Category: Cafeteria plans

Open Enrollment Compliance Reminders & Considerations

On By Michelle Turner, MBA, CEBSIn ACA, Cafeteria plans, COBRA, FSA, HIPAALeave a comment

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.

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

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, FSA, HSALeave a comment
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.

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

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, eligibilityLeave a comment
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.

Compliance Trap: HSA & Spouse’s FSA

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, eligibility, FSA, HSA7 Comments

Despite an employer’s best intentions, many entities don’t have processes in place to ensure that they are compliant with the IRS’s 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 health savings account (HSA) compliance “traps” that I regularly find myself providing guidance on regarding HSAs, which 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

All are equally problematic, however, for many employers open enrollment season is upon them and the one top of mind is disqualifying coverage, or what makes one ineligible for an HSA account.

According to the IRS, to be an eligible individual and qualify for an HSA, an individual must meet the following requirements:

  • Must be covered under an HDHP on the first day of the month
  • Cannot have disqualifying health coverage
  • Cannot be enrolled in Medicare
  • Cannot be claimed as a dependent on someone else’s tax return for the year

One of the most overlooked disqualifying coverages is a health flexible spending account (FSA) or a spouse’s health FSA (unless it is limited purpose or post-deductible).

The most common mistake I come across is when both spouses enroll in their own employer’s sponsored health coverage and one spouse elects a non-high deductible health plan (HDHP) plan with a general purpose health FSA and the other elects an HDHP plan and makes HSA contributions. Under the IRS tax rules, the health FSA could be used to reimburse qualified medical expenses on the employee, spouse or all dependents claimed on the employee’s tax return, therefore it is considered “disqualifying health coverage’ and it disrupts HSA eligibility. I often here, “but my spouse doesn’t spend their FSA $ on me”….that doesn’t matter. The FSA could be spent on the spouse, therefore, it disrupts HSA eligibility

For example:

  • Marcy and Charlie are married, Marcy is a full-time employee at Peanut’s Place and Scott is a full-time employee at Snoopy Hotel.
  • Marcy enrolls in single coverage PPO (e.g. non-HDHP) with Peanut’s Place and elects the health FSA.
  • Charlie enrolls in single coverage HDHP with Snoopy Hotel and wishes to enroll in the accompanying HSA but is ineligible. This is because Marcy has a health FSA (which is disqualifying coverage) and she is permitted to spend her health FSA dollars on her qualifying medical expenses, and those of her spouse and dependents.
  • Even if Marcy does not spend her health FSA dollars on Charlie, Charlie is still ineligible for Snoopy Hotel’s HSA.

It is important during open enrollment meetings that employers are providing education to employees and helping them be aware of this ‘trap’ so employees are enrolling in the health plan that works best for their situation and/or family.

This is Part 1 of HSA Compliance Traps. Be sure to follow my blog to learn about additional HSA Compliance Traps published later this year.




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

On By Michelle Turner, MBA, CEBSIn Cafeteria plansLeave a comment

 

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

On By Michelle Turner, MBA, CEBSIn Cafeteria plansLeave a comment

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.

 

What is Imputed Income?

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, imputed incomeLeave a comment

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In general, if an employer has adopted a cafeteria plan, their employees are not taxed on the cost of employer-provided benefits for the employee and their tax dependents. However, there are three benefits-related exceptions to this rule:

  1. Cost of group term life insurance – in certain situations
  2. Long-term disability (LTD) “gross up” amounts
  3. Benefits for domestic partners and other individuals who do not meet federal tax law definitions of “dependent”

In these situations, the cost of the benefits provided is considered “imputed income” to the employee and therefore the cost or “fair market value” of the benefits are added to the employee’s gross (taxable) income.  This non-cash taxable compensation (i.e. benefit) is treated as income and included in the employee’s form W-2 for tax purposes. Imputed income is subject to Social Security and Medicare tax and employment tax withholding.

Cost of Group Term Life Insurance 

An employer must impute income for:

  1. Life insurance coverage for any employee above $50,000
  2. Employer-paid coverage for spouses or dependents on amounts greater than $2,000
  3. If a plan is discriminatory, the cost of coverage in any amount for “key employees”

Life insurance coverage for any employee above $50,000

In 1964, Congress adopted Code §79 which begins by stating a general rule that the cost of group-term life insurance is included in gross income. It then carves out a limited exception for the cost of up to $50,000 of group-term life insurance coverage per employee.

