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Under transition relief that is still in effect, an employer that contributes to a multiemployer plan (the term used to describe a union plan) is not required to include the cost of coverage provided to an employee under that multiemployer plan in determining the aggregate reportable cost. Thus, if the only applicable employer-sponsored coverage provided to an employee is provided under a multiemployer plan, no reporting is required on the Form W-2 for that employee. That transition relief was published back in 2012 (when the W-2 reporting obligation first became effective) but is still in effect. So, the employer would not be required to report on union employees' Forms W-2.

That said, union employees would be included in the count to determine if the employer has to report on other employees’ Forms W-2. As background, employers that file fewer than 250 Forms W-2 for the previous calendar year are not required to include the aggregate reportable cost on the current year’s Forms W-2, and that count is determined on an EIN-by-EIN basis (the aggregation/controlled group rules do not apply). So, generally speaking, to determine if an employer must report the cost of coverage for 2022, the employer would look back and determine if they filed fewer than 250 Forms W-2 under their EIN in 2021. If the count is less than the 250-form threshold, then the employer wouldn’t be subject to the Form W-2 cost of coverage reporting for 2022.

Applying that to the union employee example, if in 2020 the employer employed 200 union employees and 75 non-union employees, the employer would have filed more than 250 Forms W-2 in 2021. Therefore, the employer in 2022 would have to report the aggregate reportable cost on the non-union employees’ Forms W-2 (even if they didn’t have to report on the union employees’ forms, per the above exception).

The W-2 reporting requirement also applies to employer-sponsored major medical coverage, both fully and self-insured (e.g., PPO, POS or HDHP). In addition, the requirement applies to prescription drug coverage and any dental/vision coverage that is combined with major medical coverage. However, an employer would not report any “excepted benefits” (those not subject to HIPAA, and thereby exempt from ACA), including stand-alone dental or vision plans, non-coordinated and independent benefits (such as hospital indemnity or specific-illness plans), and health FSA salary reduction elections (but there are special rules regarding optional employer flex credits that could be used to contribute to an FSA). HRAs, HSA contributions, long-term care and coverage under Archer MSAs are also not included.

Employers will also want to review their EAP, wellness and on-site medical clinic arrangements and programs. If COBRA applies to those plans, then the cost of these programs will need to be included in the reportable cost. Whether COBRA applies is a trickier analysis, but it basically comes down to whether the EAP, wellness program or on-site medical clinic provides medical care. Employers should work with outside counsel in making that determination.

If the employer continues to have questions, they should review their obligations under this requirement with their advisor. Additionally, the IRS has provided a Q&A to assist employers in both determining whether they are subject to the reporting requirement and calculating the total cost of coverage. NFP has information as well. Please ask your advisor for more information.

Before addressing the issues of whether coverage should be offered to independent contractors, it is important to understand the difference between an independent contractor and an employee. An employer needs to be very careful in classifying workers. If the worker is correctly classified as an independent contractor, it is not recommended that the employer offer them coverage or consider them “common law employees.”

The determination of who is an employee versus an independent contractor takes a facts and circumstances based analysis of the nature of the individual’s employment. It includes an analysis of factors such as who directs the individual’s work, provides tools, determines work processes, etc. In plain terms, a contractor is given a project or goal to accomplish. The contractor determines how the project gets completed. If the employer dictates exactly how a project must be completed, then the individual is most likely an employee.

Courts have used the following factors to determine whether an individual is an employee or independent contractor:

• the hiring party's right to control the manner and means by which the product is accomplished
• the source of the instrumentalities and tools
• the location of the work
• the duration of the relationship between the parties
• whether the hiring party has the right to assign additional projects to the hired party
• the extent of the hired party's discretion over when and how long to work
• the method of payment
• the hired party's role in hiring and paying assistants
• whether the work is part of the regular business of the hiring party
• whether the hiring party is in business
• the provision of employee benefits
• the tax treatment of the hired party

The DOL has two helpful resources on this issue – a fact sheet and eLaws Advisor. Both resources outline discussion points and questions that should be asked when determining the status of independent contractors. They are available at:

Fact Sheet: Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor (dol.gov)

eLaws Advisor: elaws - Fair Labor Standards Act Advisor (dol.gov)

The DOL and many states have made misclassification a focal point of investigation. Penalties can be high for misclassifying an employee as an independent contractor if the federal investigator believes the practice to be motivated by an avoidance of paying taxes on the workers or offering them benefits. See the following information on the DOL Initiative: Misclassification of Employees as Independent Contractors | U.S. Department of Labor (dol.gov)

Generally speaking, an employer would want to limit its offerings to independent contractors- including tools, supplies, equipment, and benefits. If there is too much integration of the employer and the contractor, the DOL and IRS may determine the employee to be a misclassified employee. This would have tax implications for the employer as well as past liability on the group health plan. An employer could owe back employment taxes and have past liability for workers’ compensation.

Health Plan Eligibility

Under ERISA and the Internal Revenue Code, only employees and common law employees can be offered coverage under an ERISA group health plan. That term would not include an independent contractor. An independent contractor is a self-employed individual. They are not a common law employee. If an employer determines and offers them the benefits that should only be provided to common law employees, the DOL could view that as evidence that the workers are misclassified as independent contractors.

As self-employed workers rather than employees, independent contractors would not be eligible for coverage under any ERISA plan- group medical, dental, vision, health FSA, life, disability or HRA. If an independent contractor is offered coverage under a group health plan, there could also be an argument that the plan would be considered a multiple employer welfare arrangement (MEWA). This could subject the plan to MEWA filings and state-imposed MEWA regulations.

Employer Mandate

The employer mandate requires the employer to offer coverage to and report full-time employees (including common-law employees). If the employer offers coverage to an independent contractor or reports them as a full-time employee, they are adding weight to the argument that they have misclassified the worker as an independent contractor and that the contractor should have been classified as an employee.

If the individual is classified as an independent contractor, not offered coverage and the DOL later determines them to be a common law employee, this could result in the employer being subject to employer mandate penalties if the person goes to the exchange and receives a premium tax credit.

Summary

Employment practices are beyond our scope. Employers should carefully consider the factors discussed above and whether the workers will be independent contractors or employees, consulting with employment counsel as necessary. If the workers are independent contractors, then offering them coverage may give rise to compliance and legal issues. If they are employees, then the employer would have to look at their terms of eligibility to see if they remain eligible for coverage.

Mid-year election change requests due to the exercise of HIPAA special enrollment rights (SERs) remain subject to the temporary relief provided by the extension of certain timeframes. Accordingly, certain requests that are made after the plan’s notification deadline may still need to be administered.

Generally, under IRC Section 125, elections are irrevocable for the plan year and once a participant makes an election, the participant generally may not change that election for the duration of the coverage period (usually the plan year) until the following open enrollment. There are two exceptions to this rule – HIPAA SERs, (which arise due to birth, adoption/placement for adoption, marriage, loss of eligibility for other group coverage, loss of Medicaid or CHIP and gain of eligibility for Medicaid or CHIP premium assistance program), and IRS permissible qualifying events.

 In 2020, the DOL published temporary guidance allowing an extension of certain notice requirements due to the ongoing COVID-19 public health crisis, including an extension for HIPAA SERs. While generally, a HIPAA SER should be administered within plan deadlines (with HIPAA requiring a minimum of 30-days to make the enrollment request, and 60-days in the event of loss of eligibility under Medicaid or CHIP), this guidance requires that plans toll these deadlines until the earlier of one year from the date the individual is eligible for relief or 60 days following the declared end of the COVID-19 national emergency. However, only HIPAA SER requests are subject to the extension of certain timeframes; the permissible qualifying events are not. (For further information on the extensions, see our March 2, 2021, Compliance Corner article.)

