Brian Gilmore

Is the opt-out credit offered to all employees who waive (and the others just declined by enrolling in the health plan instead)? Or is the opt-out credit offered to only this one HCE to waive? If it's the former, it's probably fine. If it's the latter, it probably violates the uniform election rule.

Yeah I think it's weird they highlight that distinction since you can only contribute for under 18 folks anyway. How many under 18 employees wanted to contribute to their own Trump account? Pretty much a non-issue. The BIG deal I think from this is that it seems to suggest employees will be able to make pre-tax salary reduction contribution elections (presumably up to $2,500, reduced by any employer contribution) for Trump accounts of a dependent. There's no way to make deductible contributions outside of payroll. So all of a sudden the name of the game in Trump accounts is going to be to get your employer to throw them into the cafeteria plan, and then always make sure to utilize the pre-tax option through payroll before ever considering a regular nondeductible contribution. Given that most employers are working with a FSA TPA that offers a variety of cafeteria plan benefits in a unified login (health FSA, dependent care FSA, commuter, HSA), it seems that adding Trump accounts with employee pre-tax contributions would be an easy flip to switch to offer a pretty meaningful benefit to employees at almost no cost.

@Peter Gulia a surprising development here, I stand corrected: https://www.irs.gov/pub/irs-drop/n-25-68.pdf Q. I-3: May a Trump account contribution program be offered via salary reduction under a section 125 cafeteria plan? A. I-3: Yes, in most, but not all, circumstances. A Trump account contribution program may be offered via salary reduction under a section 125 cafeteria plan if the contribution is made to the Trump account of the employee’s dependent but not if the contribution is made to the Trump account of the employee. Although a Trump account contribution program would be a qualified benefit under section 125(f)(1), a contribution under the Trump account contribution program to a Trump account of the employee would provide deferred compensation under section 125(d)(2)(A), because the employee would have a vested right to compensation that may be payable to that individual in a later year. The Treasury Department and the IRS intend to address rules related to the coordination of Trump account contribution programs and section 125 cafeteria plans in proposed regulations.

Since I lost my job in mid-January but had an active FSA at that time, were my wife’s HSA contributions still allowed for the rest of the year? Yes, your spouse (assuming a) health FSA coverage ended in January, b) you didn't elect COBRA for the health FSA, and c) she no other disqualifying coverage from 2/1 forward) became HSA eligible as of February. If partial-year eligibility applies, is the maximum HSA contribution prorated to 11 months, meaning 11/12 of $8,550 ($7,837.50)? Yes, I agree. Although you could take advantage of the last-month rule if you wanted to increase that to the full $8,550. I've copied the details below. I haven’t used any of the $1,100 in the FSA. The FSA provider shows the account as active and says I can still use the funds. Is that correct? Probably not. It's possible they have a very long run-out period. But a run-out period doesn't affect HSA eligibility regardless. https://www.newfront.com/blog/the-hsa-contribution-rules-part-ii Contribution Limit for Partial Year of HSA-Eligibility: The Last-Month Rule Employees who enroll in the HDHP mid-year are generally subject to the proportional contribution limit above. However, a special rule known as the “last-month rule” (alternatively referred to as the “full contribution rule”) may apply to permit the mid-year enrollee to contribute up to the full statutory limit—even though the employee was not HSA-eligible for the full calendar year. In order to qualify for the last-month rule, the employee must satisfy both of the following two conditions: The employee is HSA-eligible on December 1 of the year at issue; and The employee remains HSA-eligible for the entire following calendar year. This creates a 13-month “testing period” that applies to determine whether the individual has met the last-month rule requirements. The mid-year HDHP enrollee must be eligible on December 1 through the entire subsequent calendar year to contribute up to the full statutory limit—as opposed to the standard proportional limit—for the year in which the employee enrolled in the HDHP mid-year. Example 2: Kris enrolls in HDHP coverage on October 1, 2025 and is HSA-eligible continuously through the end of 2026. Result 2: Kris can contribute up to the full statutory limit (as opposed to the standard proportional limit) in 2025 by taking advantage of the last-month rule. Kris qualifies for the last-month rule in 2025 because he was HSA-eligible in the 13-month testing period from December 1, 2025 through December 2026. If Kris had not qualified for the last-month rule (e.g., enrolled in a standard HMO in 2026), his 2025 contribution limit would have been 3/12 (1/4) of the contribution limit. The IRS provides a useful summary of the last-month rule in Publication 969 and in the Form 8889 Instructions. Mid-year HDHP enrollees who contribute to the statutory limit but do not satisfy the 13-month testing period by failing to remain HSA-eligible will be subject to income taxes and a 10% additional tax on the amounts contributed in excess of the statutory limit. 2025 Newfront Go All the Way with HSA Guide