If any employee (highly compensated or non-highly compensated) receives more than $50,000 of employer-provided life insurance, then employers are required to impute income on the cost of coverage in excess of $50,000.

IRS Publication 15-B “Employer’s Tax Guide to Fringe Benefits”, explains in detail how the calculation is determined, however, here is a high level overview:

 To calculate the value of the excess benefit coverage:

  1. Determine the excess of the life insurance (Value of life insurance – $50,000 allowable).
  2. Divide the excess amount by 1,000.
  3. Multiply the result by the age-appropriate value in Table 2-2 (page 14 of IRS publication 15-B (2019) table below)
  4. Multiply that result by the number of months of coverage.
  5. Subtract after-tax premiums paid by the employee.

Example: an employee is 40 years old and does not pay any of the premiums for life insurance for the whole year*. The value of the life insurance was $75,000.

  1. Determine excess (Value of life insurance – $50,000 allowable) – $75,000 – $50,000 = $25,000 (excess)
  2. Divide the excess amount by 1,000 – $25,000 /$ 1,000 = 25
  3. Multiply the result of #2 by the age value found in Table 2-2 (IRS pub. 15-B page 14 (2019) table below) – 25 x $0.10 = $2.50
  4. Multiply the result of #3 by the number of months of coverage – $2.50 x 12 (months) = $30.00

$30.00 is the amount to be added to the employee’s W-2 as income for the premiums paid by the company on the excess $25,000.

Table 2-2. Cost Per $1,000 of Protection for 1 Month
Age                                          Cost
Under 25 ……………………….  …. $ 0.05
25 through 29 ………………………… 0.06
30 through 34 ……………………….. 0.08
35 through 39 ……………………….. 0.09
40 through 44 ……………………….. 0.10
45 through 49 ……………………….. 0.15
50 through 54 ……………………….. 0.23
55 through 59 ……………………….. 0.43
60 through 64 ……………………….. 0.66
65 through 69 ……………………….. 1.27
70 and older ………………………… 2.06

(*Ideally, imputed income amounts are being taxed over the course of the year, but if they were not, at a minimum, the amount should be included on employees’ W-2 at the end of the year.)

Coverage in excess of $2,000 for spouses or dependents.

If an employer pays for life insurance coverage for an employee’s spouse or dependents in an amount more than $2,000, the entire premium amount is imputed income for the employee.

Note:  There is no imputed income for the employee if the coverage amount paid by the employer for the employee’s spouse or dependents is less than $2,000. In this case, it may be considered a  “de minimis” fringe benefit and excludable from income.  (See IRS Notice 89-110 for more details.)

If a plan is discriminatory, the cost of coverage in any amount for “key employees”

If the group life insurance plan favors either as to eligibility or as to the kind or amount of life insurance benefits to any “key employee” (as defined by paragraph (1) of section 416(i)) then all “key employees” covered under the plan must also include in taxable income the higher cost of the first $50,000 of coverage or Table I cost.

Long-term disability (LTD) “gross up” amounts

If an employer wants their employees to have a tax-free LTD benefit in the event the employee becomes disabled, the employer would need to “gross up” (i.e. increase) the employee’s salary by the amount of the employer-paid premium and report the premiums as taxable wages on the employee’s W-2.

Otherwise, if the disability premium is paid pre-tax, the LTD monthly benefit the employee receives if they become disabled and cannot work, will be taxed just like their income is taxed when they are working. e.g. disabled employee receives 60% of their monthly earnings less taxes.

Most carriers will offer a tax choice plan (will apply a slight load to the LTD rate) when the employer pays for the premium, the employer can either:

  1. Treat the premium payments as employee paid and include in W-2 income (taxable premiums but non-taxable benefits);
  2. Treat the premium payments as employer paid with no W-2 income (non-taxable premiums but benefits are taxable); or,
  3. Give employees the choice between options 1 and 2.