This means that enrollment requests due to a HIPAA SER should be considered even if they are made after the timeline permitted by the plan is over. For example, an employee has a baby on 8/20/2021. The birth of a child gives rise to a HIPAA SER, and the plan normally allows 30 days from the date of birth for the employee to request mid-year enrollment. However, the 30-day deadline does not begin until the earlier of the 60 days after the end of the national emergency or 8/19/2022.

Keep in mind that HIPAA SERs are only enrollment requests. An election change request to drop coverage due to marriage would not involve a HIPAA SER, but rather an IRS permissible qualifying event that is not subject to the extension of certain timeframes.

Lastly, while the HIPAA special enrollment period allows retroactive enrollment for births (and adoption/placement for adoption), for all other special enrollment events (e.g., marriage) it only requires plans to make the enrollment effective no later than the first day of the first calendar month following notification of the event. As such, while the request may be made after the timeline permitted by the plan, it generally will be administered prospectively (other than due to birth/adoption/placement for adoption). However, if the plan document permits enrollment as of the date of the event (rather than first of the month following notification of the event), employers should discuss with counsel how the application of the extension of time would apply to the plan’s provisions. Also keep in mind that the extension of certain timeframes would not require an employee to elect and pay coverage for the baby back to the date of birth, but could be elected prospectively.

There are three things that must happen in order for a COBRA qualifying event to occur under these circumstances. First, the employee must have been covered under the employer’s group health plan on the day before the first day of the FMLA leave. Second, the employee does not return to employment with the employer at the end of the FMLA leave. Finally, in the absence of COBRA coverage, the employee would lose coverage under the group health plan before the end of the maximum coverage period when they fail to return to work.

In most cases, the COBRA maximum coverage period will begin on the last day of the period of leave to which the employee is entitled. The maximum coverage period may begin earlier if the employee notifies the employer that they are not returning to work. Any lapse of coverage under a group health plan during the FMLA leave, either due to the failure to pay premiums or due to the employee’s choice, is not considered when determining when the maximum coverage period begins.

For example, Wiley is covered under Acme, Inc.’s group health plan on July 15, 2021. Wiley takes FMLA leave beginning July 16, 2021, and declines group coverage for the duration of the leave. On August 28, 2021, Wiley tells Acme that he will not be returning to work. According to FMLA regulations, his last day of FMLA leave is August 28, 2021. Accordingly, Wiley experiences a qualifying event on August 28, 2021, and the maximum coverage period (which is generally 18 months) begins on that date.

Note that the COBRA election notice must be “furnished” (i.e., as of the date of mailing, if mailed by first class mail, certified mail or Express Mail; or as of the date of electronic transmission, if transmitted electronically) within 14 days after receipt of notice of the qualifying event (or 44 days after the qualifying event, if the employer is also the plan administrator, for qualifying events requiring notice from the employer to the plan). Since the failure to return to work after FMLA leave is a qualifying event that triggers an offer of coverage under COBRA, the notice should be furnished within 14 days (or 44 days) from either the last day of the FMLA leave, or the date the employer is informed that the employee will not return to work.

The CARES Act and subsequent guidance provided plan sponsors with additional flexibility to offer telehealth services to participants. Generally, the relief was intended to ensure that healthcare services remained accessible to participants while minimizing the potential spread of COVID-19. Although some of the telehealth relief provisions have a set expiration date, others continue until the declared end of the COVID-19 public health emergency.

For example, the CARES Act allowed a high deductible health plan (HDHP) to cover telehealth services without a deductible or with a deductible below the minimum deductible normally required for an HSA-qualified HDHP. Importantly, such coverage could be provided even if the telehealth services were not related to COVID-19. Accordingly, plan sponsors could amend their plans to permit coverage of telehealth services before the statutory deductible was met, without these services being considered “impermissible” coverage for HSA eligibility purposes. As a result, participants of such amended HDHPs could continue to make HSA contributions while using the telehealth services.

Unfortunately, this temporary HDHP relief allowing for broad coverage of telehealth services is only available for plan years beginning on or before December 31, 2021. (Despite the immense popularity of this particular provision, no regulatory announcement has yet been made to extend the relief further.) Accordingly, the provision currently expires for calendar year plans on December 31, 2021. For non-calendar year plans, the relief would continue for the remainder of the plan year that ends in 2022. For example, the relief would extend through June 30, 2022, for a plan year beginning July 1, 2021.

The CARES Act also requires that group health plans cover COVID-19 testing without cost-sharing, whether provided via telehealth or otherwise. The plans must cover items and services provided to participants that result in administration of a COVID-19 diagnostic test for individual evaluation purposes. However, this requirement does not extend to testing for workplace surveillance purposes.

In separate guidance, the IRS stated that coverage of COVID-19 testing and treatment could be provided by a qualified HDHP prior to satisfaction of the statutory deductible, without such coverage being considered impermissible coverage. Therefore, participants could continue to contribute to HSAs while receiving such services. This relief was intended to reduce financial and administrative barriers to COVID-19 testing and treatment, whether provided through an in-person or telehealth visit.

The Cares Act requirement for coverage of COVID-19 testing without cost-sharing and the IRS relief (referenced in the preceding paragraph) remain in effect as the COVID-19 public health emergency continues. However, it is unclear if this IRS relief could apply to coverage for testing provided for other than individual diagnostic purposes; additional guidance would be welcome. Employers that sponsor HDHPs and wish to provide COVID-19 testing coverage without cost-sharing for workplace safety purposes should consult with counsel for guidance.

Additionally, COVID-19 relief was provided for a telehealth arrangement sponsored by a large employer (generally defined as an employer with over 50 employees) and offered only to employees or their dependents not eligible for coverage under any other group health plan offered by the employer (e.g., part-time employees). Under this relief, the telehealth arrangement is exempt from certain (but not all) ACA requirements, such as the prohibition on annual and lifetime limits and the preventive services mandate.

This relief extending telehealth services to otherwise ineligible employees is in effect for the duration of any plan year beginning before the end of the COVID-19 public health emergency. For example, if the emergency ends in June 2022, the relief would extend through the end of 2022 for a calendar year plan.

We will continue to monitor the regulatory guidance for further telehealth updates.

This will depend on the reason the employee took leave. HIPAA prohibits discrimination based on a health factor. Before HIPAA was implemented, many plans had provisions stating that employees had to be actively-at-work on the day their coverage would otherwise begin. However, one of the implications of HIPAA is that any plan that has an actively-at-work clause must treat an employee who is absent because of a health problem as being at work.

This would mean that medical-related leave taken during an employee’s waiting period would be counted in the days needed for the employee to meet the waiting period. Likewise, plans that don’t allow for coverage to begin unless the employee is at work on the first effective date of the coverage would have to have a carve out for those who are absent due to a medical condition.

Consider the following example:

An employee begins work on October 1 and has a 30-day waiting period. Coverage under the plan would become effective on the first day of the month following that waiting period (November 1). On October 20, the employee takes leave to have surgery and is unable to return to work until November 12.

Because the employee was out for a medical reason, the employee’s leave is disregarded for waiting period and effective date purposes. The employee would be eligible to begin coverage on November 1.

If the leave is a nonmedical leave, the plan terms will dictate whether the employee has met their waiting period requirement and is eligible to begin coverage. If there is an actively-at-work clause, then employees taking nonmedical leave may not be eligible to begin coverage if they take leave during their waiting period or on the first day that coverage should be effective. Employers should ensure that they ultimately follow plan terms.

