Brian Gilmore

Agreed. Although it does seem like a poor plan design from an employee relations and tax savings perspective. I can't think of any good reason to structure it that way.

I wouldn't consider that approach to need an amendment for each increase.

I've always figured H&W was mostly a throw-in afterthought that has become it's own multi-headed monster only after many years of additional laws piling on, as Dave noted. COBRA, HIPAA, Section 125, FMLA, ACA, MHPAEA, CAA, etc. Great point, Peter. Also a sleeper issue that's been brewing under the radar related to state and local paid family and medical leave laws. It's the most complex nightmare you could ever imagine at this point for nationwide employers, so groups like the Business Roundtable have been pushing for a few years now to get a federal program that includes a preemption clause in the same manner as ERISA for H&W benefits. Here's an example: https://www.businessroundtable.org/paid-family-and-medical-leave-policy As Congress and the Administration consider paid family and medical leave legislation, Business Roundtable urges policymakers to enact uniform standards and procedures that would apply nationwide and preempt overlapping state and local requirements. A single federal standard should apply to all covered employees.

Not having actually been involved with one in practice, the main ones that seem problematic to me are: Properly calculating, communicating, and administering the required employer contributions for each cafeteria plan benefit component; and Making sure your health FSA employer contributions don't cause it to lose excepted benefit status under the "maximum benefit" rule. https://www.theabdteam.com/blog/aca-and-hipaa-excepted-benefits/ Common Excepted Benefit #3: Health FSA Health FSAs must qualify as an excepted benefit to avoid violating the ACA market reform provisions. The general requirements for a health FSA to be considered an excepted benefit are: The Footprint Rule: All employees eligible for the health FSA must also be eligible for the major medical plan; and The $500 Rule: Employer nonelective contributions to the health FSA cannot exceed $500. Under the footprint rule, all employees eligible for the health FSA must also be eligible for (regardless of enrollment in) the major medical plan. In other words, the health FSA eligibility “footprint” cannot be broader than the major medical plan’s eligibility “footprint.” For more details, see our prior post: The Health FSA Eligibility Footprint Rule. The $500 rule typically is not an issue because most employers do not make employer contributions to the health FSA. Those employers that do contribute to the health FSA generally will have to limit that employer health FSA contribution to no more than $500 to preserve the plan’s excepted benefit status. Employers wishing to contribute in excess of $500 to the health FSA can generally do so only if the structure the employer contribution as a matching contribution. This is because the health FSA “maximum benefit” rule technically prohibits employers from contributing any amount that exceeds two times the employee’s salary reduction election (or, if greater, $500 plus the employee’s salary reduction election).

I think because the only cafeteria plan nondiscrimination test employers have a realistic chance of failing is the 55% average benefits test component of the §129 testing for the dependent care FSA. The added complication (it's not actually that simple) and funding requirements that come with a Simple plan just aren't worth it for that. They'll either reduce the HCE dependent care FSA elections as needed or stop offering the dependent care FSA instead. Whoever lobbied for this provision in the ACA probably just wasn't very familiar with how cafeteria plans typically operate and the FSA TPA industry that largely runs them. A reform of the 55% average benefits test would have been much more useful. I've also never seen an employer actually establish a Simple cafeteria plan. Probably a very small number actually exist in operation.

The Tri-Agencies have confirmed in FAQ guidance today that the activity-only wellness program standards apply: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/aca-part-50.pdf Q3: May a group health plan (or health insurance issuer offering coverage in connection with a group health plan) offer participants in the plan a premium discount for receiving a COVID-19 vaccination? Yes, if the premium discount complies with the final wellness program regulations.9,10 A premium discount that requires an individual to perform or complete an activity related to a health factor, in this case obtaining a COVID-19 vaccination, to obtain a reward would be considered a wellness program that must comply with the five criteria for activity-only wellness programs described in paragraph (f)(3) of the final wellness program regulations.11 To satisfy these criteria, a wellness program that provides a premium discount to individuals who obtain a COVID-19 vaccination must be reasonably designed to promote health or prevent disease and must provide a reasonable alternative standard to qualify for the discount. For example, the wellness program may offer a waiver or the right to attest to following other COVID-19-related guidelines to individuals for whom it is unreasonably difficult due to a medical condition or medically inadvisable to obtain the COVID-19 vaccination in order to qualify for the full reward. The plan must also provide notice of the availability of the reasonable alternative standard under the wellness program. Further, the reward the plan provides in connection with the vaccine incentive program must not exceed 30 percent of the total cost of employee-only coverage and must give individuals eligible for the program the opportunity to qualify for the reward under the program at least once per year.

