Brian Gilmore

First of all, unless this is a birth/adoption event the election change request received in '26 generally would not have a retroactive effect to 2025. More details: https://www.newfront.com/blog/when-mid-year-election-changes-are-effective Assuming the change is retro to '25, this would be a matter of plan design. Employers have broad discretion on how to structure their ER HSA contribution approach. Any consistent approach would generally be fine. I leave to you to address the potential vendor issues. If you are going to make the contribution, employers can make a year one HSA contribution by 4/15 of year two if they notify the HSA custodian and employee that the amount is to be allocated to year one. That does not require any changes to the year one W-2. More details: https://www.newfront.com/blog/correcting-missed-hsa-contributions Missed Employer HSA Contribution: Prior Year (Correction by 4/15) Employers frequently discover missed HSA contributions after the calendar year has closed. These discoveries often occur as part of a regular year-end payroll auditing process. They may also be discovered as part of the reporting process for HSA contributions on the Form W-2. The good news is that whatever the reason for the error or the cause of its discovery, missed HSA contributions from a prior year are still an easily correctible mistake. The HSA rules provide that employers can make a prior year missed HSA contribution by the tax filing deadline without extension (generally April 15). There are two communication steps required to ensure that the contribution is allocated to the prior year contribution limit: The employer must notify the HSA bank that the contribution is to be allocated to the prior year; and The employer must inform the employee that the contribution is to be allocated to the prior year. No Form W-2 Correction Required Employers must report all employer and employee HSA contributions made through payroll as a single aggregated amount on the employee’s Form W-2 in Box 12 using Code W. Employers are often concerned that making an HSA contribution for the prior year will require a corrected Form W-2c to report the additional contribution allocated to that prior year. However, IRS guidance is clear that an HSA contribution correction by the tax filing deadline (generally April 15) does not require any correction to the prior year Form W-2. Rather, the IRS guidance confirms that employers simply report the prior year HSA contribution on the current year Form W-2 (issued the following January). Note that this may result in the employee’s Box 12, Code W showing an amount larger than the annual statutory HSA contribution limit. However, as long as the amount in excess of the limit is attributable to the prior year contributions made prior to the tax filing deadline, this will not present any issues. Employee Addresses Additional Prior Year Contributions on Form 8889 On the employee side, the additional contributions made for the prior year are addressed via the Form 8889 that all individuals with HSA contributions or distributions must include with the individual tax return (Form 1040). This will ensure that the contributions are allocated to correct year and are consistent with the Form 5498-SA provided by the HSA custodian. The Form 8889 Instructions include an “Employer Contribution Worksheet” that accomplishes two purposes to ensure proper reporting of HSA contribution amounts attributable to the tax filing year: Prior Year Contributions Subtracted: The employee subtracts any amounts attributable to the prior year that were included on the current-year Form W-2 (because it was contributed by the prior year tax filing deadline); and Current Year Contributions Added: The employee adds any employer contributions made for the current year after the Form W-2 was issued (because it was contributed by the current-year tax filing deadline). Potential Complications: Employees who have already filed their individual tax return (Form 1040) prior to receiving notice of the additional HSA contribution attributable to that prior year (the tax-filing year) may have to amend their individual tax return (Form 1040-X) to reflect the additional contribution on the Form 8889. Employees may argue that they should receive some form of lost earnings compensation for the duration of the failure. Although there are no specific rules addressing this (unlike, for example, the EPCRS lost earnings rules that apply in the 401(k) context), employers might consider accommodating such a request. Any such adjustment should generally be made outside the HSA (i.e., as standard taxable compensation) to avoid the potential for excess HSA contributions. If the employee has terminated from employment, the HSA account with the employer’s designated custodian may no longer be open. In this case, employers should consider making the missed payment to the former employee as standard taxable cash compensation. Example: Jason works for his employer Treadstone Security, which offers an HDHP plan option to employees. Treadstone Security makes a $3,000 employer contribution ($125 per payroll period) for employees who enroll in the HDHP. Upon review of his 2023 Form W-2 in February 2024, Jason discovers that Treadstone Security contributed only $2,875 because it missed one payroll’s HSA contribution. Result: Treadstone Security should correct the mistake by making the missed 2023 employer HSA contribution no later than April 15, 2024. Treadstone Security must notify both Jason and the HSA bank that the $125 deposit made in 2024 is to be allocated to the 2023 HSA contribution limit. Treadstone Security does not prepare a corrected 2023 Form W-2c for Jason to address the error. Instead, Treadstone Security reports the 2023 contribution made in 2024 on Jason’s 2024 Form W-2 provided in January 2025 (aggregated as one amount with the 2024 employer and employee HSA contributions, if any, in Box 12 using Code W). Jason will prepare his 2023 Form 8889 to reflect that the additional $125 HSA employer contribution made in 2024 is allocated to the 2023 contribution limit. Jason will prepare his 2024 Form 8889 to exclude the $125 additional amount reported on his 2024 Form W-2 that was attributable to the 2023 HSA contribution limit. Slide summary: 2026 Newfront Go All the Way with HSA Guide

