Employer responsibility re full-time employee going to part-time w/benefits, part-time w/o benefits and termination

[Guest CheiAnn]

I am new to this forum and appreciate all the great information. I do have some questions though and would very much appreciate feedback on them.

My co. has less than 10 employees and offers a Section 125 Cafeteria Plan wherein the co. makes monthly contributions for eligible employees – “employee whose customary employment is at least 1000 hours per year and who has completed at least three months of service…" The plan year is Jul 1 to Jun 30.

If an employee has worked full-time for a number of years; requests and is granted part-time employment (over 1000 hrs/yr) because of health issues (still qualifies for benefits); is advised on Nov 22 that his employment status changed to less than 1000 hrs/yr effective Oct 31 with no written notification til Dec 16 (no longer eligible); then is terminated on Feb 1 with no explanation and no prior indication of any dissatisfaction by mgmt (this man has been a valued employee for a number of years), at what point does the benefit stop – Oct 31, Nov 15, Dec 16, Feb 1? Since he was a qualified part-time employee at the beginning of the plan year, can the employer cut his hours so as not to pay the benefit for the remainder of the year? I realize the employer is responsible for the full yearly benefit on the first day of the plan year but plan termination date effects total eligible expenses and thus total compensation.

Does it matter that no requests for reimbursement were submitted before termination? How long does he have to submit his claim?

In this case, the employer is stating they are only liable for 4 months of the company compensation (Jul,Aug,Sep,Oct). Is there a document that spells this out clearly in a format that most people can understand and yet references actual regulations? If the company stands firm on their position, is the only recourse through an attorney? Can the employee take this to the IRS and if so, who and where?

Thanks in advance for your responses!!

[QDROphile]

First you need to sort out eligibility for benefits from eligibility for the cafeteria plan. They are two different things, although they may be coordinated. The most important source of guidance for answers to your questions are plan documents.

You will not find much by way of law that will address the specific facts and questions of your situation. Eligibility is determined mostly by what the employer decided to put in the plan. The plan will probably not provide ready answers at the level of detail in your post, so some interpretation will be required. It is improper to take actions to prevent people from receiving benefits, but changes in employment terms are not necessarily improper, even if they have the effect of making someone ineligible.

The timing of submissions of claims is usually not a factor, but the plan documents should specify the deadlines. Most plans allow claims to be submitted even after the end of the plan year. When the costs are incurred relative to when the employee is eligible is most important, which brings you back to eligibility.

While the regulatory agencies can help (Deparment of Labor is usually better than IRS), this sort of individual hand holding is not going to be a priority and the DOL is probably not interested in the cafeterial plan at all. Best course of action is to get a lawyer who understands benefits --there are relatively few-- if the disputed amount is big enough to justify the expense. ERISA provides for the award of attorneys fees if the participant wins, but that does not mean fees will be awarded.

[GBurns]

"I realize the employer is responsible for the full yearly benefit on the first day of the plan year" Where did you see this? What benefit are you referring to?

"the employer is stating they are only liable for 4 months of the company compensation (Jul,Aug,Sep,Oct). " If this employee worked November to February, weren't they paid? If this employee was paid for the part time hours worked from November to February, What compensation are you referring to?

[JanetM]

GBurns, I read CheiAnn's post to include flex spending. The first day of the plan year the annual election must be available for reimbursement.

[GBurns]

JanetM,

If you are correct, then there are even more questions.

For example, "can the employer cut his hours so as not to pay the benefit for the remainder of the year?" What does "pay the benefit" and "remainder of the year" mean?

And there still is the isuue of being "only liable for 4 months of the company compensation " Liable? Compensation?

**********************

CheiAnn

,

Do you have a copy of the SPD and have you looked at the Plan Document? What do they say about FSA claims submission after termination?

Were any claims submitted? If No, Why not? If Yes, Do you have a denial letter? The denial letter should have instructions for review or appeal, which should also be in the SPD.

[Guest CheiAnn]

Sorry for the ambiguity on “benefit”.

The plan document states: “Commencement of Participant – Each employee whose customary employment is at least 1000 hours per year and who has completed at least three months of service with the company will be eligible to participate in the Plan. An employee will become a participant on the later of (a) the effective date or (b) the first day of the month following the date he/she becomes eligible to participate under the preceding sentence.”

Per the plan: “Cessation of Participation – a participant will cease to be a participant as of the earlier of (a) the date on which the Plan terminates or (b) the date on which he/she ceases to be an employee eligible to participate under ‘Commencement of Participation.”