Yeah I think that works. In that case you don't even need the parent to be common law employer. That's not realistic anyway since the sub will almost certainly be directing and controlling the duties of those workers. It would just be like any outside staffing firm arrangement (or PEO). In all those situations, the worksite employer is generally always going to be the common law employer. But as long as the staffing firm is the employer of record, we don't have an issue. It's still a single employer plan. Just don't forget to follow the ACA employer mandate rules to ensure the sub is treated as having offered coverage through the parent: https://www.theabdteam.com/blog/aca-employer-mandate-and-outside-staffing-firms-2/

There's been some discussion on this topic here:

Thanks, Luke. Good to know. I wasn't aware of that common-but-not-common-enough ownership M-1 filing exemption. Also interesting re the Texas DOI mindset here. I don't believe Texas is one of the handful of states that prohibit (or severely restrict) self-insured MEWAs, so it's possible they're a bit more lax than other states. A rare ERISA situation where state DOI interpretations of self-insured plan law will all be so important because of the exception from preemption for MEWAs.

In case anyone is still tracking this issue, I posted an extensive overview of the topic here: https://www.theabdteam.com/blog/covid-vaccine-premium-incentives-and-surcharges/

I don't have answers to all your questions, other than that's a particularly dangerous situation to be in. I would want to unwind that arrangement asap to avoid ongoing potential exposure. I do have a short overview of this issue on slides 7-8 here if it's helpful: ABD Office Hours Webinar: M&A for H&W Employee Benefit Plans The most common situation where I've see this issue arise recently is with so-called "TSA" (transitional services agreement) coverage. The TSA often provides that seller permits buyer's employees to remain in seller's health plan for a transitional period post-close. Many M&A attorneys presume this does not present an issue without consulting ERISA counsel. One quick question of you: I'm not following what exemption from the Form M-1 filing requirement you're relying on here.

I agree. I think that's pretty clear in your situation assuming that both Holding and Purchaser are ALEs. The harder situation is where Company A purchases all of Company B mid-year, and all of the remaining Company B employees join the Company A entity/EIN (with no remaining Company B entity/EIN going forward). In that situation, I'm sympathetic to the argument that if Company A is providing a single consolidated Form W-2 under the successor employer rules, there can also be a single consolidated Form 1095-C from Company A for the legacy Company B employees (and only one Form 1094-C, coming only from Company A). I can't find any guidance to confirm that, but it seems like a reasonable position because the §6055 and §6056 rules borrow so heavily from the W-2 rules.

Right--the cafeteria plan itself is just a safe harbor from constructive receipt. For example, a simple POP is not an ERISA plan. Nor is a dependent care FSA because it does not provide any of the benefits outlined in ERISA §3(1). So there's no reason for the DOL to be issuing regs under §125. We're actually 15 years into waiting for the IRS to finalize most of theirs. But the DOL has confirmed that a health FSA component of a Section 125 cafeteria plan is a an ERISA welfare benefit plan (for purposes of COBRA, HIPAA, ACA, etc.) because it is a group health plan by virtue of reimbursing medical expenses. Just like the medical, dental, and vision plans that employees pay for on a pre-tax basis through the POP are an ERISA plan. Here's an example in the ACA context: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/13-03 Question 7: How do the market reforms apply to a health FSA that does not qualify as excepted benefits? Answer 7: The market reforms do not apply to a group health plan in relation to its provision of benefits that are excepted benefits. Health FSAs are group health plans but will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). (8) See 26 C.F.R. §54.9831-1(c)(3)(v), 29 C.F.R. §2590.732(c)(3)(v), and 45 C.F.R. § 146.145(c)(3)(v). Therefore, a health FSA that is considered to provide only excepted benefits is not subject to the market reforms. If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements.

