Janet LeTourneau

Happy New Year! Benefit plans have started their new plan years and questions are already coming in about how and when participants may change their plan elections. So, it’s a perfect opportunity to review the change in election rules for the most popular benefits plans such as flexible spending accounts (FSAs) (cafeteria) plans, Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and parking and transit plans.

Cafeteria Plans
The IRS 1.125-4 Regulations outline a two-pronged approach to determining when a change may be made to an existing cafeteria plan election: (1) a change in status or a change in cost or coverage occurs, and (2) the election change satisfies the consistency rules. We’ll first look at the conditions necessary for a change and then discuss the consistency rule.

Although changes to current elections are not required in the plan document, most flexible benefit plan documents allow for election changes throughout the plan year. Please check your plan documents for specific rules surrounding allowable election changes.

Conditions for Change
Seven circumstances allow for changes to accident or health plans (including healthcare FSAs within a cafeteria plan), disability, group term life insurance plans, dependent care assistance, and adoption plans:

1) Special enrollment rights under HIPAA (Health Insurance Portability and Accountability Act). Allows for election changes on a prospective basis in the event of marriage (a HIPAA event). Election changes on a retroactive basis can be made for the HIPAA events of birth, adoption, or placement for adoption if the change is requested within 30 days of the event.

Also, the gain or loss of Medicaid or state children’s health insurance program (SCHIP) coverage in the cafeteria plan can be retroactive if elected within 60 days of the event.

2) Changes in status events.

• Change in legal marital status, such as marriage, death of spouse, divorce, legal separation, and annulment.
• Change in number of dependents which includes birth, death, adoption, and placement for adoption.
• Change in employment status, for example any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: A termination or commencement of employment, a strike or lockout, commencement of or return from an unpaid leave of absence, or a change in worksite. In addition, if the employee, spouse, or dependent becomes (or ceases to be) eligible under the cafeteria plan or other benefit plan of the employer of the employee, spouse, or dependent, that event is considered a change in employment status. For example, if a plan only applies to salaried employees and an employee switches from salaried to hourly-paid with the consequence that the employee ceases to be eligible for the plan, then that change constitutes a change in employment status.
• Dependent satisfies or ceases to satisfy eligibility requirements. This change can occur because of attainment of age, student status, or similar circumstance.
• Change in residence whereby an employee, spouse, or dependent moves in or out of a healthcare insurance network coverage area.
• For an adoption assistance program. The commencement or termination of an adoption proceeding.

3) Judgements, decrees, or orders. A conforming election change can be made that results from a divorce, legal separation, annulment, or change in legal custody (including a qualified medical child support order). Such a change would allow an increase to the election if the order was to provide coverage or it would allow the participant to cancel coverage if the order required another to provide coverage and if it was, in fact, provided by another.

4) Entitlement or loss of eligibility to Medicare or Medicaid. Allows participants to decrease or increase an election under an accident or health plan.

5) Significant cost or coverage changes: There are four events that apply to accident or health plans (not including healthcare FSAs), disability plans, group term life insurance plans, dependent care assistance plans, and adoption assistance plans.

Cost changes such as automatic increases or decreases in a qualified plan or significant cost changes. If the cost charged to an employee significantly increases, the employee may revoke an election and change to coverage under another benefit package option or drop coverage under the accident and health plan if no other benefit package option is offered. On the other hand, if the cost charged to an employee decreases significantly, an employee may commence participation in the cafeteria plan for the option with a decrease in cost.

This applies whether the increase or decrease results from an action taken by the employee (switching between full-time to part-time status) or from an employer increasing or reducing the amount of employer contributions for a class of employees.

Coverage changes such as a significant curtailment of coverage under a plan allow participants to revoke their election and, on a prospective basis, receive coverage under another benefit package option that provides similar coverage. A loss of coverage permits participants to revoke their election and elect coverage under another benefit package option or drop coverage under the accident and health plan if no other benefit package is offered. (A loss of coverage means a complete loss of coverage including the elimination of a benefits package option, a network ceasing to be available in the area, by reaching an overall lifetime or annual limitation, a substantial decrease in the availability of medical care providers, a reduction in benefits for a specific type of medical condition or treatment, or any other similar fundamental loss of coverage.)

A coverage change that adds to or improves an existing benefit package option allows eligible employees to revoke their election under the cafeteria plan and elect coverage under the new or improved benefit package. This includes employees who had made no previous election under the cafeteria plan.

A coverage change is made under another employer plan. This includes changes made during an open enrollment period or a valid change of status of spouse or dependent.

A loss of coverage for the employee, spouse, or dependent under any group health coverage sponsored by a governmental or educational institution, including a state’s children’s health insurance program (SCHIP), a medical care program of an Indian Tribal government, the Indian Health Service, a tribal organization, a state health benefits risk pool, or a foreign government group health plan.

These cost or coverage events would include situations in which an employee switches between full-time and part-time employment, an employer changes the percentage of premium that an employee must pay, or a new benefit option is added. The cost charged to an employee is the key factor in determining whether a cost change has occurred.

6) Family and Medical Leave Act (FMLA). Employees may revoke an existing election for group health plan coverage and make another election for the remaining portion of the period of coverage as provided under the FMLA.

7) 401(k) plans. Elections may be modified or revoked in accordance with 401(k) plan documents. Generally, most plan documents allow for changes on any pay period.

