Brian Gilmore

Assuming the dependent is a qualified beneficiary, I'd say yes based on the COBRA independent election rights rules. The employee will be dropping while the other qualified beneficiary maintains the COBRA election independently. If the dependent is not a QB, they would lose COBRA rights upon the employee dropping. Treas. Reg. §54.4980B-6: Q-. 6. . Can each qualified beneficiary make an independent election under COBRA? A- 6 . Yes. Each qualified beneficiary (including a child who is born to or placed for adoption with a covered employee during a period of COBRA continuation coverage) must be offered the opportunity to make an independent election to receive COBRA continuation coverage. If the plan allows similarly situated active employees with respect to whom a qualifying event has not occurred to choose among several options during an open enrollment period (for example, to switch to another group health plan or to another benefit package under the same group health plan), then each qualified beneficiary must also be offered an independent election to choose during an open enrollment period among the options made available to similarly situated active employees with respect to whom a qualifying event has not occurred. If a qualified beneficiary who is either a covered employee or the spouse of a covered employee elects COBRA continuation coverage and the election does not specify whether the election is for self-only coverage, the election is deemed to include an election of COBRA continuation coverage on behalf of all other qualified beneficiaries with respect to that qualifying event. An election on behalf of a minor child can be made by the child's parent or legal guardian. An election on behalf of a qualified beneficiary who is incapacitated or dies can be made by the legal representative of the qualified beneficiary or the qualified beneficiary's estate, as determined under applicable state law, or by the spouse of the qualified beneficiary. (See also Q&A-5 of §54.4980B-7 relating to the independent right of each qualified beneficiary with respect to the same qualifying event to receive COBRA continuation coverage during the disability extension.) The rules of this Q&A-6 are illustrated by the following examples; in each example each group health plan is subject to COBRA:... 2024 Newfront COBRA for Employers Guide

I disagree with the TPA. An overspent FSA when dropping COBRA is just like an overspent FSA when terminating employment. The employer has no ability to recover that overspent amount. It's just part of the risk-shifting aspect inherent to the health FSA structure (uniform coverage risk of overspent balances against use-it-or-lose-it risk of forfeitures) that can always lead to net experience gains or losses. Employers cannot recover any amount from an employee who terminates employment mid-year with an overspent health FSA. That would risk disqualifying the entire Section 125 cafeteria plan, resulting in all elections becoming taxable to all employees. No different in the COBRA context. In short, the employee has used COBRA appropriately for the health FSA and has played his cards well. Just like if the employee had overspent the health FSA prior to termination (i.e., without the need for COBRA), the employer can't retro deny claims or do anything else to recover the overspent amount. Note that the situation is a bit more murky when it's an active employee who tries to make an election change the reduces the election below the current YTD reimbursements, but that's not the situation here. More details on that point here if you're interested: https://www.newfront.com/blog/overspent-health-fsa-upon-termination-of-employment-life-event-2 Prop. Treas. Reg. §1.125-5: (d) Uniform coverage rules applicable to health FSAs. (1) Uniform coverage throughout coverage period—in general. The maximum amount of reimbursement from a health FSA must be available at all times during the period of coverage (properly reduced as of any particular time for prior reimbursements for the same period of coverage). Thus, the maximum amount of reimbursement at any particular time during the period of coverage cannot relate to the amount that has been contributed to the FSA at any particular time prior to the end of the plan year. Similarly, the payment schedule for the required amount for coverage under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period. Employees’ salary reduction payments must not be accelerated based on employees’ incurred claims and reimbursements. IRS Chief Counsel Advice 201012060: https://www.irs.gov/pub/irs-wd/1012060.pdf The cafeteria plan rules require that a health FSA provide uniform coverage throughout the coverage period (which is the period when the employee is covered by the plan). See Proposed Treasury Regulations Section 1.125-5(d). Under the uniform coverage rules, the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. This means that the employee’s entire health FSA election is available from the first day of the plan year to reimburse qualified medical expenses incurred during the coverage period. The cafeteria plan may not, therefore, base its reimbursements to an employee on what that employee may have contributed up to any particular date, such as the date the employee is laid-off or terminated. Thus, if an employee’s reimbursements from the health FSA exceed his contributions to the health FSA at the time of lay-off or termination, the employer cannot recoup the difference from the employee.

