Brian Gilmore

Employers can exclude from FICA amounts where "its is reasonable to believe" that the employee will be able to exclude the payment or benefit under §129. In this case, there's a good argument the employer does not have that reasonable belief given it is clear the employees have no eligible eligible dependents (and therefore no qualifying expenses) for the dependent care FSA contributions. IRC §3121: (a) Wages. For purposes of this chapter, the term “wages” means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include— ... (18) any payment made, or benefit furnished, to or for the benefit of an employee if at the time of such payment or such furnishing it is reasonable to believe that the employee will be able to exclude such payment or benefit from income under section 127, 129, 134(b)(4), or 134(b)(5);

Trying to make sure I understand the play here. Is this basically a strategy to evade FICA? And your point is they don't care about the forfeitures because essentially these participants are the beneficiaries of the forfeitures for practical purposes?

Question 1: Cafeteria plans typically provide for a 90-day run-out period to submit FSA claims incurred prior to termination. Check the cafeteria plan document for the FSA to confirm. Although this is the most common structure, it is not legally required. This is purely a matter of plan design. The cafeteria plan may provide that health FSA coverage (i.e., the ability to incur reimbursable claims) continues through the end of the month in which the employee terminates, similar to many major medical/dental/vision plans. This provision is not common for the health FSA, but it is permitted. In the case where coverage continues through the end of the month, the 90-day run-out period will begin as of the end of the month. Keep in mind that the health FSA is subject to ERISA, so the Outbreak Period extension of up to one-year for a plan's benefit claim filing deadline will also apply to the health FSA run-out period. Some health FSAs have adopted the CAA FSA relief provision permitting a health FSA spend down in the same manner as a dependent care FSA spend down. If the plan has adopted that optional relief feature for mid-year terminations during calendar year 2020 or 2021, terminated employees are able to incur reimbursable health FSA claims through the remainder of the plan year in which they terminate (typically only up to the amount of their pre-termination contributions). Question 2: Employees can contribute up to $2,750 to the health FSA with as many unrelated employers as they are employed by. So employees with two unrelated employers in the same year may contribute the max to both employer’s plans—even though the annual total may exceed $2,750. The health FSA $2,750 salary reduction contribution limit is merely a plan year maximum. It’s not an individual maximum. Employees can therefore make full $2,750 elections to multiple health FSA plans in the same year. (Note that this is different from the dependent care FSA, which imposes an individual calendar year maximum. The dependent care FSA rules limit total calendar year contributions to $10,500 (or $5,250 if married filing separately) in 2021 over all employers combined.) Here's the relevant cite: IRS Notice 2012-40: https://www.irs.gov/irb/2012-26_IRB/ar09.html All employers that are treated as a single employer under § 414(b), (c), or (m), relating to controlled groups and affiliated service groups, are treated as a single employer for purposes of the $2,500 limit. If an employee participates in multiple cafeteria plans offering health FSAs maintained by members of a controlled group or affiliated service group, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,500 (as indexed for inflation). Section 125(g)(4). However, an employee employed by two or more employers that are not members of the same controlled group may elect up to $2,500 (as indexed for inflation) under each employer’s health FSA. Additional Materials: https://www.theabdteam.com/blog/health-fsa-reimbursements-termination-employment-2/ https://www.theabdteam.com/blog/health-fsa-salary-reduction-contribution-limit-2/ https://www.theabdteam.com/blog/top-10-issues-resolved-in-irs-fsa-relief-guidance/ ABD Office Hours Webinar: Section 125 Cafeteria Plans

HRAs are a self-insured group health plan. That includes an ICHRA. The special HRA PCORI rule I highlighted above (re not counting dependents for HRAs integrated with fully insured coverage) does attempt to address this double-dipping issue.

