Can carrier plan materials serve as the SPD?

scratching head
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, every employee benefit plan must be “established and maintained pursuant to a written instrument” called the plan document.

  • It is the legal document that governs the plan.
  • Must contain certain terms required by ERISA -which are almost never included in the insurer’s documents
  • It is typically written in legalese
  • It does not need to be distributed unless requested. 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)

  • Primary method for communicating the plan terms to participants
  • Written in plain language and in a manner to be understood by the average plan participant
  • Must be distributed at specific times to participants (e.g., within 90 days of the employee enrolling in the plan.)
  • ERISA 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 it 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 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 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 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, creating a complete SPD.

When an employer combines their health and welfare benefits into one document, the employer can file one Form 5500 (rather than a separate 5500 for each benefit).

Many employers use a single consolidated document as both the wrap plan document and the wrap SPD. 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 2020 fiscal year, 67% 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 will not happen to me”, however, the DOL conducts over 3,000 audits each year with an increase on employers with fewer than 500 employees. (See: Are You Prepared for a DOL Audit?)

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.

If you have questions about the above, or need help with another employee benefits administration question, please contact The Compliance Rundown. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Open Enrollment Compliance Reminders & Considerations

Open enrollment can be a stressful time for employers. Planning well in advance and ensuring there is time to strategize and set new goals can help alleviate the missteps.

Open enrollment is also a perfect time to address compliance, especially this year with the relaxed regulations that many employers adapted based on their workforce needs.

Prior to open enrollment employers may also need to determine if changes made for the 2021 plan can or will continue in 2022.

Here is a list of open enrollment compliance reminders & considerations:

(Download checklist)

COBRA Beneficiaries

  • Are you notifying COBRA beneficiaries of election opportunities? The “Outbreak Period” has relaxed the timing for elections. Therefore, anyone who is still eligible to elect COBRA will need to receive the open enrollment materials.
  • COBRA beneficiaries have the same rights as similarly situated active employees.

Evergreen/Default Elections

  • How is your election process communicated?
  • Do your plan documents allow for evergreen elections?
  • If you offer an FSA, are you requiring an annual election?

ACA – Offers of Coverage

  • How are offers of coverage being documented?
  • Are you able to provide proof of employees who waive benefits?
  • If you are an ALE, can you confirm that at least one of the health plans offered satisfies the ACA’s affordability standard? (9.83% for 2021 plan years)

Are you providing the mandatory notices?

-CHIPRA                                          
-Medicare Part D
-Wellness Notices
-Summary of Benefits & Coverage (SBC)
-HIPAA Special Enrollment Rights
-HIPAA Privacy Notice
-WCHRA
-Initial COBRA Notice
-Notice of Patient Protections

Open Enrollment Guide

  • Is there a disclaimer indicating that if there are discrepancies between the open enrollment guide, summary plan description & plan document that the plan document will control?

⭐ TIP: Include language in the guide about it also being the Summary of Material Modification (SMM). This prevents the need to create a separate SMM. ⭐

Electronic Disclosure

  • If you are providing your documents electronically, do all employees use a computer as an integral part of their duties? If not, have you received affirmative consent to provide them electronically?

HIPAA Privacy

  • Enrollment data may be considered “PHI” under HIPAA.
  • Do you have a HIPAA Policy & Procedure manual?
  • Are business associate agreements in place?

Correcting/Changing Participant Elections

  • Pre-tax elections are irrevocable after the plan year has started unless the participant. experiences another permissible midyear change in status event (e.g., marriage).
  • Pre-tax elections are required by the IRS to be prospective in most situations.
  • Retroactive election changes are rarely permitted under the tax code.

If you have questions about the above or need help with an employee benefits administration question, please contact us. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Top 3 Life Insurance Compliance Obligations for Employers

Group life insurance plans are a valuable benefit many employers offer to their employees. Employers may also provide employees the opportunity to purchase additional voluntary coverage for themselves or their dependents.

Administering a group life insurance plan may appear innocuous, however, failure to comply with 3 general requirements can have significant financial consequences for the employer.

1 – Evidence of Insurability

Most insurance policies are designed to have a coverage level amount (e.g., $50,000) that employees may elect that is a “guaranteed” level of coverage. This amount is known as a “guaranteed issue” and is available to all employees when they are first eligible to enroll in coverage. If an employee wants to enroll in an amount higher than the guaranteed issue or is enrolling at a time other than when they were first eligible for the coverage, the insurance provider requires the employee to complete an evidence of insurability (EOI) form.

