Brian Gilmore

An agent can still be an independent contractor. Clearly there's no employment relationship here between the CA and BA in the vast majority of situations. So they will always be independent contractors. But they'll also generally be agents. Here's the main factor: I would assume in most cases the CE is going to direct the BA's conduct via the terms of their contractual arrangement for services and their general relationship with respect to the plan.

I read the rules to say that there's only a breach for a CE when the CE or BA knows, or should know by exercising reasonable diligence, that a breach of unsecured PHI occurred for individual's with that CE. Nonetheless, I think it would be difficult to argue that your CE breach notification timeline is different from others affected by the breach at the BA level. You would have to feel confident that even a BA exercising reasonable diligence couldn't sort out whether the CE's specific participants were affected by the breach. Seems like a tough sell to me. I would always assume the 60-day outer limit is going to start running no later than the date the BA announces the breach. This is also why it's so important in BAAs to have an outer deadline for notification to the CE that's well before the 60-day outer deadline. The BA is generally acting as the agent for the CE, so the CE is treated as discovering the breach on the first day the BA knew (or should have known by exercising reasonable diligence) of the breach. That can put the CE in a real bind if the BA takes up most of the time to notify the CE of the breach. Here's an overview with cites that you might find helpful-- https://www.newfront.com/blog/hipaa-breach-notifications-for-employers Where the breach occurs at a business associate, the business associate must notify the covered entity of the breach. The covered entity is then responsible for satisfying the breach notification obligations described above, even though the breach occurred at one of its business associates. Under the standard HIPAA rules, business associates must notify the covered entity of the breach without unreasonable delay, and in no event later than 60 calendar days following discovery of the breach (or, if earlier, when the breach would have been discovered by exercising reasonable diligence). However, many BAAs include terms to provide a shorter outer limit (e.g., 15 calendar days) for the business associate to notify the covered entity of the breach to ensure that the covered entity has sufficient time to satisfy its breach notification obligations. Where the business associate is acting as an agent of the covered entity, the covered entity’s 60-day outer notification limit applies based on the date the business associate discovers the breach—it is not based from the date the business associate notifies the covered entity. ... 45 CFR §164.404: (a) Standard. (1) General rule. A covered entity shall, following the discovery of a breach of unsecured protected health information, notify each individual whose unsecured protected health information has been, or is reasonably believed by the covered entity to have been, accessed, acquired, used, or disclosed as a result of such breach. (2) Breaches treated as discovered. For purposes of paragraph (a)(1) of this section, §§164.406(a), and 164.408(a), a breach shall be treated as discovered by a covered entity as of the first day on which such breach is known to the covered entity, or, by exercising reasonable diligence would have been known to the covered entity. A covered entity shall be deemed to have knowledge of a breach if such breach is known, or by exercising reasonable diligence would have been known, to any person, other than the person committing the breach, who is a workforce member or agent of the covered entity (determined in accordance with the federal common law of agency). ... 74 Fed. Reg. 42740, 42754 (Aug. 24, 2009): https://www.federalregister.gov/documents/2009/08/24/E9-20169/breach-notification-for-unsecured-protected-health-information If a business associate is acting as an agent of a covered entity, then, pursuant to § 164.404(a)(2), the business associate’s discovery of the breach will be imputed to the covered entity. Accordingly, in such circumstances, the covered entity must provide notifications under § 164.404(a) based on the time the business associate discovers the breach, not from the time the business associate notifies the covered entity. In contrast, if the business associate is an independent contractor of the covered entity (i.e., not an agent), then the covered entity must provide notification based on the time the business associate notifies the covered entity of the breach. As reflected in the comments we received in response to the timing of business associate notification to a covered entity following a breach, covered entities may wish to address the timing of the notification in their business associate contracts 78 Fed. Reg. 5565, 5581-5656 (Jan. 25, 2013): https://www.federalregister.gov/documents/2013/01/25/2013-01073/modifications-to-the-hipaa-privacy-security-enforcement-and-breach-notification-rules-under-the An analysis of whether a business associate is an agent will be fact specific, taking into account the terms of a business associate agreement as well as the totality of the circumstances involved in the ongoing relationship between the parties. The essential factor in determining whether an agency relationship exists between a covered entity and its business associate (or business associate and its subcontractor) is the right or authority of a covered entity to control the business associate’s conduct in the course of performing a service on behalf of the covered entity. The right or authority to control the business associate’s conduct also is the essential factor in determining whether an agency relationship exists between a business associate and its business associate subcontractor. Accordingly, this guidance applies in the same manner to both covered entities (with regard to their business associates) and business associates (with regard to their subcontractors). … Because of the agency implications on the timing of breach notifications, we encourage covered entities to discuss and define in their business associate agreements the requirements regarding how, when, and to whom a business associate should notify the covered entity of a potential breach.

