Affordability Safe Harbors

The IRS lowered the affordability percentage for 2022 –even if you do not increase your premiums for 2022, your health plan may no longer be affordable. To avoid exposure to a shared responsibility penalty, it is important to reevaluate your health plan contribution structure.

The ACA requires employers with 50 or more employees (i.e., Applicable Large Employers (ALE’s)) to provide affordable coverage to employees working 30 or more hours per week or may be liable for a penalty. Determining affordability is based on looking only at the employee share of the lowest-cost monthly premium for self-only minimum value coverage. It does not include any additional cost for family coverage and if an employer offers more than one health coverage option, affordability applies to the lowest-cost minimum value option. The final “employer shared responsibility regulations include three optional safe harbors that an employer may use.

FEDERAL POVERTY LEVEL (FPL):

The federal poverty level safe harbor requires just one calculation. Under this safe harbor, coverage is affordable if the employee’s monthly cost for self-only coverage under the plan does not exceed the federal poverty level for a single individual. The employer can ignore the employee’s actual hours and wages, which is very helpful when calculating premiums for a workforce with fluctuating schedules and compensation. But, the federal poverty level safe harbor often results in high-cost sharing by the employer and relatively low premiums for employees. In 2021, the FPL for calendar year plans $12,760 x 9.83% = $1,254.31/12 =$104.52/mo is the maximum monthly employee-only premium cost to be affordable for employee-only coverage. However, the FPL for 2021 non-calendar year plans may be different. HHS posts the FPL compensation amount annually by February, so the FPL used to calculate the Safe Harbor in December 2020 for a 1/1/2021 plan year, $12,760 was the only FPL compensation level amount available. Whereas, in February 2021, the FPL compensation level is $12,880 9.83%($12,880)=$1,266.10/12 =$105.50/month. Therefore, the FPL for 2022 calendar year plans is $103.14/month ($12,880 x .0961=$1,237.77/12=$103.14) Federal regulations allow employers to select the applicable FPL compensation amount by looking back 6 months before the first day of their plan year. If that look-back period reaches into a prior calendar year and two different FPL compensation amounts (and corresponding FPL affordability safe harbor contribution amounts) are available (one from the prior year and the other from the current year), the employer can choose between the two calculations in applying the FPL affordability safe harbor.

W-2 SAFE HARBOR:

Under the W-2 safe harbor, an employer looks at each employee’s W-2 for the calendar year (as reported in Box 1). To be affordable, the employee’s required premiums for the employer’s lowest-cost self-only coverage cannot exceed 9.83% for 2021 (9.61% for 2022) of that employee’s W-2 wages. This requires a retrospective analysis of each employee’s W-2 wages. In other words, you don’t know whether you passed the test until it’s too late. Alternatively, an employer could attempt to use the W-2 safe harbor at the beginning of the year by setting premium rates which would ensure that employee contributions would fall below the required threshold. However, it’s very risky to set employee contribution rates based on W-2 wages that cannot be determined until after the end of the year, especially for employees with fluctuating schedules and income. Note: W-2 Box 1 income does not include 401k and cafeteria plan deductions, therefore it’s not equivalent to using the employee’s salary or gross pay.

RATE OF PAY SAFE HARBOR:

Rate of pay safe harbor avoids the retrospective analysis of each hourly employee’s W-2 wages because it allows you to assume a rate of 130 hours per calendar month times the employee’s hourly rate of pay. To be affordable, the employee’s required premiums for the employer’s lowest-cost self-only coverage cannot exceed 9.83% for 2021 (9.61% for 2022) of that rate (i.e., 130 hours times the employee’s hourly rate of pay). However, if an employee’s hourly rate of pay is reduced during the year, there are significant limitations on the use of this safe harbor and the calculation of employee premiums. Further, the rate of pay safe harbor is not available for any month that a non-hourly employee’s compensation is reduced, including due to a reduction in work hours. Also, as a practical matter, rate of pay safe harbor cannot be used for tipped employees, commissions or similar compensation arrangements where income fluctuates on a monthly basis.

If you need help in determining whether your plan is affordable or which safe harbor may be best, send an email to: inquiry@compliancerundown.com with the subject line “Affordability Calculator”.

If you have questions about the above or need help with another 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.