Until the employee has returned their EOI form and the insurance provider has notified the employer of their approval of the employee’s level of coverage above the guaranteed issue, the employer should only deduct premiums from an employee’s paycheck for the guaranteed issue amount.   

Why does this matter? 

If the employee fails to return their EOI form, or the insurer does not approve the increased life insurance amount, the insurer has no contractual obligation to pay a life insurance benefit above the guaranteed issue amount.

What does this mean? 

By taking premium payments for the full amount of coverage the employee elected, the employer may be misrepresenting to the employee the amount of their life insurance coverage. If the employee were to pass away, the employer may be responsible for paying the difference between the guaranteed issue benefit amount and the amount elected by the employee. (Example:  Van Loo v. Cajun Operating Co., 703 Fed. Appx. 388 (6th Cir. 2017))

2 – Portability or Conversion Rights

Most group life insurance plans have portability or conversion provisions that allow an employee to continue their coverage after the employee terminates employment or is no longer actively working (e.g., disability leave). The provisions explaining the employee’s rights are found in the life insurance policy documents (e.g., summary plan description).

In addition to making sure employees receive a copy of the insurance plan documents, it is a best practice for an employer to notify an employee who is losing coverage of their rights by providing a portability or conversion form, or instructions on obtaining a form in an employee’s termination packet.

Why does this matter? 

If the employee does not elect to continue their policy, the insurance carrier is no longer obligated to pay life insurance benefits if the former employee passes away.  

What does this mean? 

If an employee is terminated from employment or is out on a leave of absence and an employer failed to provide a former employee of their rights to keep the coverage in place, they may be liable to pay the life insurance amount.

3 – Terminating coverage according to policy terms

Keeping an employee on benefits when they are not actively at work is risky. Group life insurance policies contain rules that define when an employee is eligible for coverage and how long coverage remains in effect when an employee is no longer actively at work.  

Employers need to be familiar with the terms of their group life insurance plan and properly terminate coverage when an employee is no longer eligible.

Why does this matter? 

An insurer is not responsible for paying a life insurance benefit for an employee who passes away if they were ineligible to be enrolled on the plan.

What does this mean? 

The employer may be liable to pay the life insurance benefit if they misrepresented to the employee that coverage was in effect. (Example: McBean v. United of Omaha Life Insurance Co. and By Referral Only, Inc., Case No. 18cv16MMA (JLB) (S.D. Cal. Apr. 5, 2019).

Best Practices for Administration

An employer needs to read their policy and be knowledgeable about the rules. If an employer requires clarity on how to apply the rules or their responsibility, they should contact the insurance provider for assistance or seek guidance from legal counsel.

If you have questions about the above or need help with an employee benefits administration question, please contact us. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Compliance Trap: HSA & FSA – When There Is a Grace Period Or Carryover

Despite an employer’s best intentions, many entities do not have processes in place to ensure that they are compliant with the IRS’s health savings account (HSA) rules. Others are not even aware of the compliance risks and find themselves in violation, which creates risks for both the company and their employees.

There are four main HSA compliance “traps” that fall into 4 main categories:

  • Disqualifying Coverage – eligibility violations
  • Contribution issues – excess or ineligible contributions, failure to open an account
  • Cafeteria Plan Issues
  • Mistaken Contributions

This is the second blog post on disqualifying coverage. As mentioned previously, a health flexible spending arrangement (FSA) or a spouse’s FSA (unless it is limited purpose or post-deductible) is problematic.

However, employers who offer a health FSA also need to understand the complications if they also offer an HSA. Especially employers who have a calendar year FSA and their medical plan renews off calendar year. Or employers who add an HDHP when they already have a health FSA established. Their health FSA plan design may impact HSA eligibility, preventing employees from being eligible to participate in an HSA when they first enroll in a HSA compatible high deductible health plan (HDHP).

Grace Period

For instance, a grace period is an optional plan design feature that permits participants with unused amounts at the end of the plan year to continue incurring reimbursable claims from that unused balance for up to 2 ½* months following the end of the plan year. This plan design disqualifies an individual from HSA eligibility unless they have a zero balance on the last day of plan year.

A zero balance means the claims have been processed and the account balance shows $0.00. If they have any amount in their FSA as of the last date of the plan year, they are not eligible to contribute (or receive contributions) to an HSA until first of the month following the end of the grace period. Even if they spend the remaining money during the grace period.

