Compliance Corner Archives

In short, no, not necessarily. However, the simplest course of action is to distribute the CHIP notice to everyone.

The Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA) created a voluntary program whereby state governments could elect to provide a premium subsidy for individuals to enroll their dependent children in their employer-sponsored group health plan coverage instead of enrolling directly into the state Children’s Health Insurance Program (CHIP) or Medicaid coverage. Employers must provide a notice to their employees who reside in states with a CHIP premium assistance program notifying them of the program’s availability and contact information — regardless of the employer’s principal place of business, office location, or policy situs. The DOL maintains a Model CHIP Notice on their website, with copies available in both English and Spanish.

Though they may have a Medicaid or CHIP program, not every US state or territory has elected to create a premium assistance program as authorized by CHIPRA. The states that do have a CHIP premium assistance program are listed on the chart that is included in the DOL’s CHIP Model Notice. As of the publication date of the most recent CHIP Model Notice (July 31, 2024), 38 states maintain a CHIP premium assistance program. This means that the remaining 12 states, plus the District of Columbia and the US territories, have no such program.

The CHIP notice must be distributed annually by the first day of the plan year, and it may be combined with other compliance notices or enrollment materials. For this reason, it is commonly included in benefits guides and open enrollment materials.

Employees residing in the 38 states with CHIP premium assistance programs must receive this annual notice. Employees residing in the remaining 12 states, the District of Columbia, and the US territories are not required to receive it. However, many employers provide the notice to all employees regardless of where they live in the interest of administrative ease. The guidance issued by the EBSA explicitly states that this course of action is allowed:

• An employer in the District of Columbia sponsors a group health plan that provides reimbursement for medical care to plan participants or beneficiaries residing in the District of Columbia, Virginia, Maryland, West Virginia, Delaware, and Pennsylvania.
• In this example, employees residing in Virginia, West Virginia, and Pennsylvania are entitled to receive the notice because those three states offer premium assistance programs. Of course, the employer may send the notice to all employees if the employer chooses (for example, if it is administratively easier to send the notice to all employees than to distinguish between employees based on residency).

If your employees live exclusively in a state or states without a CHIP premium assistance program, there is no need to distribute the CHIP notice. However, best practice remains including the notice in the benefits guide and distributing it to all employees, who can then determine for themselves whether they might be eligible for a CHIP premium assistance program.

• DOL CHIP Model Notice for Employers
• EBSA CHIP Notice Guidance to Employers

FMLA requires a covered employer to maintain an employee’s coverage under its group health plan on the same basis as would have been provided if the employee had been continuously employed during the entire FMLA leave period. However, an employer may terminate an employee’s coverage during FMLA if the employee’s premiums are paid late, provided certain rules are strictly followed.

Under these rules, when an employee agrees to pay their share of group health plan premiums during FMLA leave (a.k.a. the “pay-as-you-go” payment method) but is late with a premium payment, then, in the absence of an established employer policy for a longer grace period, an employer may terminate an employee's coverage if an employee’s payment of their share of the premium is more than 30 days late. 

In order to terminate coverage on this basis, however, the employer must provide advanced written notice informing the employee that payment has not been received and coverage will be dropped on a specified date (which must be at least 15 days after the date of the notice) if the payment is not received by the specified date.

Furthermore, if the employer has established policies regarding other forms of unpaid leave that provide for coverage to cease retroactively to the date on which the unpaid premium payment was due, the employer may drop the employee from coverage retroactively in accordance with that policy given that the 15-day notice was given. As a practical matter, the notice should highlight the coverage would be terminated retroactively with the specified date.  

Note that even if an employer does terminate the coverage for this reason, the employer must still restore the employee to coverage and benefits equivalent to those of the employee upon the employee’s return from FMLA leave. Importantly, COBRA would not be triggered during FMLA leave even when coverage is terminated due to late premium payment.

But what if this employee does not return to work after exhausting their FMLA leave? 

While COBRA is not triggered during FMLA leave even when coverage is terminated due to late premium payment, COBRA would be triggered under these circumstances, even if their coverage was terminated for the failure to pay premiums during the FMLA leave, provided that the employee was covered on the day before the first day of the FMLA leave under a group health plan of the employer and the employee would lose coverage under the group health plan before the end of the maximum coverage period in the absence of COBRA coverage. 

For these purposes, the COBRA maximum coverage period would generally begin on the last day of FMLA leave. While the regulations are not entirely clear on this point, standard practice indicates that the last day of FMLA leave is either the last day of the period of leave to which the employee is entitled, or earlier, if the employee notifies the employer that he or she is not returning to work. 

It is important for the employer to detail their FMLA leave policy clearly in their employee handbook or other materials and communicate it to their employees in advance of the leave. Furthermore, employers are required to retain employees’ benefits premium payment records (among other FMLA-required records) for at least three years. 

Employers should work with their employment legal counsel and HR experts to set up comprehensive leave policies and practices to ensure compliance with all applicable federal and state laws. 

For additional information on this topic, please refer to:

DOL FMLA Employer Guide

DOL FMLA Advisor: Employee Failure to Pay – Health Plan Premium Payments

DOL FMLA Advisor: Employee Payment of Group Health Benefit Premiums

There are four nondiscrimination tests specific to dependent care assistance programs (DCAPs), which are also sometimes referred to as dependent care flexible spending accounts (or “DCFSAs”).

They are:

• An “eligibility test,” under which the DCAP must benefit employees who qualify under an eligibility classification that does not discriminate in favor of highly compensated employees (HCEs).
• A “benefits and contributions test,” under which the benefits or contributions provided under the DCAP must not discriminate in favor of HCEs.
• The “5% owner test,” under which not more than 25% of the total benefits under the DCAP can be provided to individuals who own more than 5% of stock, capital, or profit interest of the employer company.
• The “55% average benefits test,” under which the average benefits provided to non-HCEs must be at least 55% of the average benefits provided to HCEs.

DCAPs that do not plainly discriminate in favor of HCEs, exclude certain categories of employees from participation, or limit availability only to certain member employers of controlled groups should generally face few difficulties satisfying the first three of these tests, all of which are similar to tests required for cafeteria plan testing under Code section 125.

The 55% average benefits test, however, is particular to DCAPs, and can be challenging for many otherwise nondiscriminatory DCAPs to pass. This is because the test is a pure utilization test with an especially high threshold for passage. Under this test, the average DCAP benefits provided to non-HCEs must be at least 55% of the average benefits provided to the HCEs. Thus, on average, for every $100 reimbursed to HCEs, at least $55 in benefits must be reimbursed to non-HCEs.

That may not seem at first glance like too steep a hill to climb, but there’s a catch: All DCAP elections must be thrown into the calculation mix, including the elections of those who choose not to participate in the DCAP at all. For many groups, this is the vast majority of employees, HCE and non-HCE alike. (The test may exclude employees whose compensation is less than $25,000, certain employees who are under age 21 or who have not completed a year of service, and certain collectively-bargained employees.)

This means a DCAP can fail the 55% average benefits test, even when the average benefit enjoyed by HCEs and non-HCEs who actually participate in the plan is exactly the same, as the following example illustrates:

Suppose an employer has seven employees — A, B, C, D, E, F, and G. A and B are HCEs; C, D, E, F, and G are non-HCEs. All employees are eligible to participate in XYZ’s DCAP as of their date of hire. A, B, C, and D participate in the DCAP through the cafeteria plan, using salary reduction agreements, but E, F, and G do not participate in the DCAP at all. A, B, C, and D have each reduced their salaries by $5,000 and are each provided benefits worth $5,000 under the plan.

Under the 55% average benefits test, XYZ must compare the average benefits of the HCEs with those of the non-HCEs. The average benefit provided to the HCEs is $5,000 [($5,000 + $5,000) ÷ 2]. The average benefit provided to the non-HCEs is $2,000 [($5,000 + $5,000 + $0 + $0 + $0) ÷ 5]. The average benefit provided to the non-HCEs is 40% of the average benefit provided to the HCEs ($2,000 ÷ $5,000 = 0.4), which is well under than the required 55% threshold, and, consequently, this employer’s DCAP would fail the test.