Well that's a creative idea to take advantage of the 30-day retro rule and allow some extended time for the stragglers. I can't think of anything to prevent it. While I agree there doesn't seem to be anything explicitly blessing it, my take would be that flies under the general 125 election rules. Where I'm not sure if it would fly is with the carriers and/or stop-loss. So if you get comfortable with the idea from a 125 perspective (which seems reasonable to me), you'll still want to check with those players as to whether they consider it viable. It may create some adverse selection issues that concern them. Prop. Treas. Reg. §1.125-2 (d) Optional election for new employees. A cafeteria plan may provide new employees 30 days after their hire date to make elections between cash and qualified benefits. The election is effective as of the employee's hire date. However, salary reduction amounts used to pay for such an election must be from compensation not yet currently available on the date of the election. The written cafeteria plan must provide that any employee who terminates employment and is rehired within 30 days after terminating employment (or who returns to employment following an unpaid leave of absence of less than 30 days) is not a new employee eligible for the election in this paragraph (d).

Interesting situation. My reading is the spouse has the same right as any QB to add the former employee as dependent at OE. So I'd say the plan has to allow the spouse (as a QB) to enroll the former employee in the dental plan at OE. It will be a rare situation where the former employee is a non-QB COBRA dependent. Treas. Reg. Sec. 54.4980B-5: 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. ... (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. (d) The rules of this Q&A-4 are illustrated by the following examples: ... Example (2). (i) The facts are the same as in Example 1, except that E's family members are not covered under E's group health plan when E terminates employment. (ii) Although the family members do not have to be given an opportunity to elect COBRA continuation coverage, E must be allowed to add them to E's COBRA continuation coverage during the open enrollment period. This is true even though the family members are not, and cannot become, qualified beneficiaries (see Q&A-1 of §54.4980B-3).

You have until 4/15/24 (not 2025) to process the corrective distribution and thereby avoid the 6% excise tax for the 2023 excess contributions. Are you saying you took distributions of those funds already? In that case you could try to have them returned as a mistaken distribution. Here's a full overview: https://www.newfront.com/blog/correcting-mistaken-hsa-distributions

I don't see that as sufficient. The TPA reimbursing the employer plan sponsor is not part of the correction process for an improper FSA payment. If the employer demanded repayment from the employee, and the employee repaid the employer, that would be sufficient under the steps outlined in the guidance.

I'm not following why you think the 2023 1099 should show the distribution. You aren't taking the corrective distribution until 2024. So the '24 1099-SA should show the corrective distribution code in Box 3 with Code 2 I believe.

Yeah that's what I would do in that situation.

Yes, I agree. For purposes of the POP component of the Section 125 cafeteria plan, eligibility should be tied to each particular component within the health and welfare plan for which employees contribute on a pre-tax basis. That way if dental/vision has different eligibility standards than medical (e.g., they don't rely on the look-back measurement method's measurement/stability periods), employees' eligibility to pay for such benefits pre-tax through the cafeteria plan remains unaffected by a change in medical plan eligibility (or vice versa). It does make sense to tie eligibility to the health FSA component with medical plan eligibility, though. That is a requirement to preserve excepted benefit status for the health FSA (the so-called "footprint rule" that anyone eligible for the health FSA must also be eligible for the major medical). So there are situations where that eligibility tie specifically to the medical plan could make sense.

The spouse's general purpose health FSA was unfortunately disqualifying coverage for both the spouse and you. I've copied the relevant cite below for reference. Here's an overview: https://www.newfront.com/blog/hsa-interaction-health-fsa-2 So you will need to have the HSA custodian process the corrective distribution. That will avoid a 6% excise tax that would otherwise apply for the excess contributions. You should just be able to tell the custodian you had disqualifying coverage without the need to argue over the finer points of the HSA eligibility rules here. Here's an overview: https://www.newfront.com/blog/correcting-excess-hsa-contributions 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. Slide summary: 2024 Newfront Go All the Way with HSA Guide

Yeah it's an interesting question of whether the carrier is bound by those same MSP limitations, though. In any case, agreed that MSP clearly prohibits the employer from changing the employee-share of the premium for the age 65+ population to account for the increase. The employer can set the employee-share of the premium for all employees at a level sufficient to cover the intended percentage when taking into account the premium cost over the whole population, including the additional cost for the age 65+ employees.

