Employee Benefits Question of the Week: HSA Contributions

QUESTION: Can an employer utilize different HSA contribution amounts based on length of employment?

ANSWER: Tiering contributions based on length of service would be considered discrimination under a cafeteria plan and would fail comparability testing under a non-cafeteria plan. Thus, such an arrangement is not permissible.

Employers are not required to contribute to the HSAs of their employees. However, if an employer makes contributions to any employee’s HSA outside of a cafeteria plan, the employer must make comparable contributions to the HSAs of all comparable participating employees. As a general rule, contributions are comparable if they are the same dollar amount or the same percentage of the HDHP deductible. An employer that fails to comply with comparability requirements may be liable for excise taxes.

If an employer fails to comply with the comparability requirement during a calendar year, it will be liable for an excise tax equal to 35 percent of the aggregate amount contributed by the employer to the HSAs of its employees during that calendar year.

Categories of Employees
Non-collectively bargained employees can be separated into three categories for comparability testing:
• Current full-time employees
• Current part-time employees
• Former employees

Categories of HDHP Coverage
There are four categories of coverage for purposes of comparability testing:
• Self only
• Self plus one
• Self plus two
• Self plus three or more

The comparability rules do not apply to employer HSA contributions made through a cafeteria plan. HSA contributions are made through a cafeteria plan if the cafeteria plan allows employees to make pre-tax salary reductions to fund their HSAs.

Sources: Zywave, Health Equity, Robert Husta

Employee Benefits Question of the Week: COBRA and FSAs

QUESTION: How does COBRA apply to health flexible spending accounts (FSAs)?

ANSWER:    Generally, a health FSA is considered an ERISA-covered health plan, and, unless an exception applies, an employer subject to COBRA provisions must offer COBRA continuation coverage to qualified beneficiaries who experience a loss in coverage due to a qualifying event for up to 18 months, including new elections during open enrollment.

A limited COBRA option must be offered if the FSA plan is considered an excepted benefit. To determine whether an FSA is an excepted benefit, the following conditions must be met:

  1. The annual FSA election amount does not exceed two times the amount contributed by the employee. If the employer does not contribute to the FSA, this requirement is met.
  2. A health insurance plan was available to the FSA participant due to his or her employment, and this coverage was not limited to excepted benefits such as limited-scope dental and vision coverage.
  3. The maximum COBRA premium is equal to or exceeds the maximum FSA benefit.

For an excepted-benefit FSA, COBRA is only offered for the remainder of the plan year and not for a full 18 months (i.e., it is limited). COBRA coverage does not need to be offered to qualified beneficiaries who have “overspent” their accounts at the time of the qualifying event.

If the health FSA plan is not an excepted benefit, the employer will need to offer COBRA regardless of whether the account is over- or underspent and the COBRA duration is offered for the full 18 months.

Employees who elect COBRA continuation coverage may only make after-tax contributions to the FSA account once they are no longer receiving a paycheck. In addition, employers may require a qualified beneficiary to pay an additional 2% administrative fee. As an example, an employee who makes an annual FSA election of $2,400 and terminates employment on June 30 will have contributed $1,200 ($200/month) at the time of termination. For each month of continued coverage, the beneficiary should send $204 (102% of the applicable premium/contribution) to the employer.

If an employee does not elect COBRA upon termination, he or she cannot access the FSA funds once terminated (except for claims incurred prior to termination date), and any balances are forfeited.  For more information and details, search Zywave for “COBRA Rules: Health FSAs and HRAs”.


Source: SHRM (https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/howdoescobraapplytohealthflexiblespendingarrangements.aspx) and Zywave

Employee Benefits Question of the Week: Health Coverage and FMLA Leave

QUESTION: Do employers have to maintain an employee’s health benefits on FMLA leave? If the employee doesn’t pay his or her premium, can the employer cancel the employee’s health benefits?

ANSWER:    An employer is required to maintain group health coverage for an employee on FMLA leave on the same terms as if the employee had continued to work.  An employer may require employees taking FMLA leave to pay their share of health plan premiums, although they cannot be required to pay more than what they would have paid if they had remained actively employed. An employer is not required to maintain an employee’s health insurance coverage for extended leaves of absence, but it is required to follow its written policies and to apply them consistently.

An employee may choose not to retain group health plan coverage while on FMLA leave or may stop paying premiums for his or her coverage. Unless an employer has an established policy with a longer grace period, the employer is not required to maintain health coverage for an employee on FMLA leave if the employee’s premium payment is more than 30 days late. Employers must notify employees on FMLA leave before health care coverage is dropped for lack of premium payments.