Employers that struggle to pass the 55% average benefits test but still want to provide the benefit can address the issue in various ways, including but not necessarily limited to:

Encouraging Greater Participation: Employers can increase communication efforts (e.g., educational sessions) to non-HCEs to encourage their participation in the DCAP or offer matching contributions or seed money to participating non-HCEs.

Capping HCE Elections as Needed: Employers should perform nondiscrimination testing early in the plan year as well as during open enrollment before the plan year even begins to identify potential issues, and then, if warranted, the plan could cap HCEs after the tests are conducted. Note that the cafeteria plan or the DCAP plan document should give the plan administrator authority to reduce or discontinue participants’ salary reductions as may be necessary to comply with nondiscrimination requirements.

Making the DCAP Available for Non-HCEs Only: The most certain way to address the issue would be to simply prohibit HCEs from participating in the DCAP altogether, thus ensuring passage of the 55% average benefits test (because the average benefit for HCEs would be $0).

Naturally, many employers balk at this option, and it can be a tough sell in a space where decision makers often either report to HCEs or are HCEs themselves. But this can sometimes be a result of a misunderstanding of how DCAPs are treated for tax purposes. DCAPs do not offer $5,000 in potential tax savings, as many people mistakenly believe. Rather, they provide for a potential $5,000 reduction in taxable income, with a resultant lowered income tax liability amount that is much less than a $5,000 benefit amount.

As an example, consider an employee who is an HCE with an annual salary of $160,000. The employee has a preschool-aged child for whom they pay $10,000 a year for dependent care, and they participate in the employer’s DCAP, electing the maximum amount of $5,000 to help pay for that care. The employee will file their 2024 taxes as a single filer.

For 2024, the marginal tax rate on $160,000 for single filers is 24%. If this employee is able to reduce their salary for the whole $5,000 amount, the estimated resultant estimated tax savings to them would be $1,582.50 (calculated by adding the marginal tax rate of 24% and the FICA rate of 7.65% on $5,000 together ($1,200 + $382.50 = $1,582.50)).

Thus, the estimated effect of this HCE’s prohibition from participating in their employer’s DCAP would be the inability to reduce their taxes by $1,582.50. While this is not insubstantial, they would not be missing out on $5,000 in tax savings.

(Please note that this example is intended for illustrative purposes only and is simplified for that purpose. It is not intended to reflect any specific individual’s tax situation, nor should it be relied upon as tax advice by any individual or entity.)

Notwithstanding the above, employers are often understandably reluctant to prohibit their HCEs from participating in their DCAPs outright. Such employers should therefore become familiar with the consequences of failing the 55% average benefits test, which, as it happens, are somewhat less severe for HCEs than those for some other forms of nondiscrimination failures. Most notably, while the cafeteria plan nondiscrimination rules require HCEs to include in gross income any amount that could have been received as cash (e.g., the total salary reduction amount), the DCAP nondiscrimination rules only require an HCE to include in gross income those amounts (or reimbursements) that were actually received as dependent care assistance.

Furthermore, the DCAP itself is not disqualified. Non-HCEs are not adversely affected in any way, nor are there any additional monetary penalties for employers providing a discriminatory plan (though discriminatory amounts included in income for HCEs may, of course, be subject to payroll taxes and the like). In the event of a discriminatory plan, it is incumbent upon employers to consult with their tax advisors to determine the appropriate amount of income and tax reported and whether Forms W-2 need to be amended.

For further information, please ask your broker or consultant for a copy of the NFP publication Section 129 Dependent Care Assistance Program Nondiscrimination Rules: A Guide for Employers.

FAQ: What is a spousal incentive HRA?

A spousal incentive HRA (sometimes informally called a “SIHRA” for short) is an HRA that provides funds for an employee or spouse (or both, plus covered dependents if desired) who waives the employer’s plan and enrolls in the spouse’s coverage instead. The result is similar to a spousal surcharge or carve-out, as it is a different way for an employer to impose a strategy to encourage spouses to enroll in their own coverage. A SIHRA may be seen as more employee-friendly since it offers a carrot approach instead of a stick. The HRA funds can be used to reimburse qualified medical expenses incurred under the spouse’s plan, such as deductibles, copayments, or coinsurance. Employers will need to obtain confirmation of enrollment in other coverage to allow participation in the SIHRA.

Since this is an HRA, the same rules that apply to traditional HRAs also generally apply to SIHRAs, so employers need to be mindful of compliance considerations prior to implementing this type of arrangement.

Below is a high-level overview of some of the laws that would apply:

ACA: A SIHRA must be integrated with other group health coverage to comply with the ACA. This means the employer must sponsor a group health plan, the SIHRA must only be available to employees (or their spouses or dependents) who enroll in the spouse’s group health plan, and the employee must be offered the opportunity to opt out of the HRA at least annually. Employers should verify enrollment in other coverage and should not allow enrollment in the SIHRA if the other coverage is individual insurance, Medicare, Medicaid, or TRICARE.

Additionally, ACA reporting for self-insured plans is triggered since these individuals waived the employer’s medical plan but are enrolled in the SIHRA, which needs to be reported via form 1095-B even if the employer is not considered an applicable large employer. SIHRAs are also subject to PCORI filing rules since all HRAs are subject to PCORI and no exception exists since these enrollees are not also covered under the employer’s own medical plan.

Nondiscrimination rules: HRAs are considered self-insured health plans and therefore are subject to nondiscrimination rules under Section 105(h). The general idea is that these plans cannot discriminate in favor of highly compensated individuals. This includes things like eligibility or waiting period rules, amounts available under the HRA, or participation requirements. Employers who sponsor HRAs of any type should undergo annual nondiscrimination testing to ensure the plan is not discriminatory.

COBRA: HRAs are subject to COBRA as long as the employer meets the size requirements under federal law. Employers should ensure the SIHRA is included in all required COBRA notices, premiums are set appropriately, and beneficiaries receive timely election forms.

ERISA: Since HRAs are group health plans, they are subject to ERISA rules. This includes things like having a written plan document/SPD, claims and appeals procedures, and Form 5500 reporting requirements (depending on size).

HIPAA: HRAs are self-insured health plans and therefore subject to HIPAA privacy and security rules. A limited exemption may apply to a self-administered HRA with fewer than 50 participants.

SIHRAs are becoming more popular as employers try to find ways to reduce their healthcare spending. Employers interested in offering a SIHRA should pay close attention to the compliance considerations mentioned above prior to implementing such a program.

Yes, unless it is further extended by Congress.

As background, for a participant to be eligible to make or receive tax-favored contributions to an HSA, the participant must be covered under a qualified HDHP and have no impermissible health coverage. In the context of HSA eligibility, impermissible coverage refers to any non-HDHP health coverage that provides “first dollar coverage,” meaning before the statutory minimum HDHP deductible is met.

The Consolidated Appropriations Act, 2023 (CAA 2023) provided the latest two-year extension of relief that allows (but does not require) HDHPs to provide first dollar telehealth coverage without negatively impacting HSA eligibility. The relief was originally enacted through the CARES Act in March 2020 with the intention of increasing access to healthcare without an in-person contact risk of spreading COVID-19. The CAA 2023 relief expires for plan years beginning on January 1, 2025, and later. Note that for non-calendar year plans, the relief would continue for the remainder of the plan year that ends in 2025 (e.g., the relief would extend through June 30, 2025, for a plan year beginning July 1, 2024).

While there is bipartisan support for an extension of the telehealth relief, it may come through legislation passed very late in the year, such as in an end-of-year Congressional budget bill, or not at all. Opponents of the extension argue that the original pandemic-related inability to access in-person care has passed.

Unless the relief is extended again, plans currently providing first dollar telehealth coverage to HDHP participants will need to start charging for telehealth services in order to ensure HSA eligibility is not impacted. Changes to telehealth coverage should be clearly communicated to participants through enrollment materials and plan document amendments (e.g., through a Summary of Material Modifications or updated Summary Plan Description).

We will continue to report on any developments in Compliance Corner. For more information on HSA eligibility and impermissible coverage, please ask your broker or consultant for a copy of the NFP publication Health Savings Accounts: A Guide for Employers.