Benefits for Domestic Partners (DP) & Their Children

Most domestic partners do not meet the financial dependency criteria to qualify as an employee’s tax dependent for group health plan purposes. Under federal law, the fair market value of coverage for the cost of the non-tax code dependents (minus any after-tax contributions paid by the employee) would be included (i.e. imputed) in the employee’s gross income for federal (and most state) tax purposes and reported as taxable earnings on their W-2 Form. The imputed income is subject to federal income tax withholding as well as FICA and FUTA.

However, if a domestic partner (and their children) qualifies as the employee’s tax dependent, (something an employee needs to determine, not the employer**) there is no imputed income.

(**Best practice is for an employer to require a signed affidavit from the employee as to whether or not a domestic partner qualifies as a Tax Code dependent.)

This information is an overview and should not be considered tax or legal advice.

Health FSA & HSA in the same year?

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, COBRA, FSA, HSA1 Comment

puzzle

Q: We just hired a new employee on 7/1 who told us he elected the maximum amount under his previous employer’s health FSA that started in January. We offer a HDHP with an HSA. Is he eligible to participate in an HSA? Or does he need to wait until next year? 

A:  If his health FSA terminated (i.e. he did not elect COBRA), he is eligible to participate in an HSA as of the first of the month after his FSA termination, assuming he’s otherwise eligible for the HSA.

There are 4 basic rules to Qualify for an HSA:

  • Covered under a high deductible health plan (HDHP), on the first day of the month.
  • Have no other health coverage except what is permitted under the regulations
  • Not enrolled in Medicare.
  • Cannot be claimed as a dependent on someone else’s tax return.

So if he meets these 4 requirements, he is eligible to open an HSA on the first of the month following the health FSA termination.

When an employee leaves a job during the course of the year, they are still entitled to the earmarked FSA amount for that year (assuming the eligible expenses incurred prior to termination and claims submitted timely), even if they spend more than has been taken out of their paycheck so far. Furthermore, they could contribute to a new employer’s FSA (or HSA) and have additional pre-tax dollars to spend. (The “FSA loophole” doesn’t work for HSAs because the HSAs are portable and the employee’s account even if they leave.) Likewise, an employee may work for two or more entirely different (i.e. unrelated) entities and contribute the maximum amount to both employer’s FSAs at the same time. The health FSA limit is per employee per employer’s health FSA plan.

So if the health FSA and the HSA don’t overlap, (i.e. the health FSA terminated when the employee left the previous employer) he can contribute to an HSA for the remaining months assuming he’s otherwise eligible (mentioned above). The amount he is eligible to contribute, is calculated in two ways (see Limit On Contributions):

  1. “general monthly contribution rule” – which is one-twelfth of the applicable maximum contribution limit for the year for each month of they year they are HSA eligible. (There are tax implications for “over contributing” when not eligible.)
  2. “last month rule” – which basically states an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if they are eligible on the first day of the last month of their tax year (which is Dec. 1 for most). However, to rely on this special rule, the individual must then remain eligible for the HSA through the next 12 months after the last month of their tax year. (i.e. 13 months total).

If he did elect COBRA, assuming no carry-over provision (not common for COBRA participants to be eligible for) or grace period (this is something many COBRA participants are eligible for), or if there is a grace period (or carryover) & he has a zero balance on the last day of the FSA plan year, then he would be eligible for an HSA as of the first day of the month after the health FSA plan year ends (assuming he’s otherwise eligible for the HSA).

Cafeteria Plans Do Not Have to Permit Midyear Election Changes

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

Changes

Under an Internal Revenue Code Section 125 cafeteria plan, employee’s elections must generally be irrevocable until the beginning of the next plan year. In other words, employees are unable to make a change to their pretax elections made when newly hired or open enrollment unless they experience a permitted election change event (e.g. change in status) allowed under IRS rules (26 CFR § 1.125-4) and the event is recognized by the employers cafeteria plan.

Employers do not have to allow any exceptions to the irrevocable rule for pretax elections1.  However, the IRS does allow employers to design their cafeteria plans to permit employees to change their pretax elections prospectively2 when certain conditions are met.

NOTE: Section 125 permitted election changes are regarding pretax deductions to pay for benefits, not the actual enrollment (or disenrollment) in an insurance plan.

But I thought if an employee got married, or had a baby we had to let them enroll in our plan? 

