Does the Uniform Coverage Rule require the employer to assume the risk by funding all health care FSA claims up to the annual election?

[Guest AHayhow]

Does the Uniform Coverage Rule require the employer to assume the risk by funding all health care FSA claims up to the annual election? Or, can the broker for the employer assume that risk? Thanks

[Guest llerner]

I have never heard of a broker assuming the risk because the risk in a large plan would be greater than the fees collected by the broker! The Plan sponsor is the employer and the plan name is usually the "Such and such" company plan. The plan is set up by the employer for their employees. The employer also keeps the funds that employee have elected but not had the services they had planned at the end of the year. The employee forfeits those funds and that is supposed to offset the amount in "use it or lose" - theoretically that is.

I don't know of any broker that would do this and they are not the employer that is funding or paying the administrative fees so technically it seems inappropriate. I have never heard this question before because it seems so unlikely that they would do this unless they want some other lucrative business from you and are dangling this carrot to wrap you in their entire package. If they said they would, make sure you have it in writing because they will say they never said it. It could be an act of desperation by someone that is chasing the up front dollars and you want to stay away from those types. Did this broker offer to cite a precedent and bring a contract or sdrvice agreement just "made a promise" Be careful. I don't think there is any law against a broker paying but it could also violate some state regs as well. You should consult an attorney or lower your annual health reimbursement max. to mitigate risk.

[GBurns]

Aside from Uniform Coverage, an FSA has to show the characteristic of insurance namely the risk. If the broker or anyone else got involved (assuming that it was legal to do so) this would or should remove the element of risk for the employer. Without the risk no chacteristic of insurance thus no compliant FSA.

It probably would not cost the broker much to do this, but it might cost the employer and employees a disqualified plan.

[Mike Preston]

I don't think that the Broker can assume the liability. I think the Broker can assume the risk. The company retains the liability in all cases. If the company seeks reimbursement from an outside source (think reinsurance - happens all the time) one can assume that the cost the company is bearing (whatever is being paid to the broker) includes some sort of charge for the "reinsurance".

I have no idea whether the insurance rules where you are located would render such an arrangement illegal. Could be. Might not be.

If some well-funded broker has properly underwritten the risk (again, think reinsurance) it seems like it would work.

I don't know any organizations that would be willing to do this, though.

[Guest AHayhow]

Since I posted this, I have been in contact with an attorney whose practice is concentrated in the areas of employment law, pensions and employee benefits. She has told me that "Under a health FSA an employer can reimburse the participant the amount in the participant's health care FSA at the time the claim is

actually paid. This is done by revising the SPD and legal plan

documents as well as any communication materials to reflect that the

company acknowledges that the full claim amount is due and owing to the

participant, but that the amounts will be paid in installments. And for a terminated participant who does not elect COBRA with respect to the cafeteria plan would have to be paid the full amount of reimbursement due to him at the time he leaves.

I have never heard that the health FSA reimbursement can be handled like this. Does anyone else have their or their client's health FSAs set up like this? Thanks

[QDROphile]

Ask the expert what would happen to the installment payments if the employee terminated during the year.

[Guest b2kates]

AHayhow

such "crafting" language appears to violate the Uniform Coverage rules in the regulations.

Is the attorney who provided you with this strategy willing to issue a formal opinion letter?

This sounds similar to insurance carrier limiting payment of benefits only through the last premium payment, even though the policy would still be in force.

[Guest AHayhow]

QDROphile - According to the attorney, if the employee terminated, then the full amount would have to be available to him/her.

b2kates - The attroeny provided this information via an e-mail that included their electronic signature.

This attorney's interpretation/answer to my question certainly makes the health care FSA much more attractive to many groups that don't want to "front" the money, but I am very hesitant to adminster the heaht FSA this way.

[QDROphile]

The attorney is taking an agressive position about the timing of reimbursements. I would not support that approach, but I cannot say is it is prohibited. I cannot say it is OK either. To have a chance, the plan document and SPD must very clear that the participants are going to be strung out on the timing of reimbusements. It is not very good policy from a participant morale standpoint even if it is legal.