There are a few different notice requirements in play when an employer makes a midyear change to benefits. First, ERISA includes a summary of material modification (SMM) requirement. The SMM requirement pertains to material changes in a group health plan. ERISA does not define “material,” but this term would generally refer to any information or changes that impact the rights or obligations of plan participants and beneficiaries. Such changes may include, but are not limited to, changes in plan benefits, funding, or management.

When the plan is changed in a way that materially affects the content of the Summary Plan Description (SPD), the administrator must inform participants of these changes. The plan administrator must generally furnish an SMM within 210 days after the end of the plan year in which the modification or change was adopted. However, if there is a material reduction in covered services or benefits, the plan administrator must provide a summary of material reduction (SMR) within 60 days of the adoption of the material reduction. The SMM and SMR are intended to provide participants with a description of the specific material changes to the plan or to the information required to be in the SPD. It should be written in a manner calculated to be understood by the average plan participant and must be furnished in a timeframe compliant with the regulations. However, regardless of the legal deadline, the best practice is to distribute the notice in advance of the material change, if possible, since participants will be relying upon the prior information provided until they receive the updated notice.

The ACA includes a Summary of Benefits and Coverage (SBC) requirement that requires group health plans and health insurance issuers to provide a concise document detailing, in plain language, simple and consistent information about health plan benefits and coverage. The SBC is designed to help beneficiaries compare different coverage options by summarizing key features of the plan or coverage, such as the covered benefits, cost-sharing provisions, and coverage limitations. If there's a material change that impacts the information provided in the SBC, and that change occurs outside of open enrollment (i.e., it occurs midyear), then the employer must distribute an updated SBC (or a notice describing the change) 60 days in advance of the change. So, for many modifications to the plan that occur midyear, that advance-notice SBC will likely need to be distributed. Remember that providing the updated SBC will also meet ERISA’s SMM and SMR requirements.

Now, if the change or modification (even if it’s a reduction) is occurring as part of renewal or open enrollment (that is, changes that are taking effect for the new plan year), then those changes can be included in a new SBC that is distributed during open enrollment. In that case, there's no need to distribute an updated SBC (or notice describing the change) 60 days in advance. Instead, the employer could just include the updated SBC/notice in the open enrollment materials.

Employers should ensure they fulfill their fiduciary obligations to provide required disclosures within the appropriate time interval.

Yes, employers are generally permitted to offer taxable cash incentives to employees who waive group health coverage under the employer’s Section 125 cafeteria plan. The details of the opt-out arrangement should be specified in the cafeteria plan document and clearly communicated to employees in the annual enrollment materials.

However, there are several compliance issues to consider with an opt-out arrangement.

First, for an applicable large employer (ALE) with 50 or more full-time or equivalent employees in the prior year, the design of the opt-out arrangement can affect their affordability calculation under the ACA employer mandate. To review, an ALE must offer affordable, minimum value coverage to full-time employees to avoid potential penalties. “Affordable” means that the employee cost for the least expensive single tier coverage must not exceed 8.39% (for plan years beginning in 2024 but indexed annually) of the employee’s household income, as determined according to the applicable safe harbor (i.e., rate of pay, W-2, or federal poverty line) chosen by the employer.

If the opt-out arrangement allows an employee to waive the group medical coverage unconditionally (i.e., regardless of whether the employee has other minimum essential coverage (MEC)), the employee’s coverage cost for affordability purposes would include the opt-out payment. Accordingly, from the employer’s perspective, the opt-out payment would negatively impact the ACA affordability calculation.

By contrast, if an employer requires the employee to provide reasonable evidence, such as an attestation, that the employee and their tax family (i.e., family members for whom the employee expects to claim a tax exemption) have other MEC that is NOT individual market coverage to receive the opt-out payment, then it’s considered a conditional or “eligible” opt-out arrangement. The other MEC coverage could be, for example, coverage under the group health plan of a spouse or parent. Additionally, an IRS official has informally indicated that other MEC would include coverage under Medicare or TRICARE. With an eligible opt-out, the cash payment is not added to the employee’s contribution when performing the affordability calculation, making it easier for the employer to satisfy ACA affordability requirements.

Second, the employer would generally want to offer opt-out benefits to all eligible employees, to avoid violating nondiscrimination rules. For example, the HIPAA nondiscrimination rules prohibit discrimination based on a health factor and singling employees out for a payment on this basis. The Section 125 nondiscrimination rules apply to cafeteria plan benefits and prohibit discrimination that favors key or highly compensated employees. Additionally, for employers with over 20 employees, the Medicare Secondary Payer rules would prohibit incentivizing only Medicare-eligible employees to opt out of the employer’s plan to enroll in Medicare.

Third, the employer would need to consider the amount and timing of the opt-out payments. The cash-out amount is typically a fraction of the actual cost of the coverage, and thus is less likely to be viewed as aggressive encouragement by the employer to drop the group coverage. Additionally, the employer may prefer to spread the payments over the plan year; this approach alleviates the situation where an employee receives an up-front lump-sum incentive for declining coverage and quits after a few months. Furthermore, an employee who waives coverage may still have a HIPAA special enrollment opportunity later in the plan year (e.g., due to a loss of other coverage or a new dependent).

Fourth, since the opt-out payment is considered taxable compensation, the employer may want to review any impact on wages or the calculation of overtime compensation, as applicable, with their employment law counsel or payroll advisor.

Finally, it’s generally advisable for the employer to check with their insurer or stop-loss carrier before offering an opt-out payment to ensure such an arrangement is consistent with any insurance requirements and/or contract terms.

For further information on opt-out arrangements and other cost-share contribution considerations when offering group health coverage, please ask your broker or consultant for a copy of the NFP publication Cost-Share Contribution Models: A Guide for Employers.

Employers that receive MLR rebates have compliance obligations regarding the use of the rebates, including requirements to distribute to eligible plan participants (potentially including former participants) within three months of receipt for any portion of the rebate that constitutes a plan asset. MLR rebates do not apply to self-insured plans. However, distribution of the employees’ (participants’) share of any form of insurer rebates should generally follow the MLR rebate or similar rules.

DOL guidance gives employers some discretion when allocating the rebate among plan participants (including former employees participating in the plan under COBRA), provided employers follow ERISA’s general standards of fiduciary conduct.

First, employers should review the applicable ERISA plan document (in conjunction with the carrier policy) for any specific direction as to how the rebate should be used and provided. In determining who is entitled to the distribution, employers should carefully analyze the terms of the governing plan documents.

Whether former participants should be included in any MLR rebate allocations depends on the type of plan. While the DOL guidelines do not specify what constitutes an administrative cost, it is generally accepted that these costs include only “hard costs” (such as the cost of producing a check and the related postage and handling) and do not include the effort to track down former participants. Note that the opportunity to exclude participants from MLR rebate actions based on a cost/benefit analysis pertains only to former participants and does not also apply to current participants.

For nonfederal governmental plans, any portion of a rebate that is based on former participants' contributions needs to be aggregated and used for the benefit of current participants.

For nongovernmental, non-ERISA plans, if the rebate is paid to the plan sponsor, the plan sponsor must allocate the rebate to current participants only. If the rebate is paid directly to participants by the carrier, the carrier must distribute the rebate equally among those who were participants during the MLR reporting year on which the rebate is based.

For comprehensive information on MLR rebates, distribution methods and employer requirements, please ask your broker or consultant for a copy of the NFP publication MLR Rebates: A Guide for Employers.

To be HSA-eligible (that is, to be able to establish and contribute to an HSA), an individual must be covered by a qualified high deductible health plan (an HDHP) with no disqualifying non-high deductible health plan (non-HDHP) coverage. Health FSAs can never be HDHPs, but most health FSAs are disqualifying non-HDHPs.

This is because most health FSAs reimburse most or all qualified medical expenses for covered individuals (general-purpose health FSAs). But not all health FSAs jeopardize HSA eligibility. These “HSA-compatible health FSAs” include health FSAs that reimburse only dental, vision, or preventive care (limited-purpose health FSAs), health FSAs that reimburse medical expenses incurred only after the applicable HDHP minimum deductible has been met (post-deductible health FSAs), and combination limited-purpose and post-deductible health FSAs.