Here you go: Prop. Treas. Reg. Section 1.125-7: (f) Safe harbor test for premium-only-plans. (1) In general. A premium-only-plan (as defined in paragraph (a)(13) of this section) is deemed to satisfy the nondiscrimination rules in section 125(c) and this section for a plan year if, for that plan year, the plan satisfies the safe harbor percentage test for eligibility in paragraph (b)(3) of this section. (2) Example. The following example illustrates the rules in paragraph (f) of this section: Example. Premium-only-plan. (i) Employer F's cafeteria plan is a premium-only-plan (as defined in paragraph (a)(13) of this section). The written cafeteria plan offers one employer-provided accident and health plan and offers all employees the election to salary reduce same amount or same percentage of the premium for self-only or family coverage. All key employees and all highly compensated employees elect salary reduction for the accident and health plan, but only 20 percent of nonhighly compensated employees elect the accident and health plan. (ii) The premium-only-plan satisfies the nondiscrimination rules in section 125(b) and (c) and this section.

The cafeteria plan regs issued by IRS/Treasury don't address the fiduciary duties that also apply to a benefit subject to ERISA. Just because something is permitted by the Code doesn't mean it's permitted by ERISA.

Yes, there can be net experience losses resulting from mid-year terminations with overspent accounts (per the health FSA uniform coverage rule). In other words, those overspent mid-year term losses can exceed any forfeitures caused by the use-if-or-lose-it rule for a given plan year. However, that's not a basis for retaining net experience gains when the flip is true for a plan year (i.e., forfeitures exceed losses from overspent mid-year terms). That's just the simple risk-shifting aspect of the benefit. The cafeteria plan regs outline the possible applications of FSA experience gains from forfeitures. The option for the employer to retain the experience gains is on the table for the dependent care FSA (non-ERISA) but not the health FSA (ERISA) for the reasons discussed above re the exclusive benefit rule. Prop. Treas. Reg. §1.125-5(o): (o) FSA experience gains or forfeitures. (1) Experience gains in general. An FSA experience gain (sometimes referred to as forfeitures in the use-or-lose rule in paragraph (c) in this section) with respect to a plan year (plus any grace period following the end of a plan year described in paragraph (e) in §1.125-1), equals the amount of the employer contributions, including salary reduction contributions, and after-tax employee contributions to the FSA minus the FSA’s total claims reimbursements for the year. Experience gains (or forfeitures) may be— (i) Retained by the employer maintaining the cafeteria plan; or (ii) If not retained by the employer, may be used only in one or more of the following ways— (A) To reduce required salary reduction amounts for the immediately following plan year, on a reasonable and uniform basis, as described in paragraph (o)(2) of this section; (B) Returned to the employees on a reasonable and uniform basis, as described in paragraph (o)(2) of this section; or (C) To defray expenses to administer the cafeteria plan.

Luke--the best cite is ERISA §404(a)(1)(A) and what was likely intended by the exclusive benefit rule by reference to a "plan". Plus how it's likely to be enforced by the DOL. Just as you don't have an explicit cite for saying it's permitted, neither do I for explicitly saying it's prohibited. For an unrelated but useful cite I would point to the HIPAA special enrollment regulations. They refer to "benefit packages" instead of "plans," with the understanding that a single ERISA plan isn't a useful concept for how modern benefits are structured: 29 CFR §2590.701-6(d): Special enrollees must be offered all the benefit packages available to similarly situated individuals who enroll when first eligible. For this purpose, any difference in benefits or cost-sharing requirements for different individuals constitutes a different benefit package. Agreed re DB and DC not actually being combinable--the point of the analogy was to imagine a world where all retirement benefits were housed under a single ERISA plan in the same manner as H&W plans. That's theoretically possible under ERISA--the 414(l) limitations you refer to are under the Code. In that hypothetical world wouldn't it strike you as rather aggressive to share forfeitures among the components even if they were under the same ERISA plan 001? I think your point could be arguable in a litigation/enforcement context, but advising an employer for best practices is a different story. Most employers are interested in avoiding that type of situation in the first place. Allocating experience gains only to the participants of the actual benefit component is a pretty simple step to stay out of hot water.

Hey Luke, good to hear from you. Yes the fun ones are where it's more gray and some room for reasonable disagreement. I take your point, and I've definitely heard others take that position. The reason I disagree is I think the exclusive benefit rule here is intended to target the specific benefit component. How employers draw lines on where one ERISA plan starts and the other ends--particularly in the H&W context--is somewhat arbitrary. Most employers now just have a mega wrap umbrella plan 501 for all H&W benefit components subject to ERISA. That's a more recent phenomenon that wouldn't have been contemplated by Congress in 1974. I don't think Congress or the DOL would intend for employers to share a DB plan pension overfunding with a DC plan participants if the retirement world had components all wrapped into a plan 001 in the same way. By analogy, I don't think you're operating for the exclusive benefit of health FSA participants when you apply your experience gains from forfeitures to fund a dental benefit enhancement, infertility HRA claims, EAP counselling, etc., particularly in light of the fact that there will never be perfect overlap in participation with the two benefits.

