Brian Gilmore

I don't see any way to address the potential past labilities here under §4980D. Any attempt to modify the terms at this point can't change how it was documented/administered in the past. Ultimately, I think the only thing you can do it correct the situation going forward and hope that the skeletons in the closet remain there. At least you've cut off the exposure prospectively.

I'm guessing you're driving at the "significant benefits in the nature of medical care" component, and particularly with respect to the upper limit of sessions. Is it 6? Or 12? Or....? That one is an enduring mystery with no good answer I've come across. I'm not aware of any enforcement activity that might shed light on the matter. Here's my general thoughts if you're interested: https://www.newfront.com/blog/aca-and-hipaa-excepted-benefits Common Excepted Benefit #4: EAP EAPs must satisfy all of the following conditions to qualify as an excepted benefit: Not Significant Medical Benefits: The EAP cannot provide significant benefits in the nature of medical care; No Coordination with Group Health Plan: The EAP cannot be coordinated with benefits under another group health plan by meeting the following two requirements:- No Exhaustion: Participants in the other group health plan cannot be required to use and exhaust benefits under the EAP (i.e., the EAP cannot act as a gatekeeper) before becoming eligible for benefits under the other group health plan; and- No Participation Link: Participant eligibility for benefits under the EAP cannot be dependent on participation in another group health plan; No Premiums: The EAP cannot have an employee-share of the premium (i.e., it must be fully employer-paid); and No Cost-Sharing: The EAP cannot have any cost-sharing for its services (i.e., no deductibles, copays, or coinsurance). The most difficult element to interpret is the first requirement that the EAP not provide “significant benefits in the nature of medical care.” For example, there is no specific limit on the number of counseling sessions that the EAP can offer and still remain within this definition. The only guidance in the regulations is a generic statement that employers are to take into account “the amount, scope, and duration of covered services.” The best description of this “significant medical benefits” condition comes from the preamble to the excepted benefits regulations, which provides as follows: The first requirement of…these final regulations is that the EAP does not provide significant benefits in the nature of medical care. For this purpose, the amount, scope, and duration of covered services are taken into account. For example, an EAP that provides only limited, short-term outpatient counseling for substance use disorder services (without covering inpatient, residential, partial residential or intensive outpatient care) without requiring prior authorization or review for medical necessity does not provide significant benefits in the nature of medical care. At the same time, a program that provides disease management services (such as laboratory testing, counseling, and prescription drugs) for individuals with chronic conditions, such as diabetes, does provide significant benefits in the nature of medical care." The preamble subsequently notes that the Departments (DOL/IRS/HHS) may provide additional guidance in the future to better clarify when a program provides significant benefits in the nature of medical care.

There's an additional integration rule in Notice 2015-17, Question 3, but that applies only to Part B and Part D. So I think you're going to need to just break out the retiree-only piece into a separate ERISA plan to take advantage of the retiree-only exception. That's the easy workaround everyone uses for retiree HRAs. You don't want to be having to argue the retiree piece is operating as a separate plan even though it's wrapped into the main 501 with actives--that would be a tough sell. Especially since there's not much guidance there and it's easy to establish/maintain a separate retiree-only plan to avoid the issue.

You cannot have an HSA with Employer #2 because your general purpose health FSA with Employer #1 is disqualifying coverage that prevents you from being HSA-eligible. That means you cannot make or receive HSA contributions for as long as your general purpose health FSA coverage remains in effect. You can have another health FSA with Employer #2. The health FSA limit is purely a plan year limit specific to each particular employer's plan. It's not an individual limit and it has nothing to do with each employee, the calendar year, etc. So employees could have two or more different (unrelated) employers and elect $3,200 with each in the same calendar year and have no problems. The only time the health FSA contribution limit would have to be combined is if the employee was moving between entities within the employer. Where the two employers are unrelated (as is almost always the case), the employee will have a full new limit. So as long as the two employers are unrelated, you can make a full $3,200 election under each health FSA. (Note that the $5k dependent care FSA limit is a global calendar year limit aggregated over all employers combined. This is different from the health FSA limit, which is tied to each employer plan.) More details: https://www.newfront.com/blog/health-fsa-salary-reduction-contribution-limit-2 https://www.newfront.com/blog/dependent-care-fsa-limit-challenges 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.

Assuming they're QBs, I think that can be unilaterally done at any point because it would be one QB independently ending their coverage, while the other QBs maintain their independent election rights. That was my point above. As to how it practically occurs, that will probably vary from plan to plan (or more realistically, TPA to TPA). The formal QB notice requirements in the COBRA regs surround the requirements upon divorce/legal separation, loss of dependent status, second qualifying events, disability determinations, etc. Notice of voluntarily dropping mid-maximum coverage period doesn't seem to be addressed. Any reasonable requirement that the QB notify the plan of the change in coverage I would think suffice. Clearly there will have to be some form of notice for the plan to know that a) it's not just a premium shortfall situation, and b) which QBs are maintaining coverage.

Yes, you can drop COBRA at any point by simply not making the required premium payment.

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.