That's strange because (as you noted) it's clearly prohibited by the MSP rules for employers with 20+ employee companies. I'd go back to BCBS to try to understand why they quoted the Medicare-eligible population differently. Here's an overview: https://www.newfront.com/blog/medicare-secondary-payer-employer-size-requirements 2024 Newfront Medicare for Employers Guide Here's the relevant cites: 45 CFR §411.108 (a) Examples of actions that constitute “taking into account”. Actions by GHPs or LGHPs that constitute taking into account that an individual is entitled to Medicare on the basis of ESRD, age, or disability (or eligible on the basis of ESRD) include, but are not limited to, the following: (1) Failure to pay primary benefits as required by subparts F, G, and H of this part 411. (2) Offering coverage that is secondary to Medicare to individuals entitled to Medicare. (3) Terminating coverage because the individual has become entitled to Medicare, except as permitted under COBRA continuation coverage provisions (26 U.S.C. 4980B(f)(2)(B)(iv); 29 U.S.C. 1162.(2)(D) ; and 42 U.S.C. 300bb-2.(2)(D) ). (4) In the case of a LGHP, denying or terminating coverage because an individual is entitled to Medicare on the basis of disability without denying or terminating coverage for similarly situated individuals who are not entitled to Medicare on the basis of disability. (5) Imposing limitations on benefits for a Medicare entitled individual that do not apply to others enrolled in the plan, such as providing less comprehensive health care coverage, excluding benefits, reducing benefits, charging higher deductibles or coinsurance, providing for lower annual or lifetime benefit limits, or more restrictive pre-existing illness limitations. (6) Charging a Medicare entitled individual higher premiums. (7) Requiring a Medicare entitled individual to wait longer for coverage to begin. (8) Paying providers and suppliers no more than the Medicare payment rate for services furnished to a Medicare beneficiary but making payments at a higher rate for the same services to an enrollee who is not entitled to Medicare. (9) Providing misleading or incomplete information that would have the effect of inducing a Medicare entitled individual to reject the employer plan, thereby making Medicare the primary payer. An example of this would be informing the beneficiary of the right to accept or reject the employer plan but failing to inform the individual that, if he or she rejects the plan, the plan will not be permitted to provide or pay for secondary benefits. (10) Including in its health insurance cards, claims forms, or brochures distributed to beneficiaries, providers, and suppliers, instructions to bill Medicare first for services furnished to Medicare beneficiaries without stipulating that such action may be taken only when Medicare is the primary payer. (11) Refusing to enroll an individual for whom Medicare would be secondary payer, when enrollment is available to similarly situated individuals for whom Medicare would not be secondary payer. CMS MSP Manual: https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/msp105c02.pdf 10 -MSP Provisions for Working Aged Individuals (Rev. 11755, Issued:12-21-2022, Effective: 01-23-2023, Implementation: 01-23-23) Pursuant to 42 CFR § 411.100, and further specified in § 411.170 and § 411.172, Medicare pays secondary to GHP coverage for individuals age 65 or over if the GHP coverage is by virtue of the individual's current employment status or the current employment status of the individual's spouse. Health insurance plans for retirees or the spouses of retirees do not meet this condition and are not primary to Medicare. The law requires employers (as defined in Pub. 100-05, Chapter 1) to offer to their employees age 65 or over and to the age 65 or over spouses of employees of any age the same coverage as they offer to employees and employees' spouses under age 65. For example, a plan may not provide benefits that are less for individuals age 65 or over or charge policyholders premiums that are higher for individuals age 65 or over since this would create an incentive for these individuals to reject the GHP coverage and make Medicare the primary payer. This provision applies whether or not the individual age 65 or over is entitled to Medicare. This equal benefit rule applies to coverage offered to full-time and part-time employees. CMS accepts that an individual attains a particular age on the day preceding his or her birthday.

