Q&A Cafeteria Plans

October 28, 2008

Which individuals cannot participate in a cafeteria plan?

Self-employed individuals, partners in a partnership and more than 2% shareholders in an S corporation cannot participate in a cafeteria plan as provided in Proposed Treasury Regulations Sections 1.125-1(g)(2)(i) and (g)(2)(ii).

In what situations can a participant changes his or her election under a Health FSA during a plan year?

Treasury Regulations Section 1.125-4 provides that there are only six situations in which participants may be allowed to change his or her election during the plan year under a Health FSA. These include:

  • Change in Status,
  • FMLA,
  • Medicare,
  • QMCSO.
  • HIPAA Special enrollment situations, and
  • COBRA.

Can an employer use a last check to reimburse unpaid amounts during a Plan Year after an employee terminates employment under a Health Flexible Spending Accounts (Health FSA)?

No, an employer may only withdraw those amounts that the employee has elected. This is provided In IRS information Letter-, dated July 9, 1998.

Are Health Flexible Spending Accounts (“Health FSAs”) subject to the privacy requirements of Health Insurance Portability and Accountability Act of 1996 (HIPAA)?

Yes, Health FSAs must comply  as provided in HHS Frequently Asked Questions (“Is a flexible spending account or a cafeteria plan a covered entity?”), available at http://healthprivacy.answers.hhs.gov

There are exceptions for those Health FSA Plans that have under 50 participants and are self-administered. As provided in Social Security Act Section 1171(5)(A).  Health FSA Plans must comply separately from insured health Plans.

Before a participant can be reimbursed for an expense under a Health FSA, must the participant pay for the expense?

No. It is only required that the participant incurred the expense to be reimbursed as provided under Proposed Treasury. Regulations Section 1.125-6(b)(4).  There is no requirement that a plan participant actually pay for a service before reimbursement can be made under a health FSA. Requiring payment as a condition to reimbursement may violate the monthly reimbursement requirement

Must a participant in a Health Flexible Spending Accounts (Health FSA) be offered Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) upon termination of employment during the year?

Yes. A Health FSA that is subject to COBRA must offer COBRA continuation rights to qualified beneficiaries who lose health FSA coverage as a result of qualifying events, and must provide COBRA notices, including the initial COBRA notice. However, if the health FSA meets certain conditions prescribed in the Treasury Regulations Section 54.4980B-2, Q/A-8(b), the obligation to offer COBRA is limited.

This limited COBRA obligation can be summarized as follows:

  • first, COBRA does not need to be offered to qualified beneficiaries who have overspent their accounts as of the date of the qualifying event; and
  • second, for those who have underspent their accounts, COBRA must be offered but can be cut off at the end of the year in which the qualifying event occurs

Q&A Health Savings Accounts (HSAs)

October 28, 2008

An individual is covered by an HDHP for 2008. He also covers his dependent children under his HDHP. His wife also covers the dependent children under her health plan that is not HDHP, but not the husband. Is husband eligible to contribute at the higher family coverage level if his dependents are covered by a health plan that is not an HDHP?

Yes.  Under IRS Notice 2008-59, as long as the eligible individual is not covered by his or her spouse’s health plan that is not a high deductible health plan, that individual would be eligible to make HSA contributions. Since the dependents are not eligible to make HSA contribution, it does not matter if any dependent is covered by a health plan that is not a HDHP. If an employee has family coverage, the dependents can be covered by another Plan that is not a high deductible.

When an employer sponsors an HSAS program, what responsibilities to the employees have under the program?

When an employer sponsors in an HSA program, the responsibility for administering the account is transferred to the employee. It is the employee who decides:

  • Whether he or she is eligible to make contributions to an HSA;
  • The amount of the eligible contribution to the HSA for any calendar year;
  • The withdrawal of any excess contributions;
  • How funds in his or her HSA will be spent; and
  • Whether the distributions are taxable or nontaxable.

Once can employee makes contributions are made an HSA, can an employer ever forfeit them?

