Category: eligibility

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.

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

On By Michelle Turner, MBA, CEBSIn COBRA, eligibility, leave of absence, self-insured1 Comment
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?

On By Michelle Turner, MBA, CEBSIn ACA, eligibilityLeave a comment
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.

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.




Affordable Care Act (ACA) Measurement Methods

On By Michelle Turner, MBA, CEBSIn ACA, eligibilityLeave a comment

The ACA has established rules on how to measure an employee’s hours to ensure an employee isn’t denied benefits based on a job title or classification of “part time” when in actuality they are working what the ACA considers full time (i.e. 30 hours a week or 130 hours a month). Part of these rules also includes when an employee must be offered benefits. 

Unfortunately, the measurement rules may be confusing, and often it’s easiest to understand the concept with an illustration (above). First, a few definitions:

  • Standard measurement period (SMP): a period of time (recommended is 12 months) for counting hours of service to determine full-time status for all ongoing employees
  • Ongoing employee: an employee who has been employed for at least one standard measurement period
  • Administrative period: allows time for enrollment and disenrollment, typically it’s 1 or 2 months
  • Standard Stability Period: when coverage must be provided if the employee averages full-time hours during the prior standard measurement period, this timeframe coincides with an employer’s plan year
  • Initial measurement period (IMP): lasts between three and 12 consecutive months, as chosen by the employer (we recommend 12), it begins on the first day of the calendar month following the employee’s start date
  • Initial stability period: when coverage must be provided if the employee averages full-time hours during their initial measurement period. If an employee does not average 30 hours/week during the IMP, the stability period cannot be more than one month longer than the IMP, typically this is the same length as the IMP

The above illustration is what these periods look like assuming a 1/1 plan year.

When an employee is hired as PT, their initial measurement period (IMP) starts the first day of the month after they were hired (e.g., date of hire 3/15/16, IMP starts 4/1/2016) and may last for up to 12 months (this diagram 11 months is used). During the IMP (e.g., 4/1/16 – 2/28/17) their hours are being tracked. At the end of the IMP (e.g., 2/28/2017), if the employee averaged 30 hours a week (or 130 hours a month) they must be offered benefits by the first day of their 13th month of employment which is the first date of their initial stability period (e.g., 5/1/2017). The employee also then must continue to be offered coverage for their entire initial stability period regardless of the number of hours they are working. 

These employees are also being measured during the SMP (e.g., 11/1/2016 – 10/31/2017) being used for all ongoing employees. If during the SMP they measure FT, the employee is eligible for benefits for the duration of the standard stability period (e.g., 1/1/2018 -12/31/2018), which means at the end of their IMP (e.g., 2/28/2017), benefits continue until the end of the standard stability period (12/31/2018). So, in the diagram above, on 4/30/2018 when the initial stability period ends, if from 11/1/16 – 10/31/17 (the standard measurement period) the employee measured full time, their benefits would continue until 12/31/2018. If, however, on 4/30/2018 the employee did not measure full time during the SMP (11/1/16 – 10/31/17) the employee would no longer be eligible for coverage. 

The other method that is available to use is the monthly measurement method, which means each month an employer determines whether an employee is/is not eligible for benefits based on the # of hours they worked the previous month and they would enroll/term accordingly monthly. Not a method that makes administrative sense for an hourly employee with fluctuating hours. 

Reference/Resource:

“The Five Ws, and One H of Affordable Care Act (ACA) Measurement Methods.” Alera Group, 23 Dec. 2020, aleragroup.com/insights/the-five-ws-and-one-h-of-affordable-care-act-aca-measurement-methods-102120/.