I take the position that the standard PCORI rules for an HRA integrated with a fully insured plan also apply to an ICHRA. So the employer must file the Form 720 and pay the PCORI fee for the employees (but not dependents) covered by the ICHRA. More details: https://www.theabdteam.com/blog/aca-pcori-fee-increases-to-2-66-for-2020-calendar-year-plans/ Does the PCORI Fee Apply to HRAs? Yes, an HRA is a self-insured health plan. However, the PCORI rules provide an exception to the fee requirement for an HRA where it is offered along with a self-insured major medical plan that has the same plan year as the HRA. This avoids the need to pay the PCORI fee for both the HRA and the self-insured major medical plan (i.e., each person covered by both plans is counted only once for purposes of determining the PCORI fee). There is no exception from the PCORI fee for an HRA offered along with fully insured major medical coverage. While the insurance carrier is responsible for paying the PCORI fee for the fully insured medical plan, the employer is responsible for paying the PCORI fee on the HRA. The IRS is essentially double-dipping in this scenario by imposing the PCORI fee on the same lives covered by both the major medical and the HRA. In recognition of this, the HRA PCORI fee paid by the employer is determined by counting only one life per employee participating in the plan (and not dependents). Summary: The PCORI fee is required for an HRA unless it is paired with a self-insured major medical plan that has the same plan year as the HRA. Where the PCORI fee is required, the employer is responsible for filing the Form 720 and paying the PCORI fee for an HRA solely for the covered employees (not dependents).

Just a reminder that electronic distribution is not necessarily opt-in. There are safe harbor and non-safe harbor ways to use electronic distribution by default. Here's an overview: See slide 8 here for more details: 2021 ABD ERISA for Employers Guide.

The Section 125 cafeteria plan's purpose is to act as a safe harbor from the doctrine of constructive receipt. It's a payment mechanism to permit employees to make a choice between taxable cash income and nontaxable cafeteria plan benefits, including to make a salary reduction election to pay for health and welfare benefits on a pre-tax basis, and not be subject to taxable income on the cash the employee could have received. None of that is going to apply in the retiree context. In other words, the cafeteria plan is not relevant for individuals who are not making an election between taxable cash and non-taxable benefits. There are currently no nondiscrimination rules in effect for fully insured health plans. The ACA provides that insured group health plans will be subject to rules “similar to” the nondiscrimination requirements that have long applied to self-insured plans under Internal Revenue Code §105(h). The insured plan rules technically were originally to apply at the same time as the first wave of the ACA market reforms (the first plan year beginning on or after September 23, 2010). However, the IRS issued Notice 2011-1 at the end of 2010, which provided that employers are not required to comply with the new nondiscrimination rules for insured plans until the Departments issue regulations or other administrative guidance. The DOL and HHS indicated their agreement with the IRS to delay enforcement. The Notice further states that any such guidance will not apply until plan years beginning a specified period after issuance (e.g., it may not apply until the first plan year beginning on or after six months following the regulatory issuance date). Note that you will want to be absolutely certain that the insurance carrier(s) approve adding retiree coverage.

The Outbreak Period extensions (now capped at a disregarded period of one year) apply to HIPAA special enrollment, COBRA (elections, notices, and payment), claims submission deadlines, appeal deadlines, and external review deadlines. They don't apply to a dependent audit documentation situation. However, if this was a mid-year enrollment based on a HIPAA special enrolment event (e.g., loss of other coverage or birth, adoption, or placement for adoption), and it's still within one year of that event, the Outbreak Period would apply. In other words, if the employee attempted to enroll the child based on the HIPAA special enrollment event that occurred within the past year but failed to provide the required documentation for enrollment (e.g., proof of loss of other coverage, birth certificate), the employee would still have the extended one-year window (or, if earlier, until the end of the Outbreak Period) to complete the special enrollment. Here's the relevant section of the "Joint Notice": https://www.federalregister.gov/documents/2020/05/04/2020-09399/extension-of-certain-timeframes-for-employee-benefit-plans-participants-and-beneficiaries-affected III. Relief A. Relief for Plan Participants, Beneficiaries, Qualified Beneficiaries, and Claimants Subject to the statutory duration limitation in ERISA section 518 and Code section 7508A,[7] all group health plans, disability and other employee welfare benefit plans, and employee pension benefit plans subject to ERISA or the Code must disregard the period from March 1, 2020 until sixty (60) days after the announced end of the National Emergency or such other date announced by the Agencies in a future notification (the “Outbreak Period”) [8] for all plan participants, beneficiaries, qualified beneficiaries, or claimants wherever located in determining the following periods and dates— (1) The 30-day period (or 60-day period, if applicable) to request special enrollment under ERISA section 701(f) and Code section 9801(f),Start Printed Page 26354 (2) The 60-day election period for COBRA continuation coverage under ERISA section 605 and Code section 4980B(f)(5),[9] (3) The date for making COBRA premium payments pursuant to ERISA section 602(2)(C) and (3) and Code section 4980B(f)(2)(B)(iii) and (C),[10] (4) The date for individuals to notify the plan of a qualifying event or determination of disability under ERISA section 606(a)(3) and Code section 4980B(f)(6)(C), (5) The date within which individuals may file a benefit claim under the plan's claims procedure pursuant to 29 CFR 2560.503-1, (6) The date within which claimants may file an appeal of an adverse benefit determination under the plan's claims procedure pursuant to 29 CFR 2560.503-1(h), (7) The date within which claimants may file a request for an external review after receipt of an adverse benefit determination or final internal adverse benefit determination pursuant to 29 CFR 2590.715-2719(d)(2)(i) and 26 CFR 54.9815-2719(d)(2)(i), and (8) The date within which a claimant may file information to perfect a request for external review upon a finding that the request was not complete pursuant to 29 CFR 2590.715-2719(d)(2)(ii) and 26 CFR 54.9815-2719(d)(2)(ii).