The issue here is whether the return of the excess pre-tax contributions is taxable in year one or year two. There are arguments either way here. For example, in the health FSA context the IRS has specifically approved including year one improper payment amounts in year two taxable income under certain circumstances. Many employers are comfortable with that approach in this type of context, too. The employer likely haven't finalized/issued the year one W-2 in this case, so it probably would not be that difficult to address this as year one taxation if they preferred. IRS Chief Counsel Advice Memorandum 201413006: https://www.irs.gov/pub/irs-wd/1413006.pdf In cases in which all other correction procedures have been exhausted by the employer and the employer treats the improper payment as business indebtedness in accordance with Prop. Treasury Reg. §1.125-6(d)(7)(v), the improper payment should be reported by the employer to the employee as wages on a Form W-2 to the extent the employer forgives the indebtedness after requesting payment consistent with collection procedures for other business indebtedness. The amount included in income is subject to withholding for income tax, FICA and FUTA, since the benefits are made available to the employee by the employer for the performance of services. The improper payment is reportable in the taxable year of the employee in which the indebtedness is forgiven.

Yeah that's how I read it. The A Penalty could only be triggered above five full-time employees. However, they could trigger B Penalty liability at any number of full-time employees. There would be no B Penalty liability at one full-time employee given that it's capped at the A Penalty amount--which is zero based on the one employee proportional reduction. But at two or more full-time employees there would be an A Penalty amount. Then an employee triggering the B Penalty would create a calculation scenario of which penalty amount (A or B) is lower to determine the actual potential liability.

This is an interesting one. I agree the A Penalty does not apply, but it's not because of the proportional 30-employee reduction for each ALEM. That reduction is used for purposes of calculating the applicable A Penalty amount where a full-time employee of ALEM has triggered the A Penalty by receiving a subsidy on the exchange. But in this case, the (one and only) full-time employee of the ALEM can't even trigger the A Penalty. The A Penalty generally applies if the ALEM fails to offer coverage to at least 95% of it's full-time employees (and at least one full-time employee receives an exchange subsidy). However, there is an additional rule that says if greater, the ALEM can fail to offer to up to five full-time employees without A Penalty exposure. Given that the ALEM doesn't even have five full-time employees, there is no way the A Penalty can apply. So in any case, we're reaching the same result here but the different reasoning is still interesting. With that in mind, I agree the ALEM's one full-time employee can still trigger B Penalty liability by receiving subsidized exchange coverage. But that raises yet another interesting point, which is that B Penalty liability cannot exceed A Penalty liability. As you noted, even if it were possible to trigger the A Penalty, the one-employee proportional reduction would result in no A Penalty. The end result I'm seeing is that there is no potential ACA employer mandate liability for this ALEM with only one full-time employee because a) the A Penalty can't be triggered, and b) the B Penalty can't exceed the A Penalty, which is zero. I know this is real life, but you really couldn't design a better law school exam question on the employer mandate than this scenario here. Here's the relevant points: https://www.federalregister.gov/documents/2014/02/12/2014-03082/shared-responsibility-for-employers-regarding-health-coverage The alternative margin of five full-time employees (and their dependents), if greater than five percent of full-time employees (and their dependents), is designed to accommodate relatively small applicable large employer members because a failure to offer coverage to a few full-time employees (and their dependents) might exceed five percent of the applicable large employer member's full-time employees. ... Notwithstanding the foregoing, the aggregate amount of assessable payment determined under this paragraph (a) with respect to all employees of an applicable large employer member for any calendar month may not exceed the product of the section 4980H(a) applicable payment amount and the number of full-time employees of the applicable large employer member during that calendar month (reduced by the applicable large employer member's ratable allocation of the 30 employee reduction under § 54.4980H-4(e)).