For non-FMLA leave situations where health FSA coverage continues, you would generally use the standard pre-pay, pay-as-you-go, or catch-up contribution options set forth in the cafeteria plan FMLA rules. I understand you're talking about a non-FMLA leave, but that's really all we have to go with. More details: https://www.newfront.com/blog/health-fsa-for-employees-on-leave How to Collect Health FSA Contributions for the Leave Period The Section 125 rules provide three ways for employers to collect the employee’s health FSA (or any other group health plan) contributions during the leave: 1. Pre-Pay: Under the pre-pay option, the employee is given the opportunity to pay for the continued coverage in advance (i.e., before commencing the leave). Employees can elect to reduce their final pre-leave paycheck(s) with pre-tax salary reduction contributions for all or a part of the expected leave period. Pre-Pay Limitations: The pre-pay option cannot be the sole option offered. Employers offering this approach must offer at least one of the other two options to employees. Pre-pay cannot be used to pay for coverage in a subsequent plan year on a pre-tax basis. If the leave is expected to spill over into a subsequent plan year, the employee can only make pre-tax contributions for the part of the leave that occurs during the initial plan year. 2. Pay-As-You-Go: Under this approach, employees pay their contribution in installments during the leave. If it is a paid leave, the employee can continue to use the Section 125 cafeteria plan to contribute on a pre-tax basis from the stream of compensation through payroll. Otherwise, these contributions would have to be made by the employee on an after-tax basis (e.g., by check). 3. Catch-Up: With the catch-up approach, employees agree in advance to pay their contributions upon returning from leave. These catch-up contributions will reduce their initial return paycheck(s) by the contribution amount missed during the leave period. Although not entirely clear, it appears that employees may make catch-up contributions on a pre-tax basis even if the leave straddles two plan years. In general, employees on a paid leave will prefer the pay-as-you-go option because it facilitates pre-tax contributions in a consistent manner without any disruption. Employees on unpaid leave will generally prefer the pre-pay or catch-up options to avoid having to make contributions on an after-tax basis outside of payroll. Although the cafeteria plan regulations explicitly address these three payment options only in the context of FMLA leaves, employers are generally comfortable following the same approach for any other form of leave (e.g., state protected leave) where the employee will continue health FSA or other group health plan coverage. Slide summary: 2025 Newfront Health Benefits While on Leave Guide

There are different options you could take for how to handle. There's no right answer here--just what you find to be the most appropriate for your situation. The employee already authorized the deductions via the Sections 125 cafeteria plan election, so that's not an issue. The options are: Spread Repayment Over Multiple Pay Periods: Take the missed contribution amount in intervals over the remainder of the year. Lump Sum Repayment: Take the missed contribution amount in a lump sum. Convert Missed Amounts to Employer Contributions: Forgive the employee contributions and not require the employees to repay. I posted a full walkthrough on all these options (including template employee communications) here-- https://www.newfront.com/blog/correcting-missed-cafeteria-plan-contributions Slide summary: Newfront Office Hours Webinar: Section 125 Cafeteria Plans