A medical expense reimbursement plan, or MERP, is a type of HRA meant to assist employees with their medical expenses. While specially named, for all compliance-related purposes, a MERP functions and should be treated like an HRA. Specifically, a MERP (like an HRA) is a 100% employer-funded account that reimburses employees (and their spouses/dependents) for incurred medical expenses on a tax-advantaged basis (the MERP reimbursements are not included in the gross income of the employees). There are no employee pre-tax contributions towards MERPs, so there are no related Section 125 compliance issues. Employers sometimes offer MERPs alongside a medical plan or to a specific group of employees.

Generally, compliance issues posed by a MERP will depend on the structure of the MERP itself, including the group of employees eligible for the MERP, the types of expenses that qualify for reimbursement, the maximum reimbursement amount, and the types of plans it is coupled with (including an HDHP/HSA plan). Below are a few of the compliance considerations when offering a MERP.

First, the Section 105 nondiscrimination rules apply directly to self-insured plans, and MERPs are considered a type of self-insured plan. Generally, the nondiscrimination rules prohibit plan designs from favoring highly compensated individuals (HCIs, defined very generally as the top-25% of all employees with respect to compensation, although it also includes a top-five-paid officer and a more-than-10% shareholder/owner). If a MERP is offered to a classification of employees that consists primarily of HCIs, the MERP would likely be viewed as favoring HCIs. The general consequence is that the HCIs would lose the tax benefits associated with the plan (the reimbursements, or a portion thereof, would become taxable to the HCI). So, if the MERP is offered only to a group of executives or managers (which is a common MERP design), then it is likely to have trouble with the nondiscrimination rules.

Second, if the MERP is offered alongside an HDHP/HSA plan, then the MERP will likely cause employees in those plans to lose HSA eligibility. This is because a MERP is generally considered “first dollar” (impermissible) coverage, since it is reimbursing coverage under the statutory minimum deductible for HSA-qualifying HDHP plans. So, employers should consider offering a MERP alongside a non-HDHP plan so that there's no HSA issue, and then make it available to anyone that enrolls in that non-HDHP plan so that there's no nondiscrimination issue. Another possibility is to offer a MERP in lieu of the HSA option, as the primary way to assist employees with the cost-shifting burden of a low deductible.

A third issue is the ACA. The ACA’s employer mandate requires an offer of coverage to any employee working 30 hours or more per week, and a MERP will not generally constitute an offer of coverage. So, a stand-alone MERP offering (in lieu of major coverage) may not meet the employer mandate offer requirement. Further, the ACA requires HRAs to be integrated with a group health plan — so the MERP should be offered alongside an employer plan (integrated) anyway. If it is not integrated, then the MERP on its own (considered a group health plan subject to ACA) would violate at least two of the ACA's requirements: coverage of preventive services without cost-sharing and prohibition on annual dollar limits for essential health benefits. So, the MERP should be offered alongside the employer's major medical plan rather than as a stand-alone MERP, as a way to avoid these ACA issues.

Lastly, a MERP would generally be considered a group health plan, and that means it must comply with ERISA, COBRA, and other benefit laws and regulations. The best approach is to build the MERP in as a component benefit of the group health plan itself. If it is integrated, then the plan as a whole (bundled together) will satisfy ERISA, COBRA and other compliance requirements. If it's offered on its own, the MERP would have to meet those requirements independently (e.g., the MERP must have its own plan docs). In addition, wherever the MERP benefits are described, it is important to clearly outline eligibility, MERP reimbursement limits, and the types of medical expenses that could potentially be reimbursed. Some MERPs limit the types of expenses to dental and vision only, which would create a limited purpose type of HRA, and that could eliminate the HSA and some ACA issues above. Regardless, a clear description and communication of MERP benefits will help employees clearly understand what they are getting with the MERP. 

There are three conditions that must be satisfied for an individual to qualify for the 11-month COBRA coverage extension for a total maximum coverage period of 29 months.

The first condition is that the qualified beneficiary’s (QB’s) initial COBRA triggering event must be the employee’s termination of employment or reduction of hours.

The second condition is that the Social Security Administration must determine that the QB is disabled during the first 60 days of COBRA coverage. The QB can be the employee, spouse or child. The QB’s disability determination may have occurred before the COBRA effective date.

The third condition is that the QB or the employee must notify the plan administrator in a timely manner of their disability determination. They must do so within 60 days of any one or more of the following, whichever is later:

• The date of the disability determination.
• The COBRA triggering event date.
• The date that the QB lost coverage under the group plan due to the triggering event.
• The date in which the employee was notified of their obligation to provide notice either through a COBRA Initial Notice or SPD- whichever date is later. Note that the COBRA Initial Notice and SPD should have been provided to the employee when they were initially enrolled in coverage under the employer's plan. The COBRA Initial Notice must also be provided to covered spouses upon enrollment. This is one reason why the COBRA Initial Notice is so important.

Keep in mind, though, that the third condition is currently impacted by the extension of certain time frames relief that was provided due to the COVID-19 pandemic. Specifically, recent IRS guidance on the ARPA COBRA premium assistance clarifies that individuals who received a disability determination from March 2020 through now (and ongoing) will be entitled to a year and 60 days to notify the employer of their disability determination.

If all of these conditions are met, the maximum coverage period extends to 29 months. The extension applies to all QB family members. The employer may charge up to 150% of the premium or premium equivalent during the 11-month extension as opposed to the normal 102%.

The ARPA does not extend a QB’s maximum coverage period, but does provide a subsidy for the premiums if they lost coverage due to reduction of hours or involuntary termination of employment. You can find more information about this in our article in the May 25, 2021, edition of Compliance Corner.

Business reorganizations are complex transactions that can impact benefit administration in a variety of ways. One common issue concerns handling health FSA balances of acquired employees.

If health FSA terms are not negotiated during the transaction, certain default rules apply depending upon whether an asset or stock purchase occurred. An asset purchase occurs when the buyer purchases some or all of the seller’s assets (and may also be assuming certain liabilities). Employees of the purchased entity would normally be considered terminated employees of the seller. However, these employees will often be rehired by the buyer. In contrast, a stock purchase occurs when a buyer purchases all of the stock or ownership in the seller’s business (or a unit thereof). Employees of the purchased business would continue to be employed by the same legal entity; however, the ownership of that entity is transferred from seller to buyer.

With an asset purchase, this typically results in termination of the former employee’s participation in the seller's health FSA and the possibility of a health FSA forfeiture (and COBRA rights). However, the IRS provides two ways the existing balances under the seller’s plan can transfer following the closing date of the transaction. One option allows the buyer to cover the rehired employees under its health FSA for the remainder of the plan year. The employees' account balances (whether underspent or overspent) under the seller's health FSA are rolled over to the buyer's health FSA. The other option is that the parties could agree to have the rehired employees continue to participate in the seller’s health FSA plan for a period of time, such as the end of the plan year.

If the transaction is a stock purchase, then the default rules are a little different. In the instance where the acquired business maintains its own cafeteria plan and the plan is continued following the transaction, the acquired employees' health FSA elections would continue uninterrupted. Alternatively, the plan could be terminated prior to the transaction closing. In this event, acquired employees should be given as much advance notice as possible so that they have an opportunity to use account balance and avoid forfeitures. Generally, there will be no COBRA rights in this instance because there is no termination of employment and therefore no COBRA qualifying event.

Additionally, informal guidance from the IRS indicates that employees of the acquired business are permitted to be brought into the buyer's cafeteria plan midyear (at the time of the closing) with the same level of health FSA coverage and the same salary reduction elections as they had under the acquired company’s cafeteria plan at the time of the sale. In this situation, the buyer would have to make appropriate amendments to its plan.

