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Jason Folks

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Jason Folks, CAS, CFCI, CHA, HSAe, is the director of Product Compliance with HealthEquity, Inc.  Folks has over 20 years of experience in regulatory compliance and employer consultation, with a particular focus on federal COBRA and state continuation requirements.   He attended New York University and holds COBRA Administration Specialist (CAS), Certified in Flexible Compensation Instruction (CFCI), Certified HIPAA Administrator (CHA), and Health Savings Account Expert (HSAe) designations through the Flexible Compensation Institute, LLC, a wholly-owned subsidiary of the Employers Council on Flexible Compensation. Folks can be reached by telephone at 214-596-7842. Email: jasonf@healthequity.com.

2021 Index Figures

On October 26, 2020, the Internal Revenue Service issued1 the 2021 annual inflation adjustments for many tax provisions of the IRS Code. These adjusted amounts will be used to prepare tax year 2021 returns in 2022. Also on October 26, the IRS released2 the dollar limitations for qualified retirement plans for tax year 2021, including 401(k) plans.

Indexed Compensation Levels

As a reminder, for Healthcare FSAs that permit the carryover of unused amounts, the maximum carryover amount is increased to an amount equal to 20 percent of the maximum health FSA salary reduction contribution for that plan year. Accordingly, the maximum carryover amount from a plan year beginning in 2020 to be carried over to the immediately subsequent plan year beginning in 2021 is $550 (= $2,750 x 20 percent).3

While the $5,000/$2,500 DCAP limit has not changed, there are adjustments to some of the general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2021 tax rate tables, earned income credit amounts, and standard deduction amounts. The child tax credit limits are also relevant when calculating the federal income tax savings from claiming the dependent care tax credit (DCTC) versus participating in a DCAP.

The preceding general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact specific. As always, we strongly encourage employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.

Nothing in this communication is intended as legal, tax, financial or medical advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Always consult a professional when making life-changing decisions.

References:

  1. https://www.irs.gov/pub/irs-drop/rp-20-45.pdf.
  2. https://www.irs.gov/pub/irs-drop/n-20-79.pdf.
  3. https://www.irs.gov/pub/irs-drop/n-20-23.pdf.
  4. https://www.irs.gov/pub/irs-drop/rp-20-32.pdf.
  5. https://www.irs.gov/pub/irs-drop/rp-20-43.pdf.
  6. EBHRAs are only available for plan years beginning on or after January 1, 2020.

IRS Provides Limited Relief For Health Coverage Information Reporting

On October 2, 2020, the Internal Revenue Service (IRS) released an advance version of Notice 2020-761 which extends the deadline under sections 6055 and 6066 of the Internal Revenue Code for insurers, self-insuring employers, applicable large employers (ALEs), and certain other providers of minimum essential coverage to furnish to individuals the 2020 Form 1095-B: Health Coverage2 and 2020 Form 1095-C: Employer-Provided Health Insurance Offer and Coverage.3

Generally, such entities must provide these forms by January 31 of the year following the applicable ACA reporting year. For ACA reporting year 2020, however, the deadline for these entities to furnish information returns to employees and beneficiaries has been delayed from January 31, 2021, to March 2, 2021.

By way of background, Section 6055 requires health insurance issuers, self-insuring employers, government agencies, and other providers of minimum essential coverage to file and furnish annual information returns to the IRS and furnish statements to individuals regarding coverage provided. Form 1095-B generally contains enrollment information; ALEs report enrollment information for employees enrolled in their self-insured health plans on Part III of Form 1095-C.

Section 6056 requires applicable large employers (which are generally those with 50 or more full-time employees, including full-time equivalent employees, in the previous year) to file and furnish annual information returns and statements relating to the health insurance, if any, that the employer offers to its full-time employees.

According to Notice 2020-76, the IRS and Treasury Department have determined that a “substantial number of employers, insurers, and other providers of minimum essential coverage need additional time” to complete the 2020 Forms 1095-B and 1095-C that are to be furnished to individuals.

Notice 2020-76 cautions that it does not extend the due date for filing Forms 1094-B, 1095-B, 1094-C or 1095-C with the IRS for 2020. The deadlines for these will be March 1, 2021, for paper filings (as February 28, 2021, will fall on a Sunday) and—for electronic filings—March 31, 2021. Notice 2020-76 does not affect the provisions regarding an automatic extension of time for filing information returns; the automatic extension remains available under the normal rules for employers and other coverage providers that submit a Form 8809 on or before the due date, and does not affect the provisions regarding additional extensions of time to file.

Notice 2020-76 also provides that the IRS will not impose a penalty under section 6722 for failures to furnish a Form 1095-B to responsible individuals and also provides a final extension of transitional good-faith relief from section 6721 and 6722 penalties to the 2020 information reporting requirements under sections 6055 and 6056. No penalties will be imposed on entities that report incorrect or incomplete information (either on statements provided to individuals or to returns filed with the IRS) if good-faith efforts are made to comply with these reporting requirements. This relief is not available to entities that fail to furnish statements or file returns, miss an applicable deadline, or are otherwise not making good-faith efforts to comply. Evidence of these efforts may include gathering necessary data and transmitting it to a third-party to prepare the necessary reports, or testing the ability to transmit data to the IRS. Notice 2020-76 provides that 2020 is the last year the IRS intends to provide this good-faith relief from penalties for incorrect or incomplete information returns.

In addition, for 2020, the IRS will not assess penalties against reporting entities that fail to furnish Forms 1095-B automatically to individuals provided: 1) a Form 1095-B is furnished within 30 days after an individual’s request is received; and, 2) a notice with information about requesting Form 1095-B is posted prominently on the reporting entity’s website. Similar relief is afforded to ALEs that fail to furnish Forms 1095-C automatically to employees who were not full-time for any month in 2020, provided the form is furnished by request and website notice is provided.

With this notice, the IRS and Treasury Department are requesting comments as to whether and how the reporting requirements under section 6055 may need to change, if at all, for future years. Comments are requested by February 1, 2021.

References:

  1. https://www.irs.gov/pub/irs-drop/n-20-76.pdf.
  2. https://www.irs.gov/pub/irs-pdf/f1095b.pdf.
  3. https://www.irs.gov/pub/irs-pdf/f1095c.pdf.

This general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact specific. As always, we strongly encourage employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.

Nothing in this communication is intended as legal, tax, financial or medical advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Always consult a professional when making life-changing decisions.

2021 San Francisco Health Care Expenditure Rates Released

The San Francisco Office of Labor Standards Enforcement recently released updated Health Care Security Ordinance (HCSO)1 required health expenditure rates for 2021.

Background
The HCSO provides individuals who work in San Francisco and qualify as employees entitled to minimum wage with access to affordable healthcare through a Health Access Program. The HCSO requires “Covered Employers” to spend a minimum amount of money each quarter towards the healthcare of their “Covered Employees.”

For purposes of the HCSO, a Covered Employer employs one or more workers within the geographic boundaries of the city and county of San Francisco, are required to obtain a valid San Francisco business registration certificate,2 and employ at least 20 employees (or at least 50 for a nonprofit organization) worldwide. To determine workforce size, employers must count all employees irrespective of where they work or reside. The expenditure, however, applies only for hours worked in San Francisco.

Covered Employees are defined by the HCSO as having been employed by the employer for at least 90 days, have performed at least eight hours of work in San Francisco, and are not employees who:

  • Have signed a waiver form3 voluntarily waiving their right to have employers make health care expenditures for their respective benefit;
  • Qualify as managers, supervisors, or confidential employees4 and earn more than the applicable salary exemption amount ($104,761 in 2020; the 2021 salary exemption amount has not been announced);
  • Are covered by Medicare or TRICARE;
  • Are employed by a non-profit corporation as a trainee in bona fide training; or,
  • Receive health care benefits pursuant to the San Francisco Health Care Accountability Ordinance.5

Remote Employees
As the COVID-19 outbreak continues, many employees are engaging in telework. Covered Employers will not be required to make health care expenditures for any employees who work outside of San Francisco exclusively during the quarter (as they will not have worked at least eight hours per week in San Francisco). Employees whose home offices are within San Francisco (and for whom none of the exemptions listed above apply), however, would still qualify as Covered Employees for whom expenditures would still be required.