@Peter Gulia Lots of discussion these days about whether the retirement plan fiduciary committee model should be adopted on the health plan side. I assume that's the reference from @QDROphile. I've set out some thoughts on that issue if you're interested here: https://www.newfront.com/blog/the-pros-and-cons-of-a-health-and-welfare-plan-fiduciary-committee

The ACA aspect is a really tricky one here. It can easily subsume the whole wrap plan document/SPD if you really go into the details. Here's my take on how to handle: https://www.newfront.com/blog/compliance-fast-where-to-define-eligibility-for-health-plans Four Eligibility-Related Areas Typically Addressed Outside Wrap SPD There are a few areas that deserve additional attention when determining if and how to address eligibility in the wrap SPD: 1) ACA Employer Mandate Applicable Large Employers (ALEs) need to offer minimum essential coverage that is affordable and provides minimum value to full-time employees (and their children to age 26) to avoid potential ACA employer mandate penalties. There are two different measurement methods available to determine whether employees are full-time (i.e., averaging a least 30 hours of service per week) for purposes of the ACA: the monthly measurement method and the look-back measurement method. The ACA full-time status determination methodology is unendingly complex, particularly with respect to the look-back measurement method. Attempting to fully explain the many intricate details of the measurement, administrative, and stability periods, for example, would be so lengthy that it would likely overwhelm all other content in the wrap SPD. Accordingly, best practice will typically be to include a “fail safe” type provision in the wrap SPD addressing the employer’s ALE status and that certain aspects of the applicable measurement method may qualify the employee for eligibility. Employers wishing to provide a more comprehensive description of the ACA full-time employee definition should generally refer to a separate company policy that is not restricted by the confines and multiple competing objectives of the wrap SPD.

There aren't rules around how they have to adjust. They can adjust in any manner they like as long as the total/overall/aggregate/combined HCE contributions are reduced low enough to pass the test (i.e., you get above the 55% threshold). That said, you almost never see employers taking a different approach here. Almost always employers will reduce HCE contributions by a uniform percentage amount. That's pretty universally viewed as the most fair way to handle. But again, they aren't bound by that. The other advantage to doing the standard percentage-based HCE reduction is they can rely on the TPAs calculations to determine how much they have to reduce each HCE. But I think your point is specifically how to address new HCE elections mid-year after a failed pre-test, which is not an area with any set process-- 1. Since it's possible for us to have another HCE enroll mid-year, am I correct that we have to apply the same reduction to any HCE mid-year enrollees? Well you don't have to, but you should at a minimum do that. And also I'd recommend considering going to 57.5% or 60% to provide some buffer. Otherwise you may have to reduce HCEs again by the end of the year if the mid-year non-HCE participation rates are also not helpful. You might also consider excluding new HCE participation for the remainder of the year if you want to keep it at 55%, that way you would be certain to pass. 2. If yes, how do we determine what the reduced amount should be? The same percentage as the existing HCEs, at a minimum. Again, the rules don't really care how the sausage is made as long as you get to 55%. It's all just an HCE issue at this point, so it isn't discriminating against non-HCEs regardless of how you handle. 3. Other than exclude HCEs altogether moving forward or setting a low election maximum, is there anything else I'm missing? An employer match for non-HCEs is an attractive option of the employer is willing to allocated budget to the dependent care FSA (rare). Also don't forget the top-paid group (top 20%) election may be an option. But no, I don't think you're missing anything. These 55% average benefits test rules are always a hassle. How you want to handle mid-year HCE elections after a failed pre-test is just a matter of how much wiggle room you think you need to pass as of the last day of the year. More details: - https://www.newfront.com/blog/the-dependent-care-fsa-average-benefits-test - https://www.newfront.com/blog/the-obbb-dependent-care-fsa-increase-could-backfire Slide summary: Newfront Office Hours Webinar: Section 125 Cafeteria Plans