Consistency Rule for Accident or Health Coverage
The second part of the equation deals with whether the election change satisfies the consistency rule. The consistency rule applies to each employee, spouse, or dependent separately and basically requires that the election change be on account of and correspond with a change in status that affects eligibility for coverage under an employer’s plan. This includes an increase or decrease in the number of an employee’s family members or dependents who may benefit from coverage under the plan.

One exception to the consistency rule allows a plan to permit the employee to increase payments under the employer’s cafeteria plan if the employee, spouse, or dependent becomes eligible for COBRA under the group health plan of the employee’s employer.

Keep in mind that, under these rules, the change occurs when an employee, spouse, or dependent gains or loses coverage eligibility for accident or health coverage and group term life insurance. Therefore, a spouse that goes on an unpaid leave of absence, where no eligibility change takes place, would not constitute a reason for the participant to change their coverage elections.

When a participant gains coverage under another employer’s plan and revokes his or her election, a certification that coverage was actually obtained should be sought from the employee.

Regulations do allow a participant to revoke their election and receive, on a prospective basis, coverage under another benefit package option that provides similar coverage by another employer, such as a spouse’s or dependent’s employer.

Note, however, that the “Significant cost or coverage changes” section of the regulations do not apply to healthcare FSAs. Employees may only change their election to a healthcare FSA if any of the other five “Conditions for Change” occur and the resulting election change satisfies the consistency rule.

Additional changes allowed for Marketplace enrollment: A change is allowed for employees to prospectively revoke or change an election with respect to an employer’s accident or health plan if the employee wants to begin participation during open enrollment or a Special Enrollment Period, such as marriage or addition of dependent, to a Marketplace Qualified Health Plan (QHP). The new coverage in the QHP must be effective no later than the day immediately following the last day of the original coverage that is revoked.

HRAs, HSAs, Parking and Transportation Accounts, and 401(k) Plans
HRAs: Employees do not elect into HRA plans. Their eligibility for the HRA is based on the criteria outlined in the plan document. For example, the eligible group may be all those that selected a particular employer-sponsored group health plan. However, under certain conditions, participants in the HRA may suspend their participation in the HRA before the HRA coverage period begins and forgo payment or reimbursement by the HRA to perhaps participate in an HSA or to seek Premium Tax Credits for marketplace insurance coverage. Employees may also switch from single to family insurance coverage, or vise/versa. Employers may make changes to their HRA plans at any time during or at the beginning of the plan year.

HSAs and Parking and Transit Plans: It’s a lot less complicated for participants that have an HSA or are enrolled in parking and/or transit plans. Basically, an election in any of these types of accounts may be increased or decreased for any reason on a prospective basis.

401(k) Plans—inside and outside of a cafeteria plan: Election, generally, can be changed on a per payroll basis without any sort of status change. The selection of the types of investment options for HSAs or 401(k) plans can be changed at any time from the plans’ portals.

Lastly, there may be one more avenue for changing an election to a cafeteria plan—when a mistaken election occurs. This would require clear and convincing evidence that a change is needed. For example, if a participant signed up for the dependent care benefit, thinking it was for healthcare expenses of a dependent, although no child under the age of 13 resides in their home.

Of course, plan documents must be consulted to see when and how changes to elections may be made for any particular benefit plan.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

This article examines the rules for participants going on an unpaid Family and Medical Leave Act (FMLA) leave. Internal Revenue Service (IRS) Regulation 1.125-3 summarizes employees’ rights to continue or revoke coverage and cease payment for healthcare flexible spending accounts (FSAs) when taking an unpaid FMLA leave and specifications for participants returning from leave. The leading principle outlined mandates employers offer coverage under the same conditions as would have been provided if the employee were continually working during the entire leave period.

Coverage Continuation
Employers may require an employee who chooses to continue coverage while on FMLA leave to be responsible for the share of premiums that would be allocable to the employee if the employee were working. FMLA requires the employer to continue to contribute their share of the cost of employees’ coverage.

Flexible benefits plans may offer one or more payment options to employees who continue coverage while on unpaid FMLA. These options are pre-pay, pay-as-you-go, and catch-up.

• Pre-pay is paying for coverage in advance of the FMLA leave. This may be a difficult method of continuing coverage for a couple of reasons. The first consideration is if participants cannot afford to have extra funds taken from their paycheck and the second consideration is a timing issue. Most leaves involve an incident or circumstance that is not planned, making the pre-pay option impossible to deduct from participants’ paychecks. However, if planning in advance is feasible, the coverage can be paid on a pre-tax basis through the flexible benefits plan.
• The Pay-as-you-go option means that participants pay their share of coverage payments on a schedule as if they were not on leave. This method would require the participant to write a check to the employer each month or pay period in order to continue coverage. Since no payroll is taking place, this payment is with after-tax dollars.
• Catch-up contributions allow employees to continue coverage but suspend coverage payments during their leave. Contributions are made up upon their return. The advantage is that contributions can be taken out on a pre-tax basis through a flexible benefits plan. The downside for the employer is if the participant does not return from the leave, the employer may have reimbursed expenses in anticipation of the participant making up the coverage payments.

The flexible benefits plan may offer one or more of the payment options and may include the pre-pay option for employees on an FMLA leave even if this option is not offered to employees on a non-FMLA leave. However, the pre-pay option may not be the only option offered.

As long as employees continue healthcare FSA coverage, or employers continue it on their behalf, the full amount of the election for the healthcare FSA, less any prior reimbursements, must be available to the participant at all times, including the FMLA leave period.