I don't read those attribution rules applying in any context other than a more than 2% owner of an S Corp. The cross reference to §1372/§318 attribution only explicitly applies in the S Corp shareholder definition section. So I would interpret those rules to permit cafeteria plan eligibility for family members of a partner or other type of (non-S Corp) self-employed individual.

Interesting theoretical question, but I have not seen anyone intentionally take that position--and for good reason. I would consider it very aggressive to follow a different interpretation than the proposed cafeteria plan regs here. These regs have notoriously been in proposed form for an eternity now (since '07), and since then they've taken root as the primary basis for Section 125 guidance in many areas. Without them it's a sea of gray interpretations of the statute, which really would just be a guessing game. Even the IRS constantly points to the proposed cafeteria plan regs as controlling in other forms of guidance like Chief Counsel Memoranda (example: https://www.irs.gov/pub/irs-wd/202317020.pdf) and Information Letters (example: https://www.irs.gov/pub/irs-wd/16-0048.pdf). Plus the IRS itself has told us we can rely on the proposed regs in the preamble-- https://www.govinfo.gov/content/pkg/FR-2007-08-06/pdf/E7-14827.pdf As noted in this preamble, taxpayers may rely on the new proposed regulations for guidance pending the issuance of final regulations. ... Proposed Effective Date With the exceptions noted in the ‘‘Effect on other documents’’ section of this preamble and under the ‘‘Debit cards’’ section of the preamble, it is proposed that these regulations apply for plan years beginning on or after January 1, 2009. Taxpayers may rely on these regulations for guidance pending the issuance of final regulations.

Not sure I fully understand the corporate structure you're describing, but regardless the Section 125 cafeteria plan rules prohibit more than 2% owners from participating. That prohibition includes family attribution for both parents and children. I think that gets you to your answer here. Here's a quick summary overview: https://www.newfront.com/blog/compliance-fast-s-corporation-owners-2-shareholders-2 Here's the family attribution rules: IRC §1372: (b) 2-percent shareholder defined. For purposes of this section , the term “2-percent shareholder” means any person who owns (or is considered as owning within the meaning of section 318 ) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation. IRC §318: (a) General rule. For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable— (1) Members of family. (A) In general. An individual shall be considered as owning the stock owned, directly or indirectly, by or for— (i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and (ii) his children, grandchildren, and parents. (B) Effect of adoption. For purposes of subparagraph (A)(ii) , a legally adopted child of an individual shall be treated as a child of such individual by blood. Here's the 125 regs: Prop. Treas. Reg. §1.125-1(g)(2): (2) Self-employed individual not an employee. (i) In general. The term employee does not include a self-employed individual or a 2-percent shareholder of an S corporation, as defined in paragraph (g)(2)(ii) of this subsection. For example, a sole proprietor, a partner in a partnership, or a director solely serving on a corporation’s board of directors (and not otherwise providing services to the corporation as an employee) is not an employee for purposes of section 125, and thus is not permitted to participate in a cafeteria plan. However, a sole proprietor may sponsor a cafeteria plan covering the sole proprietor’s employees (but not the sole proprietor). Similarly, a partnership or S corporation may sponsor a cafeteria plan covering employees (but not a partner or 2-percent shareholder of an S corporation). (ii) Two percent shareholder of an S corporation. A 2-percent shareholder of an S corporation has the meaning set forth in section 1372(b). ... Example (1). Two-percent shareholders of an S corporation. (i) Employer K, an S corporation, maintains a cafeteria plan for its employees (other than 2-percent shareholders of an S corporation). Employer K's taxable year and the plan year are the calendar year. On January 1, 2009, individual Z owns 5 percent of the outstanding stock in Employer K. Y, who owns no stock in Employer K, is married to Z. Y and Z are employees of Employer K. Z is a 2-percent shareholder in Employer K (as defined in section 1372(b)). Y is also a 2-percent shareholder in Employer K by operation of the attribution rules in section 318(a)(1)(A)(i).