Here's my take-- https://www.newfront.com/blog/the-550-carryover-vs-the-grace-period Important Note for Health FSAs Moving from the Grace Period to the Carryover: Employers generally should not amend a plan that offers the grace period mid-year to convert to the carryover for the current plan year. Employees may have made their elections intending to utilize their health FSA balance during the grace period by combining a year-one and year-two election for a high-cost procedure (e.g., laser eye surgery). IRS guidance suggests that this approach may be subject to non-Code legal restraints, such as an ERISA breach of fiduciary duty claim. Any such amendment to move from the grace period to the carryover should be made in a manner that ensures employees are aware of the change when making their health FSA elections at open enrollment.

Oh interesting. And I guess because it's a PC none are considered self-employed. That's an unusual one. But the silver lining is that they can just make the HSA contributions outside of payroll and take the above-the-line deduction in Schedule 1. True they miss out on the FICA exemption by not using the cafeteria plan, but that probably isn't very meaningful here since I assume they're all over the Social Security wage base for the 6.2%. So they're just missing the 1.45% Medicare tax exemption (and potentially the 0.9% additional Medicare tax).

Yeah the regs have been proposed forever, but that's all we have to work with given that the statute is generic. They're still easily accessible in the Federal Register: https://www.govinfo.gov/content/pkg/FR-2007-08-06/pdf/E7-14827.pdf The rules here piggyback on the coverage testing rules by imposing the nondiscriminatory classification test. Basically there's the safe harbor ratio percentage, and the unsafe harbor ratio percentage that requires the facts and circumstances test. See the table on page 3 here: https://www.govinfo.gov/content/pkg/CFR-2012-title26-vol5/pdf/CFR-2012-title26-vol5-sec1-410b-4.pdf I don't see how you could pass either with exclusively highs given that the applicable ratio percentage is is determined by dividing the percentage of non-HCPs benefitting from the plan by the percentage of HCPs who benefit. Seems to me zero divided by anything non-zero will always be zero. That's why I was saying the top-paid group (top 20%) approach would be needed and the easy workaround.

You wouldn't pass the reasonable classification portion of the eligibility test (i.e., the safe harbor percentage or unsafe harbor w/ facts/circumstances) without any NHCEs. That would cause the HCEs (everyone in this case) to lose the Section 125 safe harbor from constructive receipt (i.e., be taxed on their contributions). Prop. Treas. Reg. §1.125-7(b): (b) Nondiscrimination as to eligibility. (1) In general. A cafeteria plan must not discriminate in favor of highly compensated individuals as to eligibility to participate for that plan year. A cafeteria plan does not discriminate in favor of highly compensated individuals if the plan benefits a group of employees who qualify under a reasonable classification established by the employer, as defined in §1.410(b)-4(b), and the group of employees included in the classification satisfies the safe harbor percentage test or the unsafe harbor percentage component of the facts and circumstances test in §1.410(b)-4(c). (In applying the §1.410(b)-4 test, substitute highly compensated individual for highly compensated employee and substitute nonhighly compensated individual for nonhighly compensated employee). Prop. Treas. Reg. §1.125-7(m): (2) Discriminatory cafeteria plan. A highly compensated participant or key employee participating in a discriminatory cafeteria plan must include in gross income (in the participant's taxable year within which ends the plan year with respect to which an election was or could have been made) the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable benefits offered.