Agreed with Artie. If it's a direct COBRA subsidy, it would generally be tax-free in the same manner as any employer-share of the health plan premium (active, retiree, or COBRA) under §106. The former employee would receive it only if they timely elected COBRA. If it's a taxable cash payment intended as a COBRA subsidy, in most cases the former employee receives it regardless of a COBRA election. That cash payment would always be taxable. The taxable approach is common for employers with self-insured plans to avoid §105(h) nondiscrimination issues. More details: https://www.newfront.com/blog/cobra-subsidies-reimbursement-2 Slide summary: 2025 Newfront COBRA for Employers Guide

Got it. Well if they do not have a formal trust in place, they may have inadvertently created a trust requirement through the segregated accounting. However, if the separate account is in the employer's name (not the plan's name) there are still ways to avoid the trust requirement. I'm assuming here they do not want to have a trust with all the associated compliance requirements and potential liabilities. The DOL looks to "ordinary notions of property rights” via all the facts and circumstances to determine “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.” Here's a quick shorthand: https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2 Common Arrangements That Generally Meet the 92-01 Relief to Avoid the ERISA Trust Requirement No Trust Required: Premiums/benefits paid from the employer’s general assets checking account. Facts and Circumstances: Premiums/benefits paid from a separate account in the employer’s name where the employer expresses no intent and makes no representations to lead employees to believe the funds in the account are plan assets. In either case, the employer could provide the third-party administrator (TPA) with check-writing authority over the account to ameliorate administrative burdens. Arrangements That Often Do Not Qualify for the 92-01 Relief (Subject to the ERISA Trust Requirement) Trust Required: A separate checking account held in the name of the health plan (even if maintained with a zero-balance approach to immediately pay premiums/benefits upon receipt). Facts and Circumstances: Zero-balance account maintained in the name of the TPA whereby the TPA periodically has the employer transfer funds in the exact amount of aggregate adjudicated claims to the fund the account and release approved benefit distributions to participants and beneficiaries. With respect to the TPA account zero-balance approach, the DOL has cautioned that “drawing benefit checks on a TPA account, as opposed to an employer account, may suggest to participants that there is an independent source of funds securing payment of their benefits under the plan,” which could create ERISA plan assets that must be held in trust. The J&J Connection: Avoiding the inadvertent loss of the DOL’s trust enforcement policy could end up as a key liability consideration derived from the J&J case. The J&J plan’s trust-funded status may prove to be one of the primary reasons the plan was targeted as the test case in this area, as well as a potential factor in the court’s analysis of the class plaintiff’s breach of fiduciary duty allegations.

I think all those recitals you made at the start actually answer your question. The vast majority of self-insured health plans have benefits paid from the employer's general assets. That means on the employer side, there are no "plan assets." With respect to employee contributions, those also are almost always not held in a trust. This stems from relief in DOL Technical Release 92-01 that (in short form) does not require plan assets to be held in trust where the contributions are made through a Section 125 cafeteria (as is almost always the case). The DOL has made clear that “ERISA does not impose funding requirements or standards with respect to welfare plans.” It has further clarified that “an employer sponsor of a welfare plan may maintain such plan without identifiable plan assets by paying plan benefits exclusively from the general assets of the employer.” The end result is there are no surplus "assets" subject to the ERISA exclusive benefit rule in almost all self-insured health plans. The employer simply pays what it needs to out of general assets to address claims. More details: https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-1 https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2 On your specific point, I disagree with the premise of the question. One of the rare situations where experience gains can arise that are subject to the ERISA exclusive benefit rule is with respect to health FSAs because Section 125 imposes specific rules on how to apply forfeitures. There is some debate as to how broadly to define "plan" for this purpose, but my position is that the employer can apply those gains only to benefit participants in the health FSA. I do not believe a broader cafeteria plan or wrap plan reading to shift the benefit to participants outside that specific benefit package is appropriate in the health FSA context or in the context of a major medical plan where there are plan assets to address (e.g., a plan funded by a trust). For example, MLR rebates are a common area where there are medical plan refunds subject to the ERISA exclusive benefit rule. I don't see a good argument that the portion of the rebate attributable to plan assets could be allocated to dental plan benefit enhancements just because the dental arrangement is housed under the same mega wrap umbrella plan 501. More details: https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-core-four-erisa-fiduciary-duties-part-1 Exclusive Benefit Rule Common Application Example: Health FSA Forfeitures Another common area where employers directly confront limitations imposed by the Exclusive Benefit Rule is in the context of health FSA experience gains caused by employee forfeitures. In other words, where the total health FSA contributions exceed the total health FSA reimbursements for the plan year. This will occur where the health FSA forfeitures (employee failures to submit qualifying expenses sufficient to meet their contributions) are higher than the health FSA losses (employees terminating mid-year with an overspent account) for the plan year. In this situation, the Exclusive Benefit Rule likely prevents employers from allocating health FSA experience gains from forfeitures to fund the administrative expenses of another employee benefit such as the employer’s health plan, dependent care FSA, wellness program, lifestyle spending account, or commuter benefits. Applying the health FSA experience gains to other benefits would likely breach the Exclusive Benefit Rule because not all of the health FSA participants would be participants in those other benefits, and therefore the funds would not be used for the exclusive benefit of the health FSA participants. For more details: FSA Experience Gains from Forfeitures Slide summary: Newfront Office Hours Webinar: ERISA for Employers