Updated Rates
The 2021 Health Care Expenditure rates—and previous years’ rate history—are shown in Table 1.

Oct2020GippleTable1

Irrevocable Expenditures
On June 17, 2014, the San Francisco Board of Supervisors amended the HCSO to phase in, over a three year period, a requirement that all health care expenditures made by Covered Employers on behalf of their Covered Employees be made “irrevocably.” Employers previously had the option to make health care expenditures on behalf of their Covered Employees either with irrevocable expenditures, such as insurance premium payments, or with revocable expenditures, such as allocations to Health Reimbursement Arrangements (HRAs) where unspent funds can be returned to the employer.

The three year “phase-in” required that 60 percent of the employer expenditure in 2015 be irrevocable; 80 percent be irrevocable in 2016; and all employer health care expenditures be irrevocable on and after January 1, 2017. The amended Ordinance also permits employees to voluntarily waive the unused balance of revocable expenditures made on their respective behalf for hours worked prior to January 1, 2014.

The Ordinance explains the benefits available for employees of employers that contribute to the SF City Option program. Based on their eligibility, employees will be offered one of three health benefits through the employer SF City Option program:

  • SF Covered Medical Reimbursement Accounts,
  • Healthy San Francisco, or
  • SF Medical Reimbursement Accounts.

The Administrative Guidance for the HCSO is available with sections concerning “Revocable and Irrevocable Health Care Expenditures,” “Calculating Required Health Care Expenditures,” and “Contributing to the SF City Option.” For details about these and other requirements, Frequently Asked Questions, or other resources, please visit the San Francisco government website.6

The preceding general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact specific. As always, we strongly encourage employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.

Nothing in this communication is intended as legal, tax, financial or medical advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Always consult a professional when making life-changing decisions.

References:

  1. https://sfgov.org/olse/health-care-security-ordinance-hcso.
  2. http://sftreasurer.org/registration.
  3. http://sfgov.org/olse/sites/default/files/Document/HCSO%20Files/Employee%20Voluntary%20Waiver%20Form%20-%2011.01%20Final.pdf.
  4. https://sfgov.org/olse/C-COVERED-employees#managersupervisor.
  5. https://sfgov.org/olse/health-care-accountability-ordinance-hcao.
  6. http://.sfgov.org/olse/hcso.

Proposed Regulations Protect Grandfathered High Deductible Health Plans And HSAs

The following general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact specific. As always, we strongly encourage employers and plan sponsors to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.

On July 10, 2020, the Department of Labor (DOL) Employee Benefits Security Administration (EBSA) announced the release of proposed regulations by the Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury (collectively, the “Agencies”) regarding health insurance plans that are grandfathered under the Affordable Care Act (ACA) to preserve their grandfathered status, along with guidance in the form of FAQs and a press release explaining the proposal.1

By way of background, group health plans and health insurance coverage that were in existence and had at least one participant on the date the ACA was enacted (March 23, 2010) are excused from some of the requirements of health care reform listed in the Public Health Service Act (PHSA) and incorporated by reference into the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. Such plans and coverage are, under Section 1251 of the ACA, referred to as “grandfathered health plans.” To retain this status, the plan or coverage must have continuously covered someone—though not necessarily the same person—since March 23, 2010. While such a plan is a “grandfathered health plan,” it is not subject to certain requirements of the ACA, including the requirement to cover preventive services without cost-sharing.

However, certain changes in plan terms can cause these plans to lose their grandfathered status and—therefore—would make them subject to these requirements. The final regulations (published November 18, 2015),2 along with previously issued interim regulations3 and guidance documents, detailed the various changes that could be made to health coverage that could maintain—and those that might result in a loss of—grandfathered status.

Under those regulations, increases in the amount of fixed-amount cost sharing (e.g., deductibles, copayments, out-of-pocket limits) under the grandfathered health coverage would not cause the loss of grandfathered status as long as the change was within certain parameters. Specifically, inflationary adjustments of up to 15 percent above medical inflation were allowed; any increase (cumulatively measured from March 23, 2010) in fixed-amount cost-sharing other than copayments (e.g., deductible or out-of-pocket limits) of more than 15 percent above medical inflation would cause the plan to lose its grandfathered status.

In January 2017, President Trump issued Executive Order 13765—“Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal”4 directing the Agencies to minimize the unwarranted economic and regulatory burdens of the ACA. Pursuant to this instruction, the Agencies proposed regulations to modify the final 2015 regulations by expanding the parameters for changes to grandfathered coverage that would not result in the loss of grandfathered status.

High Deductible Health Plans
First, a noteworthy change in the proposed regulations is that, to the extent an increase in fixed-amount cost sharing requirements in a Health Savings Account (HSA)-compatible high deductible health plan (HDHP) is necessary to maintain its status as an HDHP (for example, an increase to a deductible), such an HDHP may make such an increase without losing its grandfathered status under the ACA. This would allow participants and beneficiaries enrolled in that HDHP coverage to remain eligible to contribute to an HSA. The preamble to the proposed regulations noted that annual cost-of-living adjustments to the required minimum deductible for an HDHP (determined by the IRS after finalization of the 2015 regulations) have not caused any HDHPs to lose grandfathered status. However, the Agencies were asked to provide guidance to ensure that following the IRS-determined cost-sharing amounts in future years would never cause an HDHP to lose its grandfathered status.

Alternative Inflation Adjustment
Second, the proposed rule provides an alternative method of measuring permitted increases in fixed-amount cost sharing that would allow plans and issuers to better account for changes in the costs of health coverage over time. Generally, under the 2015 regulations, increases—measured since March 2010—in fixed-amount cost-sharing requirements are permitted provided that they do not exceed the “maximum percentage increase,” which is determined by reference to the overall medical care component of the Consumer Price Index for All Urban Consumers measure of medical inflation plus 15 percentage points.

The proposed rules revise the definition of “maximum percentage increase” for purposes of group health plan coverage so it is the greater of the current standard (that is, percentage medical inflation plus 15 percentage points) or by reference to the applicable portion of the “premium adjustment percentage” that the HHS publishes for each calendar year in its annual Notice of Benefit and Payment Parameters, plus 15 percentage points. This premium adjustment percentage generally measures premium growth in the private health insurance market since 2013. The Agencies acknowledged that this revision was suggested by commenters and may be a more appropriate accounting of changes in healthcare coverage costs over time (versus medical inflation based on the Consumer Price Index, which also includes patients who pay out-of-pocket and those on Medicare). The proposed rules will allow plan sponsors to implement cost-sharing increases using the greater of these two figures occurring on or after the effective date of the final regulations.

The proposed rules do not otherwise amend the current regulations, such as the rules regarding other plan changes that cause a loss of grandfathered status (such as an elimination of benefits or decreases in employer contributions).

The regulations are proposed to apply beginning 30 days following the publication of any final rules. The Agencies requested that public comments be submitted no later than August 14, 2020.

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.

References:

  1. https://www.dol.gov/newsroom/releases/ebsa/ebsa20200710.
  2. https://www.govinfo.gov/content/pkg/FR-2015-11-18/pdf/2015-29294.pdf.
  3. https://www.govinfo.gov/content/pkg/FR-2010-06-17/pdf/2010-14488.pdf.
  4. https://www.federalregister.gov/d/2017-01799.

IRS Provides More Relief For Certain Plan Deadlines Due To COVID-19 Pandemic

The following general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. The government’s guidance is complex and very fact specific. As always, employers and plan sponsors are strongly encouraged to consult competent legal or benefits counsel for all guidance on how the actions apply in their circumstances.