Coverage Revocation
Prior to taking an unpaid leave, participants may revoke existing healthcare FSA coverage. Failure to make required payments during an FMLA leave may also result in lost coverage. Regardless of the reason for the loss of coverage under FMLA, plans must permit employees to be reinstated in the healthcare FSA upon their return.

Depending on the plan document language, returning employees may decide not to elect coverage into the healthcare FSA; or plans may require returning employees to be reinstated in healthcare coverage. If the employer requires reinstatement into the plan, they must also require those returning from an unpaid leave not covered by the FMLA to also resume participation upon return from leave.

The employer also has the right to recover payments for benefits when the employee revokes coverage.

If coverage under the healthcare FSA terminates while employees are on FMLA leave, employees are not entitled to receive reimbursement for claims incurred during leave. Even if employees wish to be reinstated upon return for the remainder of the plan year, employees may not retroactively elect healthcare FSA coverage for claims incurred during leave when coverage was terminated.

Employees have the right to reinstate coverage at the level before their FMLA leave and make up unpaid coverage payments, or they may resume coverage on a prorated basis at a level that is reduced for the period during FMLA leave for which no premiums were paid. This prorated level of coverage is further reduced by prior reimbursements and future coverage payments are due in the same monthly amounts payable before the leave.

Reinstate Coverage. Using the above facts, and upon the participant’s return from FMLA, the annual election will remain at $1,200. The election, or coverage amount, for the remainder of the year is as follows: Original annual election minus reimbursed to date ($1,200 minus $600) equals $600. The new per pay period contributions will increase to $80 per pay period. Remember, they are making up contributions from the three-month leave. The employee will contribute $1,200 [$400 contributed prior to the leave plus $800 ($80 times 10)]. The employer exposure is $1,200 ($600 disbursed prior to leave plus $600 available upon their return. Now let’s see what happens if employees choose to prorate coverage upon their return from FMLA leave.

Prorate Coverage. The calculation is different in this instance. A new annual election is determined. This is done by prorating the original annual election for the months participants were absent. Using the same facts as previously, the annual election amount minus six pay periods that were missed ($1,200 minus $300) equals $900. The new prorated annual election, reduced by prior reimbursements ($900 minus $600), equals $300. The per pay period contribution remains the same as before at $50 per pay period. In this instance the employee will contribute $900 ($400 plus $500) with an employer exposure of $900 ($600 plus $300).

In either scenario, employees are not covered for the time they are on FMLA if coverage is revoked. They may not turn in claims that were incurred during leave whether they choose reinstatement or prorated coverage upon their return.

Certain restrictions apply when an employee’s FMLA leave spans two flexible benefits plan years. A flexible benefits plan may not operate in a manner that enables employees on FMLA leave to defer compensation from one plan year to a subsequent flexible benefits plan year. In other words, employees may not pre-pay for coverage in one plan year that pays for coverage in the subsequent plan year.

If on paid FMLA leave, the employer may mandate that the employee’s share of premiums be paid by the method normally used while the employee was working.

And finally, employees on FMLA leave have all the rights to change their elections according to the change in status rules under IRS Regulation 1.125-4 when returning from an unpaid leave of absence. They may also enroll in benefits for new plan years or any benefits that may have been added by the employer while they were on leave. 

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living (COLA) inflation adjustments that apply to dollar limitations set forth in certain IRS Code Sections. The Consumer Price Index rose and therefore warranted increases in most indexed figures for 2020.

Social Security and Medicare Wage Base
For 2020, the Social Security wage base is $137,700. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent applies to all wages.

In addition, individuals are liable for a 0.9 percent “Additional Medicare Tax” on all wages exceeding specific threshold amounts.

Indexed Compensation Levels
Highly compensated and Key employee definitions.

401(k) Plans
In 2020 the maximum for elective deferrals is $19,500 and the catch-up contribution for those 50 or older is $6,500. That means if you are age 50 or over during the 2020 taxable year, you may generally defer up to $26,000 into your 401(k) plan.

Healthcare FSA
The annual limit for participant salary reductions for the healthcare flexible spending account (FSA) for plan years starting on or after January 1, 2020, may not exceed $2,750. However, this does not preclude employer contributions (as long as they are not convertible to cash) from being added to participants’ healthcare FSAs.

Adoption Credit
For 2020 this tax credit is $14,300. The credit starts to phase out at $214,520 of modified adjusted gross income (AGI) levels and is completely phased out when modified AGI reaches $254,520.

The exclusion from income provided through an employer or a Section 125 cafeteria plan for adoption assistance also has a $14,300 limit for the 2020 taxable year. And remember – a participant may take the exclusion from income and the tax credit if enough expenses are incurred to support both programs separately.

Health Savings Account (HSA)
Minimum deductible amounts for the qualifying high-deductible health plan (HDHP) increased to $1,400 for self-only coverage and $2,800 for family coverage for 2020. Maximums for the HDHP out-of-pocket expenses increased to $6,900 for self-only coverage and $13,800 for family coverage for 2020.

Maximum contribution levels to an HSA for 2020 increased to $3,550 for self-only coverage and $7,100 for family coverage. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2020. Remember, there are two general requirements in order to fund an HSA: You must have qualifying HDHP coverage and no other impermissible coverage (such as coverage under another employer’s plan or from a healthcare FSA that is not specifically compatible with an HSA).

Archer Medical Savings Account (MSA)
For high-deductible insurance plans that provide self-only coverage, the annual deductible amount must be at least $2,350 but not more than $3,550 for 2020. Total out-of-pocket expenses under plans that provide self-only coverage cannot exceed $4,750. For plans that provide family coverage in 2020, the annual deductible amount must be at least $4,750 but not more than $7,100, with out-of-pocket expenses that do not exceed $8,650.