If everyone is $160k+ you would want to use the top-paid group (top 20%) election for the cafeteria plan, which I'm assuming they are already doing for the 401(k) (unless it is safe harbor). Then you would have NHCEs and therefore likely no issues. Prop. Treas. Reg. §1.125-7(a)(9): (9) Highly compensated. The term highly compensated means any individual or participant who for the preceding plan year (or the current plan year in the case of the first year of employment) had compensation from the employer in excess of the compensation amount specified in section 414(q)(1)(B), and, if elected by the employer, was also in the top-paid group of employees (determined by reference to section 414(q)(3)) for such preceding plan year (or for the current plan year in the case of the first year of employment). Treas. Reg. §1.414(q)-1, Q/A-9(b)(2)(iii): (iii) Method of election. The elections in this paragraph (b)(2) must be provided for in all plans of the employer and must be uniform and consistent with respect to all situations in which the section 414(q) definition is applicable to the employer. Thus, with respect to all plan years beginning in the same calendar year, the employer must apply the test uniformly for purposes of determining its top-paid group with respect to all its qualified plans and employee benefit plans. If either election is changed during the determination year, no recalculation of the look-back year based on the new election is required, provided the change in election does not result in discrimination in operation.

That's a tough one. First of all, there are quite a few exceptions to the M-1 filing requirements. Take a look here on page 8 (page 2 of the instructions) for a good summary to double-check none apply: https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/forms/m1-2024.pdf If none apply, it's harsh because (for inexplicable reasons) there's no DFVCP equivalent for the M-1. I'd suggest they work with counsel to see if there's any way they can back channel with the DOL to encourage them to come forward with some understanding they won't get hit with the full potential penalties. It would be quite difficult to just start filing going forward without addressing the prior years given that the rules require filing 30 days prior to operations. Good FAQ here: https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/forms/mewa-filing-tips.pdf

The HSA rules have little in common with the HRA rules because the HRA is an ERISA employer-sponsored group health plan. That said, HRAs are almost almost always unfunded notional accounts that are bookkeeping entries paid from the employer's general assets. In that overwhelming majority situation, there really isn't such thing as a mistaken HRA contribution. I suppose you could have a funded trust account HRA, which would be different. In that case there are probably plan/trust terms governing how to address overcontributions. It's possible you're referring to the much more common issue of mistaken HRA distributions. In that case, I recommend following the health FSA (not HSA) framework: https://www.newfront.com/blog/correcting-improper-health-fsa-payments

The ERISA preemption point is a fair one I think. There seem to have been decisions going both ways. This is a pretty strong case in the Fourth Circuit for your position @rocknrolls2: https://www.ca4.uscourts.gov/opinions/Unpublished/011232.U.pdf Jackson sued Wal-Mart under the South Carolina Payment of Wages Act, S.C. Code Ann. §§ 41-10-10 to 41-10-110 (Law. Co-Op. Supp. 2000), alleging that Wal-Mart made excessive deductions from his wages for insurance premiums...Because Jackson’s claim entails an inquiry into the terms and administration of the employee benefits plan to determine whether Wal-Mart deducted unauthorized amounts from Jackson’s wages, Jackson’s claim relates to the employee benefit plan. Therefore, we find that the district court correctly found that ERISA preempted the application of the South Carolina Payment of Wages Act. Nonetheless, no employer wants to have to litigate the issue of ERISA preemption of a state wage withholding law. There seems to be enough conflicting case law and general disagreement in the courts about how preemption applies to wage withholding laws to open at least the potential exposure--either from the state law itself or the cost to litigate its status under ERISA.

There's no doubt the excess has to be refunded. If nothing else, it would be a violation of state wage withholding laws to fail to refund. Probably ERISA fiduciary duties also implicated. The refund will be taxable income because presumably these amounts were initially pre-tax health plan contributions through the cafeteria plan. As to whether the employee has to be paid interest, that's a good question. I'm not aware of any guidance directly addressing the issue. As Peter noted, this is likely a very small amount anyway.