Recently, the Internal Revenue Service (IRS) published IRS Notice 2020-35,1 which temporarily extends a number of deadlines for certain employee benefits filings with respect to certain employee benefit plans and tax-favored arrangements, including Health Savings Accounts (HSAs).

Notice 2020-35
By way of background, on March 13, 2020, President Donald Trump issued an emergency declaration2 under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the COVID-19 outbreak. Pursuant to this emergency proclamation, the IRS issued Notice 2020-183 postponing the April 15, 2020, due date for filing federal income tax payments to July 15, 2020.

On March 24, 2020, the IRS issued FAQ guidance4 regarding this relief, clarifying that this extended tax return filing gives taxpayers more time to make contributions to their Health Savings Accounts for 2019, noting that HSA contributions for a particular year may be made at any time during that year or by the tax return filing due date for that year. Therefore, because the 2019 federal income tax return filing deadline was extended to July 15, 2020, HSA contributions for 2019 could also be made at any time up to July 15, 2020.

On April 9, 2020, the IRS released Notice 2020-23,5 which expanded on the relief provisions of 2020-18, including an extension to July 15, 2020, of deadlines related to any “specified time-sensitive action” listed in Rev. Proc. 2018-58,6 including the 60-day timeframe for completing HSA (and Archer MSA) rollovers, and the deadline to report HSA contribution information by filing Form 5498-SA and furnishing the information to account holders.

Additional Extensions
The relief specified in Notice 2020-35 extends deadlines not otherwise included in Notice 2020-23. Also, Notice 2020-35 clarifies that—in addition to extending the referenced deadlines imposed by the Internal Revenue Code—these extensions apply for purposes of any parallel deadlines under the Employee Retirement Income Security Act (ERISA).

Among the relief provisions specified in Notice 2020-35, the deadline for filing Form 5498 and the other iterations of the form, namely Form 5498-SA, is extended to August 31, 2020. As indicated previously, this form is used to report contributions to HSAs and similar accounts.

Penalties for filing these forms after the extended deadline will begin to accrue on September 1, 2020.

Notice 2020-23 had previously extended this deadline until July 15, 2020. This is an important further extension because the deadline to contribute to an HSA for 2019 has been extended to July 15, 2020.


The continued response to the ongoing economic and health impacts of the COVID-19 pandemic is welcome in providing additional flexibility to impacted plan participants, beneficiaries, and taxpayers. We will continue to monitor these developments and remain abreast of future relief efforts for the current year and possibly through 2021. As noted before, the government’s guidance is complex and fact-specific, and employers and plan sponsors are encouraged to consult their legal or benefits advisors for all guidance on how the guidance applies in their circumstances.

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.

References:

  1. https://www.irs.gov/pub/irs-drop/n-20-35.pdf.
  2. https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/.
  3. https://www.irs.gov/pub/irs-drop/n-20-18.pdf.
  4. https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers.
  5. https://www.irs.gov/pub/irs-drop/n-20-23.pdf.
  6. https://www.irs.gov/pub/irs-drop/rp-18-58.pdf.

New Model COBRA Notices And Clarification On COBRA And Medicare

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As the ongoing Novel Coronavirus Disease (COVID-19) has more individuals facing the prospect of losing their job-based health insurance, the need for qualified beneficiaries to understand their coverage options–whether through COBRA continuation coverage, the Health Insurance Marketplace (the “Marketplace”), or through alternatives such as Medicare–is critical.

Prompted by a letter from several House Committees,1 the Department of Labor (DOL) Employee Benefits Security Administration (EBSA) published updates to its model COBRA General Rights2 and COBRA Election Notices3 on May 1, 2020, to help these individuals better understand the interactions between COBRA and Medicare. In addition, the EBSA published helpful FAQs4 to assist qualified beneficiaries with understanding how COBRA might affect their rights under Medicare.

While these model notice updates do not address recent compliance guidance and relief issued jointly by the DOL and the Department of the Treasury extending certain deadlines related to retirement, health, and welfare plans in response to the current COVID-19 pandemic, the revisions provide welcome clarification to help Medicare-eligible individuals make important decisions regarding their healthcare coverage.

Background
Generally, employers with 20 or more employees must offer COBRA continuation for their group health plans. Part of this requirement is to furnish adequate written notices providing a general summary of COBRA rights and responsibilities when coverage under group health plan coverage begins (the COBRA General Notice) and a COBRA Election Notice following a loss of that coverage due to a qualifying event (for example, following a termination or reduction of hours of employment).

In 2004, the DOL released notice requirements and model COBRA notices to assist employers with COBRA compliance. In May 2014, the DOL released updated versions of these model notices along with proposed regulations that allow the DOL to maintain these model notices on its website. In this way, the DOL can maintain and revise the model notices as necessary.

Model COBRA Notices
As with earlier models, in order to use these notices properly the plan administrator must complete them by filling in the blanks with the appropriate plan information. The DOL will consider use of the model notices available on its website, appropriately completed, to be good faith compliance with the notice content requirements of COBRA.

Use of model notices is not required; these are provided solely for the purpose of facilitating compliance with applicable notice requirements.

COBRA and Medicare
It is crucial that qualified beneficiaries who are also eligible for Medicare better understand the choices available to them when considering their health care coverage options, whether it’s electing to continue their employer group health plan through COBRA, enrollment in a Marketplace, or enrolling in Medicare.

The COBRA General Notice, COBRA Election Notice, and EBSA FAQs help explain the interaction between COBRA and Medicare, including Medicare election obligations explaining how COBRA coverage usually pays secondary to Medicare (and that certain plans may pay as if secondary to Medicare, even if Medicare is not elected).

Generally, if a Medicare-eligible individual does not enroll in Medicare Part A or B when first eligible because he/she/they are still employed, after the Medicare initial enrollment period, that individual will have an eight-month special enrollment5 period to sign up for Medicare Part A or B, beginning on the earlier of 1) the month after his/her employment ends; or 2) the month after group health plan coverage based on current employment ends.

The COBRA regulations also contain a special rule extending the maximum eligibility period for spouses and dependent children if Medicare entitlement (which occurs when an individual is both eligible for and actually enrolled in Medicare coverage in either Medicare Part A or B) occurs less than 18 months prior to the employee’s qualifying event (i.e., termination of employment or reduction of hours). In this case, the spouse and/or dependent children can be entitled to a 36-month maximum eligibility period calculated from the date of Medicare entitlement.

For example, assume Martha becomes entitled to Medicare Part A effective March 1, 2019. She terminates her employment on February 29, 2020. Both she and her covered spouse Thomas elect COBRA coverage as of March 1, 2020. Since Martha’s qualifying event was a termination of employment, she is entitled to an 18-month maximum COBRA period beginning March 1, 2020, and ending August 31, 2021. However, since her termination of employment is 12 months after the date of her Medicare entitlement (March 1, 2019), COBRA coverage for Thomas can last up to 36 months after the date of Martha’s Medicare entitlement, which is equal to 24 months after the date of the qualifying event (36 months minus 12 months). So, in this case, Thomas would be entitled to a maximum COBRA period beginning March 1, 2020, through February 28, 2022. It is important to note that this extension for spouses and dependent children is only afforded if, following a termination of employment or reduction of hours (i.e., 18-month COBRA qualifying events), the date of Medicare entitlement occurs less than 18 months before the qualifying event. If the date of Medicare entitlement is more than 18 months prior to the qualifying event–or if it happens the same day as the qualifying event–this extension does not apply.

If a Medicare-eligible individual does not enroll in Medicare and–instead–elects COBRA continuation coverage, he/she/may have to pay a Medicare Part B late enrollment penalty and may have a gap in coverage if that individual decides to elect Medicare Part B later.

If COBRA continuation coverage is elected first, that coverage may be terminated early when the qualified beneficiary becomes–after the date of the COBRA election–enrolled in Medicare benefits (in either Part A or B). Bear in mind that this provision allowing for early termination of COBRA coverage refers to a termination of COBRA continuation as a whole, even though Medicare generally does not provide a benefit package as generous as the COBRA plan might (e.g., Medicare does not cover most dental expenses).

