Brian Gilmore

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.

I'm not aware of any guidance on this issue beyond FAB 2006-02. I interpret that to be require employee contributions be deposited in the HSA as of the earliest date in which the contributions can be reasonably segregated from the employer’s general assets, and in no event later than 90 days after the payroll deduction is made. Failure to timely deposit HSA contributions could raise a potential prohibited transaction under IRC §4975, which creates an excise tax liability of 15% of the amount involved and must be reported on IRS Form 5330. I posted a short discussion on the issue here for reference: https://www.theabdteam.com/blog/hsa-contribution-timing-requirements-2/ Note that sometimes this comes up where the employee fails to open the HSA with the custodian. In that case, I do not believe these late deposit rules would apply. Short discussion on that topic here: https://www.theabdteam.com/blog/employee-fails-to-establish-hsa-2/ DOL FAB 2006-02: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2006-02 Are HSAs subject to the prohibited transaction provisions of section 4975 of the Internal Revenue Code? Yes. Although the Department believes that HSAs meeting the conditions of FAB 2004-01 generally will not be ERISA-covered plans, the Medicare Modernization Act specifically provided that HSAs will be subject to the prohibited transaction provisions in section 4975 of the Code. In that regard, the Department’s plan asset regulation at 29 C.F.R. § 2510.3-102 states, in relevant part, that “[f]or purposes of [certain specified provisions of ERISA] and section 4975 of the Internal Revenue Code only . . . the assets of the plan include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets.” (Emphasis added). As a result, employers who fail to transmit promptly participants’ HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code. See Code § 4975(c)(1)(D) (prohibited transactions include the “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”). 29 CFR § 2510.3-102(c): (c) Maximum time period for welfare benefit plans. With respect to an employee welfare benefit plan as defined in section 3(1) of ERISA, in no event shall the date determined pursuant to paragraph (a)(1) of this section occur later than 90 days from the date on which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the date on which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages).

Unless the impending Treasury guidance states otherwise, I would treat this as an AEI situation because the ARPA definition is focused only on the actual COBRA qualifying event. The COBRA qualifying event was the loss of coverage caused by the involuntary reduction of hours. Under the basic statutory terms, the only intervening event that could remove AEI status during the maximum coverage period would be becoming eligible for another group major medical plan or Medicare. Subsequently declining a rehire opportunity shouldn't affect that analysis. From ARPA: (3) ASSISTANCE ELIGIBLE INDIVIDUAL.—For purposes of this section, the term ‘‘assistance eligible individual’’ means, with respect to a period of coverage during the period beginning on the first day of the first month beginning after the date of the enactment of this Act, and ending on September 30, 2021, any individual that is a qualified beneficiary who— (A) is eligible for COBRA continuation coverage by reason of a qualifying event specified in section 603(2) of the Employee Retirement Income Security Act of 1974, section 4980B(f)(3)(B) of the Internal Revenue Code of 1986, or section 2203(2) of the Public Health Service Act, except for the voluntary termination of such individual’s employment by such individual; and (B) elects such coverage.

The grace period for year one coverage does not affect the employee's contribution limit for year two coverage. The technical rules are in Prop. Treas. Reg. §1.125-1(e). But more useful is the IRS confirmation in its recent notice addressing the extended grace period option: IRS Notice 2021-15 https://www.irs.gov/pub/irs-drop/n-21-15.pdf If an employer adopts the § 214 carryover or the extended period for incurring claims permitted by § 214(c)(1) of the Act, the annual limits under §§ 125(i) and 129(a) apply to amounts contributed to a health FSA or dependent care assistance program for a particular year, and not to amounts reimbursed or otherwise available for reimbursement from a health FSA or dependent care assistance program in a particular plan or calendar year. Thus, unused amounts carried over from prior years or available during an extended period for incurring claims are not taken into account in determining the annual limit applicable for the following year.