The agreed upon approach for the transition should be incorporated in the purchase agreement, so each party’s obligations are clearly defined. Cafeteria plan amendments will likely also be necessary, as will clear communication with employees. Importantly, while the IRS provides default rules for health FSAs and business reorganizations, employers should consult with counsel on this matter.

ARPA’s premium subsidy period begins on April 1, 2021, and ends on September 30, 2021, so it covers the entire second and third quarters of the calendar year. Since individuals have up to 60 days to notify employers that they are assistance eligible individuals (AEIs), it is possible that they would not provide that notice of premium assistance for the second quarter until after the third quarter has already begun. For instance, an individual might be laid off on May 31, 2021, but not notify the plan of the need for assistance beginning on June 1, 2021 (during the second quarter) until July 15, 2021 (during the third quarter).

Employers claim their credit for providing premium assistance on Form 941, which is filed on a quarterly basis. If the employer provided COBRA subsidies to eligible beneficiaries in April, May and June, the ARPA tax credit for these amounts should be claimed on the second quarter Form 941 due August 2. Under normal circumstances, any corrections to information provided in a Form 941 must be made by filing Form 941-X. However, IRS guidance indicates that the employer becomes eligible to claim the credit once they become aware of the AEI's eligibility and the qualified beneficiaries' premiums are paid for them. So, if an employer is notified in the third quarter of an employee's eligibility for the second quarter, they can claim the credit for the third quarter by filing in the fourth quarter. To continue with the example above, the employer could claim the credit for the month of June, as well as any months in the third quarter during which the AEI received premium assistance, on the Form 941 filed for the third quarter (which is due on October 31).

Employers should consult with their tax or payroll advisors concerning any specific issues with filing Form 941.

The handling of health FSA contributions while an employee is on a leave of absence depends upon the type of leave and the employer’s leave policies.

For FMLA leave, the employer must maintain the same group medical benefits, which include health FSA benefits, during the leave as if the employee was still working. So, the employee must be allowed to continue contributing to the health FSA for the leave period.

In such an event, arrangements should be made for the employee on FMLA leave to pay the health FSA contribution. The three options permitted are pre-payment (prior to the leave), pay-as-you-go (meaning at regular intervals during the leave, which would be post-tax for an unpaid leave) and catch-up (i.e., upon return from leave). The employer cannot offer pre-payment as the only option.

However, the employee is not required to make contributions during FMLA leave. If the employer requires the health FSA coverage to continue during the leave, the employee could cease contributions during the leave period (and then make catch-up contributions upon return). But an employer cannot require continuation of coverage during FMLA leave, unless also required for a non-FMLA leave of absence.

Alternatively, the employer could permit the employee to revoke the health FSA coverage during the leave (and be reinstated upon return). If the employee revokes the coverage, the employee is not entitled to reimbursement for health FSA claims incurred during the period the coverage was not in place.

USERRA also provides certain benefit rights for employees on a leave of absence for military service. Employees on USERRA leave must have the right to continue the health FSA coverage during the leave and are generally offered the same three payment options as those on FMLA leave (noted above). The employee may also be permitted to revoke coverage during the leave, subject to reinstatement upon return.

For other types of leave, the employer should review their cafeteria plan terms and leave policies to determine how the health FSA benefits should be addressed during the leave. These terms and policies should be clearly communicated and consistently applied to all similarly situated employees.

With respect to dependent care FSAs, an employer is not required to allow contributions to continue during the leave. The employee could be permitted to continue such contributions and, as with health FSA contributions, be offered the options of pre-payment, pay-as-you-go or catch-up contributions.

However, the employee may instead prefer to revoke or decrease the dependent care FSA contribution during the leave period because the employee will not have dependent care expenses that are eligible for reimbursement. Under IRS rules, dependent care expenses are generally only reimbursable if for the purpose of enabling the employee (or spouse) to be gainfully employed, (although there is an exception for short absences of two consecutive weeks or less). Additionally, the applicable qualifying event rules allow an employee to change a dependent care FSA election because of any change in daycare use, provider or cost. So, the employee should be made aware of the option to stop the contributions for the leave period (and make a new election upon return).

An HSA is not coverage under a group medical plan that must be continued during FMLA, USERRA or other types of leave. Rather, an HSA is a trust or custodial account owned by the employee. If permitted under the terms of the HSA program, an employee on a leave of absence may continue to contribute to the HSA, provided that the HDHP coverage is maintained during the leave period. If the leave is unpaid, the employee may prefer to cease HSA contributions for the leave period and then make a new election to resume HSA contributions upon return. Under a cafeteria plan, an employee must be permitted to change HSA elections at least monthly, for any reason. 

Employers are not required to make employer HSA contributions for employees on a leave of absence, even if the leave is protected leave (such as FMLA). So, an employer may discontinue employer HSA contributions for an employee on leave (with no catch-up upon return).  However, if the employer chooses to make HSA contributions for employees on non-protected leave, the contributions must be made for those on protected leave. The employer’s policy with respect to HSA contributions should be clearly defined in their leave policies and HSA program.

Accordingly, whether health FSA, dependent care FSA and HSA contributions continue during a leave period depends upon the type of leave, employer policy and, as applicable, options elected by the employee. Therefore, it is imperative that the employer’s cafeteria plan document, leave policies and other benefit materials clearly reflect how the health FSA, dependent care FSA and HSA contributions and benefits will be addressed during the leave period. This information should be clearly communicated to affected employees, so they are aware of their options and obligations for the leave period.

The annual Form 5500 filing must be filed by plan sponsors that are subject to ERISA, unless there is an exception. One such exception is the small plan exception that applies to small unfunded, fully insured or combination unfunded and fully insured health and welfare plans that cover fewer than 100 participants on the first day of the plan year. In other words, an employer only needs to file a Form 5500 for a given plan year if there were 100 or more participants on the first day of the plan year; exceeding that threshold mid-year is of no consequence until the following plan year. (For calendar year plans, the plan would have to have 100 participants on January 1 to be subject to the Form 5500 requirement for that year.)

Importantly, when counting participants for this purpose, employers must count all participants who are enrolled in the plan. Benefits that are wrapped together for plan document purposes (i.e., established with a single plan document) would need to have all distinct participants counted when determining whether the small plan exception applies. As an example of this, an employer with a wrapped plan consisting of medical, dental and vision benefits would need to file a Form 5500 if there were 75 medical participants, 40 dental participants (20 of whom are not on the medical plan), and 35 vision participants (10 of whom are not on the medical or dental plan); this is because the distinct participants in each group equal more than 100 participants in the wrapped plan (75+20+10=105).

Plan sponsors should work with their service providers to ensure their compliance with the Form 5500 annual filing requirements. Employers who have engaged in compliance failures with regards to the Form 5500 can explore the DOL’s delinquent filer voluntary compliance program.

Employers who seek a tax credit for providing the ARPA COBRA premium assistance must collect and maintain documentation to substantiate that the individuals who received the assistance are in fact eligible for it. This would include documentation confirming that the individual experienced a reduction in hours or involuntary termination as well as documentation confirming that they are not eligible for other group health plan coverage or Medicare.

The IRS’ guidance does not require employers to obtain a self-certification or attestation if the employer has other documentation to substantiate that the individual was eligible for the COBRA premium assistance. Examples of other documentation include employment records concerning a reduction in hours or involuntary termination of employment.

However, since individuals are only eligible for premium assistance if they are ineligible for other group health plan coverage or Medicare, employers will likely need to obtain an attestation from the individual reflecting that they do not have that access to such disqualifying coverage.