MEDICAL LOSS RATIO (MLR) REBATES

👉Who does this apply to?

Fully-insured health plans only. This does not apply to self-funded health plans or policies for “excepted benefits” such as stand-alone dental or vision coverage.

👉Summary of MLR rebates

The ACA requires health insurers to spend a minimum percentage of their premium dollars, or MLR, on medical care and health care quality improvement.

This percentage is:

-85 percent for issuers in the large group market; and

-80 percent for issuers in the small and individual group markets.

Issuers that do not meet these requirements must pay rebates to the policyholder by Sept 30 of each year, and are based upon aggregated market data in each state, not upon a particular group health plan’s experience.

👉How should employers handle MLR rebates?

Determine which plan or policy is covered by the rebate they received. (The issuer should include policy information as part of the rebate.)

👉Decide how much of the rebate must be paid to plan participants, and how much the employer may keep

-If the plan documents do not specify otherwise, the portion of the rebate that will be considered “plan assets” is the same percent of the total premium that was paid by participants and must be paid to or for the benefit of plan participants.

e.g. If ER contributes 55% of total premiums, EE contributes 45%, then 45% of the MLR rebate is plan assets

👉Must or should the rebate be allocated to both prior year and current year participants?

In most cases, an employer probably can decide to allocate the rebate among only current employee participants, rather than having to track down former employees and send them checks.

👉Decide how the rebate be paid or used

Rebates for plan participants can either be paid to or for the benefit of participants or can be used to pay for benefit enhancements adopted by the plan sponsor.

Common examples:

-Pay the rebate to current employees by including the amount in their paychecks and withholding taxes

-Reduce employees next month’s premiums by the rebate amount

👉When must the rebate be paid?

The “plan asset” portion must be paid within 3 months of the date the employer receives the check from the insurer, or the employer must establish a trust to hold plan assets. 

If you have questions about the above, or need help with another 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.

Medicare Part D Notices & October 15th

I have seen numerous alerts, blogs, and marketing emails disseminating about the Medicare Part D notice being “required” before October 15th.

While it is true, the rules require the notice to be provided to all Medicare Part D eligible individuals “prior to” October 15. Per the guidance “prior to” means the notice must have been provided within the last 12 months.

Therefore, if you have provided the notice during open enrollment with all your other required annual notices (which I recommend), assuming the plan’s status has not changed from creditable to non-creditable or vice-versa since open enrollment, there is NO NEED to provide the notice again for the October 15 requirement. The obligation has already been met!

TIPS:

👉 If the creditable coverage disclosure notice is provided to ALL plan participants annually (e.g., during open enrollment) the plan is relieved of the requirement to also distribute the notice to covered individuals who first become eligible for Medicare Part D coverage during the year.

👉 Employers may not have accurate information nor know which employees, spouses, dependents, COBRA participants, or retirees are enrolled in Part A or Part B, nor will they know which individuals are seeking to enroll in the employer’s plan. Therefore, providing the Notice to ALL individuals eligible for their Rx coverage is a best practice.

If you have questions about the above, or need help with another 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.

No Schedule A or C Required for Most Self-Funded Health Plans

In general, there is no Schedule A requirement for a self-funded plan. Schedule A is used to report on insurance information. If an entity does not provide insurance, there is no Schedule A reporting requirement with respect to the group contract.

Schedule A reporting of a stop-loss policy on Form 5500 is required when the stop-loss policy is an asset of the plan (e.g. funded via a trust).

Likewise, any self-insured plan that qualifies under Technical Release 92-01 is not required to file a Schedule C. That includes self-insured plans that are not funded through a trust and which take EE contributions pre-tax through a cafeteria plan. It is more common for self-insured plans to pay claims through the company’s general assets and take employee contributions pre-tax therefore they rarely have a Schedule C requirement.

The purpose of a Schedule C is to report fees of $5,000 or more paid out of trust or plan assets to a vendor who provided services to the ERISA Plan. Its purpose is not to report self-funded fees or commissions paid (unless paid out of the trust).

A self-funded plan is though represented on the 5500 by virtue of a benefit code (e.g. 4A for medical on line 8B) and by checking general assets in 9a/b.

Why does it matter?