If those contributions from the 12/29/23 payroll are attached to the 2024 plan year (i.e., available only for expenses incurred on or after 1/1/24), I think you could reasonably take the position that the contributions were not attributable to the 2023 plan year and therefore did not exceed the 2023 limit. Otherwise, the more conservative route would be to treat this as an excess contribution that's taxable in 2024 when refunded. 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.

Ha, thanks for teeing me up here Bill. Good news is you're fine, Bri. You can still be HSA-eligible if your spouse is in non-HDHP coverage. HSA eligibility is on an individual-by-individual basis. You just need to be in an HDHP and have no disqualifying coverage to be HSA-eligible. A few things- You can't just drop employer coverage for the spouse whenever you want. Is your OE for 2/1? If not, you'll need a permitted election change event because otherwise your election is irrevocable under the Section 125 cafeteria plan rules for the rest of the plan year. Make sure you have that in order before the spouse moves to the exchange. You can always use your HSA for your spouse's medical expenses. It doesn't matter if the spouse isn't on your health plan, and it doesn't matter if the spouse is HSA-eligible. HSA eligibility is exclusively about putting money into the HSA. Tax-free medical distributions are always available for you and your spouse. If you're in family HDHP coverage for one month and individual HDHP coverage for the remaining months in 2024, you will have a proportional contribution limit. ($8,300 + (($4,150 x 11) / 12) ) = $4,495. If your spouse enrolls in an individual HDHP for Feb-Dec, she can contribute up to 11/12 of the individual limit to her own HSA. So 11/12 x $4,150 = $3,804. (Subject to the last month rule exception, I won't go into that). You'll each need separate HSAs at this point. You won't have the special rule for spouses that allows you to combine the family limit for Feb - Dec, so you each have to contribute to your own HSAs for those months. The special rule requires that at least one of you be in family HDHP coverage. There's also a proportional amount of the $1,000 catch-up contribution amount available for each period to your respective HSAs if either of you is 55 (or will be by the end of 2024). Here's some info walking through all of this in more detail if you're interested: 2024 Newfront Go All the Way with HSA Guide https://www.newfront.com/blog/hsas-and-family-members https://www.newfront.com/blog/the-hsa-proportional-contribution-limit https://www.newfront.com/blog/special-hsa-contribution-limit-for-spouses https://www.newfront.com/blog/hsa-catch-up-contributions

I put together an overview on this issue covering a wide variety of options that may be helpful: https://www.newfront.com/blog/correcting-missed-cafeteria-plan-contributions In short, I don't see any issue with the employer eating the missed contributions as a corrective measure. This shouldn't affect NDT because employees will have access to the same amount as elected. Here's the relevant part-- 3. Convert Missed Amounts to Employer Contributions: One final approach is for employers to simply forgive the missed employee contributions without requiring the employee to repay the missed amount. There should not be any issue with taking this approach in a corrective context to address a bona fide employer error. This approach is the costliest for the employer, but also the simplest and least likely to cause employee relations issues related to the mistake. Under this approach, the affected employees will still need to have the full elected coverage (e.g., premium only plan contributions for medical/dental/vision) or balance available for reimbursement (e.g., health FSA or dependent care FSA) despite missing some amount of the contributions associated with that election. In other words, this approach is effectively the equivalent of converting the missed employee contributions to employer contributions as a corrective measure—the employer is covering the cost for the amount they failed to withhold from the employee’s paycheck. Sample employee communication: During a recent system audit, we discovered that your year-to-date payroll contributions for [Medical/Dental/Vision/FSA/etc.] have been underfunded. We will be correcting this error by forgiving your missed contributions and withholding your corrected elected contribution amount through payroll for each pay period remaining in the plan year. You will still have access to the full benefits you elected for the plan year. Please contact People Operations with any questions.