On the other hand, early termination of COBRA continuation coverage because of Medicare coverage may properly occur only if the other coverage becomes effective after the qualified beneficiary elects COBRA. If Medicare Part A or B is effective on or before the date of COBRA election, the qualified beneficiary will remain entitled to COBRA benefits for the entire COBRA maximum coverage period.

Conclusion
Employers who are using previous EBSA’s COBRA model notices, or those who have based their own notice templates on previous EBSA model notices, should work with ERISA counsel to ensure their notices are updated to incorporate this new verbiage.

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.

References:

  1. https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/1.21.20_COBRA%20Letter.pdf.
  2. https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/cobra/model-general-notice.docx.
  3. https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/cobra/model-election-notice.docx.
  4. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/cobra-model-notices.pdf.
  5. https://www.medicare.gov/sign-up-change-plans/how-do-i-get-parts-a-b/part-a-part-b-sign-up-periods.

Additional Relief And Flexibility Related To COVID-19

On May 12, 2020, the Department of the Treasury (the Treasury) and the Internal Revenue Service (IRS) published two notices as part of ongoing relief efforts related to the Novel Coronavirus Disease (COVID-19). These notices offer guidance for employers to allow additional flexibility with respect to their Section 125 cafeteria plans, Healthcare Flexible Spending Accounts (health FSAs) and Dependent Care Assistance Programs (DCAPs) during the 2020 calendar year.

Overview
IRS Notice 2020-291 provides greater flexibility for cafeteria plans, health FSAs, and DCAPs with respect to mid-year election changes, an extension of claims grace periods for plan participants through 2020, and clarifies previously released guidance2 with respect to Health Savings Account (HSA)-qualified High Deductible Health Plans (HDHPs). IRS Notice 2020-333 replaced the current $500 carryover amount for health FSAs with an amount equal to 20 percent of the annual salary reduction limit (indexed for inflation) and clarified the rules regarding reimbursements of health care premiums by Individual Coverage Health Reimbursement Arrangements (ICHRAs). While the guidance issued in 2020-29 is directly related to the pandemic and “to assist with the nation’s response” to the coronavirus, the guidance of 2020-33 is not COVID-19 specific.

Notice 2020-29: Mid-Year Election Changes Under a § 125 Cafeteria Plan
Generally, cafeteria plan elections must be irrevocable and made before the first day of the plan year. Plans may allow for mid-year election changes following certain “change in status” events (e.g., termination of employment). Under this guidance, a cafeteria plan sponsor may—at its discretion—amend its cafeteria plans to permit employees to make certain mid-year election changes prospectively during the 2020 calendar year:

  • Make a new election to participate in employer-sponsored health coverage if the employee initially declined to elect employer-sponsored health coverage.
  • Revoke an existing election for employer-sponsored health insurance coverage and make a new election to enroll in different health coverage provided by that employer (including changing enrollment to add otherwise-eligible dependents to the coverage prospectively).
  • Revoke an existing election for employer-sponsored health coverage, provided that the employee attests in writing that the employee is enrolled—or immediately will enroll—in other “comprehensive” health coverage not provided by the employer (optional model attestation language is included in the notice).
  • Revoke an election, make a new election, or increase or decrease an election to a health FSA.
  • Revoke an election, make a new election, or increase or decrease an election to a DCAP.

Again, employers are not required to provide these election changes and can determine which changes they will permit. The relief provided in 2020-29 may be applied retroactively to periods prior to this guidance and on or after January 1, 2020, to address a cafeteria plan that—prior to the issuance of this guidance—permitted mid-year election changes that are otherwise consistent with the requirements of the notice.

Also, in determining the extent to which these election changes are permitted and applied, the Treasury and IRS note that an employer may wish to consider the potential for adverse selection and limit mid-year elections to instances in which an employee’s coverage will be increased or improved as a result of the election (e.g., by switching from self-only to family coverage). For health FSAs and DCAPs, employers are permitted to limit mid-year election changes to amounts no less than amounts already reimbursed.

Extended Claims Period for Health FSAs and DCAPs
Generally, any unused balance remaining in an employee’s health FSA or DCAP at the end of the plan year is forfeited (the “use-it-or-lose-it” rule). Health FSAs or DCAPs may provide a grace period immediately following the end of each plan year during which unused amounts at the end of the plan year may be used to reimburse eligible medical expenses incurred during the grace period (which cannot extend more than 2 months and 15 days [“2½ months”] beyond the end of the preceding plan year). Employers may amend their health FSAs or DCAPs to permit employees to apply the unused amounts in their health FSA or DCAP as of the end of a grace period ending in 2020 (e.g., March 15, 2020, for the 2019 calendar plan year) or plan year ending in 2020 to pay for reimbursable medical expenses incurred on or before December 31, 2020. This relief applies both to general purpose and limited-purpose health FSAs.

The extension of time for incurring claims is available both to cafeteria plans that have a grace period and plans that provide for a carryover (notwithstanding the general rule4 that health FSAs may not have both a carryover and a grace period).

In other words, a health FSA that allows a carryover would also be permitted to amend the plan to extend the claims period to December 31, 2020. However, this additional flexibility would only benefit those plans ending on or after January 1, 2020 (i.e., a non-calendar plan year). For a health FSA with a non-calendar plan year (e.g., February 1, 2019—January 31, 2020), a participant would be able to use any remaining amounts from the 2019 plan year as of January 31, 2020, to pay for reimbursable expenses through December 31, 2020, even amounts exceeding the otherwise-applicable $500 carryover limit for the 2019 plan year.

Conversely, a calendar-year health FSA (e.g., January 1, 2019—December 31, 2019) with a carryover would already allow participants to use up to $500 through the end of December 31, 2020, irrespective of this guidance and would not gain any additional flexibility from the extended claims period nor would the 2019 carryover dollars be increased by the provisions of Notice 2020-33.

However, an individual who has unused amounts remaining at the end of the plan year or grace period ending in 2020, and who is allowed the extended claims period per Notice 2020-29, will be ineligible to make HSA contributions during the extended period (except in the case of an HSA-compatible health FSA [e.g., a limited-purpose FSA]). Thus, employers who have HDHPs and facilitate employees’ HSAs should exercise care to make sure their adoption of this extension does not adversely impact their employees’ ability to contribute to an HSA.

A similar grace period extension can be made available for DCAPs.

Plan Amendments
Plan amendments that allow for these mid-year cafeteria plan election changes and the extension of the grace period must be adopted before December 31, 2021, and can be retroactive to January 1, 2020, provided that the plan is operated in accordance with the rules of Notice 2020-29. Plan sponsors must notify eligible employees of the changes made under these temporary rules.

COVID-19 Testing and Treatment for HSA-Compatible HDHPs
In the previously released Notice 2020-15, the guidance allows HDHPs to provide benefits associated with testing for and treatment of COVID-19 either without a deductible or with one that is below the otherwise required minimum annual deductible; therefore, an HDHP providing such care on a no- or low-cost basis will not fail to qualify as an HDHP. Consequently, employees’ eligibility to make contributions to their HSAs will not be jeopardized, even if medical expenses related to COVID-19 testing or treatment are paid by the HDHP. Notice 2020-29 clarifies this relief applies for expenses incurred on or after January 1, 2020, and clarifies what expenses are to be treated as COVID-19 testing and treatment, including “the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under the Families First Act, as amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Telemedicine and HSA-Compatible HDHPs
Just as HSA-qualified health plans can provide benefits related to COVID-19 testing and treatment either without a deductible or with reduced or no-cost sharing without jeopardizing HSA eligibility, Section 3701 of the CARES Act expanded this to include all remote care service expenses (i.e., telehealth). Previously, plans that covered telemedicine prior to reaching the deductible disqualified HSA holders from making HSA contributions. This change, effective as of March 27, 2020 (the date of enactment), applies for plan years beginning on or before December 31, 2021. Notice 2020-29 provides that such services provided on or after January 1, 2020, will also be permitted in an HSA-compatible HDHP.