The ICHRA rules are designed as a workaround to the ACA individual policy reimbursement and stand-alone HRA prohibitions for active employees. Details here if you're interested: 2021 ABD ICHRA for Employers Guide ICHRAs don't apply for a retiree-only plan because they already have the ACA market reform exemption for plans with fewer than two current employees. That's why we've had pre-65 retiree-only HRAs flourishing since the start of the ACA marketplace in 2014--and also why there has been such a pent-up demand for ICHRAs for actives. Be very careful if you are designing a purported §106 only plan. Any HRA feature (e.g., carryover) would trigger §105. And I believe the off-the-shelf vendor products are all retiree-only HRAs.

All HRAs are group health plans subject to ERISA. So you will need the plan doc, SPD, Form 5500, etc. The retiree-only exception (fewer than two participants who are current employees) allows you to structure the plan to avoid the ACA market reform (and HIPAA portability) requirements. That means you can have a standard retiree-only stand-alone (i.e., not integrated with a group major medical) HRA without application of the ACA prohibition on individual policy reimbursement (or the need to use an ICHRA to avoid it). There is a special §105(h) rule for retired employees that basically just requires the plan not be structured to discriminate in favor of retirees who were highly compensated while active (e.g., the retiree coverage is not limited to or more generous for top management). Treas. Reg. §1.105-11(c)(3)(iii): (iii) Retired employees. To the extent that an employer provides benefits under a self-insured medical reimbursement plan to a retired employee that would otherwise be excludible from gross income under section 105(b), determined without regard to section 105(h), such benefits shall not be considered a discriminatory benefit under this paragraph (c). The preceding sentence shall not apply to a retired employee who was a highly compensated individual unless the type, and the dollar limitations, of benefits provided retired employees who were highly compensated individuals are the same for all other retired participants. If this subdivision applies to a retired participant, that individual is not considered an employee for purposes of determining the highest paid 25 percent of all employees under paragraph (d) of this section solely by reason of receiving such plan benefits. You may be able to avoid application of §105(h) altogether if you truly limited coverage to §106, but I think you would want to be very careful there because there would be many restrictions. My understanding is that these are almost always established as a retiree-only HRA (which is under §105).

I take the position that it likely creates a MEWA because otherwise there wouldn't be a special Form M-1 carve out where the non-employee directors are less than 1% of the total number of employees covered by the MEWA. Why would you need the carve out if there wasn't a MEWA? However, the DOL has not definitively opined to my knowledge, so there is at least some gray area. Note that a number of states prohibit self-insured MEWAs--which raises the stakes considerably if the plan is not fully insured. I posted a summary on this issue here a few years ago: https://www.theabdteam.com/blog/board-members-employee-benefits-2/

@austin3515 Amen. Preaching to the choir, my friend. I work for a broker/consulting firm, and I feel your pain when bringing in new clients at how much of this is never addressed in the industry. I've yet to meet a client that wanted to take employee contributions after-tax outside of a cafeteria plan. It's a near universal norm.

I take your point--maybe in an ideal world it would work that way. In reality, the broker should be the intermediary advising on the POP where there is no FSA. The health plan carrier or TPA isn't going to provide a cafeteria plan doc that relates only the the employee pre-tax contributions. It doesn't fall under their responsibility because it doesn't actually affect plan benefits. The carrier or TPA just thinks of that as an employer payroll function and an area of potential liability they want no part of.

@austin3515 Most employers offer a health FSA and/or dependent care FSA. Those are almost universally administered by a TPA, and the TPA almost always will provide a template cafeteria plan document that employers can adopt for this purpose. They will typically include a POP, too, since that's also a component of the Section 125 cafeteria plan. It's not a perfect arrangement, but in the vast majority of situations it covers the necessary bases.

Unfortunately, I think you have bigger fish to fry in that scenario. I assume you mean that this $2,000 amount was not properly recharacterized as taxable in 2020 before the end of the year. That's a problem because adjustments to pass the 55% average benefits test can't be made after year end. So if this amount caused the plan to fail the 55% average benefits test, all HCEs would theoretically need to have their full elections recharacterized as taxable in 2020. If on the other hand you already recharacterized that $2,000 as taxable in 2020, and the FSA TPA is just stating that the recharacterized balance remains in the account, then you would simply distribute those funds to the employee. I take the position that once they've been recharacterized as taxable they really aren't FSA funds anymore, and they can be distributed without qualifying expenses. There would be no taxation on the distribution because they were already taxed in 2020.