EXAMPLE:

  • Kelsey is a full-time employee at Jam Studios. For 2020, Kelsey is enrolled in a PPO plan and contributes $2,750 to the calendar year health FSA with a 2 ½ month grace period.
  • Jam Studios for 2021 open enrollment adds an HDHP plan with a $100/month employer HSA contribution.
  • Kelsey decides the HDHP is a better option for her and elects this new plan option in November at open enrollment effective for the 1/1/2021 plan year.
  • On December 31, 2020, Kelsey’s health FSA account had a $300 balance remaining. Kelsey is not eligible to open an HSA, make or receive any HSA contributions until the first of the month after the 2 ½ month grace period, or 4/1/2021. Even if Kelsey submits a claim for reimbursement during the grace period.

Carryover

Likewise, a carryover is an optional plan feature that permits health FSA participants to carryover up to $550 (2020 maximum*) of unused amounts the subsequent plan year. This may also create a problem.

Solutions

There are ways for the health FSA plan to be designed to avoid these hiccups. For instance, a plan with a:

  • Grace Period or Carryover: Plans could be designed to permit participants to opt out or waive the grace period or carryover prior to the beginning of the following year.
  • Carryover: Plans with a carryover could be designed so a minimum threshold amount is required to create a new annual election and if the employee’s balance is less than the minimum their health FSA participation does not automatically continue.
  • Carryover: The employer with a carryover could offer a limited purpose FSA and design their plan so remaining funds automatically carry over to the limited purpose FSA for employees who elect an HDHP.

But these plan design options need to be made prior to the start of the plan year.** Therefore, employers need to be aware of these traps in order to educate their employees prior to being permitted to enroll in an employer’s HSA.

*The grace period timeframe and carryover limits mentioned are under generally applicable FSA rules. Because of the COVID-19 pandemic and unanticipated changes in the availability of certain medical care, the IRS recognized employees may be more likely to have unused health FSA amounts at the end of plan years, or grace periods, ending in 2020. Notice 2020-29 provides temporary special rules that allowed employers to amend their cafeteria plans to extend the period employees could be permitted to use health FSA amounts remaining in their accounts as of the end of the grace period or plan year. However, an individual is not eligible to make contributions to an HSA during a month in which the individual participates in a general purpose health FSA to which unused amounts are carried over or the grace period is extended.

**The IRS made exceptions for plan amendment rules due to the pandemic. Employers may amend their plans to allow employees, on an employee-by-employee basis, to opt out of the carryover or to opt out of any extended period for incurring claims in plan years ending in 2021 and 2022, to preserve their HSA eligibility.

This is Part 2 of HSA Compliance Traps. Be sure to follow our blog to learn about the additional HSA Compliance Traps published later this year.

If you have a question, we are here to help! Let us end your employee benefits compliance confusion. Send us an email today!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything contained in this post or on our website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

REMINDER – PCORI Fees Due July 31, 2021

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Background:

The Affordable Care Act (ACA) imposes a Patient-Centered Outcomes Research Institute (PCORI) fee for all self-funded medical plans* ending on or before September 30, 2029. 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 7/31/2021.

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.

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 plan 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.

2019 New & Renewal Plan Dates Fee per average covered life When fee must be paid
January 1, 2019 through December 31, 2019 $2.54 July 31, 2020
February 1, 2019 through January 31, 2020 $2.54 July 31, 2021
March 1, 2019 through February 28, 2020 $2.54 July 31, 2021
April 1, 2019 through March 31, 2020 $2.54 July 31, 2021
May 1, 2019 through April 30, 2020 $2.54 July 31, 2021
June 1, 2019 through May 31, 2020 $2.54 July 31, 2021
July 1, 2019 through June 30, 2020 $2.54 July 31, 2021
August 1, 2019 through July 31, 2020 $2.54 July 31, 2021
September 1, 2019 through August 31, 2020 $2.54 July 31, 2021
October 1, 2019 through September 30, 2020 $2.54 July 31, 2021
November 1, 2019 through October 31, 2020 $2.66 July 31, 2021
December 1, 2019 through November 30, 2020 $2.66 July 31, 2021
2020 New & Renewal Plan Dates Fee per average covered life When fee must be paid
January 1, 2020 through December 31, 2020 $2.66 July 31, 2021
February 1, 2020 through January 31, 2021 $2.66 July 31, 2022
March 1, 2020 through February 28, 2021 $2.66 July 31, 2022
April 1, 2020 through March 31, 2021 $2.66 July 31, 2022
May 1, 2020 through April 30, 2021 $2.66 July 31, 2022
June 1, 2020 through May 31, 2021 $2.66 July 31, 2022
July 1, 2020 through June 30, 2021 $2.66 July 31, 2022
August 1, 2020 through July 31, 2021 $2.66 July 31, 2022
September 1, 2020 through August 31, 2021 $2.66 July 31, 2022
October 1, 2020 through September 30, 2021 $2.66 July 31, 2022
November 1, 2020 through September 30, 2029 PCORI fee increases by rate of Medical inflation per average covered life (To be announced)