Yeah I agree. There are no explicit rules (that I'm aware of) for this issue on the Section 125 side for pre-tax contributions to FSA and/or health and welfare benefits. However, the IRS does have guidance for how to this issue on the 401(k) side. I’ve always felt comfortable piggybacking on the 401(k) rules for this purpose. Generally, compensation must actually be paid or made available to an employee within the year to be counted as compensation for that year. However, year-end payrolls do not always pay out by the end of the year. The qualified plan regs allow for adjustments to address this minor timing difference. The plan may provide that compensation for a year includes amounts earned during year one but not paid until year two solely because the timing of pay periods/pay dates. There are three conditions to taking this approach if they wanted to use it: The paycheck must be during the first few weeks of year two; The amounts must be included in year one plan comp on a consistent basis for all similarly situated employees (no one-offs for timing which year the contributions count toward); and No compensation is included in more than one year (the contributions must only count toward year one). I’ve copied the reg below for reference. Treas. Reg. §1.415(c)-2(e)(2): (e) Timing rules. (1) In general. (i) Payment during the limitation year. Except as otherwise provided in this paragraph (e), in order to be taken into account for a limitation year, compensation within the meaning of section 415(c)(3) must be actually paid or made available to an employee (or, if earlier, includible in the gross income of the employee) within the limitation year. For this purpose, compensation is treated as paid on a date if it is actually paid on that date or it would have been paid on that date but for an election under section 125, 132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b). (2) Certain minor timing differences. Notwithstanding the provisions of paragraph (e)(1)(i) of this section, a plan may provide that compensation for a limitation year includes amounts earned during that limitation year but not paid during that limitation year solely because of the timing of pay periods and pay dates if— (i) These amounts are paid during the first few weeks of the next limitation year; (ii) The amounts are included on a uniform and consistent basis with respect to all similarly situated employees; and (iii) No compensation is included in more than one limitation year.

It's the former. The IRS Form 8889 Instructions have a pretty easy worksheet (copied below) where you plug in the applicable amounts: https://www.irs.gov/pub/irs-pdf/i8889.pdf Your situation should come out to $5,800. $8,200 x 4 = $32,800. $4,600 x 8 = $36,800. $32,800 + $36,800 = $69,600 / 12 = $5,800. Note that things get a little more complicated with the catch-up when both spouses are HSA-eligible and at least one is enrolled in family HDHP coverage. In that case, the special spousal combined limit applies, and each spouse may be eligible to contribute a catch-up to their own HSA. Here's a couple posts walking through that issue: https://www.theabdteam.com/blog/hsa-catch-up-contributions/ https://www.theabdteam.com/blog/special-hsa-contribution-limit-for-spouses/ 2021 ABD Go All the Way With HSA Guide (slide 17)