Ultimately, the attestation may be the easiest way to substantiate that the person receiving the premium assistance is eligible for it, but the employer may also rely upon their employment records to substantiate the individual’s status as an assistance-eligible individual.

Prior to January 1, 2019, all US taxpayers and dependents had to maintain a certain level of health insurance, minimum essential coverage (MEC), or pay a tax penalty. This was known as the "individual mandate" or "individual shared responsibility." There is no longer a penalty attached to the federal requirement for individuals to maintain MEC. However, several states have implemented a state version of the requirement.

An employer with 50 or more full-time employees, including equivalents (otherwise known as an “applicable large employer” or ALE), must comply with two conditions of an employer shared responsibility imposed by federal law. If an ALE fails to meet this "employer mandate," then it is at risk for two penalties. Each penalty corresponds with one of the two conditions of the employer mandate. Penalty A requires employers to offer MEC to at least 95% of full-time employees and their dependent children. This is one reason that it is important for employers to correctly identify employees versus independent contractors and full-time employees versus part-time employees. If they were to incorrectly classify more than 5% of their population and fail to offer coverage to those workers, the penalty is $2,700 (in 2021) times each full-time employee (minus the first 30 employees).

Penalty B requires employers to offer each full-time employee coverage meeting minimum value and affordability thresholds. Minimum value is a higher threshold than MEC. Minimum value must include hospitalization and prescription coverage. In contrast, MEC only needs to provide coverage for preventive care.

Affordability is measured by applying one of the three employer safe harbor tests to the employee's required monthly contribution for the lowest cost self-only coverage tier.

• Rate of Pay: The employee's required contribution is 9.83% (2021) or less of the employee's monthly salary. If the employee is hourly, the contribution is 9.83% or less of the employee’s hourly rate times 130 hours (regardless of the number of hours worked). Importantly, an employer cannot use this method for tipped or commissioned employees.
• Form W-2: The employee’s required contribution is 9.83% or less of the employee’s 2021 Box 1 earnings. Box 1 includes tips, wages, overtime, bonuses, commissions, etc., but does not include pre-tax retirement and health contributions.
• Federal Poverty Level: The employee’s required contribution is 9.83% or less of the federal poverty level. The 2021 contribution threshold would be $104.52 or less per month.

An ALE must meet both Penalty A and Penalty B conditions to comply with the employer mandate. If it only offers MEC, any full-time employee who waives that coverage in favor of purchasing individual coverage in the exchange with a premium tax credit would trigger a penalty for the employer. Alternatively, if an employer offers an MEC along with a minimum value/affordable plan, both requirements would be met regardless of whether the employees waive coverage, enroll in the MEC or enroll in the richer minimum value plan.

An employer must use a facts and circumstances test in order to determine whether termination is involuntary for purposes of COBRA premium assistance eligibility under the American Rescue Plan Act of 2021(ARPA).

The ARPA provides premium assistance for qualified beneficiaries who elect continuation coverage through COBRA, including state continuation programs. To be an assistance eligible individual (AEI), a qualified beneficiary must have experienced a reduction of hours or an involuntary (i.e., employer-initiated) termination of their employment (other than by reason of such employee's gross misconduct) and must also not be eligible for other group health coverage or Medicare. This subsidy covers the entire cost of COBRA premiums and applies to COBRA premiums paid for coverage periods between April 1, 2021, and September 30, 2021 (or when the qualified beneficiary becomes eligible for other group medical or Medicare coverage, whichever date comes first).

On May 18, 2021, the IRS issued guidance related to COBRA premium assistance under the ARPA. This guidance defined involuntary termination as an employer’s unilateral decision to terminate employment when the employee is willing and able to continue performing services. As an example, IRS Notice 2021-31 explains that termination is involuntary, even if it is designated as voluntary, when the facts and circumstances indicate that the individual was willing and able to continue working and but for the voluntary termination, the employer would have terminated the individual (and the individual was aware that they would be terminated).

Since the ARPA was signed into law, how to determine if a termination was in fact involuntary remained unclear in certain circumstances. That said, the notice clarified that:

• Voluntary termination due to general concerns about workplace safety, a health condition of the employee or a family member, or other similar issues generally will not be involuntary termination. This is because the actual reason for the termination is unrelated to the action or inaction of the employer.
• Absence from work due to disability or illness is not an involuntary termination unless the employer takes action to terminate employment. However, this could be a reduction in hours that may give rise to premium assistance if the individual loses coverage as a result of the leave.
• Involuntary termination includes when an individual voluntarily terminates employment due to being offered a severance agreement or imminent termination.
• Generally, retirement is a voluntary termination except for when the facts and circumstances indicate that, absent retirement, the employer would have terminated the individual’s employment and the individual was aware that they would be terminated and was willing and able to continue working.
• Employees who voluntarily terminated employment because they do not have childcare would not be AEIs. However, if such employees remain employed, take leave for that reason, and lose coverage this would be considered a reduction in hours that may make them AEIs.
• Involuntary termination includes a situation where an employee voluntarily terminates employment because of the employer’s material change to the employment relationship such as a reduction in hours or change in geographic location of worksite.
• An employer’s decision not to renew an employee’s contract is an involuntary termination only if the employee is willing and able to continue the employment relationship. However, if all parties always understood that the contract was for specified services over a set term and would not be extended, the completion of the contract without it being renewed is not an involuntary termination.

Not all terminations will fall neatly into the scenarios provided above. As mentioned, whether a termination is considered voluntary will ultimately depend on whether facts and circumstances show that the termination was the employer’s unilateral decision to terminate employment when the employee is willing and able to continue performing services. Clients may need to seek counsel to make such a determination.

The American Rescue Plan Act (ARPA) provides a 100% premium subsidy for COBRA premiums, including state continuation premiums, under certain circumstances. However, absent further guidance, individuals covered only by state healthcare continuation programs do not appear to have a special election period.

Under the ARPA, individuals are eligible for premium assistance if they were terminated from employment (except when terminated due to gross misconduct) or experienced a reduction in hours (either voluntary or involuntary). Voluntary terminations (e.g., resignations) do not qualify an individual for premium assistance.

The ARPA provides a special election period for qualified beneficiaries who are eligible for premium assistance, and who are currently in their maximum continuation coverage period but either failed to initially elect continuation coverage or dropped continuation coverage. However, recent DOL guidance explains that the ARPA does not change any requirements or time periods for election of state continuation.

We believe that this means that there is not a special enrollment opportunity where state continuation applies, so it is not necessary to look back to determine who would qualify for state health continuation right now but have not elected it. Since ARPA does not give state continuation individuals a special enrollment opportunity, employers just need to run a report on who was enrolled in state continuation on April 1, 2021, to determine the group that gets the ARPA subsidy for state continuation. You can find the DOL guidance here.

The DOL provides a model Alternative Notice for all qualified beneficiaries subject to state health continuation, not just covered employees. It is clear that this notice is intended for those who experience a qualifying event sometime between April 1 and September 30. We believe that this form would also be used for persons who are covered by state health continuation before April 1 and continue to be covered during the subsidy period. However, it does not appear to give persons who initially declined state health continuation coverage or who dropped it before the end of the coverage period an opportunity to elect that coverage (as discussed above).

The client may wish to consult with counsel or with the insurance carrier before sending anything to a person who initially declined state health continuation coverage or who dropped it before the end of the coverage period.

The Consolidated Appropriations Act of 2021 (CAA) amended the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) by imposing new obligations on group health plans. These additional requirements went into effect on February 10, 2021.

Under the MHPAEA, financial requirements (e.g., deductibles and copayments) and treatment limitations imposed on mental health or substance use disorder (MH/SUD) benefits cannot be more restrictive than those applied to medical/surgical benefits. Nor can separate treatment limitations be imposed only on MH/SUD benefits.