No. Once HSA contributions are made to the HSA trust or custodial account, Code Section 223(d)(1)(E) provides that the eligible individual’s HSA balance is nonforfeitable at all times.  This means that once contributions are made, the eligible individual‘s HSA trust or custodial account cannot be subject to a vesting schedule or returned to the employer once the employee terminates employment.

If an employee’s spouse participates in a “general purpose” Health Flexible Spending Account (Health FSA) during the year and the spouse can be reimbursed for the employee’s expenses, will that right make the employee ineligible to participate in a HSA?

Yes, even if the spouse never submits a claim for reimbursement the employee’s expenses under the Health FSA. Under Revenue Ruling 2004-45, and IRS Notice 2005-86, a general purposes Health FSA is not considered a High Deductible Health Plan and therefore would make any participating or receiving reimbursements ineligible to participating in an HSA.

If an employer adopts a High Deductible Health Plan (HDHP) during the year, may an employee elect to terminate participation in a Health Flexible Spending Account  (Health FSA)?

No, a change in cost or coverage is not an allowable reason to change an election during the year for Health FSAs, as provided in Treasury Regulations Section 1.125-4.

Can an employee participate in a Health Flexible Spending Account (Health FSA) or a Health Reimbursement Arrangement (HRA) the same month and still be eligible?

In Revenue Ruling 2004-45, the IRS provides that an employee cannot participate in both a health FSA, HRA and HSA in the same month, unless the employee’s situation is one of the following:

  • The employee’s expenses reimbursed under a Health FSA and/or an HRA are limited to dental, vision and/or preventive care benefits (“Limited Purpose Health FSA or HRA”).
  • If an employee suspends participation in an HRA for the year (“Suspended HRA”).
  • Health FSA or HRA pays expenses above the deductible of the HDHP (“Post-Deductible Health FSA or HRA”).
  • HRA pays or reimburses the employee’s expenses incurred after the employee retires (“Retirement HRA”).

Can an employer place any restrictions on their employee’s ability to take distributions from his or her HSA?

No. An employer or an HSA trustee or custodian cannot place any restrictions on withdrawals.  Under IRS Notice 2004-50, Q/A-79, an HSA trustee or custodian can place reasonable restrictions on both frequency and the minimum amount from an HSA.  A trustee or custodian can prohibit distributions for amounts of less than $50 or only allow a certain number of distributions per month.

Under IRS Notice 2004-50, Q/A-79, an HSA trust or custodial agreement cannot restrict the account holder’s ability to rollover or transfer an amount from that HSA.

HSA trustees or custodians or employers are not permitted to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs must make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.

Must an individual participate in a High Deductible Health Plan (HDHP) for the entire calendar year to contribute the full amount to his or her HSA?

No. Under Code § 223(b)(8), if an individual is covered by a High Deductible Health Plan on December 1 of any calendar year, he or she may deduct the full contribution amount  for the HSA for the calendar year if he or she remains covered under an HDHP for the “testing period.”

The “testing period “is the period beginning with the last month of the taxable year and ending on the last day of 12th month following such month.

An employer sponsors an HSA program for its employees and requires employees to establish their HSAs at a particular financial institution.  Once contributions are made to the HSA, the employee directs contributions to be transferred to another institution.  Can an employer limit the employees’ ability to transfer?

No, once contributions are made to an employee’s HSA, they are owned by the employee and he or she has complete freedom to transfer funds, as provided in IRS Notice 2004-50.

May participants transfer their Health Flexible Spending Account (Health FSA) or Health Reimbursement Arrangement (HRA) balances to an HSA?

Yes, an individual must meet the following requirements, as provided in Code Section 106(e); and IRS Notice 2007-22:

  • The employer amends the plan effective by the last day of the plan year to allow such transfers;
  • No transfer has not previously been made for that employee with respect to that Health FSA or HRA;
  • The employee has High Deductible Health Plan (HDHP) coverage as of the first day of the month during with the transfer occurs, and is otherwise an eligible individual;
  • The employee elects by the last day of the plan year to have the employer make the transfer;
  • The Health FSA or HRA makes no reimbursements to the employee after the last day of the plan year;
  • The employer makes the transfer directly to the HSA trustee or custodian by the fifteenth day of the third calendar month following the end of the plan year, but after the employee becomes HSA eligible;
  • The transfer does not exceed the lesser of the balance of the Health FSA or HRA on September 21, 2006 or the balance on the date of the distribution; and
  • Either after the transfer there is a zero balance in the Health FSA or HRA and the employee is no longer a participant in any non-HSA compatible health plan, or on or before the first day of the transfer, the general purpose Health FSA or HRA is converted to a limited purposed Health FSA or HRA for all participants

Can an individual transfer his or her IRA balances to a HSA?