Generally, an employer must provide written notice to the employee at least 15 days before coverage is to cease. The notice must explain that the payment has not been received and that coverage will be dropped on a date that is at least 15 days after the date of the letter, unless payment is received by that date.

Alternatively, when an employee stops making premium payments while on FMLA leave, the employer may decide to maintain the employee’s coverage by paying both its share and the employee’s share of the premium. After the FMLA leave ends, the employer may recover from the employee the portion of the employee’s share of the premium that it paid, even if the employee does not return to work following leave.

Upon the employee’s return from FMLA leave, the employer must unconditionally restore the employee to the same coverage and benefits that he or she would have had if he or she had not taken leave and stopped paying premiums. The employee cannot be required to re-qualify or meet any other conditions prior to being reinstated to the group health plan.

Aside from certain small employers, as well as the federal government and church organizations, employers must allow employees to elect the COBRA continuation coverage if health insurance coverage is terminated due to a leave of absence from work. Generally, for losses of health insurance due to leaves of absence, former employees will be entitled to 18 months of continued COBRA coverage.



Sources: Broker Briefcase “FMLA – Maintaining Health Benefits”


Employee Benefits Question of the Week: 1095-C Form

QUESTION: I thought the individual mandate no longer applies, what is the purpose of 1095-C form? Will employees covered under an employer’s group health plan still receive the 1095-C?

ANSWER:    The IRS 1095-C form shows whether an employer offered an employee affordable health care coverage of minimum value during the past year. It also reports whether the employee and their family members actually had health coverage through the employer for each month of the past year.

The employer or health insurance company sends one copy of the 1095-C to the Internal Revenue Service (IRS) and one copy to the employees.  It is the responsibility of the plan sponsor to provide the 1095-C, so if your client is self-insured they are the responsible party, if they are fully insured, it is the responsibility of the health insurance company to provide the form.

The 1095-C should be received by March 2nd, 2020.  While not needed for federal tax purposes given the absence of a penalty for not having health insurance, some states require residents to have health insurance.  New Jersey, Massachusetts and Washington, D.C. required individuals to have health coverage in 2019. California, Vermont and Rhode Island will join them in 2020.

Source: https://www.irs.gov/affordable-care-act/individuals-and-families/affordable-care-act-what-to-expect-when-filing-your-tax-return

Employee Benefits Question of the Week: COBRA Extensions

QUESTION: Can COBRA be extended?

ANSWER:    Before answering the question, it’s best to explore how long qualified beneficiaries are entitled to COBRA.  Depending on the qualifying event (QE), the maximum coverage period can be anywhere between 18 and 36 months.

18 Months

Where a loss of coverage is a result of an employee’s termination of employment (other than by reason of gross misconduct) or reduction in hours, qualified beneficiaries are entitled to continue coverage for a maximum of 18 months.

36 Months

Where a loss of coverage is a result of any of the following, qualified beneficiaries are entitled to continue coverage for a maximum of 36 months:

  • Death of a covered employee;
  • Divorce or legal separation of a covered employee from the covered employee’s spouse;
  • A covered employee becoming entitled to Medicare benefits; and
  • A dependent child ceasing to be a dependent child under the terms of the health plan.

29 Months

Where a loss of coverage is a result of an employee’s termination of employment (other than by reason of gross misconduct) or a reduction in hours and a qualified beneficiary is determined by the Social Security Administration to be disabled before, at or within 60 days of the date of the qualifying event, all qualified beneficiaries within that family are entitled to COBRA for a maximum period of 29 months. To benefit from this extension, any qualified beneficiary within the family must notify the plan administrator as required by the reasonable procedures established by the plan administrator.


If the employee was enrolled in Medicare prior to his or her termination or reduction in hours (for example, retirement), the employee is entitled to 18 months of COBRA continuation coverage. Where the spouse or dependent is covered under the plan on the day before the employee’s termination or reduction in hours, the spouse and dependent are entitled to COBRA continuation coverage for the longer of:

  • 18 months from the date of the employee’s termination or reduction in hours; or
  • 36 months from the date the employee became enrolled in Medicare.

As outlined, the length of the maximum coverage period depends on the type of qualifying event that has occurred.  There are situations where the maximum coverage period can be extended or terminated early.

There are several ways that the standard maximum coverage period can be extended. The following chart provides a summary of the available methods.

Disability Extension Rule Extends 18-month period to 29 months for all related QBs
Multiple Qualifying Event Rule Extends 18-month coverage period to 36 months for spouse and children when a second qualifying event (such as divorce from or death of the covered employee or loss of dependent status) occurs during the initial 18-month coverage period
Medicare Entitlement Rule Extends 18-month period for spouses and children when the covered employee becomes entitled to Medicare within 18 months before the qualifying event

COBRA coverage usually terminates at the end of the maximum coverage period. It is important to keep track of each QB’s period of coverage to be able to tell when coverage should be terminated. In addition, coverage can be terminated early for the following reasons:

  • The QB fails to make timely premium payments;
  • The employer ceases to make any group health plan available to any employee;
  • The QB becomes covered under another group health plan;
  • A disabled QB is determined not to be disabled; or
  • For cause.

