enrollment Season – Don’t Forget About Those on COBRA

COBRA OE

‘Tis the season for not only the holidays, but many employers are in the midst of open enrollment.  There’s so much to think about that it’s easy to forget important tasks, like notifying COBRA participants.

Have you sent COBRA open enrollment kits notifying your COBRA participants* of the new plan options and rates?

If  “Ummm….what?” is your first thought, keep reading……

COBRA regulations provide that COBRA participants (i.e. qualified beneficiaries) have the same health insurance rights during open enrollment as their former employer’s active employees. So although, a qualified beneficiary was only entitled to continue the coverage in place immediately before the qualifying event,  COBRA participants at open enrollment may:

  1. Add/drop coverage
  2. Add/drop dependents
  3. Switch from one group health plan to another
  4. Switch to another benefit package within the same plan

to the same extent that similarly situated active employees can.

Therefore, COBRA participants must also receive an open enrollment packet containing not only any updated information about the plans and changes to rates but also all required open enrollment disclosures.

Avoid a Common Pitfall

Many employers use a COBRA administrator and believe they automatically send all required notices on their behalf. However, COBRA open enrollment packets are generally an opt-in service, often for an additional fee.  Ultimately it is the employer who is responsible for ensuring participants receive the information, so it is worth reaching out to your COBRA administrator if you are not sure whether they’ve been sent.

While open enrollment may be winding down for many, don’t be caught off guard. To be compliant, it’s important that employers, remember to notify COBRA participants of open enrollment, as if they are active employees. Employers who fail to communicate open enrollment options to COBRA participants, may be exposed to legal action, including expensive lawsuits and penalties.

*For the purposes of Open Enrollment, COBRA Participants are individuals currently enrolled and paying for COBRA, individuals in their 60-day election period, and individuals who have elected, but not yet paid for, COBRA.

Spouse’s Open Enrollment – Can I drop my employer’s plan?

 

3AAD19E0-733F-4430-B8E4-66E8C19DA078Q: It is open enrollment at my spouse’s employer. If my spouse adds me to their medical plan can I drop my coverage on my employer’s plan, even though it’s outside of our open enrollment?

A: The IRS has rules (26 CFR § 1.125-4 – Permitted election changes) on what changes to pretax elections outside of open enrollment are permissible. It’s these rules which are used to create an employer’s Section 125/Cafeteria plan. An employer may design their plan to be as permissive as the IRS (which in my experience is the norm) but there is no requirement to recognize all of the permitted election changes. So, your employer’s Section 125/Cafeteria plan document is where one should look for which rules are permissible for an employee, based on your employer’s plan design.

That being said, assuming your employer is using an “off the shelf” plan and are as permissive as what the IRS allows, then yes, change in coverage under another employer’s plan is a permissible midyear change event allowing you to decrease or revoke your election if you have elected corresponding coverage under your spouse’s plan.

So assuming your employer’s S.125/Cafeteria plan recognizes “change in coverage under another employer plan” as a permissible mid year change event, if you enroll in medical coverage under your spouses plan during their open enrollment, you may drop your employer’s medical plan. The IRS allows open enrollment under another employer plan/different plan year to be a permissible midyear change event to help resolve “election gridlock”. Otherwise an employee would have to have double coverage or go without coverage for a period of time in order to “synch” up with the plan they want to be enrolled in.

However, keep in mind, the ‘consistency rule’ always applies with any midyear event. Which means the election change must be on account of and corresponds with the change on the other employers plan. e.g. if only enrolling in spouse’s medical, you couldn’t also drop your dental coverage

Reminder: Nondiscrimination Testing Required for Cafeteria Plans

reminder finger

Employers, regardless of size, who provide a cafeteria plan (also known as a Section 125 plan) are required to perform nondiscrimination testing (NDT) as of the last day of their plan year. 

Definition: In general, Section 125(d)(1) defines the term “cafeteria plan” as a written plan under which— (A) all participants are employees, and (B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits. 

In other words, a cafeteria plan is what permits employees to pay for qualified benefits, such as group health insurance, on a pretax basis, reducing both the employees’ and the employer’s tax liability.

However, in order for the employer (and employee) to receive the tax advantages associated with a cafeteria plan, the Internal Revenue Code (IRC) requires testing to ensure highly compensated employees (defined as $125,000 for 2019 plan year testing) and other individuals key to the business (i.e. officers, more than 5% shareholders or spouse/dependent of the highly compensated employees or these key individuals) do not receive a more favorable tax treatment (i.e. does not discriminate in favor of highly compensated employees).

Although the Section 125 rules only require an employer test “as of the last day of the plan year”, corrections are not allowed to be made retroactively after the plan year ends. Therefore, best practice is for a plan to be tested more than once, allowing an employer to possibly make adjustments to ensure the plan passes at the end of the year to preserve the tax treatment for the highly compensated and key employees. Otherwise, if a plan fails (i.e. found discriminatory) at the end of the year, the affected employees would be taxed on their total election amount.