Notice 2020-33: Health FSA Carryover
Under current guidance, an employer may elect to allow a health FSA to provide that unused amounts at the end of the plan year could be carried over to the following plan year, which was limited to $500. In June 2019, President Trump issued Executive Order 13877, “Improving Price and Quality Transparency in American Healthcare to Put Patients First,”5 which directed the Secretary of the Treasury—to the extent consistent with the law—to issue guidance that would increase the amount that could be carried over at the end of the year for health FSAs. Notice 2020-33, issued in response to the executive order, provides that the $500 carryover amount is increased to an amount equal to 20 percent of the maximum health FSA salary reduction contribution for that plan year. This amount, which is set under Internal Revenue Code § 125(i) (at $2,500), is indexed for inflation (i.e., $2,750 for 2020). Accordingly, the maximum carryover amount from a plan year beginning in 2020 to be carried over to the immediately subsequent plan year beginning in 2021 is $550 ($2,750 x 20 percent).

Notice 2020-33 provides that—for an employer that wishes to allow this increased carryover amount—the plan must be amended. In general, this amendment must be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of the plan year (provided the plan operates in accordance with the guidance under Notice 2020-33 and informs all eligible employees of the carryover provision). For 2020, however, the change must be adopted by December 31, 2021, and can be retroactive to the 2020 plan year.

Unlike the provisions of Notice 2020-29, this guidance is not time-limited and will apply indefinitely.

ICHRAs
An ICHRA is designed to provide a means for employees to be reimbursed for premiums for health insurance coverage incurred after the beginning of the ICHRA’s plan year. Notice 2020-33 provides clarification intended “to assist with the implementation of individual health reimbursement arrangements,” which are HRAs under which employers may provide contributions to use to purchase coverage in the Health Insurance Marketplace or Medicare.

Notice 2020-33 provides that the ICHRA is permitted to treat health care premiums as incurred on 1) the first day of each month of coverage, 2) the first day of the period of coverage, or 3) the date the premium is paid. Therefore, payment of the premium for coverage made before the beginning of the plan year can be reimbursed if the insurance coverage starts during the plan year.

Conclusion
The additional flexibility with respect to cafeteria plan benefits is a welcome response to the ongoing economic and health impacts of the COVID-19 pandemic. While the guidance described above provides relief for 2020, we will continue to monitor these developments and remain abreast of future relief efforts for the current year and possibly through 2021.


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.

References:

  1. https://www.irs.gov/pub/irs-drop/n-20-29.pdf.
  2. https://www.irs.gov/pub/irs-drop/n-20-15.pdf.
  3. https://www.irs.gov/pub/irs-drop/n-20-23.pdf.
  4. https://www.irs.gov/pub/irs-drop/n-13-71.pdf.
  5. https://www.govinfo.gov/content/pkg/FR-2019-06-27/pdf/2019-13945.pdf.

Healthcare In The Time Of COVID-19

Like many of you, I woke up to another day of social distancing, prodigious handwashing, and a litany of unanswered questions.

“Why did they start teaching third-grade math this way? What was wrong with the real way?”

“At what time of day do I change from my daytime sweatpants to my nighttime sweatpants?”

“Will my parents ever figure out how to work their camera when we Facetime, or will I continue to talk to their empty dining room?”

Fortunately, we’re beginning to see the answers to more pressing questions in the time of the novel coronavirus 2019 (COVID-19): “How do I protect my health and the health of my family? And how would I pay for tests and treatment?”

One such useful vehicle for tackling the financial burden of medical expenses is through a health savings account (HSA). Many employees and their family members are enrolled in qualifying high-deductible health plans (HDHPs), which are required for the establishment of an HSA. However, for HDHPs, nothing but a list of preventive care expenses, vision, and dental care can be paid by the HDHP on behalf of an HSA owner before the HDHP’s or statutory deductible is met. If the HDHP pays for other expenses prior to reaching the deductible, the HSA-holder will not be able to make contributions to that HSA.

On March 11, 2020, the Treasury and Internal Revenue Service (IRS) issued guidance in Notice 2020-151 to “facilitate the nation’s response” to COVID-19 and to remove potential financial burdens from HSA owners that might dissuade them from seeking the testing or treatment they and their family members need.

The guidance in Notice 2020-15 allows HDHPs to provide benefits associated with testing for and treatment of COVID-19 either without a deductible or with one that is below the otherwise required minimum annual deductible. This guidance, therefore, allows that an HDHP providing such care on a no- or low-cost basis will not fail to qualify as an HDHP. Therefore, employees’ eligibility to make contributions to their HSAs will not be jeopardized, even if medical expenses related to COVID-19 testing or treatment are paid by the HDHP.

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (FFCRA),2 which requires—among other things—group health plans and insurers (including grandfathered plans) and government programs to cover—without “any cost sharing (including deductibles, copayments and coinsurance) requirements or prior authorization or other medical management requirements—Food and Drug Administration-approved COVID-19 diagnostic testing products. This coverage must include items and services furnished during a provider visit (that is, urgent care, emergency room, office or telehealth visits) that relate to or result in an order for or administration of a covered diagnostic test.

While the requirement to cover this testing does not directly amend the Internal Revenue Code (the “Code”), the Employee Retirement Income Security Act (ERISA), or the Public Health Service Act (PHSA)—that is, this requirement is considered “off-Code”)—the Departments of Health and Human Services (HHS), Labor, and Treasury are specifically authorized to implement these requirements through subregulatory guidance and instruction.

The requirement to cover COVID-19 testing costs starts from the date of enactment (that is, March 18, 2020) until the Secretary of HHS determines that the public health emergency has expired.

Shortly thereafter, the IRS—in its Notice 2020-183—delayed the April 15, 2020, deadline for 2019 federal income tax return filings and income tax payments to July 15, 2020. In addition, the IRS has published helpful guidance and clarification—in the form of an FAQ4—concerning the relief provided in Notice 2020-18. A particularly noteworthy FAQ addresses the impact of this delay with respect to contributions to Health Savings Accounts (HSAs):

Contributions may be made to your HSA or Archer MSA, for a particular year, at any time during the year or by the due date for filing your return for that year. Because the due date for filing Federal income tax returns is now July 15, 2020, under this relief, you may make contributions to your HSA or Archer MSA for 2019 at any time up to July 15, 2020.

Perhaps the most significant development came on March 27, 2020, with the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).5 Coming swiftly after the FFCRA,this $2 trillion stimulus bill provides additional emergency relief for families and includes several provisions that will make a major impact on those with HSAs, flexible spending accounts (FSAs) and health reimbursement accounts (HRAs).

Just as HSA-qualified health plans can provide benefits related to COVID-19 testing and treatment either without a deductible or with reduced or no-cost sharing without jeopardizing HSA eligibility, The CARES Act expanded this to include all remote care service expenses (i.e., telehealth). Previously, plans that covered telemedicine prior to reaching the deductible disqualified account holders from making HSA contributions. This change, effective as of the date of enactment, applies for plan years beginning on or before December 31, 2021.
This is huge news amid the COVID-19 pandemic as more people can affordably access a physician without exposure to unnecessary health risk. Telemedicine keeps sick people away from other sick and healthy people, which is crucial to help reduce contagion.

Employers have wanted to provide telemedicine coverage for a long time. It’s more cost effective and minimizes time out of work. Plus, there’s good evidence that remote care medicine is the future of healthcare, so it’s assuring that legislation is keeping pace with innovation. Remote care services are especially important in rural communities where physician access is not readily available.