Oh yeah, definitely use your spouse's FSA. The FSA has blocked HSA eligibility for both of you, but you're still both eligible to reimburse any §213(d) expenses through the FSA. It's only a one-way street here on issues--HSA is a problem, but the FSA is all clear. Might as well make the most of the FSA since you can't take advantage of the HSA.

Yeah I agree with that. As you noted, a QMCSO/NMSN can't require the plan to provide a benefit it doesn't otherwise provide. I don't think a QMCSO/NSMN can require the employee to make a payroll salary reduction contribution of any amount toward the underlying individual policy. That individual policy is not an ERISA group health plan so it's not subject to these rules. The ICHRA rules have a whole section spelling that out. And since the ICHRA itself cannot have employee contributions (as with any HRA), I don't see any employee skin in the game here. That's what makes this so interesting/different from a standard GHP situation.

Agreed. As long as the ICHRA covers the premium for children (very likely) it should be subject to the QMCSO/NSMN requirements in the same manner as any other group health plan. What makes the ICHRA interesting in this scenario is that by definition there are no employee contributions to an HRA. So the NSMN should basically just require that the child have access to the employer reimbursement level available for child premiums for the individual policy (and anything else covered by the ICHRA for children, such as cost-sharing). Any amount not covered by the ICHRA for that individual policy premium will presumably be the child's (and therefore likely the custodial parent's) responsibility to cover. That's a big shift from a traditional group health plan where the employee is required to pay the employee-share of the premium (up to the CCPA/state limits) for the child. I have a feeling that OCSS will be quite confused by this scenario. Given the limited ICHRA infusion into the mainstream still, they might not have much experience with ICHRAs. It might need some back and forth with them to get everyone on the same page for how to handle. Here's an overview I put together on how to approach NMSNs generally that may be helpful: https://www.newfront.com/blog/employer-responsibilities-upon-receipt-of-a-nmsn Here's the cites confirming a QMCSO/NSMN can apply to any "group health plan," which includes an ICHRA. ERISA §609: (a) Group health plan coverage pursuant to medical child support orders. (1) In general. Each group health plan shall provide benefits in accordance with the applicable requirements of any qualified medical child support order. A qualified medical child support order with respect to any participant or beneficiary shall be deemed to apply to each group health plan which has received such order, from which the participant or beneficiary is eligible to receive benefits, and with respect to which the requirements of paragraph (4) are met. ERISA §607: (1) Group health plan. The term “group health plan” means an employee welfare benefit plan providing medical care (as defined in section 213(d) of the Internal Revenue Code of 1986) to participants or beneficiaries directly or through insurance, reimbursement, or otherwise. Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c) of such Code). Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986). DOL QMCSO/NSMN Guide: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/qualified-medical-child-support-orders.pdf 1 As used in this booklet, the term “group health plan” refers to that term as defined in section 607(1) of ERISA and means generally any welfare plan established or maintained by an employer or employee organization (or both) that provides medical care to employees or their dependents directly or through insurance, reimbursement, or otherwise. Q1-1: What types of plans are subject to the QMCSO provisions? The QMCSO provisions apply to “group health plans” subject to the Employee Retirement Income Security Act of 1974 (ERISA). For this purpose, a “group health plan” generally is a plan that both: Is sponsored by an employer or employee organization (or both) and provides “medical care” to employees, former employees, or their families. “Medical care” means amounts paid for the diagnosis, cure, mitigation, treatment or prevention of a disease; for the purpose of affecting any structure or function of the body; transportation primarily for or essential to such care or services; or for insurance covering such care or services. ERISA does not generally apply to plans maintained by: Federal, state or local governments; churches; and employers solely for purposes of complying with applicable workers compensation or disability laws. However, provisions of the Child Support Performance and Incentive Act (CSPIA) of 1998 require church plans to comply with QMCSOs and National Medical Support Notices, and state and local government plans to comply with National Medical Support Notices. [ERISA §§ 4(b), 609(a) and 607(1), Internal Revenue Code § 213(d), CSPIA § 401(f)]