My position is the health FSA experience gains from forfeitures cannot be used to fund the administrative expenses for another benefit, such as the health plan, dependent care FSA, wellness program, lifestyle spending account, or commuter benefits. Employers have a fiduciary duty under ERISA to act solely in the best interest of plan participants and beneficiaries. Applying experience gains to other benefits would breach that exclusive benefit rule because not all health FSA participants would be participants in those other benefits, and therefore the funds would not be used for the health FSA participants' exclusive benefit. I don't think the fact that the health FSA and health plan are components of the same umbrella mega wrap 501 in your situation makes any substantive difference for this purpose. ERISA §404(a)(1)(A): (a) Prudent man standard of care. (1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and— (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.

However, there are bigger issues to worry about here--including: Issue #1: Medicare Will Pay Primary (COBRA Coverage Can Assume Primary Medicare Payment Even If Not Enrolled) Issue #2: The Eight-Month Medicare Special Enrollment Period is Not Extended by COBRA Enrollment Issue #3: COBRA Does Not Qualify to Avoid Part B Late Enrollment Penalties Full details: https://www.theabdteam.com/blog/how-cobra-and-medicare-interact-for-retirees/ ABD Office Hours Webinar: Medicare for Employers (see slides 12-16 in particular)

Here's how the early COBRA termination from Medicare enrollment timing rule works: https://www.theabdteam.com/blog/how-cobra-and-medicare-interact-for-retirees/ Issue #4: Early Termination of COBRA Upon Enrollment in Medicare COBRA can terminate early if the qualified beneficiary enrolls in Medicare after electing COBRA. There are a few key points with this rule: Mere eligibility for Medicare (e.g., reaching age 65) does not affect COBRA rights. Although the COBRA rules refer to Medicare “entitlement,” guidance confirms that “entitlement” means “enrollment.” The enrollment in Medicare must occur after the qualified beneficiary elected COBRA to cause early termination. The timing piece means that a qualified beneficiary who enrolled in Medicare prior to electing COBRA will not be subject to early termination of COBRA because of the Medicare enrollment. In other words, qualified beneficiaries who want to have Medicare and remain on COBRA must be careful to enroll in Medicare prior to electing COBRA. This timing rule stems from the 1998 U.S. Supreme Court case Geissal v. Moore Med. Corp., which is the only U.S. Supreme Court case to address COBRA rights. Since the U.S. Supreme Court’s ruling, the IRS has updated the COBRA regulations to confirm that only enrollment in Medicare after electing COBRA can cut short the qualified beneficiary’s COBRA rights (Treas. Reg. §54.4980B-7, Q/A-3). The recently updated DOL model COBRA initial notice and model COBRA election notice include a provision directly addressing this issue: If you elect COBRA continuation coverage and then enroll in Medicare Part A or B before the COBRA continuation coverage ends, the Plan may terminate your continuation coverage. However, if Medicare Part A or B is effective on or before the date of the COBRA election, COBRA coverage may not be discontinued on account of Medicare entitlement, even if you enroll in the other part of Medicare after the date of the election of COBRA coverage.

Here's an interesting contrary position on activity-only vs. outcome based that I disagree with (footnote 3): https://img.response.aonunited.com/Web/AonUnited/{08b033f5-e994-4f61-bc08-1963325664fc}_LR-F-Aug-21_Implications_of_Charging_Unvaccinated_Employees_More.pdf Some practitioners may argue that a wellness program that requires an individual to be vaccinated against COVID-19 in order to pay a reduced premium amount is an activity-based wellness program because the program is requiring the participant to undertake a certain activity related to a health status (i.e., get vaccinated). However, we think the better argument is that the program required the participant to obtain or maintain a certain status (i.e., being vaccinated) in order to receive the reduced premium amount. Therefore, it is an outcomes-based program. This is similar to a program that provides for reduced premiums for non-tobacco users, which are outcomes-based programs, based on the participant's status as a non-tobacco user. As noted above, outcome-based wellness programs must provide a reasonable alternative standard for anyone who does not meet the initial standard. I disagree because with the vaccine you simply complete the activity of taking the shot(s). But there’s no requirement to attain or maintain a specific health outcome. It’s not like attaining or maintaining a certain BMI. Smoking cessation requires a continuing obligation for the individual. I don’t see that as analogous. "Being vaccinated" requires no additional steps to maintain that outcome. It’s not just an academic point. The ability to get a reasonable alternative standard regardless of whether taking the vaccine is unreasonably difficult due to a medical condition or medically inadvisable to attempt is probably a major issue for many employers. That right applies only if you treat the vaccine incentive as outcome-based (as opposed to activity-only). See slides 12 and 26 here for a quick overview: 2021 ABD Wellness Program Guide