The CARES Act also removes the Affordable Care Act’s requirement to obtain a prescription for over-the-counter (OTC) drug reimbursements. Previously, those with health FSAs, HRAs and HSAs needed a prescription to use such accounts to pay for items like cough syrup, acetaminophen, ibuprofen, and more. The removal of this requirement will afford tax-advantaged account holders an immediate cost-savings while also reducing healthcare providers’ need to write prescriptions for these common OTC medications.

In addition, this move will likely increase the use of OTC medications over prescription drugs, which could drive huge cost savings across America. A recent study6 found that, “On average, each dollar spent on OTC medicines saves the U.S. healthcare system approximately $7.20.” The calculations included costs for physician visits, lost work productivity, and relative costs of prescription meds versus OTC.

Furthermore, menstrual care products are now considered qualified medical expenses for purposes of tax-free payment or reimbursement through a health FSA, HRA, or HSA. Previously categorized as personal hygiene items, the CARES Act recognizes these items as eligible medical expenses affecting a part or function of the body. Both the OTC and menstrual care product revisions generally apply to expenses incurred on or after January 1, 2020 (in the case of an HSA, they apply to amounts paid on or after January 1, 2020); there is no expiration date for this provision.

Taken together, these provisions in the CARES Act represent significant advances providing immediate relief amid a pandemic, while laying the groundwork for better functioning, more modern healthcare in the long run. HSAs and other tax-advantaged accounts now further increase access, alleviate the burden on our health system and drive real cost savings for consumers at a critical time.

Of course, some questions remain. Employees may be asking to elect—or make a change to an existing election of—a health FSA because of changes to their health, or because of an increase or decrease in their healthcare spending. Preventive dental care, eye exams, and elective surgeries may have been canceled due to COVID-19 considerations (I am currently seeing—no pun intended—how long I can go before I run out of contact lenses). Unfortunately, under current guidance, changes to election amounts due to having additional (or fewer) medical expenses is not an allowable “change in status” event. Unfortunately, neither is a change in a person’s health status as a reason to enroll in or change an election of a health FSA. Only a verifiable “change in status” allows employees to change their initial elections into the health FSA.

Some employers may wonder if they could extend their health FSA’s grace period after the end of the plan year to help their health FSA’s participants from forfeiting previously contributed funds. While offering such a grace period is optional, the governing regulations limit it to up to two months and fifteen days. However, a runout period can be extended (that is, a longer time for which incurred expenses can be submitted) following the end of the grace period. Similarly, employers may question if they are permitted to increase carryover amounts (that is, the unused health FSA funds from the previous year) beyond the current $500 statutory limit. This amount is IRS-determined and, at present, remains at a limit of $500 for unused health FSA funds.

Dependent care FSAs (DCFSAs) are another area of concern. Many parents may be working from home (due, possibly, to an employer mandate or even state and local requirements) and may decide to care for their child from home instead of sending their children to daycare. Similarly, schools may have closed resulting in additional childcare costs. The DCFSA election change rules are very broad. Employees may change their elections if there is a change in the childcare provider or cost of coverage. The election change must be consistent with the reason for the change. For example, if the childcare provider is no longer providing the care (e.g., the childcare facility closes temporarily to comply with local requirements), the election can be reduced or eliminated. Due to the broadness of these rules, additional clarification or guidance with specific respect to COVID-19 should not be necessary. However, sufficient attention should be paid as this situation continues to develop.

Of course, many remain hopeful that an additional bill addressing COVID-19 issues is in the offing, such as potential financial relief to help those workers laid off, furloughed, or had their hours of employment reduced, maintain their employment-based coverage through COBRA, opening a special enrollment period nationally so people in need of health coverage can enroll in the Marketplace, or increasing health care tax credits to lower health insurance premiums.
However, employers and third-party administrators are not, in the meantime, specifically prohibited from taking their own initiative with respect to potentially ameliorative actions for their COBRA population. Following previous emergencies and disasters (such as the California wildfires), employers and plan fiduciaries were encouraged to take reasonable measures and make prudent accommodations—to the greatest extent possible—to prevent losses of benefits and otherwise act in the interest of their plan participants.

In the interim, stay healthy and stay tuned.

References:

  1. https://www.irs.gov/pub/irs-drop/n-20-15.pdf.
  2. https://www.congress.gov/bill/116th-congress/house-bill/6201.
  3. https://www.irs.gov/pub/irs-drop/n-20-18.pdf.
  4. https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers.
  5. https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf.
  6. http://overthecountervalue.org/white-paper/.

Carryover And COBRA Combinations Call For Careful Consideration

It used to be simple to determine the amount of a qualified beneficiary’s benefit available and the COBRA premium required for a healthcare flexible spending account (FSA). However, starting in 2013, healthcare FSAs are permitted to allow a carryover of up to $500 of unused funds remaining in the healthcare FSA at the end of one plan year to the following year.1

And, although they are group health plans and are therefore subject to COBRA, employers who maintain healthcare FSAs that satisfy a few particular conditions may have a limited obligation with respect to the duration of COBRA continuation for the qualifying healthcare FSA.2

While the introduction of carryover amounts added an additional factor to these determinations, the Internal Revenue Service (IRS) provided additional—and welcome—clarification with its Notice 2015-87 released December 16, 2015.3

Calculating the COBRA Premium for Healthcare FSAs, Generally
By way of background, healthcare FSAs are considered group health plans and are subject to COBRA. Under the general rules for calculating COBRA premiums, the maximum COBRA premium—referred to as the “applicable premium”—is generally the cost to the plan for similarly situated beneficiaries who haven’t experienced a qualifying event plus two percent. In the case of healthcare FSAs, the “cost to the plan” on which the COBRA premium is based is most commonly equal to the annual coverage amount the employee elects for the year. In other words, if an employee elects $1,200 under her healthcare FSA, it is reasonable to set the annual COBRA premium equal to that amount plus two percent (i.e., $1,200 x 1.02 = $1,224).

Limited COBRA Obligation for Certain Qualifying Healthcare FSAs
However, if the healthcare FSA is an “excepted benefit” and the maximum COBRA premium that can be charged for the healthcare FSA (as explained above) equals or exceeds the annual healthcare FSA coverage amount elected, a special limited COBRA responsibility may apply.

For those healthcare FSAs to which the limited COBRA responsibility applies, the healthcare FSA need not make COBRA coverage available at all for employees who—at the time of their COBRA qualifying event—have “overspent” their accounts.

To determine if a healthcare FSA is “overspent,” an employer must first consider an employee’s annual elected contribution amount for the plan year and compare that to the total amount of reimbursable claims submitted to the healthcare FSA for that plan year before the date of the qualifying event. The remaining available healthcare FSA amount for the current plan year, which is the annual contribution amount for the year less the total amount received in eligible claim reimbursements before the qualifying event, is then compared to the maximum amount the healthcare FSA is permitted to require to be paid for COBRA coverage for the remainder of the plan year.

If the employer determines the maximum COBRA premium the healthcare FSA could require as payment for the remainder of the year following the qualifying event is more than or equal to the remaining available healthcare FSA amount for the current plan year then such a healthcare FSA is “overspent” and it is not obligated to offer COBRA coverage.

To illustrate this analysis, consider the following example:

Employee Amy elects an annual contribution of $1,200 (or $100 per month) for the current plan year under her employer’s qualifying healthcare FSA, which has a calendar plan year and is funded solely by employee salary reductions.

Amy terminates her employment, and her healthcare FSA coverage ceases, on March 31. As of that date, Amy has submitted reimbursable claims totaling $285 and has made salary reductions of $300 ($100 x three months). Her employer has reasonably estimated the cost of providing the healthcare FSA coverage (the applicable premium) is equal to the annual salary reductions.

Amy’s maximum benefit available for the remainder of the plan year is $915 ($1,200—$285).

Since Amy made a $1,200 healthcare FSA election for that year, her annual COBRA premium would be $1,224 ($1,200 x 1.02); the monthly COBRA premium would be $102 ($1,224/12). The maximum COBRA premium that can be charged for the nine months remaining in the year is $918 ($102 x nine months).