It is true, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires group medical plans to permit midyear enrollment due to certain events (marriage, birth, adoption, loss of other group coverage etc.). The HIPAA special enrollment requirement is only for medical, it’s not required for excepted benefits, i.e. stand-alone dental, vision or most FSAs. (29 CFR § 2590.701-6)

NOTE: HIPAA is not a directive regarding how benefits are paid, it only mandates that an employee must be allowed to enroll in the medical plan. 

HIPAA special enrollment events are a subset of the Section 125 permitted election change events that provide special rights. Therefore, for practical matters, and to avoid requiring the premium to be taken post-tax, at a minimum, employers generally include HIPAA special enrollment events as permissible events allowing for a change to the pretax election, when designing their cafeteria plan3.

Footnotes:

1The irrevocable pretax election rules do not apply to health savings accounts (HSAs). Employees may prospectively change (start/stop, increase/decrease) their HSA contribution election at any time during the plan year. An employer must allow for changes at least monthly.

2Under HIPAA special enrollment (birth, adoption or placement for adoption) a retroactive pretax election change may be made. Likewise, if the plan has no waiting period (e.g. employees are eligible for coverage as of the first day of employment), employers may allow new employees to make a retroactive pretax election within 30 days of employment. However, if an employer has a waiting period (e.g. first of the month following date of hire, 30 days etc.) the new employee may only make a prospective election. (i.e. the effective date must be a date after the enrollment form was signed and submitted.)

3HIPAA requires group health plans, to give special enrollment opportunities for HIPAA specific events. Carriers are not required to incorporate all the election changes an employer may allow as permitted, by Treasury Regulations in Section 1.125. Therefore, employers with fully insured coverage, who recognize changes outside of what is required by HIPAA should confirm with their insurance carrier the group insurance contract and permissible cafeteria plan midyear change events are consistent.

 

Dependent Care FSA & Leave of Absence

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

daycare

When an employee takes a leave of absence (LOA), protected (e.g. FMLA) or unprotected, they may no longer be eligible for reimbursements from their dependent care FSA (which IRS regulations call a “DCAP” = dependent care assistance program) during their leave. However, they may still be able to participate in the DCAP depending on their employer’s LOA policy. 

REIMBURSEMENT

There are 2 conditions required for dependent care expenses to be eligible for reimbursement:

  1. employee must incur the expense to enable the employee and the employee’s spouse to be “gainfully employed” – a facts and circumstances test
  2. the expense must be for the “care” of one or more “qualifying individuals”

In general, condition #1 is determined on a daily basis, however there are exceptions to the “daily basis” rule for certain, short, temporary absences (e.g. vacation, minor illnesses) and part-time employment.

This “exception” is based on the IRS regulations establishing a “safe harbor” under which an absence of up to two consecutive calendar weeks is treated as a short, temporary absence. However, whether an absence for longer than 2 weeks qualifies as short and temporary is determined on the basis of facts and circumstances.

Likewise, when it comes to FMLA, the IRS does not agree that one’s entire absence under FMLA (which guarantees eligible employees up to 12 weeks of unpaid leave for certain purposes) is appropriate as a temporary absence safe harbor, noting that an absence of 12 weeks “is not a short, temporary absence” within the meaning of the regulations.   See Preamble to Treas. Reg. §§1.21-1 through 1.21-4, 72 Fed. Reg. 45338 (Aug. 14, 2007).

PARTICIPATION

Although the employee may not be eligible to reimburse dependent care expenses while on leave, an employee on LOA may be able to continue to participate in (and make contributions to) a DCAP but any reimbursements from the DCAP will still be subject to the gainfully employed rule and would have to fall within the exception for short, temporary absences.

A DCAP (a non-health benefit) is not subject to FMLA continuation requirements, therefore it would be based on the employer’s policies regarding a leave of absence as to whether they are allowed to continue or revoke their election of “non-health benefits” under the cafeteria plan and how contributions are handled during an unpaid leave.

Employers need to understand the rules regarding DCAPs when an employee is on a leave, and make sure it was “reasonable to believe” that a expense is reimbursable or there may be adverse consequences (e.g. taxes, interest, penalties).  Likewise, if using a third-party administrator, ensure that appropriate measures are being taken too, because in general the employer will ultimately be responsible for such procedures, both under the services agreement with the TPA and under governing law.