Yes, but an individual must meet the following requirements, as provided in Code Section 408(d)(9):

  • An individual may make a one-time contribution to a HSA of an amount distributed from his or her IRA during his lifetime;
  • The contribution must be made in a direct trustee-to trustee transfer;
  • The maximum amount that can be contributed to an HSA as a qualified HSA funding distribution is the maximum deductible contribution to the HSA computed on the basis of the type of coverage under the HDHP;
  • The individual must be covered by an HDHP during a testing period. The testing period begins with the month in which the transfer is made to the HSA and ends on the last day of the 12th month following such month.

Who has to correct the HSA if either the employer or the employee over contributes to the employee’s HSA?

It is the employee’s responsibility.

What the advantages of participating in HSAs?

Every month, new studies indicate that more and more employers are adopting high deductible health plans (HDHP) with Health Savings Accounts (HSAs). This adoption brings many advantages to both the employer and employee. These advantages include:

  • Lowering of health care premiums under the HDHP for coverage for employees;
  • Lowering the employer’s administrative costs;
  • Providing employees an opportunity to contribute for future health care expenses under the HSA for him or herself and his or her dependents;
  • Providing any employee who contributes to an HSA with a tax deduction and/or an income tax and payroll tax free contribution;
  • No monies in employees’ HSAs can ever be forfeited back to the employer, even if contributions are deemed in excess;
  • Providing an employer with an opportunity to contribute to eligible employees at any time and at any amount up to statutory limits;
  • Giving employees immediate access to their HSAs for any reason;
  • Providing for tax free distributions at any time for health care expenses incurred after the HSA has be established if the expense was neither reimbursed from any other source or deducted by the employee;
  • Providing for reimbursement of health care expenses for his or her spouse after the employee’s death, provided the spouse is named as the beneficiary under the HSA;
  • Providing either a trust or custodial account that accumulates earnings on a tax free basis;
  • Getting the employer out of the business of substantiating health care claims;
  • Avoiding the requirements of ERISA (and COBRA and HIPAA) if the employer does not make participation in the HSA mandatory; and
  • Giving the employees who participate in an HSA complete portability in transferring their accounts at any time.

Q&A Medicare

October 28, 2008


Can an employer in any way encourage active employees to elect out of employer sponsored health coverage when they are eligible for Medicare?

No. The Medicare Secondary Payer statute (42 U.S.C. Section 1395y(b)(3)(C)) prohibits a group health plan from “taking into account” the Medicare entitlement of an active employees or family members if such employees are still considered in “current employment status.”

Employers are prohibited from discouraging employees from enrolling in their group health plan or from offering “financial or other incentive for an individual entitled to Medicare” not to enroll (or to terminate enrollment) under” a group health plan that would otherwise be a primary plan.

The above prohibition does not apply to employers with less than 20 employees for each working day in at least 20 weeks in either the current or the preceding calendar year, as provided in 42 U.S.C. Section 1395y(b)(1)(A)(ii).

This test must be run at the time the individual receives the services for which Medicare benefits are claimed.

Can an employee elect out of employer coverage on their own and elect Medicare?

There is nothing preventing an employee electing out of employer coverage on his or her on his or her own.

If an employee continues to be covered under an employer provided health coverage, will he or she be penalized when he or she decides to elect Medicare?

No. It is extremely important that an employee enrolls in Medicare during his or her initial enrollment period.  If an employee does not, he or she will be subject to late charges or a premium surcharge. The Part B premium goes up 10 percent for each 12-month period the employee was eligible but does not enroll. The increase in the Part A premium (if the employee has to pay a premium) is 10 percent no matter how late the employee enrolls. The employee may enroll in Part B or premium Part A at any time he or she is covered under another group health plan. However, the employee may also choose to wait and enroll during a special eight-month period. This special period would start with the month the employee or his or her spouse stops working or when he or she is no longer covered by the employer plan, whichever comes first.