Tips for completing Form 720 for PCORI fees:

An employer/plan sponsor needs to complete:

  • Company information and quarter ending “June 2021” (e.g. for 2020 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, 2020, – enter “Avg. number of lives covered for self-insured health plans”

OR

    • Column (a) row (d) if plan ended on or after October 1, 2020 and before October 1, 2021 – 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
      Ogden, UT 84201-0009

If you have questions about the above, need help with calculating your PCORI fee obligation, or need help with another employee benefits administration question, please contact The Compliance Rundown. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

When A Cafeteria Plan Mistake Is Discovered – The Solution Is Not Universal

Mistakes happen
Cafeteria plan mistakes happen. How are they corrected?

Regardless of how excellent an employer’s cafeteria plan administrative processes are, it’s not uncommon for oversights to occur. Whether it’s discovering the wrong amount of premiums being deducted during a payroll audit, an employee is enrolled in a benefit plan different from what they signed up for during open enrollment, or an HSA contribution was missed. Mistakes happen!

Unfortunately, neither IRS regulations nor the Code sections which govern cafeteria plans provide guidance. There are IRS publications and a Chief Counsel Advice memorandum which address correction for a few specific areas (e.g., Form W-2 corrections, improper health FSA reimbursements), however, other mistakes, in general, the IRS has not provided information nor a standardized process for correcting.

What Is An Employer To Do?

It is our experience, the best way to correct a mistake is to put the employee and the plan back into the position they would have been in had the mistake never occurred. Failure to do so could disqualify the entire cafeteria plan! This could mean employees’ pretax elections suddenly become gross income to employees, and they would be required to pay all the employment and income taxes that go along with it.

The specific correction will depend on the facts and circumstances (e.g., what type of mistake was made and was it discovered before, during, or after the plan year).

Example: Four months after open enrollment, an employer discovers an employee was enrolled in the correct benefits with the carriers, but somehow the wrong employee pretax deductions occurred and too little premium was withheld. The employer would want to let the employee know an oversight occurred and depending on the amount of the money needed to be made up, either ask for the employee to pay the entire amount or perhaps have double-premiums deducted until the shortfall is corrected.

Employers should make a reasonable good faith effort to correct past errors and document everything (e.g. date the failure was discovered, the decision made & why, the process to correct & steps to ensure won’t occur going forward). 

If an employer is audited, their documentation could explain how the mistake occurred, show it was an honest mistake, that once realized corrective steps were taken to fix it in the least disruptive way. It will also outline the procedures implemented to ensure the mistake didn’t occur again. This could show an employer acted in good faith and was never intentionally trying to circumvent the tax code.

Note: Correcting payroll errors involves a variety of federal & state laws. Prior to implementing corrections, be sure all federal & state wage/tax laws are considered. Contact an experienced benefits attorney before implementing corrective measures if uncertainty exists.

Do you wish you had someone to bounce your situation off of? We’re here to explain complex compliance issues in layman’s terms. Contact us today. Let’s discuss your compliance needs.

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything contained in this post or on their website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

WARNING: Keeping an Employee on Benefits When They Are Not Actively at Work Is Risky

Employers who are trying to be generous by keeping employees on their benefits plan, may be making a costly mistake.

There are eligibility rules known as “actively at work clauses” for employer group benefits including medical, dental, vision, life, and disability. These provisions allow the insurer to exclude coverage for employees who are not working a minimum number of hours each week, such as when they are on a leave of absence because of an illness or furloughed.

If you have a fully insured plan, the carriers define the rules on how long an employee who is on an unprotected leave of absence (e.g., not out due to a reason covered by the Family Medical Leave Act (FMLA)) may remain on the plan before coverage must be terminated and continuation coverage (e.g., COBRA) offered. If you are self-insured, it is a conversation that should have been discussed when creating plan documents with the stop-loss carrier.