Since Amy’s maximum benefit available for the remainder of the plan year ($915) is less than the maximum COBRA premium that can be charged for the rest of the year ($918), her account is “overspent.” Because the healthcare FSA qualifies for the special limited COBRA obligation and her account is “overspent,” Amy’s employer is not obligated to offer her COBRA continuation of her healthcare FSA for the remainder of the current year.4

For employees who have not “overspent” their account (that is, their remaining available benefit for the year is greater than the total COBRA premium the plan can require as payment for the remainder of the year), then the healthcare FSA need only offer COBRA until the end of the year in which the qualifying event occurs.

So, assume the same facts as in the previous example, except that Amy made no healthcare FSA claims prior to her termination of employment on March 31.

At the time of her qualifying event, the maximum benefit available for the remainder of the plan year is still $1,200.

Since the plan can charge her $918 ($102 x nine months) for the remainder of the year, the maximum benefit available ($1,200) is greater than the maximum amount the plan could require as payment for the remainder of the year ($918). In this case, Amy’s employer must offer COBRA continuation of the healthcare FSA, but the coverage may be terminated at the end of the plan year.5 No re-enrollment rights need to be offered to her during the plan’s annual open enrollment period.

However, for instances in which the healthcare FSA does not meet all the requirements to offer limited COBRA coverage, then COBRA continuation must still be offered, but coverage would continue for up to the general maximum COBRA eligibility period (18 months or longer, depending on the qualifying event).

Carryover and COBRA Eligibility
How do a healthcare FSA’s carryover provisions apply to this limited COBRA obligation?

Fortunately, Notice 2015-87 provides welcome guidance that will assist in making correct eligibility determinations—and COBRA premium calculations—for healthcare FSAs offering a carryover.

When determining if a qualified beneficiary’s healthcare FSA is not “overspent” (again, the maximum benefit available under the healthcare FSA for the remainder of the current plan year is greater than the maximum COBRA premium the plan could require as payment for the rest of the year), any carryover amount from the previous year(s) must also be included in the calculation.6

Employee Amy elects an annual contribution of $1,200 (or $100 per month) for the current plan year under her employer’s qualifying healthcare FSA, which has a calendar plan year and is funded solely by employee salary reductions. She also has $500 in unused carryover funds from the previous plan year. Therefore, as of the first day of the current year, her maximum benefit available is $1,700 ($1,200 + $500).

Amy terminates her employment, and her healthcare FSA coverage ceases, on March 31. As of that date, Amy has submitted reimbursable claims totaling $285.

Amy’s maximum benefit available for the remainder of the plan year is $1,415 ($1,700—$285). Since Amy made a $1,200 healthcare FSA election for that year, her annual COBRA premium would be $1,224 ($1,200 x 1.02); the monthly COBRA premium would be $102 ($1,224/12). The maximum COBRA premium that can be charged for the nine months remaining in the year is $918 ($102 x nine months).

Since Amy’s maximum benefit available for the remainder of the plan year ($1,415) is more than the maximum COBRA premium that can be charged for the rest of the year ($918), her account is not “overspent” and COBRA coverage must be offered.

It’s noteworthy that—in this example—the $500 in carryover funds were not included in the COBRA premium calculation, even though they were included when calculating the maximum remaining benefit available. This is because, while carryover funds are included in determining whether an account is overspent, the IRS has clarified that the maximum COBRA premium payment amount specifically does not include unused amounts from prior plan years. The COBRA premium amount is based solely on the employee’s election for that year (and any employer contributions).7

COBRA Continuation into New Plan Year
While healthcare FSAs must offer COBRA coverage to qualified beneficiaries in the event of an account that is not “overspent,” those healthcare FSAs that qualify for the limited COBRA obligation may terminate such coverage at the end of the plan year in which the qualifying event occurred. This means they are not required to allow COBRA beneficiaries to elect additional amounts at the beginning of a new plan year or access to any employer contributions.

However, if such a healthcare FSA offers carryovers for its active beneficiary population, it must—subject to the same terms—also allow any funds (up to $500) remaining at the end of the plan year to be carried over to the new plan year for similarly situated COBRA beneficiaries as of the last day of the plan year in which the qualifying event occurred. And because, as previously stated, the prior year’s unused funds are not included in the COBRA premium calculation, the applicable premium for the carryover funds for the new plan year is zero. However, while the carryover is required to be available after the end of the plan year in which the qualifying event occurred, it is also limited to the maximum COBRA continuation period (e.g., 18 months).

Let’s recall that Amy elected salary reductions of $1,200 for the current plan year under her employer’s calendar-year healthcare FSA, which qualifies for the limited COBRA obligation and allows participants to carry over unused funds of up to $500 from the prior plan year. Therefore, as of the first day of the current year, her maximum benefit available is $1,700 ($1,200 + $500).

Amy terminates her employment on March 31. As of that date, she has received $285 for submitted eligible healthcare FSA claims. Amy elects COBRA and pays the required premiums for the remaining nine months of the year. During this period, Amy continues to submit additional reimbursable claims totaling $915. By the end of the year in which her qualifying event occurred, Amy has $500 of unused benefits remaining.

Despite the healthcare FSA’s limited COBRA obligation, Amy can continue to submit claims under the same terms as similarly situated active plan participants in the new plan year (up to $500). During this period, no additional COBRA premium can be charged for the carryover funds. However, the healthcare FSA need not reimburse any expenses incurred after Amy’s maximum 18-month COBRA period expires on September 30 of the current plan year.

Carryover Limitations
Offering the carryover of unused healthcare FSA funds is at the employer’s option. An employer may opt to provide such a carryover in lieu of a grace period, especially as the IRS has previously clarified that a healthcare FSA may not provide both a grace period and allow carryover of unused funds. The carryover feature, however, is quickly becoming a standard for healthcare FSAs. For this growing majority of employers offering the carryover provision, Notice 2015-87 allows some flexibility in how it can be offered.

A healthcare FSA may limit the availability of the carryover of unused amounts (subject to the $500 limit) to individuals who elect to participate in the healthcare FSA in the next year. Employers may even set a minimum amount of salary reduction elections to the healthcare FSA for the next year. For example, employers can condition the carryover of funds to employees electing at least $60 or more to the healthcare FSA. Therefore, only employees electing $60 or more for new plan years have their remaining funds (up to $500) carried over to the new plan year. Employees not electing the healthcare FSA for the new plan year would forfeit leftover funds as of the end of the previous plan year.

A healthcare FSA may also limit the timeframe that unused amounts may be used. For example, a healthcare FSA can limit the ability to carry over unused amounts to one year. If a participant carried over $30 and did not elect any additional amounts for the next year, the healthcare FSA may require forfeiture of any amount remaining at the end of that next year.

Parting Notes
It is important to remember, when considering the COBRA implications of healthcare FSAs, that the expenses of the employee, spouse, and dependents are all generally reimbursable under a healthcare FSA. Therefore, the IRS has clarified that an employee, the spouse, and any dependent children can be COBRA qualified beneficiaries for purposes of continuing a healthcare FSA if their medical expenses are reimbursable under that arrangement. This means that an employee’s spouse and dependent children must also be offered COBRA continuation of a healthcare FSA, not just following the employee’s termination or reduction of hours of employment, but also following the 36-month qualifying events like divorce, death, or loss of dependent child status. Therefore, it’s important to determine if you have the information and processes in place to determine COBRA benefits, premiums, and distribute beneficiary notifications with respect to all qualified beneficiaries and their potential rights under COBRA, even for the healthcare FSAs.

One final point: The healthcare FSA “footprint,” rule2 has long been misunderstood and must be followed because of the Affordable Care Act market reform. All employees eligible for the healthcare FSA must also be eligible for—irrespective of their enrollment in—the major medical 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.