I'm not a fan as a plan design/strategy matter. It's a bit like enrolling employees into dual PPO/HMO coverage. I'd pick one and use that vehicle to accomplish the carrot incentive you're aiming for through the degree to which supports your goals/budget. In other words, instead of doing both, I would recommend increasing the amount available under either (preferably the SIHRA) as being more effective and understandable for employees. From a compliance standpoint, I think it works fine. The opt-out credit is a creature of the cafeteria plan, and the SIHRA is by definition not tied to the cafeteria plan. Each would operate independently from the other and not interfere with the other. But again, why? If they're at the point where a SIHRA is on the table, I view the SIHRA as the evolved (and superior) version of an opt-out credit. I don't see a good argument for keeping the opt-out credit at that point. Take the opt-out credit budget and put it into the SIHRA allocation for maximum effect/benefit. As Yogi Berra famously said: "When you come to a fork in the road, take it." Here's some more discussion if helpful: https://www.newfront.com/blog/ten-spousal-incentive-hra-compliance-considerations

Sure thing. It's definitely an issue, but of course that's an issue with lots of benefits. For example, the OBBB also made permanent and indexed the ability for employers to provide tax-free student loan repayment assistance under §127. That section of the code contains no mechanism to avoid constructive receipt, and it's specifically excluded from the cafeteria plan safe harbor per the cite you copied in the original post. So just like tax-free employer Trump Account contributions, tax-free employer student loan repayment assistance is exclusively an employer option. If the guy in the cubicle next to you has student loan debt and gets $1k from the company, and you already repaid your student debt, might some people perceive a mild unfairness in that? Employee benefits are riddled with similar forms of unfairness. Like the larger employer contribution to the health plan for families, or the fact that families with lots of kids pay the same as families with one. The hope is you touch enough bases that everyone feels satisfied with the employer's overall strategy, and that you've hit enough contingencies as an employer to drive your recruiting/retention demands. Some really big name employers expressed interest in making contributions to Trump Accounts before the bill passed, but we'll see whether that actually occurs when the rubber hits the road on 7/4/26. Those prominent names will drive a lot of the market forces in either direction here I think.

Not by my reading. Trump Accounts are a form of IRA, and IRAs are not a Section 125 qualified benefit. Furthermore, the cafeteria plan rules are littered with the prohibition of deferred compensation through a cafeteria plan, outside of the very limited and explicitly referenced 401(k) option with cashable flex credits. But even if I were wrong, there would be little benefit to including Trump Accounts in a cafeteria plan. The OBBB is clear that Trump Account contributions must be nondeductible. So there wouldn't be any way to use a cafeteria plan for a pre-tax TA contribution. I suppose it could be interesting as an after-tax flex credit allocation option, but very few employers offer flex credits. Here's my take-- https://www.newfront.com/blog/trump-accounts-as-an-employee-benefit Note that there is no option for employees to contribute through payroll on a pre-tax basis to TAs because they are not a Section 125 qualified benefit. Nor is there the option to embed tax-free TA contributions in a broader arrangement such as flex credits through a cafeteria plan or a lifestyle spending account (LSA). The constructive receipt rules prevent any tax-advantaged approach other than standard employer contributions. Here's a couple cites-- OBBB: (b) Trump account. For purposes of this section— (1) In general. The term “Trump account” means an individual retirement account (as defined in section 408(a)) which is not designated as a Roth IRA and which meets the following requirements: ... (c) Treatment of contributions. (1) No deduction allowed. No deduction shall be allowed under section 219 for any contribution which is made before the first day of the calendar year in which the account beneficiary attains age 18. Prop. Treas. Reg. §1.125-1: (o) Prohibition against deferred compensation. (1) In general. Any plan that offers a benefit that defers compensation (except as provided in this paragraph (o)) is not a cafeteria plan. See section 125(d)(2)(A). A plan that permits employees to carry over unused elective contributions, after-tax contributions, or plan benefits from one plan year to another (except as provided in paragraphs (e), (o)(3) and (4) and (p) of this section) defers compensation. This is the case regardless of how the contributions or benefits are used by the employee in the subsequent plan year (for example, whether they are automatically or electively converted into another taxable or nontaxable benefit in the subsequent plan year or used to provide additional benefits of the same type). Similarly, a cafeteria plan also defers compensation if the plan permits employees to use contributions for one plan year to purchase a benefit that will be provided in a subsequent plan year (for example, life, health or disability if these benefits have a savings or investment feature, such as whole life insurance). See also Q&A-5 in §1.125-3, prohibiting deferring compensation from one cafeteria plan year to a subsequent cafeteria plan year. See paragraph (e) of this section for grace period rules. A plan does not defer compensation merely because it allocates experience gains (or forfeitures) among participants in compliance with paragraph (o) in §1.125-5. (2) Effect if a plan includes a benefit that defers the receipt of compensation or a plan operates to defer compensation. If a plan violates paragraph (o)(1) of this section, the availability of an election between taxable and nontaxable benefits under such a plan results in gross income to the employees.