If you haven’t ran your nondiscrimination tests, now would be a good time to engage a qualified vendor or legal counsel to perform the applicable nondiscrimination testing and possibly detect potential problems that may be resolved before the end of the plan year.

NOTE:  In addition to Section 125 NDT, the IRS Code requires other nondiscrimination testing to be done annually too. For instance, employers who sponsor a health FSA, which is considered a self-insured health plan, would be subject to both Section 125 & Section 105(h) testing, their dependent care FSA would be subject to Code Section 125 & Section 129 NDT.

 

Turning 26 and Coverage On Parent’s Health Insurance

26th birthday

Background:

Under the Patient Protection and Affordable Care Act (ACA) plans and issuers that offer dependent child coverage must “continue to make such coverage available for an adult child until the child turns 26 years of age.” This requirement is regardless of the child’s dependent status, residency, student status, employment status or marital status.  This rule applies to all health plans in the individual market and to all employer health insurance plans. (29 CFR 2590.715-2714 – Eligibility of children until at least age 26.)

Termination of coverage:

The ACA requirement for adult coverage applies only until the date that child turns 26. However, some states have laws extending coverage through the end of the month the child turns 26, or until the end of the billing cycle or calendar year or possibly beyond age 26. Check with your carrier, or policy documents to verify when coverage for a child who turns age 26 ends.

COBRA:

In general, employees must notify the employer in writing within 60 days of their dependent turning 26. In turn, employers with 20 or more employees, must provide a notice of COBRA eligibility, enrollment forms, duration of coverage and terms of payment to the individuals who are no longer eligible for coverage as a dependent under their parents plan.  (Employers with 20 or fewer employees, may have similar obligation under State law e.g. Mini-Cobra, instead of under COBRA.)

Note:  

Most states have an exception to the limiting age for disabled children. For instance, for group policies issued in Texas, a child who is not capable of self-sustaining employment because of mental retardation or physical disability and who is chiefly dependent on their parents for support and maintenance must be allowed to remain on his or her parent’s insurance, without regard to age. The employee must provide to the insurer proof of the child’s incapacity and dependency:

(1)  not later than the 31st day after the date the child attains the limiting age;  and (2)  subsequently as the insurer requires, except that the insurer may not require proof more frequently than annually after the second anniversary of the date the child attains the limiting age.

(Sec. 1201.059. TERMINATION OF COVERAGE BASED ON AGE OF CHILD IN INDIVIDUAL, BLANKET, OR GROUP POLICY.)

Why does it matter?
  1. Financial benefit: Dependents represent a large portion of the cost of many employers’ health plans. Older children who have passed age 26 are often inadvertently included on an employee’s health plan because of a lack of understanding on the part of the employee or a lack of communication on the part of the employer, including not having a process to update the status of dependents.
  2. Rejected claims: Often, ineligibility isn’t determined until a dependent makes a very large claim, at which point the provider might deny coverage.

Ensuring dependents do not remain enrolled longer than they are eligible, protects not just the employer, but also the employee and his or her loved ones from future legal and financial risk.

Can carrier plan materials serve as the SPD?

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Background

Under ERISA, all employers who offer group health and welfare benefits to their employees are required to maintain and distribute Summary Plan Descriptions (SPDs) to plan participants.

Definitions:

Plan Document – per ERISA, plans must be “established and maintained pursuant to a written instrument” called the plan document. It’s a document containing legalese, governing the terms of the plan including items such as: eligibility, participant and beneficiary rights, benefits available, how benefits are funded, and the named fiduciary. The plan document must be distributed upon request and failure to furnish the documents within 30 days after the request may expose the employer to penalties of up to $110 per day.

Summary [of the] Plan Document (SPD) – is a summary of the plan document written in language that can be understood by the typical participant. The SPD must be distributed at specific times to participants (e.g. within 90 days of the employee enrolling in the plan.) ERISA also requires specific information to be included in the SPD, such as: plan name, name of the plan sponsor & EIN, plan number, plan year, eligibility information (e.g waiting period), a description of plan benefits and circumstances causing loss or denial of benefits, benefit claim procedures, and a statement of participants’ ERISA rights.

NOTE: A summary of benefits and coverage (SBC) is also required for group health plans but is separate from and in addition to the plan document and the SPD

Employers with fully insured benefits receive plan materials (e.g. certificate of coverage) from the insurer (i.e. carrier) that describes the coverage provided under the plan. The carrier materials generally contain detailed benefits information, information on claims procedures and rights under ERISA but other ERISA required details (e.g. descriptions of eligibility, circumstances causing loss of benefits) are often missing. Therefore, it’s unlikely the the insurer’s materials can serve as the SPD on its own. 

ERISA’s requirements are the responsibility of the employer and plan administrator (typically the employer is the plan administrator), not the insurance company. Group insurance policies are written to cover the state-law and legal requirements of the insurance carrier, not to satisfy the requirements of ERISA, nor to provide legal protection to the employer. If the carrier materials do not satisfy ERISA’s requirements, it is the employer that violates ERISA, not the carrier.