Although new MSAs are not allowed, maximum contributions to existing MSAs that are attributable to single-coverage plans is 65 percent of the deductible amount. Maximum contributions for family-coverage plans are limited to 75 percent of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
The annual limit for employer-sponsored QSEHRAs is $5,250 for those with single coverage and $10,600 with family coverage for 2020.

Dependent and/or Child Daycare Expenses
Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the tax credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form. Limits for daycare credit expenses are $3,000 of expenses covering one child and $6,000 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be “deemed” as earning $250 per month for one qualifying child and $500 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.

The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a participant filing a single return, or filing as “Head of Household.” For a married couple filing separate returns, the limit is $2,500 each. The daycare credit is reduced dollar for dollar by contributions to or benefits received from an employer’s cafeteria plan. An employee may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.

Commuter Accounts
For 2020 the monthly parking limit is $270 and the 2020 monthly limit for transit also increases to $270.

Long Term Care
For a qualified long term care insurance policy, the maximum non-taxable payment increases to $380 per day for 2020.

Finally, by participating in a cafeteria plan, the participant will be lowering their income for the Earned Income Tax Credit (EITC). Check out the new limits in IRS Publication 596 “Earned Income Credit” and for more information about this tax credit.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

On August 30, 2019, Governor Gavin Newsom of California enacted Bill No. 1554.

Existing California law requires all employers to notify employees of information relating to employment and benefits. This additional bill requires employers to notify employees, who participate in flexible spending accounts and work in California, of any deadlines applicable to withdrawing funds before the end of the plan year.

Generally, flexible benefits plans are written to accommodate a “run out” period, after the formal end of the plan year, for participants to turn in claims incurred during the plan year. Some plans may allow a two-and-a-half month extended period of coverage (grace period) after the end of the plan year in which to incur expenses during the current year and use left-over funds from the previous plan year. Additionally, plans may allow participants to carry over up to $500 from a previous plan year to the current year from their healthcare flexible spending accounts.

The deadline to withdraw funds may be different according to the benefits selected. For instance, the dependent care portion of the plan may have a run out period for turning in claims incurred in the previous plan year, while the healthcare flexible spending account (FSA) may allow for a grace period or carry over, and thus a separate run out period.

These factors need to be taken into consideration when creating and distributing employee notices, including whether the FSA account is for dependent care, healthcare or adoption assistance.

The Notice needs to be delivered to participants before the plan’s year end, advising them of all deadlines to withdraw funds. The Notice also must be provided in two different forms, one of which may be electronic.

Notices may be provided as outlined below, but are not limited to the following:

• Electronic mail communication
• Telephone communication
• Text message notification
• Postal mail notification
• In-person notification

The Secretary of State for California has stated that a statute enacted during a regular session of the Legislature takes effect on January 1 of the following year, unless a date is specified in the statute. This means that benefit plans ending any time in 2020, up to and including December 31, 2020, will be required to provide two notices to California employees prior to their plan’s year end.

Notices may be delivered at any time during the plan year and may include the delivery of the Summary Plan Description. Work with your employers to ensure timely delivery of this new Notice requirement.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

On July 18, 2019, Internal Revenue Service (IRS) Notice 2019-45 added a range of preventive care benefits for chronic conditions that may be provided by an HSA-qualified high deductible health plan (HDHP) before the statutory minimum deductible is met. These additional services and items are treated as preventive only when prescribed to treat an individual diagnosed with the specified chronic condition, and only when prescribed for the purpose of preventing the exacerbation of the chronic condition or the development of a secondary condition.

Background
IRS Code Section 223 permits eligible individuals to establish and contribute to Health Savings Accounts (HSAs). Among the requirements to qualify as an eligible individual for an HSA is that the individual be covered under an HDHP and have no other disqualifying health coverage. An HDHP is a health plan that satisfies certain requirements with respect to minimum deductibles and maximum out-of-pocket expenses.

Generally, an HDHP may not provide benefits for any year until the minimum deductible for that year is satisfied. However, there is a safe harbor for preventive care that allows certain preventive care procedures and items to be paid prior to meeting the statutory minimum deductible amount for any calendar year.

Previous guidance provided in Notice 2004-23 and Q&As 26 and 27 of Notice 2004-50 gives direction on preventive care benefits allowed to be provided by an HDHP without regard to the minimum deductible requirements. Notice 2018-12 further clarified that benefits for male sterilization or male contraceptives are not considered preventive care.

Preventive Care and Chronic Conditions
On June 24, 2019, President Trump issued Executive Order 13877. Among other issues, the order included a mandate to issue guidance to expand the availability of coverage under HDHPs for low-cost preventive care, paid before the deductible is met, to help maintain the health status for individuals with chronic conditions.

In prior guidance the Treasury Department and the IRS stated that preventive care generally does not include any service or benefit intended to treat an existing illness, injury, or condition. However, cost barriers for some individuals with certain chronic conditions exist for those who cannot afford necessary care to prevent exacerbation of the chronic condition.

The Treasury Department and the IRS, in consultation with the Department of Health and Human Services, have determined that certain medical care services and products, including prescription drugs, should be classified as preventive care for those with certain chronic conditions.