The general rules are as follows:

An individual is not eligible to make contributions to an HSA for any month in which the individual is covered by a general-purpose health FSA on the first of that month. This means that an individual covered by a general-purpose health FSA is not eligible for an HSA for every month of the health FSA plan year, regardless of whether the FSA is exhausted at some point during the plan year (because the health FSA’s “period of coverage” is the entirety of its plan year). This includes not only any such coverage obtained through an individual’s own employer, but also any such coverage made available to them through their spouse or another family member.

General-purpose health FSAs that provide for grace periods or carryovers (health FSAs can have either of these options or neither, but never both) present additional problems because they can extend HSA ineligibility into a subsequent plan year.

General-purpose health FSAs with grace periods render any covered individual ineligible for an HSA for the months of that grace period (generally, three months for 75-day grace periods, because HSA-eligibility for an entire month is based upon the eligibility status as of the first day of that month). However, this does not apply to any individuals who end an FSA plan year with a zero-dollar balance (as measured on a cash basis).

General-purpose health FSAs with carryovers can potentially render an individual with access to any such carryover amount ineligible for an HSA for the entire subsequent plan year, even if the carryover amount is exhausted during that time.

The rules do provide for a few methods to address these issues, but each comes with a condition or two attached and all must be undertaken proactively (e.g., before a grace period or carryover period begins).

An employer with a grace period can choose to amend its cafeteria plan to convert its general-purpose health FSA to an HSA-compatible health FSA for the grace period. However, this amendment must apply to all health FSA participants entitled to the grace period, including those with no particular interest in becoming HSA-eligible after the plan year ends, though they could participate in a general-purpose FSA during the subsequent plan year in addition to having access to the grace period funds for any limited-purpose expenses they might incur during that period.

An employer with a carryover can allow employees to decline or waive their carryovers prior to the beginning of the subsequent plan year. Alternatively, an employer can allow unused FSA amounts to be carried over to an HSA-compatible health FSA either by:

1. Letting individuals with year-end balances elect to participate in the HSA-compatible health FSA and elect to have any unused general-purpose amounts carried over to the HSA-compatible health FSA.
2. By having their cafeteria plan provide for automatic enrollment in the HSA-compatible health FSA for individuals who elect HDHP coverage, with any unused general-purpose amounts automatically carried over to that HSA-compatible health FSA.

These rules have remained substantially unchanged since HSAs were first established in 2004 and can be frustrating for employers and employees to apply to real-life situations in today’s world. While there have been recent efforts to update these rules legislatively, none have yet come to fruition. Until such time as they do, employers offering HDHP-HSA plans must continue to be mindful of how health FSA coverage can adversely affect the HSA-eligibility of their employees by taking reasonable steps to avoid potential conflicts between health FSA coverage and HSA-eligibility, such as:

• Putting measures in place that prevent employees from enrolling in the employer’s HDHP-HSA plans and general-purpose FSA plans at the same time.
• Making HDHP-HSA enrollees aware of these rules during the enrollment process and having them either certify that they are not covered by a general-purpose health FSA (or any other non-HDHP coverage), including any such plan provided through their spouse or other family member, or acknowledge that they have read the rules and understand them.
• Taking proactive steps to address potential issues arising from their general-purpose health FSA grace period or carryover provisions (if any).

For further information on HSA eligibility and other HSA compliance considerations, please ask your broker or consultant for a copy of our publication Health Savings Accounts: A Guide for Employers.

No, posting required notices for employees without work computers on the company intranet for access via a kiosk, time clock or shared computer is not sufficient to meet the DOL’s electronic disclosure rules.

The DOL rules provide a safe harbor for electronic delivery of required notices. Under this safe harbor, electronic delivery of notices (and other ERISA-required disclosures) is permitted, but employees must either have computer access as an integral part of their job or must consent to receive plan disclosures electronically. Even if an employee has a work-provided email address, if they cannot access electronic documents in their normal work location, they are not considered to have computer access as an integral part of their job. 

However, an employee can consent to receive plan notices electronically to meet the DOL’s electronic disclosure safe harbor. The consent should explain what documents will be distributed electronically, the right to request paper copies of the documents, and the procedures for withdrawing consent.

If an employee has integral access to a computer at work or proper consent is received, electronic delivery may include things like posting notices to an intranet site, benefits administration portal or HRIS system, or sending the notices via email (either work-provided or the personal email the employee consented to use). Importantly, employers must notify employees that the notice has been posted or distributed via email and explain the significance of the notice. Employers should also use “appropriate and necessary” means to ensure employees’ receipt of the notice, such as using return receipts or periodic surveys to confirm receipt.

If an employee does not have integral access to a computer at work and does not consent to receive plan notices electronically, the employer must provide paper notices either by hand delivery or mail. If the employer chooses hand delivery, it is advisable to get the employee’s signature confirming receipt; otherwise, the employer does not have proof of distribution. If delivered by mail, the employer should document the procedure and date that the documents were mailed. 

Employers should review their electronic delivery policies and procedures and make any necessary changes to comply with the DOL safe harbor. Employers should also ensure that they adequately document and retain copies of required disclosures, regardless of whether the distribution is electronic or by paper. 

For further information on distribution of required group health plan notices, please ask your broker or consultant for a copy of the NFP publication Electronic Distribution Rules: A Guide for Employers. 

No. Both fully insured and self-insured plans must determine the applicable premium for each 12-month COBRA determination period before the beginning of the period and cannot increase the applicable premium during the determination period. In other words, plan sponsors that experience rate changes during a 12-month determination period (e.g., if the policy year and determination period start and end at different times) generally will not be able to pass along rate increases to COBRA participants during the determination period. 

There are only three instances in which a plan may increase the COBRA premium charged to a qualified beneficiary during the 12-month determination period: 

• If the qualified beneficiary qualifies for a disability extension, the rate can be increased to 150% of the applicable premium during the 11-month extension. 
• If the plan is not currently charging the maximum allowable amount (102% of the applicable premium), the rate can be raised to that maximum allowable amount as determined at the beginning of the determination period. 
• If a qualified beneficiary elects a different benefit package during the determination period (such as due to a midyear election change event), the plan can use the applicable premium for the different benefit package as determined at the beginning of the determination period. 

It may be permissible for employers to select a new COBRA determination period if the decision is supported by a business reason or significant plan change (e.g., short plan year or change in policy coverage period), so long as the employer intends to use the new 12-month determination period indefinitely. However, an employer’s decision to modify its determination period because of higher-than-expected costs contradicts COBRA’s 12-month determination period requirement. Given the lack of definitive guidance, employers should consult with legal counsel before adjusting a 12-month determination period. 

For further information on COBRA compliance, please ask your broker or consultant for a copy of the NFP publication COBRA: A Guide for Employers. 

The ACA’s employer mandate does not have special rules for interns. The same rules covering other employees will apply here too. However, there is a window within which an employer is not penalized if it doesn’t offer coverage to an employee who works less than three months, and seasonal employees (who meet the definition under the rules) may be exceptions too.

Generally, an employee who is hired to work 30 or more hours per week is considered full-time and therefore must be offered coverage under the employer mandate. This would also include even a temporary, contract, or short-term employee if they are working or are expected to work 30 hours or more per week. Such employees must be offered coverage by the first day of the fourth full calendar month.

The rules expressly state that an employer may not consider that employment will end during the initial measurement period, even if the employee has a short-duration employment contract. For example, if an employee is hired to work 30 hours per week but is expected to be laid off at some point, the employee could not be treated as part-time.

However, the employer mandate allows for a limited non-assessment period, which basically means that the employer would not be penalized if coverage is not offered to a full-time employee for the first three months, so long as that employee is offered coverage by the first day of the fourth full calendar month following hire. In other words, the employer has about a three month break to offer coverage after a full-time employee is hired.