References:

  1. https://www.wageworks.com/employers/employer-resources/compliance-briefing-center/legislation-and-reform/legislation-insights/2013/landmark-notice-allows-carryover-of-unused-funds/.
  2. https://www.wageworks.com/employers/employer-resources/compliance-briefing-center/legislation-and-reform/legislation-insights/2013/affordable-care-act-changes-for-flexible-spending-accounts/.
  3. https://www.irs.gov/pub/irs-drop/n-15-87.pdf.
  4. “If [benefits provided under the health FSA are excepted benefits under HIPAA’s portability provisions and the maximum amount that the health FSA can require to be paid for a year of COBRA continuation coverage equals or exceeds the maximum benefit available under the health FSA for the year], then the health FSA is not obligated to make COBRA continuation coverage available for any subsequent plan year to any qualified beneficiary who experiences a qualifying event during that plan year.” [26 CFR § 54.4980B-2, Q&A(d), emphasis supplied].
  5. “If [benefits provided under the health FSA are excepted benefits under HIPAA’s portability provisions and the maximum amount that the health FSA can require to be paid for a year of COBRA continuation coverage equals or exceeds the maximum benefit available under the health FSA for the year], then the health FSA is not obligated to make COBRA continuation coverage available for any subsequent plan year to any qualified beneficiary who experiences a qualifying event during that plan year.” [26 CFR § 54.4980B-2, Q&A(d), emphasis supplied].
  6. “Any carryover amount is included in determining the amount of the benefit that a qualified beneficiary is entitled to receive during the remainder of the plan year in which a qualifying event occurs.” [IRS Notice 2015-87, 2015 I.R.B. 889].
  7. “The maximum amount that a health FSA is permitted to require to be paid for COBRA continuation coverage (that is, 102 percent of the applicable premium) does not include unused amounts carried over from prior years. The applicable premium is based solely on the sum of the employee’s salary reduction election for the year and any non-elective employer contributions.” [IRS Notice 2015-87, 2015-52 I.R.B. 889].

So Long 2019; Farewell, Cadillac Tax!

We’ve seen the end of 2019. Unless you’re my neighbor, we’ve all put away our holiday decorations and are settling into the new year (and, depending on whom you ask, a new decade).

One of the most exciting developments in our industry in the past few months arrived just as 2019 came to a close: President Trump signed into law the Further Consolidated Appropriations Act of 2020.1 This legislation, which included dozens of significant health and welfare provisions, repealed three tax provisions originally enacted as part of the Affordable Care Act (ACA): the 40 percent excise tax on high-cost employer-provided health coverage, the 2.3 percent excise tax on medical devices, and an annual fee on health insurance providers (which included health insurers, health maintenance organizations [HMOs], and Multiple Employer Welfare Arrangements [MEWAs]).

By way of background, the excise tax on high-cost health coverage (often referred to as the “Cadillac Tax”), was first enacted as part of the ACA in 2010. This tax, which was a significant revenue provision of healthcare reform and intended to curb the preferred treatment of employer-sponsored health plans, was originally added as Internal Revenue Code § 4980I and was to be effective for taxable years beginning after 2017. This provision called for a tax of the amount—if any–by which an employee’s monthly employer-sponsored health benefit cost exceeded an annual threshold amount set by the government. Originally, the statutory limits–to have been effective in 2018–were $10,200 for individual-only coverage and $27,500 for family coverage; they were projected to increase to $11,200 and $30,150, respectively, by 2022.

This would have applied to each primary plan participant, such as current (or former) employees and surviving spouses. The total tax attributable to these excess benefit totals was to be determined by the employer or plan sponsor per person; the sums would then be allocated among the coverage providers that provided the employee’s coverage (such as insurers, administrators, or employer plan sponsors) along with the responsibility of paying this excise tax to the Internal Revenue Service. Not only would insured and self-funded group health plans have been subject to these calculations, but also other employer-sponsored health coverage otherwise excluded from income, such as health savings accounts (HSAs), health reimbursement arrangements, and health care flexible spending accounts (FSAs). And since the Cadillac Tax provisions factored in both employer and employee contributions, 19 percent of employers already in 2015 were considered to have plans that would exceed the statutory thresholds if these tax-favored employee-paid plans were included.2

The administrative burden of totaling these excess amounts coupled with the financial hardship of actually paying these fees made the concept of the Cadillac Tax arguably less than popular, with many voices in the industry–and the employer community at large–calling for changes (if not elimination) of this provision, or at least a means of excluding employee contributions to HSAs and FSAs from the cost calculation. Otherwise, employers sponsoring health plans were faced with the decision of whether they should reduce their benefits or increase their deductibles to avoid payment of the 40 percent excise tax.
Fortunately, this entire excise tax has been fully repealed. Employers and employees can collectively breathe a sigh of relief from the prospect of potential payroll tax increases or reductions in benefits.3

Second, the medical device excise tax, which was enacted as part of the Health Care and Education Reconciliation Act of 2010 (which modified the ACA), imposed a 2.3 percent manufacturer’s excise tax on the value of certain medical devices sold domestically after December 31, 2012. This tax—which would have applied to such devices as pacemakers, imaging technology (e.g., CAT scans, MRIs, ultrasound equipment), and artificial joints; devices generally purchased by the public for individual use were exempted–was twice suspended by Congress and was not in effect between January 1, 2016, and December 31, 2019. The Further Consolidated Appropriations Act of 2020 fully repealed this tax as well, effective January 1, 2020.

Also fully repealed is the annual fee introduced by the ACA on health insurance providers. This provision, which took effect in 2014 (and was subsequently under a moratorium for 2017 and 2019), imposed an annual fee on each covered entity engaged in the business of providing health insurance with respect to the health risks of United States citizens and residents. This would have applied to all policies in the individual and small group markets, insured employer-sponsored plans, Medicaid managed care, Medicare Part D, and Medicare Advantage plans. The fee for all covered entities–referred to as the “applicable amount”–was divided based on their relative market share of the United States health insurance business. Effective January 1, 2021, the repeal of this fee may mean a reduction in premiums passed on to covered individuals in 2021.

But wait, there’s more!

The ACA created the Patient-Centered Outcomes Research (PCOR) Institute, which is a non-profit corporation that supports clinical effectiveness research. To provide financial assistance to this endeavor, certain health insurers and self-insured health plan sponsors are required to pay PCOR fees based on the average number of lives covered by welfare benefits plans. Under the ACA provision, PCOR fees were collected for plan years ending before October 1, 2019. The applicable fee for plan years ending on or after October 1, 2018, and before the 2019 phase-out date, was $2.45. This amount, indexed each year, is determined by the value of national health expenditures and are reported and paid annually with the submission of IRS Form 720 (Quarterly Federal Excise Tax Return). These PCOR fees are due by July 31 of the year following the end of the plan year along with the IRS Form 720. The appropriations act reinstates this PCOR requirement through plan years ending before October 1, 2029.

Another modification of the appropriations act is the extension of the Health Coverage Tax Credit (HCTC). The Trade Act of 2002 created the HCTC, which is a refundable tax credit equal to a portion of premiums paid by certain individuals for COBRA continuation coverage or other qualified health insurance coverage for themselves and their qualifying family members. The HCTC expired on January 1, 2014, but was retroactively reinstated and modified by the Trade Adjustment Assistance Reauthorization Act of 2015 to 72.5 percent of the taxpayer’s premiums through December 31, 2020. The appropriations act extended the HCTC program for coverage periods beginning before January 1, 2021. This amount can be taken as a tax credit or the recipient can elect to receive advance payment of 72.5 percent of premiums paid.

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.

References:

  1. https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf.
  2. “How Many Employers Could be Affected by the Cadillac Plan Tax?”; http://files.kff.org/attachment/issue-brief-how-many-employers-could-be-affected-by-the-cadillac-plan-tax.
  3. “The Impact of the Health Care Excise Tax on U.S. Employees and Employers,” http://www.americanhealthpolicy.org/Content/documents/resources/Excise_Tax_11102014.pdf.