We're supposed to have IRS guidance on the CAA FSA election change rules any day now. This may be something they address. I've seen the FSA TPAs take every different position on these, and I don't think there is any right answer at this point. The CAA rules throw another curveball at the uniform coverage rule with the health FSA spend down option. That seems to almost by necessity involve an exception to the uniform coverage rule. The provision isn't practical unless the plan can limit the spend down to amounts contributed YTD (as with the dependent care FSA) prior to termination. But again, something I expect to be addressed when the IRS issues its much-anticipated CAA FSA guidance.

Yes, a general purpose health FSA blocks HSA eligibility for both the employee and spouse. Coverage under a general purpose health FSA for the employee or spouse is disqualifying coverage for both individuals. This is because an employee can reimburse pre-deductible expenses under the health FSA for both the employee and the spouse. The result is that if either spouse is enrolled in a general purpose health FSA, neither spouse is HSA eligible. They can still be covered by an HDHP, but they cannot make or receive HSA contributions. Here's an overview: https://www.theabdteam.com/blog/hsa-interaction-health-fsa-2/ Here's the relevant cite: IRS Notice 2005-86: https://www.irs.gov/pub/irs-drop/n-05-86.pdf Interaction Between HSAs and Health FSAs Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.” In addition to coverage under an HDHP, § 223(c)(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer. However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who is otherwise eligible for an HSA may be covered under specific types of health FSAs and remain eligible to contribute to an HSA. One arrangement is a limited-purpose health FSA, which pays or reimburses expenses only for preventive care and “permitted coverage” (e.g., dental care and vision care). Another HSA-compatible arrangement is a post-deductible health FSA, which pays or reimburses preventive care and for other qualified medical expenses only if incurred after the minimum annual deductible for the HDHP under § 223(c)(2)(A) is satisfied. This means that qualified medical expenses incurred before the HDHP deductible is satisfied may not be reimbursed by a post-deductible HDHP even after the HDHP deductible had been satisfied. To summarize, an otherwise HSA eligible individual will remain eligible if covered under a limited-purpose health FSA or a post-deductible FSA, or a combination of both.

@Christine ZinterThe standard HIPAA special enrollment right to enroll as of the first of the month following the special enrollment request would apply if the 30-day window did not run before the start of the Outbreak Period on 3/1/20. The retroactive enrollment would apply only for birth, adoption, or placement for adoption. Summary here: https://www.theabdteam.com/blog/hipaa-special-enrollment-events-2/ Here's the relevant cite: 29 CFR §2590.701-6(a)(4): (4) Applying for special enrollment and effective date of coverage. (i) A plan or issuer must allow an employee a period of at least 30 days after an event described in paragraph (a)(3) of this section to request enrollment (for the employee or the employee's dependent). (ii) Coverage must begin no later than the first day of the first calendar month beginning after the date the plan or issuer receives the request for special enrollment.

I have been taking the position that a dependent care FSA carryover from year one does not affect the year two election limit because that is how the rules have always applied to the health FSA carryover. I'd also be interested to hear if anyone is taking the position that carryovers affect the year two election limit.

Did the employee's 30-day HIPAA special enrollment period based on the spouse's loss of eligibility (caused by termination of employment) finish running prior to the start of the Outbreak Period on 3/1/20? If not, that window is still open to enroll based on the initial event. As you noted, loss of subsidized COBRA coverage is not a HIPAA special enrollment event, but the initial loss of eligibility for active coverage upon termination of employment was. I can't think of any reason why the HIPAA special enrollment right would be voided by enrollment in COBRA.