Yeah good point. While what happens in practice is probably more important, I agree that rebates should be mentioned in the SPD (or some other material provided upon entry) to meet that disclosure condition of the small filer exemption. Since all plans should have a wrap SPD, that's the logical place to address it. But I also think that provision can be something relatively generic. Here's how our client wrap SPD template handles: Under ERISA, the Plan Administrator of the group health plan may have fiduciary responsibilities regarding distribution of dividends, demutualization and use of the Medical Loss Ratio rebates from group health insurers. Some or all of any rebate may be an asset of the plan, which must be used for the benefit of the participants covered by the policy. Participants should contact the Plan Administrator directly for information on how the rebate will be used.

The issue here is the DOL nonenforcement policy for holding plan assets (typically employee contributions) in trust. This primarily is derived from Technical Release 92-01. Failure to meet the trust nonenforcement relief would mean the plan is funded and can't take advantage of the small plan exemption. In the context of MLR rebates, Technical Release 2011-04 provides that employers need to allocate the portion of the rebate attributable to plan assets (typically employee contributions) in one of the approved ways within three months to rely on that trust nonenforcement relief with respect to the rebate. Failure to act within three months would cause the plan to lose the trust relief, and thereby be subject to the 5500 requirements regardless of size and a whole host of other concerns. If they act within three months by following one of the permitted allocation approaches, there will be no issue. I've been writing about this recently in the context of the new J&J class action case: https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2 Why Employers Typically Want to Avoid the ERISA Trust Requirements for Health Plans Establishing and maintaining a trust for the health plan can require additional documentation (trust agreement), procedural policies (trustee processes), fiduciary duties (assets must be held in trust for the exclusive benefit of participants and beneficiaries), administrative burdens (deadlines to deposit employee contributions into trust), and accounting and reporting obligations (loss of the small plan Form 5500 exemption and the requirement for an independent qualified public account’s opinion reported in Schedule H of the Form 5500). For more details: Newfront ERISA for Employers Guide While employers are generally accustomed to these burdens on the retirement side—where no similar trust nonenforcement policy applies—the industry norm has developed around standard single-employer health and welfare plans being unfunded and operating without a trust pursuant to the DOL’s nonenforcement policy. The J&J Connection: The plan in the J&J case was funded by a voluntary employees’ benefit association (VEBA) trust. In some situations, typically limited to very large employers, companies choose to fund their health plan through a trust to address accounting and other similar considerations. ... How Employers Could Inadvertently Lose Technical Release 92-01 Trust Relief: MLR Rebates The DOL’s guidance for how to address the medical loss ratio (MLR) rebates required by the ACA provides that the portion of a rebate received by the employer that is attributable to employee contributions is considered ERISA plan assets. Those plan assets must be held in trust for the exclusive benefit of participants and beneficiaries, unless an exception applies. The DOL piggybacks on the Technical Release 92-01 relief in its MLR guidance by providing that employers can avoid the trust requirement for such plan assets (i.e., the portion of the rebate attributable to employee contributions) provided those assets are spent within three months of receipt on refunds to participants, premium reductions, or benefit enhancements. Failure to expend the plan assets on one of those purposes within three months of receipt would cause the employer to lose the ERISA trust relief. For more details: How to Address MLR Rebates

Oh cool, thanks Christine. I think the problem is if the cafeteria plan specifically does not allow expenses incurred post-termination. Then you would be operating contrary to plan terms (thereby jeopardizing the safe harbor from constructive receipt) if you didn't follow the improper payment correction process. Keep in mind that including in income is just the last step in the improper payment correction process. If the plan terms are silent on it, you might get comfortable taking the position that incurring claims post-termination (to some point) is permissible based on consistent plan administrative practice/interpretation. Prop. Treas. Reg. §1.125-1(c)(7): (7) Operational failure. (i) In general. If the cafeteria plan fails to operate according to its written plan or otherwise fails to operate in compliance with section 125 and the regulations, the plan is not a cafeteria plan and employees' elections between taxable and nontaxable benefits result in gross income to the employees.