As documented in the Notice, each medical service or item, when prescribed for an individual with the related chronic condition, evidences the following characteristics:

• The service or item is low-cost;
• There is medical evidence supporting high cost efficiency (a large expected impact) of preventing exacerbation of the chronic condition or the development of a secondary condition; and,
• There is a strong likelihood, documented by clinical evidence, that with respect to the class of individuals prescribed the item or service, the specific service or use of the item will prevent the exacerbation of the chronic condition or the development of a secondary condition that requires significantly higher cost treatments.

Medical services and items that can be covered by the health plan before the deductible is satisfied are limited to the specific medical care services or items listed in the chart below. These specified services and items are treated as preventive care only when prescribed to treat an individual diagnosed with the associated chronic condition and only when prescribed for the purpose of preventing the exacerbation of the chronic condition.

In other words, first confirm the diagnosis in the right-hand column and then ensure that the prescription or item purchased is specified in the left-hand column. For instance, a diagnosis of hypertension would not warrant an ACE inhibitor to be covered before the deductible is met, although a doctor may prescribe it for hypertension.

This is a significant step forward for the industry and those with chronic conditions.

On October 8, 2018, the Mayor of the City of Seattle signed into law a new Commuter Benefits Ordinance, which becomes effective on January 1, 2020.

The ordinance applies to businesses with 20 or more employees worldwide (“Covered Employer”). However, the ordinance only applies to employees who worked at least an average of ten hours or more per week in the previous month in the City of Seattle (“Covered Employees”). Covered employers will be required to offer their covered employees the opportunity to make pre-tax payroll deductions for transit, such as buses, light rail, ferry, water taxi, and vanpool commuting. The employer is not required to offer a qualified parking or bicycle benefit, but may offer those benefits.

The ordinance encourages commuters to use transit options other than single occupancy vehicles, thus reducing traffic congestion and carbon emissions. Because the deduction is pre-tax, the law has the added benefit of lowering the tax bills for both workers and businesses.

For purposes of determining whether a business is a Covered Employer, a business calculates the number of employees by counting the average number of employees who worked for compensation each calendar week during the prior calendar year. In doing so, businesses must remember to do the following:

• Count all employees worldwide;
• Count employees of all employment statuses (full-time, part-time, seasonal, temporary, employees supplied by a placement agency, etc.); and ,
• Include any week during which at least one employee worked.

Employers should not include weeks where no employees worked or those employees covered by a collective bargaining agreement.

For new businesses, employers that did not have any employees during the previous calendar year count the average number of employees employed per calendar week during the first 90 calendar days that the employer engaged in business.

No later than January 1, 2020, all covered employers need to provide a pre-tax plan for commuter benefits to their covered employees. New employees should be provided an opportunity for pre-tax commuter benefits within 60 days of starting employment.

Covered employers can meet their obligation under the ordinance by doing one of the following:

1. Allowing employees to make a pre-tax deduction up to the full amount allowed by federal law; or
2. Subsidizing all or part of the purchase price of a transit pass.

Please note that future rulemaking will impact these requirements, including about how using an employer subsidy will satisfy the ordinance’s requirements. This information will be provided once available.

Tax-exempt organizations and government entities are exempted from these provisions.

Employers must retain records that document compliance with this new ordinance, including written documentation of the offer to employees, enrollment forms, and payroll records or pre-tax deductions. Records will need to be retained for three (3) years.

The Office of Labor Standards (OLS) looks forward to teaming up with Seattle’s Department of Transportation, Commute Seattle, and community partners to equip workers and businesses, including the small business community, with the information and tools to understand these new requirements.

The Agency will create and distribute a poster giving notice of the rights afforded to them. Employers will be required to display the poster in a conspicuous and accessible place at any workplace or job site where any of their employees work. The notice will be provided in English and in the primary language(s) of the employees at any particular workplace.

In 2019 and 2020 the OLS will develop administrative rules and enforcement procedures for the ordinance. Employers are required to comply with the ordinance beginning January 1, 2020. However, OLS will not take enforcement action until January 1, 2021. During the period before enforcement begins, OLS, SDOT, Commute Seattle and other community partners will focus on educating workers and the business community, including small businesses, about the ordinance.

After January 1, 2021, OLS will accept complaints about alleged violations of this ordinance. The ordinance is designed with voluntary compliance in mind. OLS will investigate any complaints and may provide a business with a 90-day “cure” period during which time an employer has an opportunity to achieve compliance. Be aware that OLS may promulgate additional rules and guidelines regarding enforcement and penalties.

Helpful resources, including a Q&A booklet, are available at:

• https://library.municode.com/wa/seattle/codes/municipal_code?nodeId=TIT14HURI_CH14.30COBE
• https://www.seattle.gov/Documents/Departments/LaborStandards/CB_Summary,%20050219_Final.pdf
• https://www.seattle.gov/Documents/Departments/LaborStandards/CB_QA050219_Final.pdf
• https://www.seattle.gov/laborstandards/ordinances/commuter-benefits.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

My March column covered proposed regulations permitting two new types of Health Reimbursement Arrangements (HRAs) that would be available for plan years starting on or after January 1, 2020. The proposed regulations were finalized, with several important changes, on June 13, 2019. Although there were not many changes from the proposed regulations, this alert will provide an overview of these two new types of HRAs as provided for in the final regulations.

The final regulations created two new types of HRAs. An Individual Coverage HRA and an Excepted Benefit HRA. Both reverse the previous Administration’s position on how HRAs operate under the Affordable Care Act (ACA). The final regulations will be effective for plan years starting on or after January 1, 2020; however, employers wishing to set up these new HRAs for the coming plan year will need to make decisions well before the end of 2019 because of plan document and employee notice requirements.