This is a great question. @EBECatty I agree with your analysis here. Normally we're looking at this issue from the Section 125 cafeteria plan perspective as to whether the individual can make pre-tax contributions. In that case, the cafeteria plan rules are clear that the the attribution rules do apply to also block eligibility for the spouse/children of the more-than-2% shareholder of an S Corp. This is done by specifically pointing to §1372(b), which in turn points to §318. In other words, even though the spouse and children may be employees of the S Corp, they are treated as self-insured for cafeteria plan eligibility rule purposes via attribution. They even have an example on the regs directly on point. In this case, the §4980H regs do nothing of the sort. Neither does the preamble or any other guidance I can find. It simply refers to a "2-percent S Corporation shareholder" with no section reference to §1372(b), §318, or anywhere else. Given that it's all we have to work with, I would read it to not include attribution--consistent with your original approach @Morgan. If the IRS wanted attribution to apply, they could have explicitly done so as they did with the cafeteria plan regs. If this vendor is firmly stating that they believe the spouse and children can be excluded from the ALE calculation based on attribution, I'd ask them for what guidance they are relying on. My guess is it's just the standard attribution rules that aren't incorporated by reference in the §4980H regs. I'd consider that an aggressive interpretation that could expose them to quite large §4980H and §6056 liability if the IRS disagreed. Prop. Treas. Reg. §1.125-1: (g) Employee for purposes of section 125. ... (2) Self-employed individual not an employee. (i) In general. The term employee does not include a self-employed individual or a 2-percent shareholder of an S corporation, as defined in paragraph (g)(2)(ii) of this subsection. For example, a sole proprietor, a partner in a partnership, or a director solely serving on a corporation's board of directors (and not otherwise providing services to the corporation as an employee) is not an employee for purposes of section 125, and thus is not permitted to participate in a cafeteria plan. However, a sole proprietor may sponsor a cafeteria plan covering the sole proprietor's employees (but not the sole proprietor). Similarly, a partnership or S corporation may sponsor a cafeteria plan covering employees (but not a partner or 2-percent shareholder of an S corporation). (ii) Two percent shareholder of an S corporation. A 2-percent shareholder of an S corporation has the meaning set forth in section 1372(b). ... (iv) Examples. The following examples illustrate the rules in paragraphs (g)(2)(ii) and (g)(2)(iii) of this section: Example (1). Two-percent shareholders of an S corporation. (i) Employer K, an S corporation, maintains a cafeteria plan for its employees (other than 2-percent shareholders of an S corporation). Employer K's taxable year and the plan year are the calendar year. On January 1, 2009, individual Z owns 5 percent of the outstanding stock in Employer K. Y, who owns no stock in Employer K, is married to Z. Y and Z are employees of Employer K. Z is a 2-percent shareholder in Employer K (as defined in section 1372(b)). Y is also a 2-percent shareholder in Employer K by operation of the attribution rules in section 318(a)(1)(A)(i). Treas. Reg. §54.4980H-1(a): (15) Employee. The term employee means an individual who is an employee under the common-law standard. See § 31.3401(c)-1(b). For purposes of this paragraph (a)(15), a leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508 is not an employee.