So, if an employee works less than three months, the employer would not have to offer that employee coverage (even if that employee is a full-time employee — working 30 hours per week). Beyond that third month, though, the employer needs to offer coverage to that employee. For example, if any temp employees who work 30 or more hours are employed for five months, the employer must offer coverage for that fourth and fifth month in order to avoid a penalty. Accordingly, employers must offer coverage to any temporary employees employed for more than three months by the first day of the fourth full calendar month following hire.

Keep in mind, though, that the client would still need to consider their plan document terms. Specifically, if the plan document indicates that employees are generally eligible for coverage immediately or on the first of the month following 30 or 60 days, then the employer should make all full-time employees eligible on that timeline (including temporary employees if not specifically excluded). So, if an employer would like to take advantage of the full limited non-assessment period for certain classes of employees, they will need to ensure that their plan document reflects that. In other words, while there may not be a problem with waiting to offer coverage under the employer mandate, the employer still needs to administer the plan according to their plan terms.

There are two important exceptions to these rules. First, if an employee’s hours vary above and below 30 hours per week, and there is no reasonable expectation that they will always work full-time hours, then they could be placed in a look-back measurement period ranging from three months to 12 months. They would only be offered coverage prospectively if they averaged full-time hours during the measurement period. However, if an employee is reasonably expected to work full-time hours (based on determinative factors such as comparable full-time positions, how it was advertised in a job description and so on), they should not be placed in a look-back measurement period and instead should be offered coverage after completing the normal new hire waiting period.

Second, a “seasonal employee” under the employer mandate is specifically one whose customary annual employment does not exceed six months and whose work begins at approximately the same time each year. Generally, the work or the business need is seasonal in nature. So, for a summer intern to be considered a seasonal employee, the internship program would need to run the same time each year. Specifically, if the position typically lasts less than six months during the same time each year (e.g., June to August), then the interns could meet the definition of “seasonal employee.” Employees meeting this definition may also be placed in a look-back measurement period and not offered coverage until the completion of such period and if they averaged full-time hours. If the employees are not, in fact, seasonal for this purpose, the only way they could be placed in a look-back measurement period is if they were hired as working variable hours (as opposed to working 30 or more hours per week). Note that employers need to consider whether similar interns are hired sporadically throughout the year. If so, the intern would not be classified as a seasonal employee.

So an employer will need to determine if their seasonal employees actually meet the definition of seasonal under the employer mandate. Otherwise, if they will be working 30 hours or more per week just for a short duration, they’re probably not actually variable-hour employees, and they’re likely not seasonal employees either. As such, the employer would be at risk of an employer mandate penalty if they fail to offer full-time employees affordable, minimum-value coverage by the first day of the fourth month.

If they are, indeed, seasonal employees (as defined under the rules), or if they leave employment before the limited non-assessment period is up and are not eligible, a Form 1095-C would not need to be generated for such employees. But, again, an employer would need to make sure these employees are actually considered either “seasonal” employees or variable-hour employees, and not full-time eligible employees.

Assuming that the coverage is being paid for by the employee on a pre-tax basis, then no, unfortunately, the financial status of the employee would not be a qualifying event. Section 125 restricts the ability of an employee who has made a pre-tax election to make changes to that election in the middle of a plan year. Basically, an individual's election is irrevocable (unchangeable) during the plan year unless the individual experiences a recognized Section 125 midyear status change event (and even then, the plan document must allow the election change, and the election change must be on account of and consistent with the change event). Those recognized midyear election change events include:

• HIPAA special enrollment rights (acquisition of a new dependent through marriage, birth, or adoption; loss of eligibility for group health coverage, SCHIP, or Medicaid).
• Change in status (change in marital status, number of dependents, employment status, dependent satisfies or ceases to satisfy eligibility requirements or a change in residence).
• Change in cost of coverage.
• Significant cost change or coverage curtailment.
• Addition or significant improvement of benefit options.
• Change of coverage under another employer plan.
• Loss of group coverage sponsored by a governmental or educational institution.
• Court judgment, order, or decree.
• Enrollment, or expected enrollment, in a Qualifying Health Plan (QHP) on the health insurance exchange.
• Enrollment, or expected enrollment, in minimum essential coverage after dropping below 30 hours of service a week, regardless of whether eligibility for an employer's group coverage is lost.

There is no Section 125 change event for unaffordability or financial hardship. While the midyear events for changes in the costs of coverage (referenced above) might seem like they would apply, these events relate to changes in the cost of the coverage offered to employees, and not changes in the employee's personal financial circumstances that make the cost of coverage more burdensome on that employee.

However, if the coverage is not being paid for on a pre-tax basis, then Section 125 does not apply, and the coverage may be dropped as long as the carrier will allow it (if fully insured).

In summary, a Section 125 plan (whether a full plan or a premium-only plan) may not provide leeway for an employee to drop their pre-tax elections mid-plan-year due to financial hardship. Doing so places the entire plan at risk. The penalty for failing to comply with the regulations can be severe. The 2007 Proposed Treasury Regulations state that a plan that fails to operate in accordance with the Section 125 requirements is not a cafeteria plan, and employees’ elections between taxable and nontaxable benefits result in gross income to employees.

For further information on Section 125 midyear election events, please ask your broker or consultant for a copy of the NFP publication Midyear Election Change Events: A Guide and Matrix for Employers.

Not necessarily. However, as with most things related to Form 5500 reporting, ultimate decision-making authority in this regard will rest with the plan administrator.

The Form 5500 filing requirement for health and welfare plans subject to ERISA is straightforward: all such plans with 100 or more plan participants on the first day of the plan year must file Form 5500 for that plan year, including all applicable insurance information on Schedule A.

Schedule A reporting can be a challenge for plan administrators because it relies upon the delivery of Schedule A information from insurance carriers (and, occasionally, other entities such as point solutions vendors) to the plan. While insurance carriers have an obligation to provide Schedule A information, plans will still occasionally find themselves having to chase it down themselves (an earlier FAQ addressed this problem).

Sometimes, however, the opposite problem can arise, where plans receive Schedule A information that was neither requested nor expected, and this can come as an unwelcome surprise to plan administrators who may not have previously considered filing Form 5500 for this particular benefit.

In these instances, it’s worth remembering that the carrier in question may subscribe to the “when-in-doubt-send-it-out” school of Schedule A information reporting. That is, rather than trying to sort out which of their customers need Schedule A information to file Form 5500 and which ones do not, the carrier simply fulfills its obligation to those who do need the information by sending it to all of its customers. Those who need it for Form 5500 reporting will use it for that purpose, and those who do not need it will not use it. From the carrier’s standpoint, its job is done either way.

A carrier may also send out Schedule A information as a matter of practice if its benefit covers 100 or more persons, and this is often a result of Form 5500’s rather confusing treatment of “participants” for reporting purposes on the one hand and “covered persons” for purposes of Schedule A on the other.

Form 5500’s “participant” count includes only participating employees and former employees and does not include spouses and dependents. By contrast, Schedule A’s “covered persons” count includes covered spouses and dependents along with covered employees. Nevertheless, some carriers will send Schedule A information by virtue only of having 100 or more “covered persons” under the benefit, regardless of whether all of those “covered persons” for purposes of the benefit are also “participants” for purposes of Form 5500 reporting.

Whatever the carrier’s reasons for doing so may be, its provision of Schedule A information does not in and of itself obligate a plan administrator to report that information on Form 5500. But neither should a plan administrator simply ignore the information altogether. Rather, the plan administrator should take that opportunity to take reasonable steps to confirm their belief that no Form 5500 reporting is required for the benefit. The specific steps to take would depend on their rationale for that belief.

The most common such rationales include:

The benefits are “voluntary.” The plan administrator should ensure that any benefits they consider “voluntary” for purposes of ERISA (and therefore not subject to Form 5500 reporting), truly meet the DOL’s voluntary plan safe harbor requirements. These generally require that the employer’s functions regarding the program are only to allow an insurer to offer and publicize its program to employees, collecting premiums through after-tax payroll deductions and remitting these premiums to the insurer.