Will enrolling in Medicare preserve an employee’s special enrollment rights under Medicare?

No. COBRA coverage is not considered a group health plan based upon current employment under 42 CFR Sections 411.104, 411.175(a)(5), and 411.206(a)(5

Individuals who, in order to retain their COBRA coverage, do not enroll in Medicare when first eligible will not have special enrollment rights under Medicare and may expect to pay more for Medicare when COBRA coverage ends

When is an individual no longer eligible to contribute to a Health Savings Account (HSA)?

Code Section 223(b)(7) reads as follows: “Medicare eligible individuals. The [contribution limit] under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter.

An individual can become entitled to Medicare benefits (under Title XVIII of the Social Security Act) for three reasons: age, disability, or end-stage renal disease (ESRD).

Entitlement to Medicare Part A is automatic for some individuals (i.e., a separate application is not required) because they have already applied for and are receiving Social Security or Railroad Retirement Act benefits.

Other individuals must file an application in order to become entitled to Part A benefits.

Can an HSA be used to reimburse an individual for Medicare premiums?

Yes Under  Code Section  223(d)(2)(C) and IRS Notice 2004-2, Deductible health insurance premiums (other than for a Medicare supplemental policy) for an account holder who is age 65 or older can be paid or reimbursed through an HSA on a tax-free basis, including medical premiums for an employer’s insured or self-insured retiree health coverage

When premiums for Medicare Part A (hospital and inpatient services), Part B (physician and outpatient services), Part C (Medicare HMO and PPO plans), or Part D (prescription drugs) are deducted from Social Security benefit payments received by an account holder who is age 65 or older, he or she can take a tax-free HSA distribution equal to the Medicare premium deduction.

HSAs generally cannot be used by retired account holders for their health insurance premiums prior to age 65-with the exception of COBRA coverage (or premiums paid while receiving unemployment.

Q&A Health Insurance Portability and Accountability Act of 1996 (HIPAA)

October 28, 2008

May employer charge an employee more of a premium if he or she uses its health plan more than other employees?

No.  A health plan is not allowed to establish eligibility rules that discriminate on the basis of a health factor as provided in  Treasury Regulations  Section  54.9802-1(b)(1)(i), Labor Regulations Section  2590.702(b)(1)(i)and  Health and Human Services Regulations Section  146.121(b)(1)(i).

Under Code Section 9802(a)(1), ERISA Section 702(a)(1), and PHSA Section 2702(a)(1), the following factors are considered health factors:

  • health status;
  • medical condition (including both physical and mental illnesses);
  • claims experience;
  • receipt of health care;
  • medical history;
  • genetic information;
  • evidence of insurability (EOI) (including conditions arising out of acts of domestic violence); and
  • disability.

Under what situations may an employer offer a discount or impose a surcharge on premiums to employees?

Under Treasury Regulations Section 54.9802-1(f)(2), Labor Regulations Section  2590.702(f)(2) and Health and Human Services Regulations Section  146.121(f)(2), wellness programs that condition eligibility for a reward upon a participant’s ability to meet a standard that is related to a health factor are permissible only if they meet satisfy each of the following five requirements:

  • reward must be no more than 20% of the cost of coverage,
  • The program must be designed to promote health or prevent disease,
  • The program must give individuals an opportunity to qualify for the reward at least once a year,
  • The reward must be available to all similarly situated individuals, and
  • The plan must disclose that alternative standards (or waiver) are available

Can an employer offer any other wellness programs to employees?

Under Treasury Regulations Section 54.9802-1(f)(1), Labor Regulations Section 2590.702(f)(1), Health and Human Services Regulations Section 146.121(f)(1)., Wellness programs that do not condition eligibility for a reward upon a participant’s ability to meet a health standard (which we refer to as “participation-only programs”) are permissible if participation in the programs is available to all similarly situated individuals.