If coverage is to be terminated before the end of the maximum coverage period, notice to the QB is required.


Source:   Zywave’s “Top 10 COBRA Mistakes” and “COBRA Common Questions – Administration”  https://www.dol.gov/sites/dolgov/files/legacy-files/ebsa/about-ebsa/our-activities/resource-center/publications/an-employees-guide-to-health-benefits-under-cobra.pdf


Compliance: Annual Limitations on Cost Sharing

The ACA requires non-grandfathered plans to comply with an overall annual limit—or an out-of-pocket maximum—on essential health benefits.

For 2020, the out-of-pocket maximum is $8,150 for self-only coverage and $16,300 for family coverage.

Individual Mandate’s Affordability Exemption

Under the ACA, individuals who lack access to affordable minimum essential coverage (MEC) are exempt from the individual mandate penalty. Coverage is considered affordable for an employee if the required contribution for the lowest-cost, self-only coverage does not exceed 8.24% of his/her household income for MEC in 2020.

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Compliance: PCORI

The Patient-Centered Outcomes Research Institute (PCORI) fee was established as a part of the ACA to fund medical research. Insurers and employers with self-insured plans are subject to the fee. The last PCORI fee payment was expected to occur on July 31, 2019 (or July 31, 2020 for non-calendar year plans). The PCORI fee is now extended for another 10 years, which means employers with self-insured plans must continue paying the PCORI fee.

The Further Consolidated Appropriations Act, 2020, signed into law on December 20, has reauthorized those fees for the next ten years, meaning that insurers and employers will have to continue to pay this fee until 2029 or 2030, depending on their plan year. The amount due per life covered under a policy will continue to be adjusted annually.

For more information on how to calculate this fee, see the IRS website.  An update to the attached workbook will be provided once the adjusted amounts are announced.


Source: https://www.connerstrong.com/blog/insights-detail/cadillac-and-other-aca-taxes-repealed-pcori-extended/

Employee Benefits Question of the Week: Filing Form 1094 and 1095

QUESTION: Do employers still need to file Forms 1094 and 1095?

ANSWER:    Some employers are confused about whether ACA reporting is required in 2020 for health coverage in the 2019 calendar year. Here’s a reminder that the Affordable Care Act (ACA) is still law and employers must comply with its provisions, including filing forms 1094 and 1095.

The International Revenue Service (IRS) is enforcing the employer mandate by sending Letters 226-J to employers it believes owe a penalty. The determination of whether an applicable large employer (ALE) may be liable for an Employer Shared Responsibility Payment (ESRP) and the amount of the proposed ESRP in Letter 226-J are based on information from IRS Forms 1094-C and 1095-C filed by the ALE and the individual income tax returns filed by the ALE’s employees.

Employers are responsible for furnishing their employees with a Form 1095-C by Monday, March 2, 2020. Employers are responsible for filing copies of Form 1095-C with the IRS by Friday, February 28, 2020 if filing by paper or Tuesday, March 31, 2020 if filing electronically. Like previous years, IRS Notice 2019-63 extends good-faith transition relief from reporting penalties for incorrect or incomplete reporting for 2019 coverage.

While the federal individual mandate penalty is reduced to $0 in 2019, certain states, including New Jersey, Vermont and Massachusetts, have enacted individual mandates and have their own reporting rules.


Source: https://blog.ifebp.org/index.php/aca-reporting-1094-1095


Compliance: IRS Extends ACA Reporting Deadline and Issues Transition Relief

The IRS has not yet finalized the ACA reporting forms (i.e., the 1094-B/C and 1095-B/C) for the 2019 tax year, so it is no surprise that the IRS issued guidance last week extending the deadline to furnish the forms to employees and covered individuals (see Notice 2019-63). In addition to extending the deadline to furnish the forms, the IRS also issued transition relief for “B Form” filers that would waive penalties for failure to furnish the B Forms if certain conditions are met.

First, the coverage provider must post a notice on its website stating that an individual’s B Form is available and can be requested at any time. This notice must include an email address and physical address where the request can be sent and a phone number where individuals can get additional information. Second, the coverage provider must provide any requested form within 30 days of the request.

Importantly, the transition relief applies only the requirement to furnish the forms to covered individuals. The B Forms still must be submitted to the IRS by the deadline noted below.