Yes, this is a common mistake. Probably many are making the mistake all the time who don't even know about it. The good news is you don't need your employer's blessing to undo the $500 ER HSA contribution. You can simply take the corrective distribution directly from the HSA custodian. The HSA is an individually-owned account, so it's not controlled by your employer. You can simply inform the custodian that the $500 was ineligible excess contributions to process the corrective distribution. That will avoid the 6% excise tax for the excess contributions. Here's an overview of how to handle (the relevant cites are at the bottom of the post if you need them)-- https://www.newfront.com/blog/correcting-excess-hsa-contributions Corrective Distribution by Tax Filing Deadline To avoid a 6% excise tax on the excess contributions, the employee must work directly with the HSA custodian to take a corrective distribution of the excess contributions, adjusted for earnings. The earnings portion of the corrective distribution is included in the employee’s gross income, but there are no additional taxes. In other words, neither the 6% excise tax nor the 20% additional tax for non-medical distributions will apply. Note: Where the excess contribution was made pre-tax through payroll and not reported as income on the Form W-2, the excess contribution itself must also be reported as “Other Income” on the individual tax return. Where the excess contribution was made outside of payroll, the individual cannot claim a deduction for the excess contribution amount. The general rule is the employee must take the corrective distribution by the tax filing deadline (typically April 15), or the later deadline if filing for an extension (typically October 15), to avoid the 6% excise tax. The corrective distribution is reported on Line 14b of the Form 8889 filed with the individual income tax return. It is also reported as an excess contribution distribution (Code 2) in Box 3 of the Form 1099-SA provided by the HSA custodian. There is a special rule outlined in the IRS Form 8889 Instructions providing individuals the opportunity to take a corrective distribution up to six months after the due date of the return, including extensions. Under that special rule, employees can work with their personal tax advisor to file an amended return with the statement “Filed pursuant to section 301.9100-2” entered at the top. This may also require additional changes to the Form 5329 to reflect that the corrective distribution will avoid the previously applicable 6% excise tax. As to your employer being adamant that your spouse's general purpose health FSA is not disqualifying coverage for you, here's an easy cite you can provide them to confirm they are incorrect-- https://www.newfront.com/blog/hsa-interaction-health-fsa-2 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.

Well it's more of a pure plan design question then, but I agree with your reading of those plan terms. It's just how they have written/interpreted/administered their employer non-protected leave health FSA continuation policy.