Examples of such programs include:

  • incentives to participate in a health fair or testing (regardless of outcome),
  • waiver of co-payment/deductible for well-baby visits,
  • reimbursement of health club membership,
  • reimbursements for smoking cessation programs (regardless of outcome), and
  • a program that rewards employees for attending a monthly health education seminar.

Are any wellness benefits offered to employees taxable?

Yes, if the benefit does not qualify either as an “eligible medical expense” under Code Section 213(d) or a “fringe benefit” under Code Section 132.

Q&A Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

October 28, 2008

Who is a qualified beneficiary under COBRA?

Under ERISA Section 607(3); Code Section 4980B(g)(1), PHSA Section  2208(3), and Treasury Regulations Section 54.4980B-3, Q/A-1(a)(1), a qualified beneficiary is an employees, spouse and dependent children, covered on the day before the qualifying event. It can include a child born or adopted by a covered employee during COBRA. A spouse added by a COBRA beneficiary during COBRA is not a qualified beneficiary. Former dependent is a qualified beneficiary and may add children during COBRA.

Can a qualified beneficiary change coverage elections during COBRA?

Yes, during annual enrollment, a qualified beneficiary must be given the same coverage choices as active employees, as provided in Treasury Regulations Section 54.4980B-5, Q/A-4(b).

Can a qualified beneficiary add benefit coverages during open enrollment?

Yes, a qualified beneficiary must be given the same options as active employees, as provided in Treas. Reg. § 54.4980B-5, Q/A-4(c).

When a qualified beneficiary elects COBRA coverage, must he or she be given a separate election for each benefit offered or one election for all benefits?

Under Treasury Regulations Section 54.4980B-2, Q/A-6, it depends. If an employer offers medical, dental, and vision under separate plans, the employer cannot offer the qualified beneficiary three separate elections

If the employers offers all benefits under one plan, the employer is only required to offer one election for all benefits.

When does an individual’s entitlement to Medicare terminate COBRA coverage?

If a qualified beneficiary’s Medicare entitlement occurs after COBRA coverage is elected, then the qualified beneficiary’s COBRA coverage can be terminated even though Medicare does not provide a benefit package as generous as the COBRA coverage, as provided in Treas. Reg. § 54.4980B-7, Q/A-3(a).

What is the effect on COBRA coverage if a covered employee becomes entitled to Medicare before the qualifying event?

When a covered employee’s qualifying event (i.e. a termination of employment or reduction of hours) occurs within the 18-month period after the employee becomes entitled to Medicare, the employee’s spouse and dependent children (but not the employee) become entitled to COBRA coverage for a maximum period that ends 36 months after the covered employee becomes entitled to Medicare, as provided in ERISA Section 602(2)(A)(v); Code Section 4980B(f)(2)(B)(i)(V); PHSA  Section 2202(2)(A)(iv) and Treasury  Regulations Section  54.4980B-7, Q/A-4(d)(1).

Does an employer still have to offer COBRA coverage to a qualified beneficiary if he or she becomes entitled to Medicare before the qualifying event?

Yes. When a qualified beneficiary is entitled to Medicare prior to electing COBRA coverage, he or she still receives COBRA coverage.  Because of the Medicare Secondary Payer Rules, the COBRA offer cannot be withheld because of Medicare entitlement.

One of my employees dropped his spouse from health coverage during annual enrollment and then files for divorce a few months later.  Does the employer have to offer the spouse COBRA coverage?

Yes.  Under Treasury Regulations Section 54.4980B-4, Q/A-1(c) and Revenue Ruling. 2002-88. a spouse is entitled to elect COBRA only if:

  • The divorce actually occurred and
  • The employee eliminated or reduced the spouse’s coverage “in anticipation” of the divorce.

When an employee retires and is offered retiree coverage by the employer, should an employer also provide such former employee with an election for COBRA coverage?

Yes. If a retiree is provided a COBRA Notice when electing retiree coverage and elects retiree coverage, such election cuts off any right to COBRA in the future, as provided under Treasury Regulations Section 54.4980B-4, Q/A-1(c).

In a situation where a married couple separately elect COBRA, does the employer charge each of them the single premium or does the family premium apply?