There's a lot there, so a few points to keep it simple: What you're describing are non-cashable flex credits run through a Section 125 cafeteria plan. Only Section 125 qualified benefits can be allocated through flex credits. HRAs are not a Section 125 qualified benefit. An HRA cannot be funded directly or indirectly by a cafeteria plan. ALEs need to make sure there are sufficient flex credits that qualify as a "health flex contribution" to ensure the plan meets the ACA affordability test. Flex credits that can be allocated to the health FSA generally need to be cashable to avoid losing excepted benefit status. Only cashable flex credits can be allocated to the 401(k). For a list of qualified benefits, see slide 6 here: 2021 ABD Section 125 Cafeteria Plans Guide For an overview of flex credit issues, see here: https://www.theabdteam.com/blog/how-aca-affects-flex-credits-2/ Here's a "health flex contribution" overview: https://www.theabdteam.com/blog/how-the-aca-affordability-increase-to-9-83-affects-employers/ How Do Flex Credits Affect the Affordability Determination? Flex credits will reduce the dollar amount of the employee-share of the cheapest plan option providing minimum value that is used to determine affordability if they meet a three-part test to qualify as a “health flex contribution”: The employee may not opt to receive the amount as a taxable benefit (i.e., it is not a cashable flex credit); The employee may use the amount to pay for minimum essential coverage (i.e., the employer’s major medical plan); and The employee may use the amount exclusively for medical/dental/vision coverage costs. Action Item: If you offer a defined contribution-style flex credit approach to employees, make sure that a sufficient portion are designated as “health flex contributions” to qualify under an affordability safe harbor. This will require at least some of the flex credits be non-cashable and designated for health plan purposes only. Here's the guidance prohibiting any interaction between the cafeteria plan (including flex credits) and HRA funding: IRS Notice 2002-45: https://www.irs.gov/pub/irs-drop/n-02-45.pdf IV. HRAs and Cafeteria Plans Employer contributions to an HRA may not be attributable to salary reduction or otherwise provided under a § 125 cafeteria plan. An accident or health plan funded pursuant to salary reduction is not an HRA and is subject to the rules under § 125. ... An arrangement is not treated as an HRA if the arrangement interacts with a cafeteria plan in such a way as to permit employees to use salary reduction indirectly to fund the HRA. Therefore, where an employee who participates in a reimbursement arrangement has a choice among two or more specified accident or health plans to be used in conjunction with the reimbursement arrangement (or a choice among various maximum reimbursement amounts credited for a coverage period) and there is a correlation between the maximum reimbursement amount available under the HRA for the coverage period (disregarding amounts carried forward from previous coverage periods) and the amount of salary reduction election for the specified accident and health plan, then the salary reduction is attributed to the reimbursement arrangement even if the amount of salary reduction election is equal to or less than the actual cost of the other accident or health coverage.

The easy way to handle that would be by requiring a minimum election for the subsequent year. That was addressed initially in the IRS ACA "Potluck Guidance" in Notice 2015-87, and then confirmed and reiterated (and expanded to the dependent care FSA) in the IRS CAA FSA Relief guidance in Notice 2021-15. The Potluck Guidance provided the plan may restrict carryover funds to only those employees who elect to contribute for the subsequent year. The plan terms may therefore provide that employees must make a minimum election of some amount (e.g., $25) to the health FSA for the subsequent plan year in order to participate and have access to the carryover from the prior year. So employees who do not make the minimum election to participate in the FSA for the subsequent year will forfeit any unused amount at the end of the plan year and any associated run-out period. In other words, there will not be any carryover amount available in the subsequent plan year. More details here: https://www.theabdteam.com/blog/health-fsa-500-carryover-conditioned-on-new-plan-year-election-2/ The CAA FSA Relief notice added the following in footnote 6: IRS Notice 2021-15: https://www.irs.gov/pub/irs-drop/n-21-15.pdf An employer adopting the § 214 carryover may, in its discretion, require employees to enroll in the health FSA or dependent care assistance program with a minimum election amount to have access to the unused amounts from the prior plan year. See Q&A 24 of Notice 2015-87, 2015-52 IRB 889. Here's the original Potluck Guidance from 2015: IRS Notice 2015-87: https://www.irs.gov/pub/irs-drop/n-15-87.pdf Question 24: May a health FSA condition the ability to carry over unused amounts on participation in the health FSA in the next year? Answer 24: Yes. A health FSA may limit the availability of the carryover of unused amounts (subject to the $500 limit) to individuals who have elected to participate in the health FSA in the next year, even if the ability to participate in that next year requires a minimum salary reduction election to the health FSA for that next year.

We do have guidance in the IRS ACA "Potluck Guidance" in Notice 2015-87 and the IRS CAA FSA Relief guidance in Notice 2021-15 stating that carryovers can be conditioned on a minimum election amount for the subsequent plan year. But I'm not aware of guidance addressing a minimum threshold of unused funds to take advantage of the carryover. So I would proceed with caution there.