The DOL has indicated that including a Schedule C can be a red flag, as they then look for the other trust reporting elements, i.e. the Schedule H and audit. 

If you have questions about the above, or need help with another 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.

MHPAEA NQTL Comparative Analysis Reminder

Who is required to comply?

  • Generally, health plans and health insurers offering group health insurance coverage.

What is required? 

  • The Consolidated Appropriations Act of 2021 (CAA) requires a comprehensive comparative analysis to be done to prove that the financial requirements and treatment limitations on mental health or substance use disorder (MH/SUD) benefits provided under a group health plan are no more restrictive than those on medical or surgical (medical/surgical) benefits.
  • Treatment limitations may be quantitative treatment limitations (QTLs), which are numerical (such as visit limits or copayments), or non-quantitative (NQTLs), which are nonnumerical limits on the scope or duration of benefits for treatment (such as preauthorization requirements or standards for provider admission to participate in a network).

Who is responsible for the analyses?  

  • Fully insured plans may primarily be able to rely on their carriers.
  • Self-insured plans the plan sponsor is ultimately responsible for meeting the reporting requirements but likely will need to work with their TPA/PBM to obtain the underlying data.

When is the analysis required to be provided? 

  • The comparative analysis, and certain other information, must be made available upon request to applicable agencies beginning Feb. 10, 2021.

How should plan sponsors (employers) prepare?

  • Fully insured
    • Ask your carrier if they are prepared to show the ability to meet the NQTL comparative analysis reporting requirement.
    • Check to see if they will provide you with a report so you have it available if requested.
  • Self-insured
    • Check with your TPA & PBM to see if they can help with the analyses.
    • If they are not offering this service, ask if they will provide you with a list of the NQTLs by type of MH/SUD and medical/surgical benefits, which is the starting point for comparative analysis.
    • The DOL has provided a self-compliance tool and made it clear that the analysis must include a “robust discussion” of nine specific elements and include supporting documentation.
    • Although the DOL believes the use of the tool will provide a plan sponsor the ability to submit a comparative analysis, it’s not for the faint of heart.
    • It may be best to work with legal counsel or another qualified vendor (e.g., Milliman) to get a report.

Why does it matter?  

  • If the report is requested by federal regulators, and adequate testing information is not received. The plan sponsor will have 45 days to provide another analysis. After which, there can be financial penalties for noncompliance and the plan sponsor must notify all plan participants of their non-compliant status.
  • Plan participants may also request to see an NQTL comparative analysis and DOL penalties may apply for violations to comply.

If you have questions about the above, or need help with another 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.

COBRA & Medicare Entitlement (enrollment) – Are You Making This Mistake?

When an employee enrolls in Medicare and subsequently voluntarily drops the group health plan, their spouse does not become a qualified beneficiary eligible for COBRA coverage.

Medicare entitlement (i.e. eligible & enrolled) is only a COBRA qualifying event (QE) if it causes an employee to lose group health coverage (i.e. under 20 lives, or retiree plan). Otherwise, due to Medicare Secondary Payer (MSP) rules, Medicare entitlement is not a COBRA QE for the employee.

Likewise, if the employee voluntarily drops group coverage because they enroll on Medicare and as a result, the dependents (e.g. spouse) then lose employer coverage, this also is not a COBRA QE for the dependents. Medicare entitlement did not “cause” the loss of eligibility, rather the employee deciding to drop the employer’s group coverage did.

When an employee drops their employer’s plan because they enrolled in Medicare, the spouse should not be offered COBRA coverage, but it happens all the time.

Why does it matter?

Although this is something often incorrectly administered, it potentially violates the MSP rules. It could be viewed as the employer providing an incentive for the employee to drop the group plan in favor of Medicare (knowing the spouse will have continuation coverage).

The penalty for violating the rules:

If an employer offers a Medicare beneficiary an incentive, financial or otherwise, not to enroll in the plan, the group health plan is subject to a civil money penalty of up to $5,000 for each violation. In addition, an excise tax could be applied that would equal 25% of the plan’s expenses incurred during the calendar year.

Employees who are turning 65 may also need additional education, to allow them to make an informed decision when deciding whether to enroll on Medicare instead of their employer’s plan.

If you have questions about the above, or need help with another 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.

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.