The TPA acts on behalf of the cafeteria plan, which is sponsored by the employer. The employer plan sponsor is required to substantiate all claims. That responsibility is delegated to the FSA TPA. This is not something that is ultimately on the employee. It's the plan's responsibility to maintain its tax-advantaged status. Claims must be substantiated by an independent third-party. The plan's failure to properly substantiate claims could result in loss of the safe harbor from constructive receipt, causing all contributions to be taxable for all employees. Here's a short summary from a recent IRS memorandum-- https://www.irs.gov/pub/irs-wd/202317020.pdf If a section 125 cafeteria plan does not require an independent third party to fully substantiate reimbursements for medical expenses (for example, by permitting self-certification of expenses, “sampling” of expenses, or certification by favored providers), does not require substantiation for medical expenses below certain dollar amounts, or does not substantiate reimbursements for dependent care assistance expenses, then the plan fails to operate in accordance with the substantiation requirements of Prop. Reg. § 1.125–6(b) and is not a cafeteria plan within the meaning of section 125. Therefore, the amount of any benefits that any employee elects under the cafeteria plan must be included in gross income and is wages for Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) purposes subject to withholding. Here are the relevant cites-- Prop. Treas. Reg. §1.125-6: (b) Rules for claims substantiation for cafeteria plans. (1) Substantiation required before reimbursing expenses for qualified benefits. This paragraph (b) sets forth the substantiation requirements that a cafeteria plan must satisfy before paying or reimbursing any expense for a qualified benefit. (2) All claims must be substantiated. As a precondition of payment or reimbursement of expenses for qualified benefits, a cafeteria plan must require substantiation in accordance with this section. Substantiating only a percentage of claims, or substantiating only claims above a certain dollar amount, fails to comply with the substantiation requirements in §1.125-1 and this section. (3) Substantiation by independent third-party. (i) In general. All expenses must be substantiated by information from a third-party that is independent of the employee and the employee's spouse and dependents. The independent third-party must provide information describing the service or product, the date of the service or sale, and the amount. Self-substantiation or self-certification of an expense by an employee does not satisfy the substantiation requirements of this paragraph (b). The specific requirements in sections 105(b), 129, and 137 must also be satisfied as a condition of reimbursing expenses for qualified benefits. For example, a health FSA does not satisfy the requirements of section 105(b) if it reimburses employees for expenses where the employees only submit information describing medical expenses, the amount of the expenses and the date of the expenses but fail to provide a statement from an independent third-party (either automatically or subsequent to the transaction) verifying the expenses. Under §1.105-2, all amounts paid under a plan that permits self-substantiation or self-certification are includible in gross income, including amounts reimbursed for medical expenses, whether or not substantiated. See paragraph (m) in §1.125-5 for additional substantiation rules for limited-purpose and post-deductible health FSAs. Prop. Treas. Reg. §1.125-1: (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. (ii) Failure to operate according to written cafeteria plan or section 125. Examples of failures resulting in section 125 not applying to a plan include the following— (A) Paying or reimbursing expenses for qualified benefits incurred before the later of the adoption date or effective date of the cafeteria plan, before the beginning of a period of coverage or before the later of the date of adoption or effective date of a plan amendment adding a new benefit; (B) Offering benefits other than permitted taxable benefits and qualified benefits; (C) Operating to defer compensation (except as permitted in paragraph (o) of this section); (D) Failing to comply with the uniform coverage rule in paragraph (d) in §1.125-5; (E) Failing to comply with the use-or-lose rule in paragraph (c) in §1.125-5; (F) Allowing employees to revoke elections or make new elections, except as provided in §1.125-4 and paragraph (a) in §1.125-2; (G) Failing to comply with the substantiation requirements of § 1.125-6; (H) Paying or reimbursing expenses in an FSA other than expenses expressly permitted in paragraph (h) in §1.125-5; (I) Allocating experience gains other than as expressly permitted in paragraph (o) in §1.125-5; (J) Failing to comply with the grace period rules in paragraph (e) of this section; or (K) Failing to comply with the qualified HSA distribution rules in paragraph (n) in §1.125-5.

I would say health FSA coverage has to continue through at least the date the employee gives the unequivocal intent of notice not to return. Until then, the employee has the FMLA right to continue coverage. So claims incurred through that notice date remain reimbursable. The details beyond that can be a matter of plan design. Here's the cites I'd rely on for that-- Treas. Reg. §1.125-3: (b) Coverage. (1) Regardless of the payment option selected under Q&A-3 of this section, for so long as the employee continues health FSA coverage (or for so long as the employer continues the health FSA coverage of an employee who fails to make the required contributions as described in Q&A-3(a)(2)(iii) of this section), the full amount of the elected health FSA coverage, less any prior reimbursements, must be available to the employee at all times, including the FMLA leave period. (2) (i) If an employee's coverage under the health FSA terminates while the employee is on FMLA leave, the employee is not entitled to receive reimbursements for claims incurred during the period when the coverage is terminated. If an employee subsequently elects or the employer requires the employee to be reinstated in the health FSA upon return from FMLA leave for the remainder of the plan year, the employee may not retroactively elect health FSA coverage for claims incurred during the period when the coverage was terminated. Upon reinstatement into a health FSA upon return from FMLA leave (either because the employee elects reinstatement or because the employer requires reinstatement), the employee has the right under FMLA: to resume coverage at the level in effect before the FMLA leave and make up the unpaid premium payments, or to resume coverage at a level that is reduced and resume premium payments at the level in effect before the FMLA leave. If an employee chooses to resume health FSA coverage at a level that is reduced, the coverage is prorated for the period during the FMLA leave for which no premiums were paid. In both cases, the coverage level is reduced by prior reimbursements. 29 CFR §825.209: (f) Except as required by the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) and for key employees (as discussed below), an employer's obligation to maintain health benefits during leave (and to restore the employee to the same or equivalent employment) under FMLA ceases if and when the employment relationship would have terminated if the employee had not taken FMLA leave (e.g., if the employee's position is eliminated as part of a nondiscriminatory reduction in force and the employee would not have been transferred to another position); an employee informs the employer of his or her intent not to return from leave (including before starting the leave if the employer is so informed before the leave starts); or the employee fails to return from leave or continues on leave after exhausting his or her FMLA leave entitlement in the 12-month period. 29 CFR §825.311: (b) If an employee gives unequivocal notice of intent not to return to work, the employer's obligations under FMLA to maintain health benefits (subject to COBRA requirements) and to restore the employee cease. However, these obligations continue if an employee indicates he or she may be unable to return to work but expresses a continuing desire to do so.