These two HRAs provide employers with significant new flexibility in how they fund health coverage through HRAs. This flexibility empowers individuals to take greater control over what health insurance benefits they receive and the Treasury Department estimates that more than 10 million employees will benefit from this change within the next decade. It can also benefit employers as they can find more affordable coverage for all of their employees under these new regulations.

The final regulations remove the current prohibition on using HRA funds to purchase individual health insurance coverage; however, an array of stipulations apply to assure these new HRAs do not contribute to instability in the individual market and that they coordinate with current ACA premium subsidies. Both types of HRAs include nondiscrimination rules that limit their use. The nondiscrimination rules for these HRAs are designed to protect older and sicker individuals against negative consequences and to prevent employers from incentivizing employees who may be unhealthy or more costly to leave the employer’s group health plan for a plan purchased on the individual market.

The Departments of Treasury, Labor, and Health and Human Services estimate that once employers fully adjust to the new rules, roughly 800,000 employers will offer the Individual Coverage HRA.

Individual Coverage Health Reimbursement Arrangement (ICHRA)
An ICHRA may be integrated with individual health plan coverage in order to reimburse individual coverage premiums and qualified medical out-of-pocket expenses, provided that the ICHRA satisfies a few conditions.

Enrollment
First, the employer cannot offer any employee a choice between an ICHRA and employer-sponsored group health plan coverage. Plus, the participants and their dependents must be enrolled in health insurance coverage purchased in the individual market or Medicare Parts A, B, or C. Substantiation of individual coverage must take place at enrollment and with each reimbursement request.

If the participant and all dependents covered by the ICHRA cease to be covered by individual health insurance, the participant must forfeit the ICHRA. If a participant or dependent loses coverage under the ICHRA for a reason other than cessation of individual health insurance coverage, COBRA and other continuation coverage requirements may apply.
The employer must offer the ICHRA on the same terms to all employees in a “class” and employees must have the ability to opt-out of receiving the ICHRA so that they may receive a premium tax credit for coverage purchased in the individual marketplace.

Classes of Employees

• Permissible “classes” of employees are:
• full-time;
• part-time;
• salaried;
• hourly;
• employees in the same rating area;
• seasonal;
• collectively bargained;
• those who have not satisfied a waiting period for health coverage; and,
• non-resident aliens with no U.S. income.

Employers may create a class based on a group of participants described as a combination of two or more of the permissible classes of employees, i.e., coverage of just salaried and hourly employees in one rating area.

Minimum size of a class of employees
There are minimum class size requirements for the following classes: Full- and part-time, hourly, salaried, rating area, and waiting period. However, the minimum class size requirement applies only if a plan sponsor offers a traditional group health plan to one or more classes and offers an ICHRA to one or more other classes of employees. The minimum class size requirement does not apply to a class of employees offered a traditional group health plan or a class of employees that are not offered coverage.

Employers with less than 100 employees must have a minimum class size of at least 10 employees. Employers with 100 to 200 employees must have a minimum class size of at least 10 percent of all employees. For those employers with 200 or more employees, the employer must have a minimum class size of at least 20. The size of any employer is based on the common law employer standard, not on a controlled group basis, and is determined based on the anticipated number of employees at the beginning of the plan year.

Before each plan year, a plan sponsor must determine for the plan year which classes of employees it intends to treat separately and the definition of the relevant class(es) it will apply. No changes may be made to the classes for that entire plan year.

The minimum class size requirement does not apply if the rating area defining a class of employees is a state or a combination of two or more entire states. In addition, full-time employees are not an applicable class subject to the minimum class size requirement if part-time employees are not offered coverage.

Exceptions to “Same Terms and Conditions” within the Same Class of Employees
An ICHRA must generally be offered to all employees in a class on the same terms and conditions. There is an exception, however, for giving different amounts based on age, family size, and current versus former employees. If the amount is based on age, the oldest participant may only receive three times as much as the youngest participant.

There are also special rules for newly hired and former employees. Through a new hire rule, employers can offer new employees an ICHRA while grandfathering existing employees in a traditional group health plan. Those employees who have and those employees who have not completed a waiting period may be treated as different classes. The new hire rule may only be applied to a class that is being offered a traditional group health plan and no minimum number of new hires is applied.

Employers may offer the ICHRA to some, but not all, former employees within a class of employees without running afoul of the new rules.

New employees or new dependents joining the ICHRA after the plan year has begun may be treated as having the full annual election that was available on the first day of the plan year or a prorated amount based on the portion of the plan year the new hires or dependents are covered by the ICHRA. This rule would be applicable to all participants and must be determined prior to the beginning of the plan year.

The final regulations also made a point of not only disallowing discrimination among a class of employees, but also not allowing “benign” discrimination. This is the practice of discriminating in favor of sicker or costlier employees.

Additionally, individual coverage that is integrated with an ICHRA is not subject to the Employee Retirement Security Act (ERISA) provided five requirements are met:

1. Participation in the ICHRA is voluntary;
2. The employer has no role in the selection or endorsement of any individual coverage products;
3. The employer receives no consideration from coverage providers;
4. Annual notification is provided that states the individual insurance is not subject of ERISA; and,
5. There are limits on reimbursement.

The final rules provide a safe harbor for employers wishing to use a private exchange for their employees.

A section 125 cafeteria premium plan can be offered with an ICHRA for “excess contributions” to cover the premium cost over and above the benefit offered by the employer through the ICHRA. As a reminder, a cafeteria plan cannot be used for Exchange coverage premiums, but can be utilized for other individual coverage.