@Peter Gulia the plan is required to accept payment from any third-party. Most commonly that would be the employer providing a COBRA subsidy. But it could also be the employee on behalf of a former spouse. As Chaz noted, sometimes a divorce decree will require this. That's not the employer's problem (any such state family court order is preempted by ERISA and not enforceable against the plan), but it could be the employee's problem if they failed to do so. Bottom line is payment does not have to come from the QB. The plan has to accept payment from any source. Here's a couple cites confirming: https://www.govinfo.gov/content/pkg/FR-1999-02-03/pdf/99-1520.pdf Many plans and employers have asked whether they must accept payment on behalf of a qualified beneficiary from third parties, such as a hospital or a new employer. Nothing in the statute requires the qualified beneficiary to pay the amount required by the plan; the statute merely permits the plan to require that payment be made. In order to make clear that any person may make the required payment on behalf of a qualified beneficiary, the final regulations modify the rule in the 1987 proposed regulations to refer to the payment requirement without identifying the person who makes the payment. https://www.irs.gov/pub/irs-drop/n-05-50.pdf Under the COBRA continuation coverage requirements of section 4980B of the Code, payment is merely required to be made; there is no requirement that it be made by the qualified beneficiary. If full payment by a third party (such as the HCTC advance payment program) is tendered timely to a plan for the COBRA coverage of a qualified beneficiary and the plan terminates the coverage of the qualified beneficiary for failure to make timely payment, the plan is not in compliance with the COBRA continuation coverage requirements and is subject to the excise tax of section 4980B (generally, $100 per day per beneficiary for each day that the plan is not in compliance with respect to that beneficiary).

Interesting question. My position would be that the plan terms (including the carrier/stop-loss restrictions) still govern to require that the former spouse be removed from active coverage based on the divorce order. Plans (and carriers/stop-loss) almost universally do not extend eligibility to a former spouse. (Exception would be the Massachusetts law that allows former spouses to remain in active fully insured coverage in some situations.) I guess in theory the appeal could undo the divorce and effectively reinstate the marriage (although I've never heard of this happening), which would cause the spouse to again gain eligibility. If that happened, you would probably have to treat it as a mid-year HIPAA special enrollment event in the same manner as a marriage. But that seems very unlikely. It's almost certainly just the terms of the divorce that could be modified on a successful appeal. In short, my approach would be to consider the divorce final, remove the former spouse from active coverage, and offer COBRA rights. Any change to the divorce status from the appeal (unlikely) could be addressed at that point.

Yeah the DOL guidance is a bit nuanced in this area. Especially Advisory Opinion 94-31A: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1994-31a Here's some more thoughts on that point: https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2 On the other hand, using a separate account that is not in the plan’s name (e.g., in the employer plan sponsor’s name) would not necessarily cause the funds to be treated as plan assets. DOL guidance provides that “the mere segregation of employer funds to facilitate administration of the plan would not in itself demonstrate an intent to create a beneficial interest in those assets on behalf of the plan.” Accordingly, the employer could carefully create a separate account in its name whereby there is an “absence of any other actions or representations which would manifest an intent to contribute assets to a welfare plan,” and thereby avoid creation of plan assets in maintaining that separate account. Key Point: The DOL states if employers are careful not to cause the plan to gain a beneficial interest in a separate account, “the mere establishment of an account in the name of the employer to be used exclusively in administering the plan would not create a beneficial interest in the plan.” (emphasis added) Ultimately, this is a facts and circumstances analysis. As the DOL summarizes, “whether a plan acquires a beneficial interest in definable assets depends, largely, on whether the plan sponsor expresses an intent to grant such a beneficial interest or has acted or made representations sufficient to lead participants and beneficiaries of the plan to reasonably believe that such funds separately secure the promised benefits or are otherwise plan assets.”