Under Revenue Ruling 96-8, the employer will comply with COBRA continuation coverage requirements by requiring the couple to jointly pay 102 percent of the family rate.

Q&A Health Reimbursement Arrangements (HRAs)

October 28, 2008

Which individuals cannot participate tax free in an HRA?

Self-employed individuals, partners in a partnership and more than 2% shareholders in an S Corporations cannot participate in HRAs tax free as provided in IRS Notice 2002-45.

What items can be reimbursed under an HRA?

An employer can reimburse any designated medical expenses as provided in Code Section 213(s) and premiums for accident or health coverage for current employees, retirees, and COBRA qualified beneficiaries, as provided in IRS Notice 2002-45.

Can an employer vary the amount it contributes for retiree medical benefits under an HRA depending on an employee’s age and service?

Yes.  It is not a violation of the nondiscrimination rules under Code Section 105(h) as provided under Treasury Regulations Section 1.105-11.

Is there any nondiscrimination requirements that an employer must met when sponsoring an HRA?

Yes. HRAs are subject to the nondiscrimination requirements described in Code Section 105(h). HRAs are considered nondiscriminatory only if they do not favor highly compensated individuals with regard to eligibility to participate or the type of benefits provided.

Under Code Section 105(h)(3), an HRA is discriminatory for eligibility unless it benefits:

  • 70 percent or more of all employees;
  • 80 percent of employees eligible to benefit, as long as 70 percent or more employees are eligible to benefit under the plan; or
  • a nondiscriminatory classification of employees.

HRAs are discriminatory for benefits under Code Section 105(h)(4) if the type and amount of benefits available to highly compensated individuals are not also available on the same basis to other participants. The comparison is based on benefits subject to reimbursement, rather than actual benefit payments or reimbursements under the plan, and on dollar amounts, rather than percentages of pay.

For purposes of these tests, highly compensated individuals are defined in Code Section 105(h)(5) as those who are:

  • among the five highest-paid officers of the employer,
  • shareholders who own more than 10 percent in value of the employer’s stock, or
  • the highest paid 25 percent of all employees.

Under Code Section 105(h)(1), excess reimbursements by highly compensated individuals in discriminatory plans are treated as taxable benefits.

Q&A Employee Retirement Income Security Act of 1974 (ERISA)

October 28, 2008

Is there a small employer exception for complying with ERISA?

No, virtually every private-sector employer is subject to ERISA  – there is no size exemption  This includes corporations, partnerships, and sole proprietorships   Remember, non-profit organizations are covered as well  However, the plans of governmental employers and of churches are exempt from the application of ERISA Title I.

What are the consequences if an employer if it does not have a plan document for its health and welfare benefits?

It could include:

  • Increase the number of Form 5500 filings,
  • Require courts determine plan terms for employees,
  • Force letters & company communications could become plan terms to determine benefits,
  • Make fiduciaries liable for benefit breaches,

Are there any exceptions from any health and welfare benefit being considered an ERISA benefit?

Yes. There is a safe harbor under DOL Reg. § 2510.3-1(j) for certain voluntary employee-pay-all” benefits. To qualify for this exemption from ERISA, an employer allows an insurance company to sell voluntary policies to interested employees who pay the full cost of the coverage. The Employer must then permit employees to pay their premiums through payroll deductions and permits the employer to forward the deductions to the insurer   However, the employer may not make any contribution toward coverage and the insurer may not pay the employer for being allowed into the workplace. The employer may not “endorse” the program – This element is the key element in treating the program as an ERISA benefit.

What makes up an endorsement?

  • Selecting insurers
  • Negotiating terms or design
  • Linking plan coverage to employee status
  • Using employer’s name
  • Recommending plan to employees
  • Doing more than permitted payroll deduction

Is there a small plan exemption for providing Summary Plan Descriptions to employees?

No, almost every private sector employee benefit plan must comply, as provided in DOL Reg. § 2520.104-20(c).

Can insurance contracts or polices serve as a Summary Plan Description for an employer’s benefit programs?