Opt Out Provision, Carry Over, and Transfer Amounts
In order for employees to receive a Premium Tax Credit (PTC) for premiums paid for coverage purchased on an Exchange, they must not receive coverage elsewhere or have certain medical coverage.

To that end, employees must be able to opt out, at least annually, and at termination of employment, their right to ICHRA coverage. Participants may forfeit their account or opt out in order to start to receive a tax credit for premiums paid for coverage on the Exchange.

Unused amounts in the ICHRA may be carried over and made available to participants in later years and are disregarded for purposes of determining whether an ICHRA is offered on the same terms and conditions. If employees were participants covered by a prior HRA sponsored by their employer, unused amounts may be transferred to the new ICHRA. These funds are also disregarded for purposes of determining whether the ICHRA is offered on the same terms and conditions for all participants in the class of employees.

Health Savings Account (HSA)-compatible ICHRAs
An ICHRA may be designed to be offered alongside an HSA. It could offer only coverage for individual premiums, excepted benefits such as vision and dental care, and post-deductible out-of-pocket expenses.

Notices
And finally, employers offering an ICHRA must provide written notice to each eligible employee at least 90 days before the beginning of each plan year or the date on which the individual first becomes eligible to participate in the ICHRA.

Although lengthy, the examples provided within the regulations are quite lucid and provide many every-day illustrations of how ICHRAs may be offered.

Excepted Benefit Health Reimbursement Arrangement (EBHRA)
This HRA reverses the previous Administration’s stance by allowing a new type of HIPAA-excepted benefit.

This new status as an excepted benefit means that the employee who is covered under the EBHRA is not considered enrolled in “minimum essential coverage” and would not be precluded from receiving a premium tax credit on an Exchange. These are the requirements that must be met in order to offer EBHRAs:

1. The employer must offer other major medical health coverage. However, participants in the EBHRA do not have to be enrolled in the health coverage, they just simply must be offered the coverage.
2. The EBHRA is limited to $1,800 annually (not including rollovers from year to year), subject to annual indexing.
3. If unused amounts are allowed to be carried forward to later plan years, the carryover amounts are disregarded for purposes of determining whether benefits are limited in amount.
4. If more than one HRA or other account-based group health plan is provided, the plans are aggregated to determine whether the benefits are limited in amount, except HRAs that only reimbursed excepted benefits are not included in this calculation.
5. The EBHRA cannot reimburse individual health insurance premiums or Medicare Part A, B, C, or D; but may reimburse eligible health care expenses and COBRA premiums or contributions, short-term limited-duration insurance (STLDI), and excepted benefit coverage premiums such as for dental and vision insurance.
6. EBHRAs must be made available to all similarly situated employees.
7. The employer cannot offer both an ICHRA and an EBHRA.

A special enrollment period in the individual market is available for individuals who gain access to an ICHRA or who are provided a Qualified Small Employer HRA (QSEHRA) mid year.

Plan years for both an ICHRA and EBHRA are generally 12 months. However, they do not have to be on a calendar year and may be a short plan year. Short plan years would need to prorate any annual limits for just the months covered by the short plan year. Note that an employer cannot offer both an ICHRA and an EBHRA to the same class of employees.
With the EBHRA, the employer might want to offer an additional separate HRA that only provides vision and/or dental benefits (which are themselves excepted benefits). This would allow participants to utilize the $1,800 EBHRA limit plus have additional funds available for vision and dental expenses.

Still to be addressed is the small group market reform implemented by some states that does not allow employers to pay any portion of premiums for individual health insurance policies. Although implemented, states may or may not enforce this edict.

www.WageWorks.com will keep you apprised of any new developments as they occur.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

Here’s a “Top Ten” list of reasons why employers and employees should establish Health Savings Accounts (HSAs).

10. HSA-eligible high-deductible health plans can save premiums for both employers and employees.

9. HSAs belong to the account holder and are retained by the participant when changing jobs.

8. HSA contributions are non-taxable.

7. HSA growth through interest and dividends is non-taxable.

6. Disbursements for qualified medical expenses are non-taxable.

5. There is no dollar limit to the amount that may accumulate in an HSA.

4. The maximum annual contribution may be deposited into an HSA even if it is established mid-year.

3. HSAs roll forward from year to year. Funds can accumulate for expenses incurred during retirement.

2. Anyone, including both the employer and the employee, can contribute to an individual’s HSA during the year

1. HSA’s indexed figures are released earlier than any other benefits’.

This table shows the the 2020 HSA limits.

Congress mandates that cost-of-living adjustments for HSAs must be released by June 1 of every year. The early release of HSA minimums and maximums each calendar year ensures that plan sponsors and their employees have ample time to review plan design options and prepare brochures and educational materials ahead of open enrollment.

Find out more information on HSAs at: https://www.wageworks.com/employer/health-care/Health_Savings_Account/default.htm.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

These days mark a flurry of merger and acquisition activity. Typically the parties focus on tangible assets and monetary figures. However, many concerns surround employees and their benefits such as retirement plans, paid time off accruals, health insurance, and flexible spending accounts. Employees don’t want to lose benefits they’ve earned and funded. Often, aside from job retention, employees’ first concerns when a merger or acquisition is announced center around benefits.