The MHPAEA applies not only to quantitative treatment limitations (e.g., number of visits or days of coverage), but also to non-quantitative treatment limitations (NQTLs) that affect the scope and duration of treatment. NQTLS include, but are not limited to:

• Medical management standards that limit or exclude benefits based on medical necessity
• Experimental treatment exclusions
• Prior authorization or ongoing authorization requirements
• Step therapy protocols (e.g., requiring lower cost drugs to be prescribed before more expensive options)
• Methods for determining usual, customary and reasonable charges for out-of-network (OON) services
• Standards for providing access to OON providers
• Standards for provider admission to participate in a network, including reimbursement rates
• Restrictions based on geographic location, facility type or provider specialty

Since the MHPAEA’s enactment, plan sponsors have been required to review the plan’s written terms and operations to ensure that the processes and standards applied to NQTLs for MH/SUD benefits are comparable to those applied to medical/surgical benefits. The following are examples of NQTLS that would appear to be problematic:

• MH/SUD pre-authorization requirements are stricter than those for medical/surgical benefits
• Medical necessity criteria apply differently to MH/SUD services as compared to medical/surgical services
• Concurrent review (i.e., review of the necessity of care while the patient is receiving treatment) or retrospective review (i.e., after treatment has been provided) occurs regularly for MH/SUD services but not for medical/surgical services
• OON reimbursement rates for MH/SUD services are based upon lower percentages of usual, customary and reasonable charges than the percentages used to determine medical/surgical OON reimbursement rates

Under the CAA, plans must conduct and document their NQTL comparative analysis and be prepared to provide it to federal or state regulators upon request. Additionally, the written analysis must be made available to participants upon request. Amongst other items, the analysis must describe each NQTL, the plan benefits to which the NQTL applies, and the factors (e.g., high variability in cost of care, lack of clinical efficacy of a treatment) and sources (e.g., internal claims analysis, medical expert review) upon which the NQTL is based.

For example, a plan that imposes a concurrent review requirement on certain treatments might explain that the NQTL was applied because of a lack of medical literature to support the treatment’s effectiveness. In such case, the plan documents and records must also show that the requirement was applied consistently to both MH/SUD services and medical/surgical services.

Accordingly, plan sponsors should consult with their carriers and/or third-party administrators to ensure that the required NQTL comparative analysis has been completed and is available in written form.

To learn more about the MHPAEA requirements, please review our recent Compliance Corner article Federal Health Updates (nfp.com) and register for our upcoming Get Wise Wednesday webinar on May 19, 2021.

While both types of relief could apply to an employee who has experienced a reduction in hours or involuntary termination, the application of the provisions differ.

The COBRA subsidies provided through the American Rescue Plan Act of 2021 (ARPA) allow certain individuals to elect COBRA coverage and have that COBRA coverage 100% subsidized by the federal government from April 1, 2021, to September 30, 2021. (We first discussed this provision in the March 16, 2021, edition of Compliance Corner.) The extension of certain timeframes for employee benefit plans, participants and beneficiaries required plans to disregard the period from March 1, 2020, until 60 days after the end of the National Emergency (known as the “Outbreak Period”) for certain deadlines, including the deadlines applicable to COBRA notices and payment. (We first discussed this provision in the May 12, 2020, edition of Compliance Corner.)

Employees who were due an offer of COBRA under the extensions of certain timeframes continue to have the opportunity to elect COBRA based on the date of their termination or reduction in hours. Specifically, the most recent guidance on this subject (which was discussed in the March 2, 2021, edition of Compliance Corner) indicated that the relief under these extensions will continue until the earlier of a) one year from the date an individual or plan is first eligible for relief or b) 60 days after the announced end of the national emergency (the end of the outbreak period). Since the national emergency has yet to end, some individuals will be entitled to this relief at the same time that they are entitled to elect COBRA under the ARPA.

There are a few distinctions to be made, though. First, the extensions of certain timeframes applies to all COBRA-qualified beneficiaries, while the ARPA COBRA subsidies only apply to those who were involuntarily terminated or experienced a reduction in hours. So while individuals whose COBRA was triggered by divorce, death or aging off of the plan continue to have an extended time period by which they can elect COBRA, they are not eligible for the COBRA election and subsidies provided by the ARPA.

Second, the election of COBRA under the two provisions takes effect differently. Under the ARPA, individuals who were involuntarily terminated or had their hours reduced going back as far as October 2019 may now elect COBRA (even if they waived it, or elected and dropped it before). As long as they are not eligible for Medicare or other group health plan coverage, the relief provided through ARPA will allow for them to elect that COBRA prospectively, and receive a subsidy from April 1, 2021, through September 30, 2021, as long as there are still months left in their 18-month COBRA maximum duration period.

On the other hand, individuals who are eligible for relief under the extension of certain timeframes could potentially elect COBRA, but would need to elect and pay for the coverage retroactively back to the date of their COBRA-triggering event. In other words, the relief provided under that guidance allows employers to require that the coverage be instated retroactively. Individuals who are eligible for this relief also can likely elect COBRA through the end of the outbreak period even if they are eligible for Medicare or other group health coverage.

Third, the DOL’s most recent guidance on the ARPA COBRA subsidies makes it clear that the extensions of timeframes guidance does not affect the COBRA notice requirements under the ARPA. As discussed in an article in this edition of Compliance Corner, employers only have until May 31, 2021, to notify assistance-eligible individuals (AEIs) of their right to elect COBRA and receive subsidies under the ARPA. That time is not extended by the extensions of timeframes. Likewise, AEIs only have 60 days to elect COBRA under the ARPA; if they do not do so, they waive their opportunity to elect COBRA and receive subsidies.

So while it is possible for both pieces of guidance to apply to certain individuals, their effect and application will be different. Consider the following example of an employee who was terminated in December 2020:

Amy was involuntarily terminated in December 2020 and would have the right to elect COBRA, effective beginning January 2021. She does not elect COBRA.

Under the extension of certain timeframes, Amy would have until the earlier of the end of the outbreak period or one year from the date she was first granted relief (January 2022) to elect COBRA. If she chose to do so, she would have to pay for COBRA going back to January 2021.

Under the ARPA, Amy should receive a notice from her previous employer by May 31, 2021, notifying her of the right to elect COBRA and receive a subsidy from April 1, 2021, through September 30, 2021. As long as Amy is not eligible for Medicare or other group health plan coverage, she could elect COBRA prospectively and receive 100% subsidized COBRA for the entirety of the subsidy period (since her COBRA maximum duration period would not be over until June 30, 2022).

If an employer missed the deadline by which they should’ve reported under Sections 6055 or 6056, they should follow the normal procedures for filing forms as outlined in the IRS Instructions for Forms 1094-B, 1095-B, 1094-C and 1095-C. Those instructions require employers to file Forms 1094/95-B&C with the IRS electronically via the IRS’s AIR filing system (if filing 250 or more forms) or by paper/mail to the IRS address in the Instructions (if filing fewer than 250 forms). In addition, employers must distribute a copy of Forms 1095-B or -C to their employees (as applicable) (See our reminder regarding IRC 6055 and 6056 Reporting Deadlines in this edition of Compliance Corner for more information on reporting requirements.) The employer would then just have to wait and see if the IRS will assess penalties for the late filings, as there is no requirement to self-report the violation.