Turning 26 and Coverage On Parent’s Health Insurance

On By Michelle Turner, MBA, CEBSIn ACA, eligibility, TexasLeave a comment

26th birthday

Background:

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

Termination of coverage:

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

COBRA:

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

Note:  

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

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

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

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

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

Life Insurance – Portability & Conversion

On By Michelle Turner, MBA, CEBSIn eligibility, ERISALeave a comment

life insurance

When an employee goes out on a leave of absence or terminates employment, it is important for employers to have a dedicated process for notifying employees of critical changes to their benefits and what is required of an employee to continue their benefits.

Often employers remember to advise about COBRA eligible benefits but forget they are also responsible for providing information about life insurance, including portability or conversion information to employees who are losing benefit eligibility.

Background: Both the portability and conversion provisions allow the employee to continue life coverage that is lost due to an employment status change.  Policies may vary, so one needs to refer to their specific policy for clarification.

  • Portability –  When an employee ports coverage, they keep the group term life coverage offered by their employer along with some, but not all of the optional benefits that were included.
  • Conversion – When an employee converts coverage, they are converting to an individual whole life (or permanent life) insurance policy. The converted policy only provides life insurance and does not include the optional benefits such as Waiver of Premium, Accidental Death and Dismemberment.

In the case of, Erwood v. Life Insurance Company of North America and WellStar Health System, Inc., a federal district court awarded $750,000 in damages to Patricia Erwood, the wife of a deceased former employee of WellStar Health System whose life insurance lapsed while he was out on disability, and the employer failed to notify him of his conversion rights.

Even though the employer had sent the employee an FMLA leave packet that included information about it being possible to continue his life insurance benefits, the court noted that the FMLA packet did not include the materials necessary to convert, where to find the materials nor when the materials would be due if he was interested in continuing his coverage. 

This is just one of several cases which demonstrates relying on the benefit plan documents or a generalized communication may not be sufficient. Employers need to be mindful they have an ERISA fiduciary duty to adequately inform participants of their benefits and provide complete information regarding the steps necessary to keep their insurance benefits, including portability and conversion.

 

 

What about the baby?

On By Michelle Turner, MBA, CEBSIn eligibility, TexasLeave a comment

baby

Coverage of a newborn may be regulated by a combination of state, federal and carrier level regulations and rules.  Generally, in most states the state insurance law requires group health insurance policies (including HMOs) that provide maternity benefits to cover newborn children automatically for 30 or 31 days from birth.

For instance under Texas Insurance Code Sec. 1501.607 Coverage for Newborn Children:

(a) A large employer health benefit plan may not limit or exclude initial coverage of a newborn child of a covered employee.

(b) Coverage of a newborn child of a covered employee under this section ends on the 32nd day after the date of the child’s birth unless:

(1) children are eligible for coverage under the large employer health benefit plan; and
(2) not later than the 31st day after the date of birth, the large employer health benefit plan issuer receives:

(A) notice of the birth; and
(B) any required additional premium.

Added by Acts 2003, 78th Leg., ch. 1274, Sec. 3, eff. April 1, 2005.

(The same is true for a small employer, see Sec. 1501.157 Coverage for Newborn Children)

When a group policy includes automatic newborn coverage in their plan design, if the parent is enrolled for his or her own coverage at the time of the birth, the newborn is automatically covered for the first month. (If both parents have group coverage that includes automatic newborn coverage, the two plans coordinate benefits for the baby based on the birthday rule; i.e., the plan of the parent whose month and day of birth comes earlier in the year covers the baby first, then the other parent’s plan pays remaining expenses, if any, as secondary coverage.)

To continue the child’s coverage beyond the first 30 or 31 days, the Health Insurance Portability and Accountability Act of 1996 (HIPAA)  special enrollment rules requires that the “plan must allow an individual a period of at least 30 days after the date of the” birth to enroll the child and coverage “must begin on the date of birth.”

When in doubt on how the rules work or apply specifically to a fully-insured plan, confirming with a carrier is the best place to start. If self-insured, checking one’s plan documents in the eligibility section under “dependent insurance”,  in my experience are where the rules for newborn coverage are located.

e.g.  newborn exception2