If an employer does not follow this provision and fails to terminate an employee and offer them continuation coverage, then the carrier may not cover any claims, leaving the employer financially responsible. It has been my experience, although the carrier leaves eligibility verification up to the employer, before paying a large claim, many carriers are thorough and review an employee’s status by asking for payroll records.

There is no standard rule for when an employee who is not actively at work must be terminated from active coverage. Often, for ease of administration, carriers will permit an employee to remain on the plan for up to 12 weeks to be the same as a protected leave of absence under the FMLA. However, an employer must check their plan documents and never assume. Once the employee no longer meets the definition of actively working, the employer should terminate the employee and offer continuation coverage. This includes providing port/covert paperwork for life and disability coverage.

If you have questions about the above, or need help with another employee benefits administration question, please contact The Compliance Rundown. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Summer Is Almost Here. Do We Have To Offer Our Interns Benefits?

Are interns eligible for benefits?

The term “intern” is a common word which most everyone understands is a person who works (sometimes unpaid) for a temporary period of time for a company.  The classification of “intern” however, is not something recognized by the ACA. They are not defined for ACA purposes. Rather, for an Applicable Large Employer (ALE) to avoid exposure to the employer shared responsibility penalties, all their W-2 employees should be classified on their start date as either full-time (FT), part-time (PT), variable hour (VH), or seasonal depending on the facts and offered benefits accordingly.

Can’t an intern just be classified as seasonal?

Although it is true, the ACA does not require an ALE to offer coverage to a “seasonal” employee, seasonal is not synonymous with ‘intern’ so it is 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” [Emphasis added].

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 ALE 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 non-compliance penalties. i.e. If the interns are less than 5% of the employee population, $338.33 per month, the §4980H(b) penalty in 2021. If they make up over 5%, there is exposure to the §4980H(a) penalty, 1/12($2,700) per month x total number of full-time employees minus 30.

It is possible under the right circumstances for an intern to be seasonal, however, an intern is not synonymous with a seasonal employee.

Employee Benefits

If interns are hired with the intent to work 30 or more hours a week on average, then they are full-time employees, even if their employment is temporary.  Thus, for an ALE to avoid a shared responsibility penalty, they would need to be offered ACA compatible coverage after the applicable waiting period, but no later than their 91st day of employment.

Options to Consider

  1. Exclude interns from coverage (if they make up fewer than 5% of the employer’s full-time population) and accept the risk exposure to the §4980H(b) penalty for any month in which the intern is required to be treated full-time.
  2. Offer interns the same coverage as permanent, full-time employees. (Many interns, if they are college students may be on their parent’s insurance and are uninterested in paying for their own coverage.)
  3. Establish a separate class for interns with a longer waiting period than the permanent, full-time employees (e.g., the 91st date of employment) with the intent of the intern not working longer than 90 days and never becoming eligible for benefits.*

*Note: This option requires carrier approval (some carrier’s systems are not set up to handle mid-month enrollment, nor prorate premiums) and the employer would want to continue to perform applicable nondiscrimination testing to ensure it doesn’t negatively affect the testing.

FT, PT, VH, or seasonal are the only classification options for ACA purposes. Mis-classifying an intern (i.e. failing to treat them as FT for ACA purposes) may expose an ALE to ACA penalties.

If you have a question, we are here to help! Let us end your employee benefits compliance confusion. Send us an email today!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything contained in this post or on their website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Turning 65 Does Not Prevent HSA Eligibility

Medicare entitlement (entitlement=eligible & enroll) is no longer automatic for everyone when they turn 65, rather most will need to sign up to get Medicare Part A and Part B.  Medicare is only automatic for individuals who:

  • Are getting benefits from Social Security or the Railroad Retirement Board (RRB) at least 4 months before they turn 65
  • Are under age 65 and have disability benefits from Social Security or RRB for 24 months
  • Have ALS (also called Lou Gehrig’s Disease)

Therefore turning 65 and gaining eligibility for Medicare in and of itself, does not disqualify an employee from continuing to receive employer contributions or making their own contributions to an HSA. Only if one voluntarily enrolls in any part of Medicare would they then be disqualified. 

Employees wanting to work a few more years and delay retirement can continue to reap the triple tax advantage benefit of an HSA if they are otherwise an eligible individual.  Keep in mind however if an employee delays their enrollment in Medicare and continues to work beyond age 65, once the individual’s employment sponsored coverage ends, they have an eight-month special enrollment period to sign up for Medicare Part A. The first month of Medicare entitlement may be retroactive to the month they turned 65, or up to 6 months prior to enrollment, whichever is less. Therefore, an individual may become ineligible for an HSA & have to stop HSA contributions for up to 6 months before they apply for Medicare Part A benefits to ensure they do not over contribute to their HSA.