Details and cites here if you need it still: https://www.theabdteam.com/blog/which-plan-options-must-be-offered-under-cobra-2/ Exception #2: Moving Outside HMO Regional Service Area If a COBRA participant moves outside the HMO service region, and the COBRA participant requests other coverage, the employer must offer the COBRA participant the opportunity to elect coverage under any other option that is available to active employees and provides coverage in the COBRA participant’s new location. In other words, if the employer offers a different plan option that would provide coverage in the COBRA participant’s new location, that plan option must be made available to the COBRA participant upon relocating (or, if later, the first day of the month following the month in which the COBRA participant requests the alternative coverage). ... Treas. Reg. §54.4980B-4: Q-. 4. Can a qualified beneficiary who elects COBRA continuation coverage ever change from the coverage received by that individual immediately before the qualifying event? A-4. (a) In general, a qualified beneficiary need only be given an opportunity to continue the coverage that she or he was receiving immediately before the qualifying event. This is true regardless of whether the coverage received by the qualified beneficiary before the qualifying event ceases to be of value to the qualified beneficiary, such as in the case of a qualified beneficiary covered under a region-specific health maintenance organization (HMO) who leaves the HMO’s service region. The only situations in which a qualified beneficiary must be allowed to change from the coverage received immediately before the qualifying event are as set forth in paragraphs (b) and (c) of this Q&A-4 and in Q&A-1 of this section (regarding changes to or elimination of the coverage provided to similarly situated nonCOBRA beneficiaries). (b) If a qualified beneficiary participates in a region-specific benefit package (such as an HMO or an on-site clinic) that will not service her or his health needs in the area to which she or he is relocating (regardless of the reason for the relocation), the qualified beneficiary must be given, within a reasonable period after requesting other coverage, an opportunity to elect alternative coverage that the employer or employee organization makes available to active employees. If the employer or employee organization makes group health plan coverage available to similarly situated nonCOBRA beneficiaries that can be extended in the area to which the qualified beneficiary is relocating, then that coverage is the alternative coverage that must be made available to the relocating qualified beneficiary. If the employer or employee organization does not make group health plan coverage available to similarly situated nonCOBRA beneficiaries that can be extended in the area to which the qualified beneficiary is relocating but makes coverage available to other employees that can be extended in that area, then the coverage made available to those other employees must be made available to the relocating qualified beneficiary. The effective date of the alternative coverage must be not later than the date of the qualified beneficiary’s relocation, or, if later, the first day of the month following the month in which the qualified beneficiary requests the alternative coverage. However, the employer or employee organization is not required to make any other coverage available to the relocating qualified beneficiary if the only coverage the employer or employee organization makes available to active employees is not available in the area to which the qualified beneficiary relocates (because all such coverage is region-specific and does not service individuals in that area). (c) If an employer or employee organization makes an open enrollment period available to similarly situated active employees with respect to whom a qualifying event has not occurred, the same open enrollment period rights must be made available to each qualified beneficiary receiving COBRA continuation coverage. An open enrollment period means a period during which an employee covered under a plan can choose to be covered under another group health plan or under another benefit package within the same plan, or to add or eliminate coverage of family members.

@Johanna Box 10 is only going include the amount that remained tax-advantaged dependent care benefits. That means dependent care FSA amounts elected by HCEs that are in excess of the reduced limit (caused by the 55% average benefits test failure) are not included in Box 10. Those excess amount are recharacterized as taxable income and reported as such (Boxes 1, 3, 5). For example, if an HCE's $5k election is reduced to $3,500, the Box 10 amount will show only the $3,500 of pre-tax contributions that remained. The HCE will have $1,500 in additional taxable income in Boxes 1, 3, and 5 that he or she otherwise would not have. IRS Form W-2 Instructions: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf Box 10—Dependent care benefits (not applicable to Forms W-2AS, W-2CM, W-2GU, or W-2VI). Show the total dependent care benefits under a dependent care assistance program (section 129) paid or incurred by you for your employee. Include the fair market value (FMV) of care in a daycare facility provided or sponsored by you for your employee and amounts paid or incurred for dependent care assistance in a section 125 (cafeteria) plan. Report all amounts paid or incurred (regardless of any employee forfeitures), including those in excess of the $5,000 exclusion. This may include (a) the FMV of benefits provided in kind by the employer, (b) an amount paid directly to a daycare facility by the employer or reimbursed to the employee to subsidize the benefit, or (c) benefits from the pre-tax contributions made by the employee under a section 125 dependent care flexible spending account. Include any amounts over $5,000 in boxes 1, 3, and 5. For more information, see Pub. 15-B.