As an example: employers should have already filed their 2020 forms with the IRS (by March 1, 2021, if filing by paper, and by March 31, 2021, if filing electronically), and should have distributed a copy of 1095-C to FT employees by March 2, 2021. Note that while there was relief that allowed an employer not to distribute Forms 1095-B to employees if they placed a notice on their website, there’s an argument that employers would not be able to avail themselves of that relief if they actually failed to file or even draft Forms 1095-B on a timely basis. If an employer missed those deadlines, the employer may be at risk for a penalty up to $280 per form for failure to distribute to FT employees, and an additional $280 per form for failure to timely file with the IRS (capped at $3,392,000 for 2021 filings). That said, since there is no obligation to self-report the untimely filing, the employer should not submit payment with filing. Rather, the employer would just file the forms (and distribute a copy of Forms 1095-B&C to employees, if applicable), and then the IRS has discretion in assessing penalties and will notify the employer if they are going to do so. The result would be the same for any missed filings from prior years.

Penalties may be waived if the failure was due to reasonable cause and not willful neglect. Note that special rules apply that increase the per-statement and total penalties if there is intentional disregard of the requirement to file the returns and furnish the required statements. Thus, if the employer has knowledge of their responsibility and delinquency, the employer should correct as soon as possible.

Although there is not an official self-correction program (like the Delinquent Filer Voluntary Correction Program for Forms 5500), there are two potential ways that a penalty could be reduced if the error is corrected within a certain period following the due dates. The first way is the “thirty-day rule:” if a failure is corrected within 30 days after the required filing date (or the deadline for furnishing individual statements), the penalty is reduced to $50 per return or statement, and the calendar-year cap is reduced to $565,000 ($197,500 for smaller entities) for filings made in 2021. The second way is the “August 1st rule:” if a failure is corrected after the 30-day rule described above but on or before August 1, the penalty is reduced to $110 per return or statement, and the calendar-year cap is reduced to $1,696,000 ($565,000 for smaller entities) for filings made in 2021. These rules may help for this year's filings (due in 2021) but would not apply to last year’s or any previous years’ filings, since they would be too late to take advantage of those exceptions.

Ultimately, employers who have failed to timely file and distribute these forms should likely consult with legal counsel. Counsel will be best suited to assist with filing delinquent forms and, potentially, negotiating with the IRS on any assessed penalties. The IRS Instructions are helpful in outlining the process and penalty information.

While the eligibility criteria for premium tax credits (PTCs) was changed by the American Rescue Plan Act (ARPA), this does not change large employers' obligations under the employer mandate.

Prior to the ARPA, individuals were eligible for a PTC to purchase individual coverage through the exchange if these two conditions applied:

• They had household income between 100% and 400% of federal poverty level (FPL).
• They were not eligible for minimum value coverage from an employer where the self-only coverage cost 9.5% (adjusted annually) or less of household income.

Since an employer does not typically know an employee's household income, an ALE's responsibility under the ACA's employer mandate is to offer minimum value coverage to full-time employees and their children. The employee's required contribution for the employer's lowest cost option self-only coverage cannot be more than 9.5% (adjusted annually, and 9.83% in 2021) of the employee's earnings, as determined under one of the three affordability safe harbor options (FPL, rate of pay, Form W-2).

The ARPA made two changes to the PTC eligibility conditions for calendar year 2021. First, the 400% of federal poverty level maximum household income limit has been removed. In other words, U.S. taxpayers who have household incomes greater than 400% of FPL will now be eligible for a PTC. Second, individuals receiving unemployment compensation for any week in 2021 may receive a PTC even if they have income below 100% of FPL.

Importantly, if an individual is eligible for qualified coverage from an employer (meeting both the minimum value and affordability standards) they are not eligible for a PTC, regardless of income. Further, ALEs are still required to offer qualified coverage to full-time employees or be at risk of a penalty under the employer mandate. If a full-time employee who is eligible for qualified coverage from an employer purchases coverage in the exchange, they would not receive a PTC, would be required to pay the full premium in the exchange, and could not trigger a penalty for the ALE.

In short, no. The American Rescue Plan Act of 2021 (ARPA), passed by Congress on March 10, 2021, temporarily increases the allowable exclusion for DCAPs.  

Generally, a participant’s DCAP reimbursement amount in a calendar year is limited to $5,000 if the employee is married and filing a joint return or if the employee is a single parent (or $2,500 if the employee is married filing separately). Further, any account balances available at the end of the plan year are forfeited (unless the DCAP permits a grace period). 

The Consolidated Appropriations Act of 2021 (CAA), passed by Congress in December 2020, provides employers with relief options related to administering health FSAs and DCAPs. One such option provided by the CAA is that employers are permitted, if they choose, to allow up to the full year-end DCAP account balance to carry over into the subsequent plan year (a feature otherwise limited to health FSAs and capped at $550 as indexed). The CAA also permits an extended grace period up to 12-months (otherwise limited to 2.5 months) after the end of the plan year. Both the carryover and extended grace period provisions are applicable to plan years ending in 2020 and 2021. 

Then the IRS released Notice 2021-15 in February 2021, clarifying much of the guidance provided in the CAA and confirming that unused DCAP amounts carried over from prior years or made available during an extended period for incurring claims are not considered when determining the annual limit applicable for the following year. This means that a participant who takes advantage of an extended carryover or grace period can still contribute up to the annual limit in the subsequent plan year. However, neither the CAA nor Notice 2021-15 amend the annual DCAP limit permitted to be excluded from income.  

The ARPA addresses this issue by providing a temporary increase for this exclusion to $10,500 (or $5,250 if the employee is married filing separately) for taxable years beginning after December 31. 2020, and before January 1, 2022. This new increase in the DCAP limit should provide relief for employees whose employers choose to permit the temporary extended carryover and grace period DCAP provisions provided by the CAA. Accordingly, the amounts in excess of $5,000 that are reimbursed through a DCAP during a taxable year will not be treated as taxable income for participants (for the taxable year beginning after December 31, 2020, and before January 1, 2022). 

Many employers are considering doing this, but they will need to be mindful of the compliance obligations that would come with such a decision.

The biggest concern with an employer offering an incentive to employees who obtain the vaccine is that doing so is likely considered offering a group health plan. This would make the reward subject to many benefits-related laws. Specifically, when an employer offers an incentive to employees who receive medical care (in the form of a vaccine in this case), they are creating a wellness program that will need to comply with ERISA, COBRA, HIPAA, the ACA, etc.

If the incentive is provided only to employees on the major medical plan, then the employer is already meeting most of those compliance obligations through that plan and could simply tack on the vaccination reward as a part of the pre-existing plan. However, if it is also offered to employees who are not enrolled on the major medical plan, then the employer is creating a stand-alone wellness program and compliance becomes much more difficult (and virtually impossible for the program to meet the ACA’s requirements prohibiting annual and lifetime limits).

It is possible that the IRS and DOL will choose not to enforce the rules surrounding COVID-19 vaccination wellness programs in the interest of public health; however, the agencies have made no public announcement to that effect. If an employer wishes to offer an incentive to employees who aren’t on the medical plan they should consult with their own legal counsel about their options.

You can find more information on this and related topics in a recent seminar hosted by NFP.

Yes; the Form 1095-C must still be distributed to employees.

ALEs with an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year must report to the IRS how they complied with the employer mandate. Specifically, under Code Section 6056, ALEs must complete a Form 1095-C for each full-time employee and report whether that full-time employee was offered coverage meeting the minimum value and affordability requirements. This reporting obligation applies regardless of whether the plan is insured or self-funded.

Additionally, as required by Code Section 6055, an ALE must report to the IRS those who were covered by the plan and for which months. A self-insured ALE would include this information in Part III of the Form 1095-C. The carrier would report this information for an insured plan.