Fortunately, the IRS agrees with employees. Benefits shouldn’t have to be squandered just because a company has merged with or been purchased in an asset sale by another company. Participants who elected to reduce their salary to contribute to healthcare flexible spending accounts (FSAs) for unreimbursed medical expenses need assurances that their healthcare FSA will be kept whole. This great tax savings for employees is sometimes overlooked in all the details of a merger or acquisition (M&A) transaction.

Generally, at the time of the merger or acquisition, employee healthcare FSAs fall into two categories: Employees who have money in their accounts, but not enough expenses incurred to draw all the funds, and participants who have received reimbursements in excess of their year-to-date contributions. The IRS uses Revenue Ruling 2002-32 to explain exactly how to transfer those balances to the new employer.

By using specific facts and circumstances within the revenue ruling, the IRS guides the buyer and the seller in an asset sale on continuation of participants’ healthcare FSA coverage when they become the buyer’s employees. However, if the acquisition is a stock sale, benefits continue as is unhindered.

The first example allows for continuation of coverage under the seller’s healthcare FSA with salary redirections made under the buyer’s plan, while the second example illustrates how coverage and salary reductions are handed off to the buyer.

Coverage Continues Under Seller’s Plan
The facts in this company asset sale are as follows:

1. The selling company maintains a healthcare FSA plan.
2. During the plan year, a buyer acquires a portion of the seller’s assets.
3. The seller’s employees are terminated and become the buyer’s employees.

The two parties agree that transferred employees will continue in the seller’s healthcare FSA plan and salary reductions made by the buyer’s new employees for the healthcare FSA will continue as if made under the seller’s plan. The buyer must have an existing healthcare FSA plan or be prepared to adopt a new healthcare FSA plan. Healthcare FSA participants will continue to seek reimbursement from the seller for the remainder of the plan year.

Example: Joe works for Cellar Sales. He made a $1,200 annual election to the healthcare FSA plan that started on January 1. On July 1, Joe’s division was sold and he became an employee of Buy Right. Joe has contributed $600 to his healthcare FSA account, but has incurred no medical expenses to date. Prior to Revenue Ruling 2002-32, Joe would have been considered a terminated employee from Cellar Sales and would have either forfeited his $600 or been able to elect COBRA continuation coverage if applicable.

The seller and buyer agree to have the transferred employees continue to participate in the seller’s healthcare FSA for a specified period—generally through the end of the plan year. Joe’s new paycheck from Buy Right will continue to take his healthcare FSA pre-tax reductions and deposit them into Joe’s Cellar Sales healthcare FSA account. Joe will continue to send future claims to Cellar Sales.

The buyer’s new employees are not considered to have lost coverage of the seller’s plan and no COBRA is offered. However, if the seller’s healthcare FSA is not considered an excepted benefit which occurs when the employer does not offer an ACA-compliant employer-sponsored group health plan or employer contributions to the healthcare FSA exceed $500 or are in excess of the participant’s election, then the employer must offer full COBRA continuation coverage at the beginning of the first day of the new plan year following the current plan year. That’s when former employees would lose coverage after terminating employment—which is a COBRA qualifying event.

As an example, at the start of the new plan year, a COBRA beneficiary can make a new election, and does, for $1,200. The COBRA premium can be 102 percent of the premium, which in this case would be $102 per month. The participant generally has 18 months of COBRA coverage unless special circumstances apply. These include the employee’s death, divorce, or entitlement to Medicare and child’s loss of dependent status; which result in a 36-month maximum coverage period.

Coverage is Transferred to Buyer’s Plan
In this scenario the facts are the same as in scenario one except the buyer agrees to provide coverage for the new employees. Again, the buyer must have an existing plan or will adopt a new plan with salary reductions starting through the buyer’s payroll account.

The buyer must amend its healthcare FSA plan to provide that transferred employees who elected to participate in the seller’s healthcare FSA become participants in the buyer’s healthcare FSA as of the beginning of the seller’s current plan year at the same level of coverage. The buyer must also amend its healthcare FSA to provide reimbursement for expenses incurred by transferred employees at any time during the seller’s healthcare FSA coverage (even though expenses may have occurred prior to the sale).

Here, the buyer agrees to adopt a continuation of the seller’s plan. The buyer “steps into the shoes” of the seller for purposes of the healthcare FSA plan. When the buyer assumes sponsorship of the cafeteria plan covering the employees of the seller, elections under the plan continue because there is no allowable change in status that would permit a change in the election.

All affected plan participants’ accounts consisting of contributions and earlier reimbursements are transferred to the new employer. Participants will request reimbursement for expenses incurred either before or after the acquisition from their new employer. The participants enjoy uninterrupted coverage.

Example: Let’s look at Joe again with a different set of facts and circumstances. Although Joe has contributed $600 to Cellar Sales’ healthcare FSA plan, his balance will be transferred to his new employer. Thus, instead of sending his claims to Cellar Sales, he will turn in claims to his new employer Buy Right.

Even if Joe incurred eligible expenses in March of the plan year, his claim would be submitted to Buy Right and reimbursed from Buy Right’s healthcare FSA plan—because his account balance was transferred to the new company.

Additional Rules
Transferring the participants’ accounts means just that. Unless the participant has a valid change of status, no mid-year election changes are allowed because of the merger or acquisition. However, keep in mind, both the buyer and seller must have a healthcare FSA plan at the time of the sale and the FSA plans must also allow for the same period of coverage. In other words, both plans must provide coverage based on the same plan year.

Of course, in both scenarios, the seller and the buyer should document the arrangement outside of the healthcare FSA plan document and spell out appropriate financial terms. These arrangements would take into consideration contributions and reimbursements received before the merger.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.