Scenario 1: Yeah that's a red herring. The issue is the cafeteria plan terms. The plan terms could allow expenses to be incurred post-termination (e.g., through the end of the month in which they terminate to match the health plan), although that's fairly uncommon. Here's a quick overview: https://www.newfront.com/blog/cobra-for-the-health-fsa The health FSA is a component of the employer’s Section 125 cafeteria plan. Most cafeteria plans will provide that FSA coverage (i.e., the ability to incur reimbursable claims) ends as of the date of termination from employment or other event causing a loss of eligibility, such as reduction in hours. The cafeteria plan may provide that health FSA coverage continues through the end of the month in which the employee terminates, similar to many medical/dental/vision plans. However, extending health FSA coverage through the end of the month prior to starting the run-out period is not common. There is a multi-step process to follow here from IRS guidance. Here's the IRS guidance: https://www.irs.gov/pub/irs-wd/1413006.pdf Here's a full walkthrough: https://www.newfront.com/blog/correcting-improper-health-fsa-payments If you get to that step, you'd simply include in their W-2 taxable income. There won't be any withholding if there's no longer any stream of income (e.g., severance) to take it from, but you still report the taxable income. Scenario 2: There's a step-by-step process to follow here. It's pretty straightforward, and the TPA should be aware of it. The employer can contractually delegate that process to the TPA, but the employer always retains the ultimate responsibility. You can find all this IRS guidance here: https://www.irs.gov/pub/irs-wd/1413006.pdf Or here's my attempt to summarize: https://www.newfront.com/blog/correcting-improper-health-fsa-payments TPA Can Correct FSA Payment Errors on Employer’s Behalf As a practical matter, employers rarely are involved in the day-to-day operations of the health FSA. These administrative functions are almost always delegated to a TPA that assumes the role of processing claims. The TPA will therefore typically have been the entity that approved the improper payment. As always, the employer as the health FSA plan sponsor is ultimately responsible for complying with the applicable law. That’s true regardless of whether the employer has delegated plan administration functions to the TPA, and regardless of whether the TPA made the error. Nonetheless, the IRS recognizes that the employer may also delegate the responsibility to apply the improper payment correction procedures on behalf of the employer. In the same manner that the TPA processes claims on behalf of the employer and its plan, the TPA can also process the improper claims repayment process on behalf of the employer and the FSA. Because the employer retains the ultimate liability in these scenarios regardless of the delegation to the TPA, the employer should ensure that the process is completed properly and consider contractual protections to avoid or limit liability. Furthermore, the employer has a fiduciary duty under ERISA to prudently select and monitor plan service providers, which includes the health FSA TPA. Employers should monitor whether a health FSA TPA is consistently allowing preventable payment errors and/or failing to properly correct those errors.

Hi there, glad you found the thread helpful. Upon enrolling in the general purpose health FSA as of 9/1, you had disqualifying coverage that blocked your HSA eligibility. So assuming you were HSA-eligible from January - August, you had eight months of HSA eligibility. The HSA contribution limit is proportional when you are HSA-eligible for only a portion of the year (and that portion does not include December). So your limit would be 8/12 (2/3) of the 2023 limit. More details: https://www.newfront.com/blog/the-hsa-proportional-contribution-limit If you exceeded that proportional limit, you'll need to work with the HSA custodian to take a corrective distribution of the excess by 4/15 to avoid a 6% excise tax on those excess contributions. More details: https://www.newfront.com/blog/correcting-excess-hsa-contributions Slide summary: 2024 Newfront Go All the Way with HSA Guide

Yeah I copied the guidance above:

You mean the employee exceeded the $2,850 health FSA salary reduction contribution limit in 2022? In that case, the guidance says to return the excess contributions as taxable income in the year of the correction (2024). IRS Notice 2012-40: https://www.irs.gov/pub/irs-drop/n-12-40.pdf If a cafeteria plan timely complies with the written plan requirement limiting health FSA salary reduction contributions as set forth in section IV, below, but one or more employees are erroneously allowed to elect a salary reduction of more than $2,500 (as indexed for inflation) for a plan year, the cafeteria plan will continue to be a § 125 cafeteria plan for that plan year if (1) the terms of the plan apply uniformly to all participants (consistent with Prop. Treas. Reg. § 1.125-1(c)(1)); (2) the error results from a reasonable mistake by the employer (or the employer’s agent) and is not due to willful neglect by the employer (or the employer’s agent); and (3) salary reduction contributions in excess of $2,500 (as indexed for inflation) are paid to the employee and reported as wages for income tax withholding and employment tax purposes on the employee’s Form W-2, Wage and Tax Statement (or Form W-2c, Corrected Wage and Tax Statement) for the employee’s taxable year in which, or with which, ends the cafeteria plan year in which the correction is made.