The 2020 1095-C forms must be filed with the IRS by March 1 (if filing by paper) or March 31 (if filing electronically). These fillings should be submitted to the IRS with the transmittal Form 1094-C. As in past years, the deadline for distributing the forms to individuals is extended from January 31 to March 2, 2021.

Congress reduced the federal mandate penalty to zero, so individuals will not pay a federal tax penalty for failing to have coverage. However, the Form 1095-C is used to determine if an ALE is complying with the employer mandate and to determine if an individual is eligible for a premium tax credit for coverage purchased on the exchange. So the form still needs to be filed AND distributed to employees.

Furthermore, if the employer has employees residing in DC, CA, NJ, RI or MA, these regions have individual mandates that would rely upon the information reported in the Form 1095-C. Although the federal individual mandate penalty was reduced to zero, employees residing in these states could face state penalties for failing to maintain coverage. An employer with employees residing in these states may also be subject to additional state filing requirements.

The Form 1095-Cs must be mailed or hand-delivered, unless the recipient affirmatively consents to receive the statement in an electronic format. If mailed, the statement must be sent to the employee’s last known permanent address, or if no permanent address is known, to the employee’s temporary address.

For electronic delivery, the recipient’s affirmative consent must relate specifically to receiving the Form 1095-C electronically. An individual may consent on paper or electronically, such as by email. If consent is on paper, the individual must confirm the consent electronically. This affirmative consent requirement is designed to ensure that statements are furnished electronically only to individuals who can access them. Once an individual provides such affirmative consent to receive the Form 1095-C electronically, the form may be furnished either by email or by informing the individual how to access the statement on the employer’s website.

An ALE’s failure to file the Form 1095-C with the IRS, or to distribute it to employees, could result in significant penalties. The penalty is $280 per failure. For example, if an employer failed to file the form with the IRS and to distribute it to one employee, the penalty could be $560. Accordingly, if the employer fails to file or distribute the Form 1095-C for numerous employees, the potential liability could be substantial.

Lifestyle spending accounts (LSAs) are reimbursement accounts in which employers deposit a set amount of money for employees to spend on certain benefits that are determined by the employer. These accounts generally allow for the reimbursement of various wellness activities such as fitness classes, gym memberships, fitness competition entries, nutritional coaching, food supplements, work-out equipment, or other items or activities that will promote health amongst their employees. Some employers even use LSAs to include other non-wellness benefits such as pet or child care benefits, financial services, travel or entertainment.

Keep in mind, though, that the nature of the LSA will determine the compliance aspects of such a program. The first compliance concern to be aware of is that LSA benefits will likely be taxable to the employee. As a reminder, any benefit provided to employees would be included in their taxable income unless the tax code provides an exclusion. Notable exclusions are in place for benefits provided through a Section 125 plan, transportation plan or education plan. However, LSAs generally don’t include benefits that would be excluded from gross income under any of those exceptions (in fact, employers sponsoring LSAs likely have other plans in place that provide pre-tax benefits under those exclusions). So it’s most likely that employees would be taxed on the benefits provided through an LSA.

Another big question we get about LSAs is whether these arrangements are subject to ERISA. LSAs are generally not subject to ERISA for the same reason that they are taxable; the fact that they do not offer medical care or any of ERISA’s enumerated benefits would not subject them to ERISA as a health and welfare benefit. Specifically, if the employer wants to offer the benefit without it being subject to ERISA, then the employer would need to make sure that they do not allow reimbursement for medical treatment that would make the wellness plan an ERISA-covered plan. For example, offering mental health/psychiatry services or reimbursement of medication would likely be considered medical care and make the plan one that would be subject to ERISA. This is important because many employers do not want to have to meet all the ERISA requirements (Form 5500 filing, SPD, COBRA, etc.) for these types of plans. So in designing the activities that can be reimbursed through the LSA, the employer would want to work with counsel to ensure that none of them would lend the LSA to becoming subject to ERISA.

One final compliance consideration is how the LSA would impact employees’ HSA eligibility. When it comes to offering these accounts and an HSA, it would just be important to make sure that the plan does not offer first-dollar reimbursement for medical care. (Notice the theme here in ensuring that medical care is not offered through the LSA.) The reason for that is that employees who have an HDHP and want to be eligible to contribute to an HSA cannot have impermissible coverage (which is generally any coverage for medical care that pays before the deductible is met). So employers would need to make sure that the employees could not use the LSA to pay for their medical care if they want to preserve their employees’ HSA-eligibility.

Outside of the concepts mentioned above, there would not seemingly be any other compliance issues with providing an LSA to employees. But to be sure that the benefit is designed, implemented and communicated in an appropriate manner, employers should work with an LSA vendor or legal counsel in establishing the LSA.

There are some compliance items that apply in January and February each year regardless of the group health plan year start date. First, by January 31, employers must report the value of group health plan coverage on employees’ Forms W-2. (There is an exception to this reporting for employers that filed fewer than 250 Forms W-2 in the previous calendar year.) While most employers rely on payroll providers (as they prepare W-2s on behalf of many employers), it’s important to work closely with the provider in ensuring proper reporting.

Second, employers will have to prepare for employer mandate reporting (IRS Forms 1094/95-C and/or 1094/95-B). Due to IRS extensions, there are three different dates to consider for reporting, all in March. By March 1, 2021, employers must file 2020 Forms 1094/95-C with the IRS (if filing by paper). By March 2, 2021, employers must distribute 2020 Form 1095-C (or a similar statement) to employees. By March 31, 2021, employers must file 2020 Forms 1094/95-C with the IRS (if filing electronically, which is required if filing 250 or more forms). In connection with those three dates, during January and early February employers should work closely with payroll providers and filing vendors in gathering information relating to the reporting, including offers of coverage, enrollment, waivers and required employee contribution amounts.

Third, employers will have to consider pandemic-related extensions to FFCRA leave tax credits and to COBRA elections and premium payments. On FFCRA tax credit extensions, end-of-2020 legislation allows (but does not require) employers to provide FFCRA-related leave and receive the associated tax credits through March 31, 2021. Employers will have to decide whether to extend FFCRA leave availability to employees, considering the continued availability of the tax credits. On COBRA election and premium payment extensions, as the end of the so-called “outbreak period” approaches (by statute, it will end on February 28, 2021), employers will need to work closely with COBRA vendors on any additional communications to affected employees (or former employees). The extension rules place the burden of employee notification on both the employer and the vendor (the employer, as plan sponsor, has the fiduciary obligation to ensure notification, though). Thus, employers should review whether the extensions were communicated properly to affected employees or former employees (at the time of the COBRA event), and whether additional communications are necessary.

Lastly, MEWA sponsors must file Form M-1 with the DOL by March 1. MEWA sponsors will need to work with their administrator and potentially with outside counsel in preparing and filing Form M-1.

For employers with calendar year plans (i.e., those with plan years beginning on January 1), there are additional items to consider in January. First, employers should review nondiscrimination tests (for self-insured plans, cafeteria plans, and both health and dependent care FSAs) to assess whether the plan will somehow favor the more highly compensated employees. While adjustments can be made at any point before the end of the plan year to bring the plan into compliance with the tests, knowing early whether adjustments are necessary will help with difficult conversations with those highly compensated employees (whose elections may need to be adjusted).

Second, and similarly, employers should double check their election and enrollment systems to ensure employees’ elections were properly administered. Catching errors earlier in the year helps avoid more difficult administrative problems (and employee conversations) later in the year.

Finally, employers should prepare their Medicare Part D disclosure to CMS form, which is due within 60 days of the plan year start date (March 1, 2021, for calendar year plans). The CMS disclosure is meant to notify CMS whether the employer’s prescription drug coverage is on par with Medicare Part D. Filing is straightforward and can be completed online.