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Very small HRA for governmental employer


Belgarath
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Any bright ideas on this one? A very small governmental employer (app. 7 or 8 employees) thinks they want to set up an HRA for one person. Well, this won't fly, as the one person is a "Highly Compensated Individual" under the testing rules (is in the top 25% by compensation). I don't know why they want to do this anyway, (apparently something to do with Medicare, but that's unclear) -  since they can't do that, they wanted to make everyone eligible and pay their group health premiums with HRA funds. That can't be done either. And a QSEHRA isn't available if the employer provides group insurance.

I think they can't have their cake and eat it to, but wondering if there is something obvious that I'm missing?

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Beyond the issues you mention, consider whether you want to politely suggest that the employer seek its lawyer’s advice about whether the employer has power to establish a plan of the kind it wants.

 

A governmental employer other than the State itself has only the powers provided by State law.  Many States’ laws limit a local government’s powers in establishing employee-benefit plans.

 

Even if the issue is beyond your scope, you might prefer to flag the issue.  If the employer implements something beyond the employer’s powers and gets caught (often by an auditor), you might avoid or at least answer the rhetorical question “Why didn’t you tell me . . .?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you. Yes, I'm just doing some preliminary checking. Although I have little involvement with 125/HRA plans, I see way more "weirdness" per square inch than in the qualified plan market. Just saw one today where the employees take the unused FSA funds out of the plan at the end of the year and put them in IRA's...

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8 hours ago, Belgarath said:

Thank you. Yes, I'm just doing some preliminary checking. Although I have little involvement with 125/HRA plans, I see way more "weirdness" per square inch than in the qualified plan market. Just saw one today where the employees take the unused FSA funds out of the plan at the end of the year and put them in IRA's...

Curious, why is taking $ out of FSA and into IRA’s weird?

 

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That is quite likely, because I don't have much to do with 125 plans. I suppose if I saw a plan where they withdrew the unused funds to pay the water/sewer bill on the theory that "it's ok as water/sewer is a municipal charge" I would call that weirdness as well. Anyway, I told the broker they can't do that, and I'd be very surprised if their document said they could. He said he's not even sure that they have a document...

Things are never (or rarely) dull!

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Now they are asking if an HRA can be set up where only the Medicare-eligible employee is eligible? They thought this could be done.

Well, I suppose it could perhaps be done IF it could pass nondiscrimination testing, but in this situation it won't. Is there any such arrangement that is exempt from the 25% HCI test under 105(h)? I haven't heard of such a thing, but that doesn't necessarily mean anything...

I wonder if perhaps they might be thinking of a Retiree-only HRA? Which this wouldn't be anyway, as it is an active employee.

Sigh...and THANK YOU for any input. I'm trying to answer this as a favor, and I think I made a big mistake by not turning it away immediately!

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If the employer seeks to exclude employees (rather than retirees) from its regular group health plan, consider the employer's powers under State law, age-discrimination law, and law designed to make Medicare secondary to employers' group health plans.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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1 hour ago, Belgarath said:

Now they are asking if an HRA can be set up where only the Medicare-eligible employee is eligible? They thought this could be done.

Well, I suppose it could perhaps be done IF it could pass nondiscrimination testing, but in this situation it won't. Is there any such arrangement that is exempt from the 25% HCI test under 105(h)? I haven't heard of such a thing, but that doesn't necessarily mean anything...

I wonder if perhaps they might be thinking of a Retiree-only HRA? Which this wouldn't be anyway, as it is an active employee.

Sigh...and THANK YOU for any input. I'm trying to answer this as a favor, and I think I made a big mistake by not turning it away immediately!

It can be done, fund part B and D premiums.  A few landmines to navigate, but doable in most situations.

 

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2 hours ago, Belgarath said:

Now they are asking if an HRA can be set up where only the Medicare-eligible employee is eligible? They thought this could be done.

Well, I suppose it could perhaps be done IF it could pass nondiscrimination testing, but in this situation it won't. Is there any such arrangement that is exempt from the 25% HCI test under 105(h)? I haven't heard of such a thing, but that doesn't necessarily mean anything...

I wonder if perhaps they might be thinking of a Retiree-only HRA? Which this wouldn't be anyway, as it is an active employee.

Sigh...and THANK YOU for any input. I'm trying to answer this as a favor, and I think I made a big mistake by not turning it away immediately!

I would be concerned about Medicare secondary payer.  CMS does not want employers to free ride off of Medicare.  A special benefit only to Medicare-eligible employees could be a problem.

I am less concerned about age discrimination, since age discrimination in the US almost never punishes pro-senior discrimination, only anti-senior.  So if the 65+ HCE gets benefits at least as good as the under-65s, then it is probably okay.  But a policy to exclude 65s from ER GHP coverage, rather than just paying 65s to choose Medicare-only coverage, would raise age discrimination issues.

It would help to know their goals here.  Why are they doing all this weirdness?

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Leevena - is it doable if only 1 employee out of 7 or 8 "normal" full-time employees is eligible to participate, and that one person is an HCI? I'm not seeing how this would pass testing, unless there's an exemption I don't know about. Is there? Is there a reference to some official guidance that says an employer who has a group health plan can set up an HRA for only one person who is medicare eligible, exclude everyone else, and the plan is not subject to testing?

LSon - I really don't know why - I'm just trying to find out if such a thing CAN be done without the plan being subject to eligibility/benefit testing. I'm not concerned, at least at this point, about age discrimination - I won't even go there until I attempt to determine whether this is a non-starter under normal eligibility/benefits testing for an HRA.

Thank you both.

P.S. - unless there is a definitive "yes" to my question to Leevena, then I won't bother y'all any further, and just tell them to seek competent advice.

 

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Tell them to seek competent advice, but it can be done.  105h is an IRS mandated rule, not ERISA mandated.  I have never seen any IRS comments that 105h is not applicable to government plans, but will defer if someone else has.  But regardless, this group, as you have described, should not have a problem passing 105h as long as all employees are eligible for the health plan, and the plan’s eligibility rules and benefits are the same for all employees.  See the actual testing regulations for specifics.  Also, the employer cannot force the employee to drop the group health plan for Medicare.  

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For a small employer (under 20), the Medicare Secondary Payer rules do not prohibit paying/reimbursing employees' Medicare premiums. It sounds like your small governmental employer may be asking about an HRA, but what they really want is a special type of HRA called a "Medicare Premium Reimbursement Arrangement." It's allowable under IRS Notice 2015-17. Here's brief info on the conditions:

  • The employer offers a group health plan providing minimum value (e.g., major medical);
  • Employees participating in the Program are actually enrolled in Medicare Parts A and B;
  • The Program is available only to employees enrolled in Medicare Parts A and B and/or D; and
  • The Program is limited to reimbursement of Medicare Parts B and D premiums, and “excepted benefits” (e.g., Medigap policy premiums).
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