I'm assuming this came up on the 1095-C (as opposed to the 1094-C), and that the filing was accepted with errors. Based on the instructions, you will have a good argument that no penalties should apply because you have satisfied the reasonable cause criteria by acting in a responsible manner to verify the information on the 1095-C matches the information provided by the employee. (Note if the plan is self-insured and these are dependent SSNs, there are specific steps you have to take to meet this standard--but I assume we're talking about EE SSN/TIN info here). Forms 1094-C and 1095-C Instructions: https://www.irs.gov/instructions/i109495c If you fail to file correct information returns or fail to furnish a correct recipient statement, you may be subject to a penalty. However, you are not required to file corrected returns for missing or incorrect TINs if you meet the reasonable cause criteria. For additional information, see Pub. 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs on Information Returns. IRS Publication 1586: https://www.irs.gov/pub/irs-pdf/p1586.pdf III. REASONABLE CAUSE To show that the failure to include a correct TIN was due to reasonable cause and not willful neglect, filers must establish both that they acted in a responsible manner both before and after the failure occurred and that: • There were significant mitigating factors with respect to the failure (for example, an established history of filing information returns with correct TINs), or • The failure was due to events beyond the filer’s control (for example, actions of the payee or any other person). Except as otherwise stated in this publication, acting in a responsible manner for missing and incorrect TINs generally includes making an initial solicitation (request) for the payee’s name and TIN and, if required, annual solicitations. Mitigating factors or events beyond the filer’s control alone are not sufficient to establish reasonable cause. Upon receipt of the newly provided TIN, it must be used on any future information returns filed. Refer to Treas. Reg. 301.6724-1 for all reasonable cause guidelines. IRS ACA AIR Presentation: https://www.irs.gov/pub/info_return/June_2016_Webinar_Presentation.pdf

The employer can by plan design prevent a mid-year election change from reducing your election below the amount reimbursed YTD. So if your account was overspent at the time of the event, the employer can preserve a health FSA contribution election that will reach the amount of your YTD reimbursement upon loss of eligibility. For example, let's say you elected $1,500, and had reimbursed $1,000 with only $250 in contributions upon the loss of eligibility. The employer's cafeteria plan can require that your health FSA election be reduced no lower than to $1,000 upon the loss of eligibility. In a sense, that will be repaying the employer over the course of the year through your regular payroll contributions. While this is somewhat of a gray area in the rules, the federal government takes the same approach for its employees in its cafeteria plan. That's a pretty good sign the IRS doesn't have an issue with it. Note that this is different than a termination of employment situation. In that scenario, the rules are clear the employer cannot recoup any overspent amount. More details and cites here if you're interested: https://www.newfront.com/blog/overspent-health-fsa-upon-termination-of-employment-life-event-2

The IRS guidance here provides that employers can have mandatory cafeteria plan pre-tax contributions for employees who elect the underlying benefit components. I've copied that below. The choice between taxable cash and the qualified benefit is the choice between waiving the underlying plan (not paying the employee-share of the premium, and therefore receiving standard taxable cash) and electing the underlying plan (enrolling in medical, dental, vision, etc. and the corresponding election to pay the employee-share of the premium on a pre-tax basis). Pre-tax is basically better in every sense for both employer/employee. If you're looking for a reason in theory an employee might prefer after-tax, it could be to try to increase FICA contributions for a higher Social Security benefit. Or maybe they didn't want to be bound to the election for the entire plan year absent a permitted election change event. But basically everyone is going to prefer pre-tax. If you have employees actually choosing the after-tax option, I wouldn't try changing the approach here mid-year. Employees need to make their election knowing that it will be pre-tax through the cafeteria plan, and it's not clear to me you could have a mid-year "mini-OE" to facilitate that based on this cafeteria plan design change. Prop. Treas. Reg. §1.125-1(r): (1) Salary reduction-in general. The term employer contributions means amounts that are not currently available (after taking section 125 into account) to the employee but are specified in the cafeteria plan as amounts that an employee may use for the purpose of electing benefits through the plan. A plan may provide that employer contributions may be made, in whole or in part, pursuant to employees' elections to reduce their compensation or to forgo increases in compensation and to have such amounts contributed, as employer contributions, by the employer on their behalf. See also §1.125-5 (flexible spending arrangements). Also, a cafeteria plan is permitted to require employees to elect to pay the employees' share of any qualified benefit through salary reduction and not with after-tax employee contributions. A cafeteria plan is also permitted to pay reasonable cafeteria plan administrative fees through salary reduction amounts, and these salary reduction amounts are excludible from an employee's gross income.