Regardless of the status of the proposed cafeteria plan nondiscrimination regulations, the §125 nondiscrim rules are easy to pass. That's not a concern. The hard part will be that the new §128 for tax-free Trump Account contributions through and employer includes a requirement to apply rules "similar to" the §129 dependent care FSA nondiscrimination rules. That means the dreaded 55% average benefits test will likely apply. That wasn't so much of a concern when it initially looked like Trump Accounts were only going to permit employer tax-free contributions, but now that employees may be able to contribute pre-tax it is very likely that HCEs will contribute disproportionately. That will presumably cause routine failures of that 55% average benefits test in the same vein as with dependent care FSAs. https://www.congress.gov/119/plaws/publ21/PLAW-119publ21.pdf ‘‘(c) TRUMP ACCOUNT CONTRIBUTION PROGRAM.—For purposes of this section, a Trump account contribution program is a separate written plan of an employer for the exclusive benefit of his employees to provide contributions to the Trump accounts of such employees or dependents of such employees which meets requirements similar to the requirements of paragraphs (2), (3), (6), (7), and (8) of section 129(d).’’.

Yeah if there's only one HCP involved I think you're right. Still wouldn't want that structure in place in case another HCP comes along who wants to enroll in the plan someday, but until then I think there's no practical consequence of the discriminatory arrangement. As you noted, that HCP is already being taxed on the full amount anyway via the cash opt-out credit.

It's likely a violation of the Section 125 cafeteria plan nondiscrimination rules (particularly the "uniform election" component of the contributions and benefits test) that could result in the loss of the safe harbor from constructive receipt for HCPs if discovered by the IRS. In this case, that would generally mean the HCPs would have taxable income in the amount of the available opt-out credit regardless of whether they received it. They might also lose the pre-tax treatment overall for all cafeteria plan contributions by having the amount of the available taxable cash (i.e., regular wages/salary) included in taxable income even if they elected the health plan. More details: https://www.newfront.com/blog/designing-health-plans-with-different-strategies Prop. Treas. Reg. §1.125-7: (2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits)…A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits). ... (2) Similarly situated. In determining which participants are similarly situated, reasonable differences in plan benefits may be taken into account (for example, variations in plan benefits offered to employees working in different geographical locations or to employees with family coverage versus employee-only coverage). ... (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. Slide summary: Newfront Office Hours Webinar: Section 125 Cafeteria Plans

Good question. The guidance is pretty clear that you can make HSA contributions (up to the applicable proportional limit) after losing HSA eligibility for the year (until 4/15 of the prior year). It's always been a bit of a mystery to me whether contributions made prior to becoming HSA-eligible in the year are valid. My feeling is it is probably technically considered an ineligible excess contribution, but I'd consult with a personal tax adviser given it's a gray area. It does seem like an unnecessary hassle to take a corrective distribution of 1/12 only to make that contribution back, but again in theory that's probably technically correct.

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.