@dmwe Yes, I agree. My position is the excess contributions (i.e., amounts contributed in excess of the reduced cap caused by the NDT) are no longer dependent care FSA balance amounts. Therefore, any amounts not already distributed prior to the reduction need to be directly returned or made available without the need to submit qualifying dependent care expenses. Here's a summary: https://www.theabdteam.com/blog/failing-dependent-care-55-average-benefit-test-2/ Excess Contributions Not Distributed: Refunded as Taxable Income or Recharacterized as Taxable Income The amount of HCE contributions in excess of the reduced limit that have not yet been reimbursed to the HCEs must also be made taxable income before the end of the year. There are two possible approaches: Refund/Return: Have the TPA refund the excess contributions to the company (skip if amounts are not held by the TPA), and then the company will distribute the excess back to the HCEs through payroll as standard taxable wages included in gross income and subject to withholding and payroll taxes by the end of the year. Recharacterize: Recharacterize the excess contributions as taxable income in the same manner as the excess distributions. Then inform HCEs that they may take a distribution of the excess contributions (which no longer have pre-tax status) from the FSA without the need to submit qualifying dependent care expenses.

Correct, it does not affect the POP. The carryover is relevant only for the health FSA--which, like the POP, is a component of the Section 125 cafeteria plan where offered.

The health FSA carryover increase to $550 (from $500) is optional, but basically every employer offering the carryover is going to adopt it. It's indexed going forward now, too. Here's an overview: https://www.theabdteam.com/blog/the-550-carryover-vs-the-grace-period/

@BelgarathThere really aren't required cafeteria plan amendments in the same sense as a qualified plan. There have been some changes that employers may have needed to adopt to comply with changes to law (e.g., ACA capping health FSA salary reduction contributions and prohibiting individual policy payment) or wanted to adopt to based on changes to law (e.g., ACA-related permitted election change events, Covid-related relaxed election change rules). But it's certainly conceivable that a plan would not have needed (or an employer would not have wanted) to adopt any cafeteria plan amendments since that timeframe. If you're working off an old doc, you would just want to check if any of the provisions are inconsistent with current legal requirements or administrative practice.

@JSR_Kris Visa status should not affect your COBRA rights. As a general matter, immigration, visa, SSN, or citizenship status is irrelevant for purposes of health plan eligibility. Eligible employees and their eligible spouses, domestic partners, or children under age 26 in the U.S. can enroll when residing in the U.S. regardless of their immigration, visa, SSN, or citizenship status. None of that changes when you're a qualified beneficiary on COBRA continuation coverage. The COBRA maximum coverage period will be 18 months where the qualifying even is loss of coverage caused by termination of employment. Note that the child will become a COBRA qualified beneficiary upon birth if you are enrolled in COBRA at the time. Full details here: https://www.theabdteam.com/blog/enrolling-new-dependents-and-changing-plan-options-under-cobra/ Treas. Reg. §54.4980B-3: Q-1. Who is a qualified beneficiary? A-1. (a)(1) Except as set forth in paragraphs (c) through (f) of this Q&A-1, a qualified beneficiary is— (i) Any individual who, on the day before a qualifying event, is covered under a group health plan by virtue of being on that day either a covered employee, the spouse of a covered employee, or a dependent child of the covered employee; or (ii) Any child who is born to or placed for adoption with a covered employee during a period of COBRA continuation coverage.

@BSI S125 The spouse can continue coverage through COBRA until the first of the following occurs: The spouse exhausts the COBRA maximum coverage period (18 months of a termination of employment qualifying event); or The spouse enrolls in Medicare (or another group health plan). The spouse will want to enroll in Medicare upon becoming eligible to avoid a late enrollment penalty and the potential for the plan (COBRA) to assume Medicare primary coverage. Full details here: https://www.theabdteam.com/blog/how-cobra-and-medicare-interact-for-retirees/ Note that in some scenarios the COBRA maximum coverage period for a spouse or dependent can extend beyond 18 months if the employee recently enrolled in Medicare prior to terminating employment. In that situation, the maximum coverage period for the spouse or dependent is the later of: 36 months from the date the employee enrolled in Medicare; or 18 months from the date of termination (or reduction in hours). Full details on Slide 12 here: ABD Office Hours Webinar: Medicare for Employers.

@leevena good question. I was assuming this was a COBRA situation for an aged out child. Can't think of any other situation where that would be in question.