Some more details on the "old method" that still applies for H&W plans: The standard ERISA disclosure rules provide that ERISA-required documents must be provided to participants in a manner that’s “reasonably calculated to ensure actual receipt” by the intended recipient. The DOL has a safe harbor under which plans will be deemed to meet this standard. This method is sometimes misunderstood as a requirement—it is not. It is merely the only guaranteed way to satisfy ERISA’s disclosure requirements by electronic media. The safe harbor generally requires either (a) the employee has work-related computer access that is integral to his or her job duties (i.e., employee works at a desk with a computer), or (b) the employee’s electronic affirmative consent to electronic disclosure. So if all of the company’s employees have work-related computer access that is integral to their job duties, it is clear that no authorization is required to distribute ERISA documents electronically. If there are employees who don’t meet this standard, the safer approach is to meet the DOL’s safe harbor by receiving their affirmative consent to electronic disclosure of ERISA documents. Here's a highlight from the "old method" electronic safe harbor still in effect for H&W: 29 CFR §2520.104b-1(c): (c) Disclosure through electronic media. (1) Except as otherwise provided by applicable law, rule or regulation, the administrator of an employee benefit plan furnishing documents through electronic media is deemed to satisfy the requirements of paragraph (b)(1) of this section with respect to an individual described in paragraph (c)(2) if: ... (2) Paragraph (c)(1) shall only apply with respect to the following individuals: (i) A participant who— (A) Has the ability to effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee; and (B) With respect to whom access to the employer’s or plan sponsor’s electronic information system is an integral part of those duties; or ...

There are a number of areas (e.g., definition of involuntary termination) where we're being forced to rely on best judgment interpretations and prior 2009 ARRA guidance at this point. Most of the COBRA TPAs have set a deadline that's already passed or is about up on getting out the model notices of the extended election periods for those who qualify. But I agree in this situation there is really nothing to do but wait considering how unclear he issue is.

True, but we've been in limbo for quite a while now. It's becoming increasingly difficult to advise clients to wait for the impending IRS guidance when it was expected so long ago.

Not that I'm aware of.

I don't see how the MEC arrangement could work. Clearly that's not an excepted benefit regardless of whether it provides minimum value. Perhaps the second arrangement could work if the other coverage could qualify as an excepted benefit. You'd want a definitive determination of excepted benefit status to move forward. Treas. Reg. § 54.9802-4(c)(2): (2) No traditional group health plan may be offered to same participants. To the extent a plan sponsor offers any class of employees (as defined in paragraph (d) of this section) an individual coverage HRA, the plan sponsor may not also offer a traditional group health plan to the same class of employees, except as provided in paragraph (d)(5) of this section. For purposes of this section, a traditional group health plan is any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits. Therefore, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any participant or dependent.

Good points @MRestum and @Roberta Casper Watson. For some more detail-- The rules state COBRA can terminate early if the qualified beneficiary first becomes covered under another group health plan after electing COBRA. The enrollment in the other group health plan must occur after the qualified beneficiary elected COBRA to cause early termination. The timing piece means that a qualified beneficiary who enrolled in another group health plan prior to electing COBRA will not be subject to early termination of COBRA because of that other group health plan enrollment. Here's a longer summary: https://www.theabdteam.com/blog/early-termination-of-cobra-upon-enrollment-in-other-group-health-plan-or-medicare/ Here's the relevant cite: Treas. Reg. §54.4980B-7, Q/A-2: Q-2. When may a plan terminate a qualified beneficiary’s COBRA continuation coverage due to coverage under another group health plan? A-2. (a) If a qualified beneficiary first becomes covered under another group health plan (including for this purpose any group health plan of a governmental employer or employee organization) after the date on which COBRA continuation coverage is elected for the qualified beneficiary and the other coverage satisfies the requirements of paragraphs (b), (c), and (d) of this Q&A-2, then the plan may terminate the qualified beneficiary’s COBRA continuation coverage upon the date on which the qualified beneficiary first becomes covered under the other group health plan (even if the other coverage is less valuable to the qualified beneficiary). By contrast, if a qualified beneficiary first becomes covered under another group health plan on or before the date on which COBRA continuation coverage is elected, then the other coverage cannot be a basis for terminating the qualified beneficiary’s COBRA continuation coverage. (b) The requirement of this paragraph (b) is satisfied if the qualified beneficiary is actually covered, rather than merely eligible to be covered, under the other group health plan.