Sometimes carriers will customize their materials and include employer and plan-identifying information, but that information may be incomplete or inaccurate and even with this additional customization the carrier documents often still do not contain the necessary details required to satisfy ERISA’s plan document requirements.

Solution: A Wrap Document

Many employers use a separate document that, when combined with the carrier provided materials, contains all of the “bells and whistles” required to satisfy ERISA’s requirements for an SPD, as well as certain other disclosures required under ERISA and COBRA. This separate document “wraps around” (i.e. incorporates by reference) the certificates and other benefit materials (e.g. summaries, open enrollment guide) for each plan option or component plan, thereby creating a complete SPD.

Another benefit of the “wrap document” is by combining all of the employer’s health and welfare benefits into one document, the employer can file one 5500 (rather than a separate 5500 for each benefit).

Many employers use a single document as both the wrap plan document/SPD and have the plan document and SPD as a consolidated document. If this approach is taken, the document must comply with both ERISA’s written plan document requirements and its SPD format and content rules.

The wrap document and the underlying carrier plan documents should be consistent and drafted to avoid creating conflicts. However, in the event of conflicting terms, generally, as long as the carrier documents comply with applicable federal law, the wrap document defers to the carrier documents only filling in the gaps when the carrier document is lacking.

Why It Matters?

Employers face strict deadlines and liability under ERISA law and failure to comply with ERISA requirements can lead to costly government penalties and even employee lawsuits. According to a U.S. Department of Labor (DOL) audit report for the 2018 fiscal year, 64.7% of investigations resulted in penalties or required other corrective action.

The DOL has recently enhanced its enforcement of ERISA violations by significantly increasing the number of audits it is conducting. Many employers think “It’s not going to happen to me”, however, the DOL conducts more than 3,000 audits each year with an increase on employers with fewer than 500 employees.

Given the recent upswing in health and welfare plan audits and the potentially stiff penalties for noncompliance, as a best practice and additional level of protection, employers should have a wrap plan document created to ensure they have and are providing an ERISA compliant SPD.

DOL Final Overtime Rule – What Employers Need to Know

compliance rules guidance street sign
What?

Final Fair Labor Standards Act’s (FLSA) overtime regulations were released updating the earnings thresholds necessary for executive, administrative and professional employees (EAPs) to be exempt from FLSA’s minimum wage and overtime pay requirements.

What are the overtime regulations? 

The FLSA requires employers to pay minimum wage ($7.25) and overtime (time and a half on more than 40 hours worked in a workweek) to employees unless an employee meets the few, narrowly construed exemptions from this requirement.

Salary level alone does not make an employee exempt, rather to qualify for the executive, administrative or professional employee exemption the employee must also perform specific duties, i.e. pass the duties test.

Current Salary Level: $455 per week ($23,660 per year for a full-year worker)

New Salary Level $684 per week (equivalent to $35,568 per year for a full-year worker).

(The FLSA regulations also contain a special rule for “highly compensated” employees and the new regulations will increase the total annual compensation requirement for these employees from $100,000 per year to $107,432 per year.)

When?

Assuming there is no lawsuit to block these new rules, the final rule is effective January 1, 2020.

How should employers prepare?
  1. Evaluate potentially impacted employees – pull data for exempt workers earning $35,568 per year or less.
  2. Review job descriptions & ensure employees are classified correctly. Be sure to keep in mind, meeting the salary cutoff is just one requirement for classifying workers as exempt.
  3. Consider what positions you might restructure.
  4. Decide when, practically speaking, you will implement changes – the new salary level exemption under the regulations will increase all at once.

If you currently have exempt employees making less than $684/week you will need to decide whether you:

  • Keep employees at their current salary level and closely monitor overtime
  • Convert employees to hourly & reclassify to nonexempt*
  • Increase salaries

*A communication strategy to reclassified employees should be developed to make sure these employees don’t feel they are being demoted but rather the changes are based on a new government rule.

Example:

FLSA: Memo to Exempt Employees Regarding the FLSA Changes

Dear [Employee Name]

Due to both your job duties and the amount of salary you are paid, you are currently exempt from overtime under the federal Fair Labor Standards Act (FLSA). However, in September of 2019, these regulations were amended and the salary requirement to remain exempt significantly increases effective January 1, 2020. 

Therefore, to comply with the new government rules, your status is changing to nonexempt (overtime eligible) effective {date}. This means you will now be paid an hourly rate of [$] and eligible to be paid overtime any week when more than 40 hours is worked.  Your job duties do not change as a result of your nonexempt classification.  Your manager will meet with you to review the time tracking requirements and the process for obtaining approval for overtime hours.

If you have any questions regarding the impact of this FLSA overtime rule, or your change to nonexempt status, please contact [name and contact information].