Flex Credits - Cash-out option

[PhilB]

My company offers flex credits that employees may apply either to reduce their cost of benefits or receive as a cash-out option, if they waive coverage. I've had a couple of employees, who originally waived coverage, and consequently received a taxable cash payment, request mid-year after-tax election changes so that they can participate in one or more benefit programs. Payroll seems to think that the monies these employees have been paid thus far in the plan year (through the cash-out) should be recouped before they can participate in the benefit plans on an after-tax basis. I can find no regulatory precedent for such an action. Any opinions?

[mroberts]

This is going to be a company policy situation. It really depends on how you handle the situation too. For instance do you pay the employees a lump sum or disperse the opt out balance evenly over the course of the year? Do you pay dollar for dollar on the opt out plan?

Also, why are the employees requesting a change mid year? Do they have a qualifying event triggering the request? If so, is it consistent with them adding coverage?

[PhilB]

The credit is dispursed evenly throughout the payroll year and the credit is dollar for dollar, though the amounts are not that large. These are not qualified events, thus they are being handled as after-tax prospective elections. The situations typically are of the unsubstantiated "sent my form in, it was not processed", "form was mailed to a wrong address" variety. The company has historically given these people the benefit of the doubt, though not to the extent that they are allowed retroactive pre-tax election changes. In other words, it wasn't the company's fault. Because this precedent was already in place when I started here, the policy has continued.

[papogi]

I don't see how payroll can recoup the cash the employee received for opting out of the plan. In the Section 125 plan, employees have a choice between taxable cash, and non-taxable benefits funded with pre-tax dollars. When the employee opts out of the plan and receives cash, they are opting out of the Section 125 plan. It's like they're starting out flat, and have no obligation to the employer with regard to the cash. If the underlying plan allows the employee to participate on an after-tax basis later in the year, the cash the employee received earlier is irrelevant. It seems we could go on about the fact that these people are being allowed on the plan without a HIPAA event, but to answer your original question, I don't think payroll can recoup any funds.

[mroberts]

I agree that you can't recoup the funds. Additionally, a hard look really needs to be made at your enrollment process. If someone is coming back to you six months later saying they sent in the form, my question to them is why did it take you six months of collecting additional money to realize this?

Going forward, you really should focus on getting this adjusted. It sucks that you're in a situation filling someone's shoes after they allowed this. If an employee opts out of the section 125 plan, then he or she should not be able to get back into the plan that year unless they have a qualifying event. You might want employees to sign a waiver going forward indicating that they are opting out of the coverage and want the additional money just so you don't get any lame excuses as well. Plus, you may also want to check and see how your insurance carriers feel about this. If any of these coverages are voluntary, I don't think they're going to like the fact that late enrollees are signing up whenever they wish.

[PhilB]

Actually, the plans are self funded and there is no stoploss. However, I am in agreement with you in principle. Truthfully, these situations don't end up on my desk until they've bounced around on appeal for awhile. The specific situations that prompted my email were first appealed in early January after the employee received their confirmation statements. Anyone coming to me at this late date, outside of a qualified status change, would be denied. I considered the case closed until payroll appeared out of left field. Thanks for your input.

[GBurns]

Aside from the recoupment issue, which I guess is clearly settled that payroll cannot recoup, there is the issue of error.

From what you said, these employees filed their objections etc as soon as they got their confirmation statements. It seems that this is the first opportunity for them to have been aware of any errors or discrepancies and they immediately reported the matter. They did the best that they could do. The company did not immediately correct the situation.

The fact that it has taken so long for the matter to get to you should not be held against the employees and based on case history they would very likely prevail if they incurred medical expenses that would have been covered if they had been enrolled and decided that the employer was liable because of negligent enrollment and availability of the benefits.

It is now only near the end of March less than 90 days into the year and has not been a long time. Prudence suggests to me that they should be allowed into the plan even on a pre-tax basis. An error is an error, a qualifying event is not always needed.

[PhilB]

I mistyped when I used the terms "waived coverage". The lack of any election action on the part of the employee defaults them to a catastrophic plan, which is paid entirely by the employer. The appeals in these cases were situations in which the employees claimed either to have faxed something in, which we have no record of, or some other type of extenuating circumstance. Certainly "I forgot to send in my form" isn't going to cut it. Suffice to say, after examining phone logs and the date that they appealed (i.e. immediately), the decision was made to allow them in the plan, albiet outside of section 125. If anything, I think we need to tighten up the process of HOW employees enroll..........but I think you never get away from these kinds of things completely. The message in these situations was, we're going to give you the benefit of the doubt, but we won't jepordize the qualified status of the plan in doing so.

[maverick]

Philb:

When I worked in this area we required the forms to be submitted to HR by a certain date -- and kept track of when they were received. The due date was something like 11/30, so we had time to follow-up with anyone who had not submitted a form. I don't know how many employees you have, this may be unworkable for a large organiztion.

Also, I've found that no matter how many times you ask for something, and regardless of what steps you take to make it easy for employees to comply (e.g., give them a stamped return envelope), someone always finds a way to not do what you ask.

Good luck. Maverick

[PhilB]

I concur maverick. In fact, we do have a followup system such as you mention. Naturally, there are always people who are late, whether on vacation, LOA, whatever. However, I did do quite a bit of checking of the regs (which are decidely grey in a lot of these areas) and found it was permissable to allow people in the plan on an after-tax basis prospectively IF you allow people to make after-tax elections at other times, such as open enrollment. BTW, I'm a Badger myself.