The only enforcement activity I've seen in this area are demand letters from CMS stating that the employer must pay back Medicare for all claim amounts where Medicare incorrectly paid as primary. I believe they get this information from the data match program. Where the employer fails to repay, the Treasury will send a letter to follow up on the unpaid debt and threaten collections, interest, penalties, costs, etc. on top of it.

Where the plan terminates spousal eligibility at the point of legal separation (as opposed to requiring final divorce), the spouse loses eligibility at the point of the legal separation and must be removed at that point. Loss of coverage based on legal separation or divorce are both COBRA qualifying events. Note that not all married couples legally separate prior to a divorce, and a legal separation requires a court order (merely living apart is not “legally separated”). Details here: https://www.theabdteam.com/blog/legal-separation-vs-divorce-2/ Here's the relevant cite: Treas. Reg. §54.4980B-4, Q/A-1(b): (b) An event satisfies this paragraph (b) if the event is any of the following— (1) The death of a covered employee; (2) The termination (other than by reason of the employee’s gross misconduct), or reduction of hours, of a covered employee’s employment; (3) The divorce or legal separation of a covered employee from the employee’s spouse; (4) A covered employee’s becoming entitled to Medicare benefits under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg); (5) A dependent child’s ceasing to be a dependent child of a covered employee under the generally applicable requirements of the plan; or (6) A proceeding in bankruptcy under Title 11 of the United States Code with respect to an employer from whose employment a covered employee retired at any time. (c) An event satisfies this paragraph (c) if, under the terms of the group health plan, the event causes the covered employee, or the spouse or a dependent child of the covered employee, to lose coverage under the plan…

I would take the position that the former employee is still a QB eligible for COBRA under the Outbreak Period rules. The rules state COBRA can terminate early if the qualified beneficiary first becomes covered under another group health plan after electing COBRA. The enrollment in the other group health plan must occur after the qualified beneficiary elected COBRA to cause early termination. The timing piece means that a qualified beneficiary who enrolled in another group health plan prior to electing COBRA will not be subject to early termination of COBRA because of that other group health plan enrollment. In this case, the former employee has not yet elected COBRA under the employer at issue. So any other group health plan enrollment during the interim will not cut short the QB's COBRA rules under the Outbreak Period rules that will provide up to a year to make the election. Here's a longer summary: https://www.theabdteam.com/blog/early-termination-of-cobra-upon-enrollment-in-other-group-health-plan-or-medicare/ Here's the relevant cite: Treas. Reg. §54.4980B-7, Q/A-2: Q-2. When may a plan terminate a qualified beneficiary’s COBRA continuation coverage due to coverage under another group health plan? A-2. (a) If a qualified beneficiary first becomes covered under another group health plan (including for this purpose any group health plan of a governmental employer or employee organization) after the date on which COBRA continuation coverage is elected for the qualified beneficiary and the other coverage satisfies the requirements of paragraphs (b), (c), and (d) of this Q&A-2, then the plan may terminate the qualified beneficiary’s COBRA continuation coverage upon the date on which the qualified beneficiary first becomes covered under the other group health plan (even if the other coverage is less valuable to the qualified beneficiary). By contrast, if a qualified beneficiary first becomes covered under another group health plan on or before the date on which COBRA continuation coverage is elected, then the other coverage cannot be a basis for terminating the qualified beneficiary’s COBRA continuation coverage. (b) The requirement of this paragraph (b) is satisfied if the qualified beneficiary is actually covered, rather than merely eligible to be covered, under the other group health plan.