Furthermore, employers must not put any conditions on an employee’s election of benefits nor profit from the program, and the employer must be very careful not to take any actions that either expressly or implicitly endorse the program, including:

• Assisting employees with preparation of claim forms
• Negotiating with insurers
• Recordkeeping (other than maintaining a list of enrolled employees)
• Permitting payroll deductions to be made on a pre-tax basis under the employer’s cafeteria plan

The benefit has fewer than 100 participants. In such case, the plan administrator should ensure that the benefit is not included with other component benefits (e.g., under a “wrap plan”) that has 100 or more participants. Otherwise, this benefit would generally be reportable along with those other benefits on the Form 5500 for that plan. (See our previous FAQ on this topic here.)

The benefit is not insurance. Certain programs (sometimes called “point solutions”) that provide benefits for specific conditions (e.g., infertility, obesity, mental health, etc.) may not present like traditional insurance offerings, but they may still be “insurance” for purposes of Schedule A reporting. As a general proposition, point solutions vendors can be reluctant to provide Schedule A information to plan administrators, even when asked to do so. Therefore, plan administrators who receive Schedule A information unprompted from its point solutions vendor should consider that as a strong indicator that the program in question is indeed reportable on Schedule A. (See our previous FAQ on this topic here.)

As stated at the beginning, the ultimate decision as to whether to report Schedule A information on Form 5500 is the plan administrator’s to make, preferably with the advice of experienced counsel for situations that are just too close to make a solid call in one direction or the other. But the mere receipt of Schedule A information alone does not necessarily give rise to any Schedule A reporting obligation.

At a high-level, STD, LTD, and salary continuations (collectively, STD/LTD) are employer-sponsored plans provided to employees to pay partial wage replacement for an employee’s non-work-related disability or serious health condition for a specific time period.

However, STD/LTD plans alone do not entitle employees to continuation of health coverage. Instead, depending on an employer’s group size, some of the federal and state laws grant protected leave entitlements to employees with continuation of health coverage and job protection during STD/LTD’s qualifying leave; these federal or state entitlements run concurrently with STD/LTD. Specifically, the applicable federal and state laws allowing for continuation of health coverage may include the FMLA (and/or state versions of FMLA), the ACA employer mandate, and state-mandated paid family and medical leave (PFML) (AKA disability insurance and PFL) programs.

FMLA

All public agencies (e.g., state governments and political subdivisions of states), regardless of size, and all private-sector employers that employ 50 or more employees in 20 or more workweeks in the current or previous calendar year are subject to the FMLA.

During any FMLA leave, a covered employer must maintain the employee's group health plan on the same basis as coverage would have been provided if the employee had been continuously employed during the entire leave period. The maximum duration of the FMLA per eligible employee is 12 weeks per year.

Among other qualifying reasons, an eligible employee can take FMLA leave for a serious health condition that makes the employee unable to perform any one or more of the essential functions of the employee's position, as certified by a healthcare provider.

Employers subject to FMLA must designate the FMLA qualifying reason as FMLA, including STD/LTD qualifying leave, and allow eligible employees to maintain their group health coverage during FMLA leave.

ACA Employer Mandate

Employers that had at least 50 full-time employees (including full-time equivalent employees) on average on a controlled group basis in a prior calendar year are subject to the ACA employer mandate provision in the current calendar year. If an employer uses a look-back measurement method to determine their full-time employee status, then the employer needs to continue group health insurance until the end of the current stability period if the employee worked on average 130 hours a month during the preceding measurement period.

Additionally, an employee’s STD/LTD leave is generally counted toward “hours of service” under the provision.

State PFML

Statutory disability insurance and PFML mandates include leave reasons for an employee’s own serious health condition or disability similar to typical STD/LTD’s qualifying reasons. Most of the PFML programs grant employees on PFML leave the right to maintain their group health insurance during a PFML leave (e.g., NY PFL, CO FAMLI, WA PFML, MA PFML). Accordingly, an employer who has employee(s) working in any of these states should be sure to continue employees’ group health coverage the same way that they would if they were actively employed. This entitlement applies even when an employee is not eligible for or has exhausted the FMLA.

Summary

An employer’s plan document and leave policy should clearly indicate whether and when group health coverage would continue while an employee is on leave, incorporating the applicable federal and state laws noted above.

If an employer decides to allow their employees to continue their group health coverage longer than what is required under the laws during the leave period, the employer should obtain approval from insurers for fully insured plans or stop-loss providers for self-insured plans in writing in advance. Otherwise, an employer may be liable for the claims incurred on their own.

Importantly, when eligibility for coverage is lost under the group health plan terms due to the reduction in hours from the leave (e.g., upon exhaustion of FMLA or state PFML), COBRA, as applicable, needs to be offered.

As this FAQ makes clear, the interactions between STD/LTD and various federal and state laws can be very complex. Please refer to our publications for more comprehensive and detailed descriptions of each applicable requirement. For copies of our publications, please contact your NFP benefits consultant.

In short, it depends on what the qualifying life event is. As a reminder, when an employer offers pre-tax coverage through a Section 125 cafeteria plan, employee elections are generally irrevocable and cannot be changed midyear without a qualifying life event. There are two types of qualifying life events: HIPAA Special Enrollment Rights (SER) and optional, or permissible, Section 125 events.

The HIPAA SER events are:

• Birth
• Adoption
• Marriage
• Loss of eligibility for other group coverage
• Loss of Medicaid or CHIP
• Gain of eligibility for Medicaid or CHIP premium assistance program

Employees currently enrolled in the group medical plan who experience a HIPAA SER have the right to switch benefit plan options. For example, if an employee is enrolled in HDHP single coverage and gets married, they have the right to add the spouse and switch to a different medical plan option (such as to a PPO plan). This is an entitlement under HIPAA. Neither the employer nor the insurer can deny the employee the right to switch plans under these circumstances. Please note that the HIPAA SER rules don’t apply to stand-alone dental or vision plans, which are generally excepted from HIPAA portability governance.

The second type of qualifying events are the optional events under Section 125, which include:

• Change in status (employment, marital status, number of dependents, residence)
• Change in cost (significant and insignificant)
• Significant coverage curtailment
• Addition or significant improvement of benefits package option
• Change in coverage under another employer plan
• Loss of coverage sponsored by governmental or educational institution
• Certain judgments, orders or decrees
• Medicare or Medicaid entitlement
• FMLA leaves of absence
• Reduction of hours without loss of eligibility
• Exchange enrollment

These events are optional for both an employer and an insurer (or TPA/stop-loss carrier). If an employer intends to permit midyear election changes based on these events, their written Section 125 plan document would need to provide for such and the insurer’s policy (for a fully insured plan) or the TPA and stop-loss agreements (for a self-insured plan) would need to be in agreement. Employers should confirm with the insurer, TPA, and/or stop-loss carrier prior to allowing an employee to change plan options for a permissible event. Additionally, the action that the employee wishes to take must be consistent with the event that occurred. This consistency rule may limit the situations when an employee can change plan options depending on the facts and circumstances of the specific event.

Where there’s overlap between the HIPAA SER and optional Section 125 rules (for example, between the HIPAA SER event of marriage and the Section 125 event of change in marital status), remember that the HIPAA SER events along with the right to switch medical plan options are an entitlement to an eligible employee and cannot be denied by employer or insurer practice.

Lastly, remember that employers must operate the plan in accordance with the Section 125 rules and their written Section 125 Plan Document. Allowing employee election changes outside of those guidelines would put the employer at risk of disqualification of the plan’s tax status. On the other hand, denying an employee a HIPAA SER could result in DOL enforcement, an IRS excise tax penalty, or legal action against the plan. Employers should carefully review their plan documents and ensure their internal procedures align. Employers should also educate employees on the impact of HSA contribution limits in the event the change creates a change in eligibility for HSA contributions (for example, if an employee changes from an HDHP to a PPO plan).

Yes. At the beginning of a COBRA continuation period, employers must offer qualified beneficiaries the opportunity to continue the same coverage in place on the day before the qualifying event. Following the initial COBRA election, when an open enrollment period is available for similarly situated employees under the plan, or when a qualified beneficiary experiences a HIPAA special enrollment event, the qualified beneficiary may make coverage changes. This means that qualified beneficiaries can enroll dependents because of marriage, birth, adoption, or loss of other health plan coverage. HIPAA special enrollment rights only arise for qualified beneficiaries receiving COBRA coverage, not for former qualified beneficiaries who failed to timely elect coverage following a qualifying event.