In case anyone is still interested, I posted some additional thoughts on this issue here: https://www.theabdteam.com/blog/lifestyle-spending-account-compliance-considerations/

You can still always use the HSA to pay for qualifying medical expenses on a tax-free basis even when you retire and no longer are covered by an HDHP (or otherwise lose HSA eligibility). HSA eligibility is only addressing the ability to contribute to the HSA. You're just pointing out the restriction on the use of the HSA for premiums. Here's an overview: https://www.theabdteam.com/blog/the-hsa-shoebox-rule/ Loss of HSA Eligibility Does Not Affect Ability to Take Tax-Free Medical Distributions Individuals do not have to maintain HSA eligibility (i.e., the ability to make or receive HSA contributions) to take tax-free distributions for medical expenses. This means an HSA owner can: Build up an HSA balance, move to non-HDHP coverage in a subsequent year, and still use that HSA (after losing HSA eligibility) to cover qualifying medical expenses tax-free; and/or Incur but not reimburse qualifying expenses while HSA-eligible, move to non-HDHP coverage in a subsequent year, and still use that HSA (by preserving the shoebox of health receipts) to reimburse those expenses incurred while HSA-eligible. HSA eligibility is relevant only for determining the ability to make or receive HSA contributions—not for purposes of taking tax-free medical distributions. Example 2: Same as Example 1, but Phil moves to non-HDHP coverage and loses HSA eligibility as of 2022. Result 2: In 2022 or any future year after losing HSA eligibility, Phil can still continue to incur medical expenses and take tax-free medical distributions from his HSA to pay for such expenses. In 2022 or any future year after losing HSA eligibility, Phil can still reimburse himself for the $2,000 in 2021 health expenses incurred (with the records saved in his shoebox). The only consequence of Phil’s loss of HSA eligibility is that he cannot make or receive HSA contributions in 2022 or any future year unless he regains HSA eligibility.

Here's an overview of that HSA premium rule: https://www.theabdteam.com/blog/hsa-distributions-for-premium-expenses/ Most Premium Expenses are Not HSA Qualified Medical Expenses Although in almost all circumstances the Publication 502 list of §213(d) medical expenses mirrors those expenses eligible for tax-free HSA distributions, there are a few differences. The slight modifications to the list of reimbursable expenses for account-based plans are set forth in IRS Publication 969. The most significant discrepancy is the general exclusion of premium expenses from the list of HSA qualified medical expenses eligible for tax-free reimbursement. Except in the four limited situations described below, use of an HSA to pay for premium expenses would be a non-medical distribution subject to income taxes and (if under age 65) a 20% additional tax. Exception #1: Long-Term Care Insurance Premiums Individuals can take tax-free HSA distributions to pay for long-term care policy premiums, but only up to a limit that is based on age that adjusts annually. The annual cap on tax-free HSA distributions for long-term care insurance premiums is as follows in 2020: Age 40 or under: $430 Age 41 to 50: $810 Age 51 to 60: $1,630 Age 61 to 70: $4,350 Age 71 and over: $5,430 Exception #2: COBRA Premiums Individuals can take tax-free HSA distributions for COBRA premiums or any other continuation coverage premiums required by federal law (e.g., USERRA). Exception #3: Any Health Plan Premium While Individual is Receiving Federal or State Unemployment Individuals who are receiving unemployment under federal or state law can take tax-free HSA distributions to pay for any health plan premium, including individual coverage purchased on the exchange. Exception #4: Medicare Premiums Individuals who have reached age 65 can take tax-free HSA distributions for Medicare, an employer-sponsored retiree plan, or any other health coverage. Important limitation: Medicare supplemental policy premiums (such as Medigap) do not qualify for tax-free HSA distributions.