That's a tricky one. Under the NAIC model COB rules, COBRA is generally secondary to active coverage. That's true even where the individual is a dependent on the active coverage. However, a drafting note in the COBRA section says to refer to the dependent vs. non-dependent rule in your situation. In other words, it says that if you're covered as a dependent on an active plan while covered by COBRA as a non-dependent, you don't look to the COBRA COB rules. Instead, you look to the dependent vs. non-dependent rules. Under the dependent vs. non-dependent rules, the primary plan is the one in which you are covered as a non-dependent. In that case, it's the COBRA plan. I would definitely confirm with the plans that they are following this approach. Not all plans follow the model COB rules, and this is a very nuanced aspect of them. NAIC Model COB Rules: https://content.naic.org/sites/default/files/inline-files/MDL-120.pdf Drafting Note: This rule applies only in the situation when a person has coverage pursuant to COBRA or under a right of continuation pursuant to state or other federal law and has coverage under another plan on the basis of employment. The rule under Paragraph (1) does not apply because the person is covered either: (a) as a non-dependent under both plans (i.e. the person is covered under a right of continuation as a qualified beneficiary who, on the day before a qualifying event, was covered under the group health plan as an employee or as a retired employee and is covered under his or her own plan as an employee, member, subscriber or retiree); or (b) as a dependent under both plans (i.e. the person is covered under a right of continuation as a qualified beneficiary who, on the day before a qualifying event, was covered under the group health plan as a dependent of an employee, member or subscriber or retired employee and is covered under the other plan as a dependent of an employee, member, subscriber or retiree). The rule under Paragraph (1) applies when the person is covered pursuant to COBRA or under a right of continuation pursuant to state or other federal law as a non-dependent and covered under the other plan as a dependent of an employee, member, subscriber or retiree. The rule in this paragraph does not apply because the person is covered as a non-dependent under one of the plans and as a dependent under the other plan.

The penalty for violating the MSP prohibited incentive rules is $5,000 per violation. CMS takes the position that the MSP rules are violated every time a prohibited offer is made, whether orally or in writing. Here's a couple materials that may be useful: https://www.theabdteam.com/blog/medicare-group-health-plans-2/ ABD Office Hours Webinar: Medicare for Employers Here are the best cites: 42 CFR §411.103 Prohibition against financial and other incentives. (a) General rule. An employer or other entity (for example, an insurer) is prohibited from offering Medicare beneficiaries financial or other benefits as incentives not to enroll in, or to terminate enrollment in, a GHP that is, or would be, primary to Medicare. This prohibition precludes offering to Medicare beneficiaries an alternative to the employer primary plan (for example, coverage of prescription drugs) unless the beneficiary has primary coverage other than Medicare. An example would be primary coverage through his own or a spouse’s employer. (b) Penalty for violation. (1) Any entity that violates the prohibition of paragraph (a) of this section is subject to a civil money penalty of up to $5,000 for each violation; and (2) The provisions of section 1128A of the Act (other than subsections (a) and (b)) apply to the civil money penalty of up to $5,000 in the same manner as the provisions apply to a penalty or proceeding under section 1128A(a). CMS MSP Manualhttps://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/msp105c01.pdf An employer or other entity is prohibited from offering Medicare beneficiaries financial or other benefits as incentives not to enroll in or to terminate enrollment in a GHP or LGHP that is or would be primary to Medicare. This prohibition precludes the offering of benefits to Medicare beneficiaries that are alternatives to the employer's primary plan (e.g., prescription drugs) unless the beneficiary has primary coverage other than Medicare. An example would be primary plan coverage through his/her own or a spouse's employer. This rule applies even if the payments or benefits are offered to all other individuals who are eligible for coverage under the plan. It is a violation of the Medicare law every time a prohibited offer is made regardless of whether it is oral or in writing. Any entity that violates the prohibition is subject to a civil money penalty of up to $5,000 for each violation.

That's a tough call. First of all, the employee may no longer by HSA-eligible. That would definitely eliminate the option if it were the case. Even if the employee is still HSA-eligible, the extra contribution will run the risk of creating excess contributions based on how long the employee remains HSA-eligible this year (proportional limit), whether the employee had set elections to reach the maximum contribution limit (statutory limit), etc. But ultimately if the employee is still HSA-eligible and approves the contribution being deposited as a 2021 amount with the understanding of the limits, that probably is the best approach. The employer should consider some form of a missed earnings adjustment to compensate for the time lost. Otherwise, the only reasonable approach would be to refund the contribution (potentially with an interest adjustment) as standard taxable income. The employee could then choose to use the additional compensation to elect a higher pre-tax HSA contribution--which would essentially create an equivalent result. If the employee is no longer HSA-eligible, the employer should consider a gross up. Note that the employer probably has an issue with the 2019 Form W-2 (Box 12, Code W) in this situation that would also technically need correction.