That's not really how it's supposed to work because the employee was actually eligible for the FSA. It's only the HSA for which the employee was ineligible. I suppose you could try to argue that there was a systems error with the general purpose health FSA enrollment, thereby making any FSA payments improper. I'd consider that aggressive but not crazy. If you took that approach, here's an overview of how it would be handled: https://www.newfront.com/blog/correcting-improper-health-fsa-payments

Unfortunately, the employer is responsible for monitoring whether the employee has disqualifying coverage through the employer. The employee was never HSA-eligible based on disqualifying coverage (general purpose FSA) through that employer. So in this case, they are responsible for correcting the HSA contributions for the employee. The correction here is to include the HSA contributions in the employee's taxable income for 2023. That will required a corrected W-2. More details: https://www.newfront.com/blog/hsa-mistaken-contributions The employee will also need to take a corrective distribution by 4/15 to avoid a 6% excise tax on those ineligible contributions. More details: https://www.newfront.com/blog/correcting-excess-hsa-contributions Here's the relevant cites: IRS Notice 2008-59, Q/A-23: https://www.irs.gov/irb/2008-29_IRB#NOT-2008-59 Q-23. If an employer contributes to the account of an employee who was never an eligible individual, can the employer recoup the amounts? A-23. If the employee was never an eligible individual under § 223(c)(1), then no HSA ever existed and the employer may correct the error. At the employer’s option, the employer may request that the financial institution return the amounts to the employer. However, if the employer does not recover the amounts by the end of the taxable year, then the amounts must be included as gross income and wages on the employee’s Form W-2 for the year during which the employer made the contributions. Example 1. In February 2008, Employer L contributed $500 to an account of Employee M, reasonably believing the account to be an HSA. In July 2008, Employer L first learned that Employee M’s account is not an HSA because Employee M has never been an eligible individual under § 223(c). Employer L may request that the financial institution holding Employee M’s account return the balance of the account ($500 plus earnings less administration fees directly paid from the account) to Employer L. If Employer L does not receive the balance of the account, Employer L must include the amounts in Employee M’s gross income and wages on his Form W-2 for 2008. Example 2. The same facts as Example 1, except Employer L first discovers the mistake in July 2009. Employer L issues a corrected 2008 Form W-2 for Employee M, and Employee M files an amended federal income tax return for 2008. IRS Notice 2004-50: https://www.irs.gov/irb/2004-33_IRB#NOT-2004-50 Q-81. Are employers who contribute to an employee’s HSA responsible for determining whether the employee is an eligible individual and the employee’s maximum annual contribution limit? A-81. Employers are only responsible for determining the following with respect to an employee’s eligibility and maximum annual contribution limit on HSA contributions: (1) whether the employee is covered under an HDHP (and the deductible) or low deductible health plan or plans (including health FSAs and HRAs) sponsored by that employer; and (2) the employee’s age (for catch-up contributions). The employer may rely on the employee’s representation as to his or her date of birth. Slide summary: 2024 Newfront Go All the Way with HSA Guide

In theory that would be allowed. But keep in mind that a) the carrier probably has minimum employer contribution requirements, b) if this is an ALE, they would be exposing the company to "B Penalty" liability because the offer would be unaffordable for most, and c) the Section 125 uniform election rule may present an issue from an NDT perspective (overview here: https://www.newfront.com/blog/designing-health-plans-with-different-strategies). Also note that you can have a substantive eligibility condition of up to one month (referred to as a "bona fide orientation period") before application of the 90-day waiting period. You just have to be careful to coordinate that with the employer mandate limited non-assessment period rules if it's an ALE. More discussion here: https://www.newfront.com/blog/aca-first-day-of-the-fourth-full-calendar-month-rule