If you have a question on this or are stumped on another employee benefits compliance question, send us an email today! We’re here to explain complex compliance issues in layman’s terms.

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything contained in this post or on their website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Are You Prepared for a DOL Audit?

EBSA, a division of the DOL responsible for ensuring the integrity of nearly 722,000 retirement plans, approximately 2.5 million health plans, and a similar number of other welfare benefit plans, such as those providing life or disability insurance in the United States, closed 1,122 civil investigations with 754 of those cases (67%) resulting in monetary results for plans or other corrective action in Fiscal Year 2020. EBSA recovered:

• over $3.1 billion in direct payment to plans, participants and beneficiaries
• 456.3 million in connection with 171,863 “complaints” with an employee benefit plan by an individual

The risk is real! It is not a matter of “if” but “when” you get audited! In today’s information age, the government agencies easily share information too, so a “complaint” and investigation by one entity could lead to an audit by another. There are no “absolutes”.

What is your risk tolerance?

3 Tips for Proactive Employee Benefits Compliance

Tip #1 – Maintain written plan documents for every employee benefit plan. 

If you are ever selected for a DOL audit, it is important to have documents showing you are complying with ERISA and that you are maintaining these documents. This may not only reduce your exposure to penalties but also make the audit process more manageable and less time-consuming.

Plan documents are the foundation of any ERISA plan that you sponsor (i.e., all employer-sponsored plans, except churches and governments). ERISA requires that every employee benefit plan have a written plan document that describes the benefit structure and guides the plan’s day-to-day operations.  

Documents from the carrier are not usually ERISA plan documents. Carriers are not subject to ERISA. Their documents may have about 80% of what ERISA requires but typically are missing critical information (e.g., plan #, named fiduciary, ERISA discretionary authority language).  So, plan sponsors (e.g., employers) need to do something on top of the carrier documents. 

Tip #2 – Establish formal process for providing required ERISA documents to plan participants and beneficiaries.

ERISA has two primary requirements and satisfying both requirements fall on the plan administrator (typically the employer). In addition to the plan document requirement mentioned above, ERISA also requires that plan participants and beneficiaries receive specific documents at certain times of the year.  For instance:

  • Summary Plan Description – upon enrollment and at various other times, providing information the participant may rely on about the plan’s terms, including who is eligible and what the benefits are.
  • Summary of Benefits and Coverage (SBC) – upon enrollment and within 7 days upon request
  • Marketplace Coverage Notice – within 14 days of employee’s start date
  • Children’s Health Insurance Program Reauthorization Act (CHIPRA) – on the first day of each plan year, to all employees who reside in a state which medical premium assistance is available, regardless of the employer’s location, and at the time of initial enrollment.

There are potential penalties associated with not providing the document when required. Employers should keep a record of when these documents are provided, to whom and how. The DOL during an audit is likely to ask for proof of the required participant communications.

Tip #3 – Have a formal document retention policy.

ERISA generally requires employee benefit plan documents to be retained at a minimum of six years after the plan’s Form 5500 filing due date. (Employers who do not have a Form 5500 filing obligation also must maintain the documents for six years after the date a Form 5500 would have been filed if it were not for an exemption.)

Documents that should be retained include but not limited to:

  • Original signed plan documents and amendments
  • Corporate resolutions and/or committee actions related to the plan
  • Plan disclosures and communications to participants (including Summary Plan Descriptions and Summary of Material Modifications) –notices, open enrollment guides
  • Financial reports, audits, and related statements
  • Form 5500s
  • Trust documents
  • Nondiscrimination and coverage testing results
  • Disputed claim records in the event of future litigation
  • Payroll and census data used to determine eligibility and contributions

Best practice is to maintain these documents for the life of the plan, providing a paper trail of the plan from its beginning.

Bonus Tip: Do not let your first audit be with the DOL!

Plan sponsors on a regular basis should complete an internal compliance audit or “check-up” of their employee benefit plans for compliance with ERISA and other legal requirements. The check-up can uncover areas that an employer should be doing differently or need to be changing prospectively, making the DOL audit process more manageable and less time consuming.

Regardless of how sound your business practices are, every organization should be prepared for a DOL audit.



If you have any questions about the above, or want assistance with an internal compliance checkup, please contact The Compliance Rundown. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything contained in this post or on their website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.