Where an employee or dependent loses eligibility for a benefit, I don't see there being a Section 125 irrevocable election issue caused by the retro disenrollment of the ineligible individual. That's common for any situation (other than prohibited rescissions for medical under the ACA, as you noted) where the employer discovers late that an individual has lost eligibility for any health and welfare benefit for which employees pay on a pre-tax basis. The agencies also came out with an FAQ a while back stating that the ACA prohibition of rescission rules do not apply in this situation-- https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/aca-part-ii.pdf Similarly, if a plan does not cover ex-spouses (subject to the COBRA continuation coverage provisions) and the plan is not notified of a divorce and the full COBRA premium is not paid by the employee or ex-spouse for coverage, the Departments do not consider a plan’s termination of coverage retroactive to the divorce to be a rescission of coverage. (Of course, in such situations COBRA may require coverage to be offered for up to 36 months if the COBRA applicable premium is paid by the qualified beneficiary.) One important note is that this was one of the items that was addressed by the Outbreak Period extensions. So for multiple years the former spouse's COBRA rights would be preserved even by providing very late notice. That relief is over, so the employee or spouse is going to need to notify the plan within 60 days of the divorce/legal separation to preserve the former spouse's COBRA rights. There are also open questions as to whether it makes more sense to terminate coverage prospectively or retroactively in this type of situation, and whether disciplinary action against the employee might be appropriate for covering the ineligible individual for some expended period. Here's some more details I've posted on this common issue: https://www.newfront.com/blog/event-divorce-terminate-ex-spouse-2 Slide summary: 2023 Newfront ERISA for Employers Guide

I agree in that situation there's nothing to point to in the rules that could show any adverse tax consequence to the HCPs because they are not put in a constructive receipt position by the arrangement. I still think it could potentially invite further scrutiny on the plan as a whole, though. With limited guidance here (and almost no enforcement activity) there are many judgment calls to make.

Well it would affect all HCPs. Not all of them are in the fully employer-paid tier of EE-only coverage.

On a related note, the dependent care FSA limit (sadly!) has also returned to normal levels. So the ARPA changes expired on both the tax credit and §129 side. In any case, I think it would be a very rare situation where the tax credit provides more bang for the buck than the dependent care FSA. Full details: https://www.newfront.com/blog/dependent-care-fsa-limit-challenges Slide summary: Newfront Office Hours Webinar: 2022 Year in Review

Loss of the Section 125 cafeteria plan safe harbor from constructive receipt for the HCPs-- Prop Treas. Reg. §1.125-7(m): (m) Tax treatment of benefits in a cafeteria plan. (1) Nondiscriminatory cafeteria plan. A participant in a nondiscriminatory cafeteria plan (including a highly compensated participant or key employee) who elects qualified benefits is not treated as having received taxable benefits offered through the plan, and thus the qualified benefits elected by the employee are not includible in the employee’s gross income merely because of the availability of taxable benefits. But see paragraph (j) in §1.125-1 on nondiscrimination rules for sections 79(d), 105(h), 129(d), and 137(c)(2), and limitations on exclusion. (2) Discriminatory cafeteria plan. A highly compensated participant or key employee participating in a discriminatory cafeteria plan must include in gross income (in the participant’s taxable year within which ends the plan year with respect to which an election was or could have been made) the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable.