No. Insurance contracts or policies cannot serve as a Summary Plan Description because they are:

  • missing many important provisions – These can include:
  • Employer right to terminate or amend provisions,
  • What state law applies in case of benefit disputes,
  • Any important employer limitations on eligibility for employees,
  • Any detailed procedures for Qualified Medical Child Support Orders and
  • Provisions for other state and federal mandates.
  • not written in understandable language that employees can understand.

Can corporate officers or board directors be held liable for losses under an ERISA health welfare Plan?

Yes if any individual is determined to be “functional fiduciary” under ERISA Section 3(21). A person is a “fiduciary” with respect to an employee benefit plan to the extent that the person:

  • exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of plan assets;
  • renders investment advice for a fee or for any other compensation, direct or indirect, or has any authority or any responsibility to do so; or
  • has discretionary authority or discretionary responsibility in the administration of the plan.

Under ERISA Section 409, any person who is a fiduciary with respect to a plan is liable for breach of fiduciary duty.  Liability includes:

  • personal liability for losses caused to the plan;
  • personal liability to restore to the plan any profits that the fiduciary made through the use of plan assets; and
  • other equitable or remedial relief, as a court may deem appropriate, including removal of the fiduciary.


October 2, 2008


On September 29, 2008, the Internal Revenue Service (IRS) released Notice 2008-82 which provides guidance on new Internal Revenue Code Section 125(h).  This new section provides a special rule allowing distributions of unused amounts in a Health Flexible Spending Account (Health FSA) to reservists ordered or called to active duty.  It applies to distributions made on or after June 18 2008. These distributions are called Qualified Reservists Distributions or QRDs The following is an overview of the guidance.

When will a distribution from a Health FSA be considered a Qualified Reservist Distribution?

Any distribution from a Health FSA will be considered a Qualified Reservist Distribution if it is made to an individual who is a member of a reservist group ordered or called to active duty for a period of 180 or more days provided the individual’s request for a distribution is made during a period beginning with the order and ending on the last day of the plan year ( or grace period, if applicable).

Does an employer have to amend its cafeteria plan to provide for QRDs?

No. The provision is optional.

Before a QRD is made, must a cafeteria plan be amended?

Yes. A QRD cannot be made until the cafeteria plan is amended.    Once the plan is amended, it only applies on a prospective basis.   Despite this general rule, the IRS provides a transition rule for QRDs made before January 1, 2010.  Under this transition rule, a cafeteria plan may be amended retroactively to permit QRDs requested on or before December 31, 2009, provided all of the other requirements are met.  However, this transition rule does not allow an employee to request a QRD with respect to a plan year after the plan year (or the grace period, if applicable) during which the order or call to active duty occurred.

Which employees may receive QRDs?

Any individual who is ordered or called to active duty because he or she is a member of a reservist unit for a period of at 180 or more days may request a QRD.  Any individual called to active duty before June 18, 2008 and whose period of active duty continues after June 18, 2008 may request a QRD if the period of active duty meets the duration requirements.  The right to receive a QRD only applies to the employee who is called to active duty.  It does not apply if any other family member is called to active duty.

Before the employer makes the QRD, must it receive a copy of the order?

Yes. The employer must receive a copy of the order or call to order before any amounts are distributed.  The employer may rely on the order to determine the period that the employee has been ordered or called to active duty.  The employee is eligible for a QRD if the order specifies a period of 180 or more days.  It does not matter if the actual period of active duty is less or otherwise changed.

An employee will be eligible for a QRD of the original order or call is less than 180 days and subsequent calls or orders increase the total period of active duty to 180 or more days.

What amount can be distributed to the employee under the QRD?

The cafeteria plan may provide that the amount available as a QRD will be:

1.   The entire amount elected for the Health FSA for the plan year minus any Health FSA reimbursements received as of the date of the request;

2.   The amount contributed to the Health FSA as of the date of the request minus any Health FSA reimbursements received as of the date of the request;  or

3.   Some other amount (not exceeding the entire amount elected for the Health FSA for the plan year minus any reimbursements.

If the cafeteria plan document does not indicate how the amount will be determined, then the amount available will the amount contributed to the Health FSA as of the date of the request minus any Health FSA reimbursements received as of the date of the request.