Generally, any family members added during open enrollment or HIPAA special enrollment do not become independent qualified beneficiaries. The one exception to this rule is children born to or placed for adoption with the covered employee during a period of COBRA continuation coverage. Those children are considered independent qualified beneficiaries, but the maximum duration of their COBRA continuation coverage is tied to their parent’s initial qualifying event (not the birthdate or adoption date).

During open enrollment, qualified beneficiaries must be able to drop or add family members and change coverage elections, just as if they were a non-COBRA enrolled employee. Each qualified beneficiary has independent open enrollment rights to change benefit coverage options as if each qualified beneficiary were an active employee. Importantly, plan administrators must notify COBRA qualified beneficiaries of any coverage changes ahead of open enrollment.

All coverage options available to similarly situated active employees during open enrollment must also be made available to qualified beneficiaries, including any coverage modifications. This means that qualified beneficiaries must be allowed to switch elections between plans of different types (e.g., add medical, even if only enrolled in dental as of the qualifying event) during open enrollment, assuming active employees are given that choice.

Example: A qualified beneficiary (QB) was a participant in her employer’s group dental plan when she terminated employment, but not the group medical plan. QB experienced a COBRA qualifying event following her employment termination and elected to continue her dental coverage under COBRA. Three months later, the employer held an open enrollment period for active employees. During open enrollment, active employees enrolled only in group dental coverage can enroll in group medical coverage. Can QB enroll in the employer’s group medical plan during open enrollment?

Yes. The COBRA regulations require employers to offer COBRA qualified beneficiaries the same open enrollment period rights available to similarly situated active employees. Therefore, QB can elect group medical coverage during open enrollment.

An employer can provide tax-free student loan payment assistance only through a formal education assistance program. If they do not have one in place, they must adopt one. Otherwise, the benefit cannot be provided on a tax-free basis.

The CARES Act added (and the CAA, 2021 extended) “eligible student loan repayments” to the list of items that can be reimbursed under an educational assistance program under Code Section 127. That list also includes, but is not limited to, tuition, fees, and similar payments, books, supplies, and equipment. That said, the student loan repayment benefit applies to payments made by the employer, whether paid to the employee or a lender, of principal or interest on any qualified higher education loan (including undergraduate and graduate school) for the education of the employee (but not of a spouse, domestic partner, or other dependent) before January 1, 2026. Student loan repayments (and other forms of education assistance covered by Section 127) are limited to $5,250 per calendar year.

As mentioned, employers interested in providing this benefit will need to adopt or amend a Section 127 plan document (to include student loan repayments as an eligible reimbursement). It cannot be offered through a cafeteria plan. An overview of some of the key requirements of an educational assistance program includes:

Written Plan – A written plan document is required to establish a qualified educational assistance program. The document should fully describe the eligibility, benefits, and rules of operation and should be formally adopted by the employer.

No Cash Opt Out – Employers must not offer a choice between educational assistance and cash/taxable benefits. In other words, no cash in lieu of benefits is permitted. As noted above, an educational assistance program cannot be included in an employer's cafeteria plan.

Notice – In order for a program to be a qualified educational assistance program, reasonable notification of the availability and terms of the program must be provided to eligible employees.

Substantiation – Employers should obtain substantiation from employees seeking payments under the program.

Eligibility – Only employees as defined by Section 127 can participate, including current employees (and those on leave), former employees who retired or were laid off, leased employees, and self-employed individuals (partners, sole proprietors, more than 2% Subchapter S shareholders, and independent contractors). Note that if the class of eligible employees is defined too narrowly, then there is a risk that the plan will fail the nondiscrimination tests, the result being that the plan would lose its qualified status (all tax benefits are lost).

Nondiscrimination – The educational assistance program cannot discriminate in favor of highly compensated employees (HCEs). For this purpose, an HCE is a person who is either:

• A more than 5% owner; or
• An employee who made more than a certain amount for the previous year (for example, an HCE in 2024 was someone who made $150,000 in 2023) and, if elected by the employer, was also in the “top-paid group” (generally the top-paid 20% of employees) for the previous year.

Employers considering adopting or amending a Section 127 student loan assistance program should consult with their tax advisor and/or legal counsel for specific advice and guidance.

Provided you are HSA-eligible for the entire calendar year, you can contribute up to the applicable IRS annual family HSA contribution limit ($8,300 for 2024, $7,750 for 2023) to an HSA. If you are 55 or older at year-end, you can also contribute an additional $1,000 catch-up contribution. Your domestic partner, if HSA-eligible, can also contribute the family maximum (and, if applicable, a catch-up contribution) to their own HSA.

To review, to be eligible to make (or receive) HSA contributions, an individual must:

• Be covered by a qualified HDHP.
• Not have other “impermissible coverage” (i.e., coverage that provides medical benefits before the HDHP statutory minimum deductible is met, with limited exceptions — e.g., preventive care).
• Not be enrolled in Medicare.
• Not be claimed (or eligible to be claimed) as a dependent on someone else's tax return.

Generally, an individual’s contribution limit is based upon their months of eligibility and applicable coverage tier (e.g., single or family; family for this purpose is coverage other than single).

So, if you are an HSA-eligible employee with family HDHP coverage for the entire calendar year, you can make or receive HSA contributions up to the family contribution limit (regardless of the HSA-eligible status of your domestic partner or any other covered family members).

Additionally, your covered domestic partner, if HSA-eligible, can establish their own HSA and can also make or receive HSA contributions into that separate HSA up to the family contribution limit. Note that if your family tier HDHP also covered an HSA-eligible adult child (i.e., a child who was no longer eligible to be claimed as a tax dependent), the adult child could also contribute up to the family limit to an HSA.

By contrast, if an employee’s family tier HDHP covered a spouse and any child(ren) who are the employee’s tax dependents, these individuals could not collectively contribute more than the family HSA contribution limit, although they could have separate HSA accounts. However, an employee and spouse, if eligible, could each contribute the additional $1,000 catch-up contribution to their own HSA.

HSA-eligible individuals, including domestic partners, who cannot make contributions through an employer’s cafeteria plan can generally contribute post-tax and take a deduction on their personal income tax returns. As a reminder, the deadline to make or receive HSA contributions is the tax filing deadline for the year (for 2023 HSA contributions, generally, April 15, 2024). This is also the deadline for withdrawing any excess contributions (i.e., contributions that exceed an individual’s applicable maximum limit) for 2023 to avoid a penalty tax.

For specific tax advice and guidance, individuals should always consult with a professional tax advisor or legal counsel.

For more information regarding HSAs, please ask your broker or consultant for a copy of the following NFP publication Health Savings Accounts: A Guide for Employers, and register for our March 20, 2024, webinar, Kick-Starting Spring with a Compliance Refresher on HSAs.

Under ERISA, the plan administrator is obligated to provide certain documents to any participant or beneficiary under the plan when requested in writing. The documents that must be provided include the latest updated SPD (including interim summaries of material modifications), the latest annual report (i.e., Form 5500), any terminal report (i.e., final Form 5500 for a terminated plan), any bargaining agreement, any trust agreement, and “any contract or other instruments under which the plan is established or operated.” Participants and beneficiaries may request to examine documents or to be given copies of documents. If examination is requested, the plan administrator must make the documents available at the principal office of the administrator and “in such other places as may be necessary to make available all pertinent information to all participants.” So, the answer to the question depends on whether the request is coming from a participant or beneficiary and whether the requested documents are included in the list of documents that must be furnished.

Only participants and beneficiaries are entitled to receive documents upon request. The term “participant” means an employee or former employee of any employer who is or may become eligible for benefits under an ERISA plan “maintained for the employees of such employer” or whose beneficiaries may be eligible for benefits. This would include employees who are eligible but not enrolled in the plan, COBRA qualified beneficiaries, and covered retirees. A beneficiary is a person designated by a participant, or by the terms of an ERISA plan, who is or may become entitled to a benefit under the plan. This would include eligible spouses and children and healthcare providers who have received an assignment of benefits that includes requesting documents. So, if the employee whose attorney has requested the documents falls into one of these definitions, then the plan administrator must produce the documents described in the second paragraph, above, or risk being exposed to the daily penalty.

