SEMINARS

Q&A Health Reimbursement Arrangements (HRAs)

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)

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.

IRS RELEASES NOTICE 2008-82
GUIDANCE ON QUALIFIED RESERVIST DISTRIBUTIONS

Introduction

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

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?

No

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.

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

Yes. There is a safe harbor under Labor Regulations Section 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. Additionally, the employer may not “endorse” the program – this element deciding is the key element in deciding whether the program is treated as an ERISA benefit.

What makes up an endorsement?

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

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