Yeah I get squeamish about that argument even where the class has no contribution at any tier. I feel like unless the class is ineligible to participate in the cafeteria plan by the Section 125 rules (e.g., more than 2% shareholders, LLC members, partners in a partnership) there's going to be risk there.

I would still consider that to be a contribution structure that doesn't comply with the uniform election rule component of the Section 125 nondiscrimination rules. The EE-only tier isn't providing a uniform election with respect to employer contributions for the non-HCPs, and therefore it's discriminatory in favor of HCPs in that tier. I'm assuming it's the same underlying medical plan option(s) at issue for both groups. Your argument that the salaried employees with the 100% ER contribution effectively aren't part of the cafeteria plan at that EE-only tier because they have no contribution is a creative one (kudos), but my feeling is the IRS would consider it too clever by half. That would be my position here. No real way to answer this definitively since guidance is limited (and enforcement experience is essentially nil), but for what it's worth I would advise the client to change that structure. The workaround I'd suggest is that there is never any issue with providing a greater taxable salary/wage to employees. If the salaried EEs were paid a greater amount intended to cover the increased cost of coverage, the salaried EEs could then make an election to apply that extra amount on a pre-tax basis to the employee-share of the premium. That would put both parties in largely the same position as if they had received the larger employer contribution. I put out a couple of posts diving into this topic that might be interesting/helpful: https://www.newfront.com/blog/designing-health-plans-with-different-strategies https://www.newfront.com/blog/nondiscrimination-rules-for-different-health-plan-contribution-structures-2 Here's the relevant cites: Prop. Treas. Reg. §1.125-7(c)(2): (2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits)…A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits). Prop. Treas. Reg. §1.125-7(e)(2): (2) Similarly situated. In determining which participants are similarly situated, reasonable differences in plan benefits may be taken into account (for example, variations in plan benefits offered to employees working in different geographical locations or to employees with family coverage versus employee-only coverage).

Well then it's a GHP subject to COBRA, and the employee has experienced a loss of coverage triggered by termination of employment. That's a COBRA qualifying event whereby all the usual COBRA rights apply.

Without the details on the actual coverage at issue here, I'm assuming this is some type of expat group health plan maintained by a U.S. company for the benefit of employees working abroad. In that case, all the standard COBRA rights and obligations apply. This will be handled in the same manner as a U.S. employee who experiences a COBRA qualifying event under the domestic GHP. The only way you would avoid COBRA obligations would be if “such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens.” For example, if the employee were covered under a plan primarily designed for residents/citizens of that foreign country to which the employee is assigned. In that case, the plan would not be subject to ERISA/COBRA. But based on the way you're approaching this, I doubt that's the situation here. ERISA §4: (b) The provisions of this title shall not apply to any employee benefit plan if— (1) such plan is a governmental plan (as defined in section 3(32) [29 USC §1002(32)]); (2) such plan is a church plan (as defined in section 3(33) [29 USC §1002(33)]) with respect to which no election has been made undersection 410(d) of the Internal Revenue Code of 1986 [26 USC §410(d)]; (3) such plan is maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws; (4) such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or (5) such plan is an excess benefit plan (as defined in section 3(36) [29 USC §1002(36)]) and is unfunded.

My position would be that the precedent remains in place as long as the plan terms to which it relates remain in place. At its core, the precedent is just the employer's interpretation of those terms. I think they would need to formally change those plan terms to abrogate the precedent and have a new consistent interpretation going forward. Again, all of the positioning here is designed to create an argument that you're not making an exception since the employer has a fiduciary duty and general ERISA obligation to follow the plan terms. So anything that would question that by moving back and forth on interpretations would invite multiple other forms of potential scrutiny and liability. You might try just amending the plan terms to incorporate coverage in this type of situation so there aren't any clouds overhead about the precedent and its scope.