But the plan administrator does not have to produce all documents that the participant or beneficiary asks for, depending on whether they are “any contract or other instruments under which the plan is established or operated.” There are differing court opinions on whether various other documents must be disclosed, including claims-related documents, guidelines used to review benefits claims, TPA contracts, and minutes of meetings.

Participants and beneficiaries may request to examine documents or to be given copies of documents. If examination is requested, the plan administrator must make the documents available at the principal office of the administrator and “in such other places as may be necessary to make available all pertinent information to all participants.” If copies of documents are requested, the plan administrator may charge reasonable copying costs, not to exceed 25 cents per page, or the actual cost, whichever is less. Failure to produce requested documents within thirty days of the request may result in a $110 per day penalty.

It is advisable to consult with legal counsel if and when you receive a request for production of documents.

No. While the ACA requires applicable large employers to offer their full-time employees (and dependents) the opportunity to enroll in affordable minimum value coverage under an eligible employer-sponsored plan, this requirement does not apply to independent contractors, assuming they are properly classified as such.

The analysis used for purposes of the ACA is similar to but not precisely the same as that used for other employment classifications such as that used for determining worker status under the Fair Labor Standards Act (FLSA), which were discussed in the January 17, 2024, Compliance Corner article.

ACA rules define an “employee” as any individual performing services if the relationship between the employee and the person for whom the employee performs such services is the legal relationship of employer and employee, which exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.

If an individual who works for the employer is properly classified as an independent contractor, then that individual would not be an employee of the employer. Accordingly, employers should not be offering ACA coverage to those who are truly independent contractors.

Note that if the health benefits are offered through a Section 125 cafeteria plan, there are specific limitations as to which individuals can participate. One such requirement is that participants are employees. So, generally, a cafeteria plan may extend participation only to current and former employees of the employer who are considered common-law employees. Accordingly, offering benefits to an ineligible class such as independent contractors could present tax qualification issues for the plan.

Additionally, from an ERISA standpoint, it is generally not advisable to extend benefit plan coverage to independent contractors or other workers who are not the employer’s common-law employees, former common-law employees, or their dependents. Allowing 1099 workers to participate in an ERISA group health plan contrary to the plan document terms would likely be a fiduciary violation. Additionally, the employer could end up self-funding the benefits if the insurer or stop-loss carrier, as applicable, learned ineligible individuals were enrolled in the coverage.

Another potential risk is inadvertently creating a multiple employer welfare arrangement (MEWA) if the employer is essentially letting individuals who are self-employed (i.e., employed by another employer) participate in the plan. MEWAs may be subject to significant state insurance-law regulation and are subject to additional ERISA reporting requirements.

So, when an employer is considering whether the group health coverage should be offered to independent contractors, it is advisable for the employer to engage employment law counsel and review their relationship with the independent contractors to ensure they are properly classified as such. The determination is based upon the specific facts and circumstances of the parties’ relationship. Proper classification of workers has been an ongoing focus of regulators, and misclassification can give rise to potential claims and liabilities for an employer.

For the first question, the answer is yes, if the carrier (for fully insured benefits) or stop-loss carrier and TPA (for self-insured benefits) allow the plan sponsor to extend eligibility to part-time employees. Employers need to ensure the eligibility criteria is clearly defined, properly documented in plan documents, and communicated effectively to employees. This should include information on how part-time hours are calculated to ensure only those who are truly eligible receive an offer of coverage.

The second question about charging different premiums for part-time employees versus full-time employees is a bit more challenging. To begin, if we are discussing medical coverage and the employer is an Applicable Large Employer (ALE) subject to the ACA’s employer mandate, there are specific rules in place to identify full-time employees under the ACA, which may be different than the criteria an employer uses to identify part-time employees for benefits other than medical coverage. ALEs subject to the employer mandate must comply with those rules and offer affordable coverage or potentially face a penalty. Employers who are unsure as to whether they are considered an ALE should work with their consultant, advisor, or benefits counsel to better understand those obligations.

For employees who are not considered full-time under the ACA but are still offered medical coverage (such as those averaging 20 hours per week) or for other benefit offerings besides medical, it may be possible to charge a higher premium to part-time employees; however, there are things to consider. Employers will need to consider nondiscrimination rules, which is the idea that a plan should not favor highly compensated employees. We see these rules under both Section 105 and Section 125 of the IRC; Section 105 applies only to self-insured benefits, while Section 125 applies to pretax benefits. Generally, employers may vary benefit offerings and employer contributions based on bona fide employment classifications. Bona fide business classifications include those based on an objective business purpose (in other words, there must be a business reason for forming the classification — it can’t be formed solely to divide employees with respect to benefit offerings). Examples of allowable classifications include different geographic locations, offices, business lines, job titles, or hourly work expectations. Other examples include salaried versus hourly, part-time versus full-time, or union versus non-union. Even with a bona fide business class, the variance in employer contribution must not discriminate in favor of highly compensated employees. If highly compensated employees are being favored, then the plan is at risk for discrimination.

Employers who extend benefits eligibility to part-time employees but charge higher premiums should be aware of nondiscrimination rules and undergo testing to ensure the plan is not discriminatory based on the variance. For more information on these rules, please ask your broker or consultant for a copy of our Sections 105 and 125 Nondiscrimination Rules: A Guide for Employers publication.

Not in most cases, which can be an unwelcome surprise to a business owner who also works day-to-day for their business. After all, cafeteria plans are designed for employees and owner-employees are employees too, right?

Not according to the Internal Revenue Code (the Code), where Section 125 establishes the rules for cafeteria plans (aka Section 125 plans), which limits participation in those plans to “employees,” a term that excludes individuals deemed “self-employed” under the Code, including sole proprietors, partners in partnerships and LLPs, members of LLCs, and more-than-2% owners of S corporations.

Being employed by the business (for example, as its CEO) does not change this determination because, from a tax perspective, at least, a person who works for a business they own is essentially working for themselves (i.e., they are self-employed).

At first glance, it might seem unfair to prohibit owners who are also employees from participating in plans designed for employees of their businesses. But these owner-employees derive benefits from these plans in a different way because business entities, such as partnerships, LLCs, and S corporations, are not themselves subject to federal income taxation. Rather, their incomes “pass through” directly to their owners for taxation as individual income only.

These “self-employed” owners therefore directly benefit as individual taxpayers from the advantages that cafeteria plans provide to their company’s bottom lines, such as the FICA and FUTA savings derived from the salary reductions of participating employees, in addition to the other benefits these plans already offer to employers, such as the ability to provide an array of competitive benefits that attract and retain a talented and productive workforce.

(In contrast, C corporations are subject to “double taxation” under the Code: Taxation of income at both the corporate level and at the individual (owner) level. Notably, owner-employees of C corporations are eligible to participate in cafeteria plans.)

It’s also important to remember that owner-employees can still enjoy many of the same (or at least substantially similar) benefits that their company’s cafeteria plans provide to their employees.

For instance, although owner-employees may not be able to pay health coverage premiums through the cafeteria plan, they may be able to take an above-the-line deduction on their own income taxes for health coverage. Additionally, they may not be able to make “pre-tax” contributions to their HSAs through the cafeteria plan, but if eligible, they may be able to make their own direct contributions to their HSAs, for which they can also take an above-the-line deduction. They may not be able to participate in their company’s dependent care assistance program (aka DCAP or dependent care FSA) through the cafeteria plan, but they may be eligible for a DCAP funded outside of a cafeteria plan, subject, of course, to nondiscrimination rules, or they may be eligible for the dependent care tax credit that is available to most individual taxpayers under the Code.

All individual tax situations are different, of course, and owner-employees should consult with their own tax advisors as to their own eligibility for the tax deductions and credits described in the above paragraph. The essential point is that self-employed individuals, such as most owner-employees, may not be eligible to participate in cafeteria plans, but they may still be able to enjoy many of the benefits provided to their employees through those plans. However, they will have to do so through means generally available to taxpayers rather than those available only to employees.