The request only applies to an employee’s Health FSA balance in existence on or after June 18, 2008.  Any amounts forfeited on or before June 18, 2008 attributable to a prior plan year or attributable to non-Health FSAs cannot be considered in determining the amount.

In order to submit a request for a QRD, may an employer specify procedures to be followed before an QRD is granted?

Yes.  A cafeteria plan may specify a process for employees to request QRDs.  It may specify how many requests may be made by an employee during the same plan year.  Additionally, a plan may also permit an employee to submit and be reimbursed for medical expense claims incurred before the request was submitted.  For those expenses incurred after the request is made, the plan may either permit employees to continue to submit claims before end of the plan year or the grace period, if applicable; or terminate an employee’s right to submit claims.

When must an employee request a QRD?

An employee may request an QRD on or after the date of the order or call to active duty and before the last day of the plan year (or a grace period, if applicable) during which the order or call to active duty occurred.

When must the employer pay the QRD to the employee?

An employer must pay the QRD to the employee within a reasonable time, but not more than 60 days after the request for a QRD is made.  AQRD may not be made with respect to a plan year ending before the order or call of active duty.

How are the cafeteria plan nondiscrimination rules applied to QRDs?

QRDS must be uniformly available to all plan participants, The QRD amounts are disregarded for purpose of the cafeteria plan nondiscrimination rules.

How are QRDs taxed?

QRDs are included in the employee’s gross income and are subject to employment taxes.  The employer must report the QRD as wages on the employees Form W-2 for the year that the distribution was made to the employee.

Illinois Extends Dependent Coverage for Group Health Insurance

October 2, 2008

On September 12, 2008, the Illinois House and Senate accepted Governor Rod Blagojevich’s amendatory veto of House Bill 5285 which will create the new dependent coverage provisions for health plans, (Public Act 095-0958).  It amends the Illinois Insurance Code by adding new Sections 356z.11 and 356z.12.  The following is a review of the new provisions.

What is the change?

Group or individual health insurance policies will be permitted to cover unmarried dependents until they reach age 26, regardless of student status and to age 30 for dependents who are veterans and have not been dishonorably discharged.

When is this change effective?

This change applies to any policies amended, delivered, issued or renewed after June 1, 2009. Families must be provided a 90 day period after their policy is renewed, to add the dependent to an existing policy.  Each year thereafter, parents will be able to enroll dependent during the normal open enrollment period.  For calendar year plans, the change is not effective until January 1, 2010.

An employer may deny coverage for any dependent who has been without creditable coverage for more than 63 days.  Remember, if a dependent does not this gap in creditable coverage, an employer may not be able to impose preexisting condition provisions on the individual.

Will employers be required to provide this new coverage?

Yes, if the employer provides dependent coverage to its workforce, the employer will be required to provide the coverage specified under the new law.

Is an employer required to pay for dependent’s coverage?


Which employer health plans can avoid making this change?

Employers whose health benefits are either self-insured or provided under a health insurance policy not written in the state of Illinois will not have to make the change.

Can the premium for this dependent health coverage be paid by an employee under cafeteria plan on a nontaxable basis?

Yes. If the individual qualifies as a dependent under Internal Revenue Code (Code) Section 105(b). the dependent health coverage may be paid under the a cafeteria plan on a nontaxable basis. To be to a dependent under Code Section 105(b), an individual must meet most, but not all of the requirements for a “qualifying child” or a “qualifying relative” under Code Section 152. Someone who cannot meet the requirements to be a qualifying child because he or she fails the age test (he  or she is not under 19, under 24 and a full-time student, or permanently and totally disabled) can still qualify as a qualifying relative if the parents provide more than half of his or her support.

Can an employee receive a reimbursement for an eligible medical expense under an employer’s Health Flexible Spending Account (Health FSA) if the dependent does not qualify as a qualifying child?

Yes.  For employer’s Health FSA to reimburse an employee for the expenses of a dependent who does not qualify as a qualifying child, that dependent must meet the requirements for being a qualifying relative.  If he or she does not, the Health FSA cannot reimburse the expense because it would be taxable.