  Old Deadline New Deadline
Deadline to Distribute Forms to Employees and Covered Individuals Jan. 31, 2020 March 2, 2020
Deadline to File with the IRS (Paper) Feb. 28, 2020 No Change
Deadline to File with the IRS (Electronic) March 31, 2020 No Change


Source: https://www.erisapracticecenter.com/2019/12/irs-extends-aca-reporting-deadline-and-issues-transition-relief/

Employee Benefits Question of the Week: Medical Opt-Out Payments

QUESTION: What is a medical opt-out payment?

ANSWER:   Many employers offer employees the option to use the employer’s cafeteria plan to opt-out of group health plan coverage and receive taxable cash payments. It is important that employers consider the possible ramifications such opt-out payments may have on employees and their benefits.


Most opt-out payments are significantly less than the amount the employer saves. Typically, opt-out payments are spread out over the plan year, and are not paid in a lump sum, which allows the employer to reduce its risk of loss in the event an employee terminates employment or experiences a HIPAA special enrollment event.


Opt-out payments are taxable to the employee. The cash payments must be included in gross income on the employee’s Form W-2 and are subject to federal income tax withholding. These payments are also generally subject to federal employment tax withholding (FICA and FUTA). Because opt-out payments give employees a choice between health care coverage and taxable compensation, they must be offered through a cafeteria plan under Section 125 of the Internal Revenue Code.

ACA Affordability Calculation Impact

To avoid potential penalties under the shared responsibility rules, ALEs must offer affordable, minimum value health coverage to substantially all full-time employees. In general, the affordability of an employer’s offer of health coverage depends on whether the employee’s required contribution for self-only coverage exceeds a certain percentage of the employee’s household income.

The IRS’ guidance groups medical opt-out arrangements into two general categories:

  • Unconditional medical opt-out payments –opt-out payments are conditioned solely on an employee declining coverage under an employer’s health plan and not on an employee providing proof of other coverage. According to Notice 2015-87, it is generally appropriate to treat unconditional opt-out payments as increasing an employee’s contribution for health coverage beyond the amount of the employee’s salary reduction contribution.

For example, an employee whose required self-only contribution for health coverage is $200 per month, but who is eligible for a cash payment of $100 per month if coverage is waived would be treated as having a required contribution of $300 per month when determining if the coverage is affordable. Until the proposed regulations are finalized, this guidance applies to unconditional opt-out arrangements that are adopted after Dec. 16, 2015.

  • Conditional medical opt-out payments – An arrangement where the opt-out payments are conditioned on an employee declining coverage under an employer’s health plan and providing proof of other coverage. An eligible opt-out arrangement is one where the opt-out payments are available only to employees who decline employer-sponsored coverage and provide reasonable evidence that they and their expected tax dependents have or will have minimum essential coverage other than individual market coverage during the plan year. Payments under conditional opt-out arrangements will not be treated as increasing an employee’s required contribution until the proposed regulations are finalized.

Other Legal

  • Offering opt-out incentives only (or primarily) to employees who have a history of high health claims may violate nondiscrimination rules under the Health Insurance Portability and Accountability Act (HIPAA).
  • Opt-out incentives may violate the Medicare Secondary Payer rules for employers with Medicare-eligible employees (or employees who are married to Medicare-eligible persons).
  • consider how opt-out incentives may impact the calculation of overtime payments under the Fair Labor Standards Act (FLSA). The opt-out incentives may need to be factored into employees’ regular pay when calculating overtime payments, depending on the facts of the specific opt-out incentive arrangement.


Source: Zywave search “Medical Opt-out Payments”

Employee Benefits Question of the Week: The “Cadillac” Tax

QUESTION: What is the status of the “Cadillac” tax?

ANSWER:   When the Affordable Care Act (ACA) went into effect in 2010, it included the High-Cost Plan Tax (HCPT), commonly referred to as the “Cadillac” Tax. The Cadillac Tax has twice been delayed and is currently scheduled to take effect on January 1, 2022.

The tax is a 40% tax based on the value of health benefits in excess of a predetermined threshold, originally set at $10,200 for single coverage and $27,500 for family coverage (but amounts will increase by 2022 due to inflation). The Cadillac tax applies to employer and employee contributions to premiums, and contributions to health savings accounts, health reimbursement arrangements, and flexible spending accounts.

The Kaiser Family Foundation estimates that in 2022, 21% of employers offering health benefits will have at least one plan whose premium and account contributions would exceed the threshold.

The implementation of the 2022 date remains in discussion. On July 17, 2019, the Middle Class Health Benefits Tax Repeal Act of 2019 (HR 748) passed the House, although no further action is scheduled. You should continue to monitor any legislative action as the tax may continue to be delayed or even repealed altogether.


Source: IFEBP