I think I’m using incorrect terminology and will try to clear it up. “The employer’s responsibility for the full yearly benefit” refers to the yearly amount the employer contributes into the cafeteria plan for use by the employee even though that amount is divided into twelve monthly deposits.

1. The employee works full-time for a number of years and each month the company deposits $400 into the cafeteria plan for use by this employee for a total yearly company contribution of $4800.

2. Due to health reasons, the employee can no longer work full-time and so becomes a part-time employee whose customary hours exceed 1000/per year. Therefore, according to the 125 plan document, he is still eligible to participate in the plan and receive reimbursement for eligible expenses. This is his status on Jul 1 which is the beginning of the fiscal year (also the plan year).

3. For Jul, Aug, Sep and Oct the man qualifies as a participant in the cafeteria plan and the employer continues their contribution to the 125 plan for his use.

4. On Nov 22 the employee receives verbal notification from the employer that his "customary" yearly hours will be cut back to less than 1000 which means he no longer qualifies as a participant in the 125 plan (per the plan document). He receives written notification of this change in status on Dec 16 and then resigns on Feb 1.

5. The employer is stating their maximum liability is for Jul, Aug, Sep and Oct only ($400/month x 4 months for total of $1,600). It is my understanding that on the first day of a plan year, the employer is liable for the full yearly contribution of $4800. So as long as the man has eligible expenses and receipts, he can submit those for up to the $4800.

6. I also question the "customary 1000 hours" in the plan document. I have always read that to mean that on the first day of the plan year, if the employee's anticipated yearly hours will exceed 1,000, then that person is eligible for the year. It seems so odd that they would change his "customary" number of hours mid-year.

I am would like confirmation of the $1600 vs. $4800 and would also appreciate input on the actual date the man no longer qualifies as a 125 plan participant.

Oct 31 – the date the employer specifies

Nov 22 – the date the employer verbally notified the employee

Dec 16 – the date the employer gave written notification to employee

Feb 1 – the date the employee resigned

This man has considerable medical expenses so while I believe he is entitled to the full $4800 (with eligible receipts), the date he is no longer a plan participant makes a difference in how much he can submit and thus be paid. In his case, it makes a considerable difference.

The denial letter has no instructions for submission after termination. Yes, he submitted a claim for his total eligible receipts up to Feb 1, was sent a check for $1600 stating that was all they would pay but no instructions on review or appeal. And nothing in the SPD specifies – the document is very vague although when the plan was officially adopted, the minutes reflect a discussion wherein the board of directors were advised that the liability for the full year was there – and they paid another employee who left two years ago but the amount with her was just a few hundred dollars – to me $ are insignificant but I believe it set a precendent.

[Guest CheiAnn]

Correction to beginning of last paragraph in previous post:

"The SPD has no instructions for submission after termination"

[QDROphile]

You still need to provide a bit more information, especially about the $400 per month amount. Is the $400 amount an employer credit that can be used to fund various benefits through the section 125 plan? Did the $400 amount fund a health flexible spending account? Is there a health fexible spending account, and what was the amount elected or provided for the year? Did the employer $400 fund some other benefit, such as some other health benefit? Did the employee elect to have pay reduced in order to get some benefit? What are the terms of eligibility for the benefit plan (separate from the section 125 plan, although the terms are usually the same). Does any plan provide COBRA rights, even though not required?

Don't give up until you figure it out, but it looks like the employee changed to ineligible status as of the end of October and is not entitled to any benefits afterward. That means an expense incurred after October is not covered. Hovever, depending on the terms of the benefit plan, such as the health flexible spending account, expense incurred before November could be covered in amounts greater than $1600.

If the employee was covered by a health flexible spending account and the amount for the year is $4800, then eligible expenses (those incurred before November) would be covered up to $4800. But there are other possible benefit designs that would cause health benefits to be limited to $1600.

Under the ERISA standards, the denial of claims should have identified the plan terms that control the decision on benefits. It would be appropriate to ask for a step by step explanation if the denial does not adequately explain. or request review of the denial and submit an explantion of why the denial is wrong. The reponse on reivew should explain the decison and identify plan provisions.

[JanetM]

Why do you think that cutting hours going forward from November will make the employee ineligible. If they worked full time from Jul 1 (start of plan) to late November you could still have very reduced schedule and get the 1,000 hours before Jun 30.

[Guest CheiAnn]

Is the $400 amount an employer credit that can be used to fund various benefits through the section 125 plan? Yes. The employer contributes $400/month to the plan to be used by the individual as tax free money for reimbursement for the following expenses: health insurance, medical expenses or dependent child care. The employee selects how much they expect to use in each of the above listed categories, can elect to have tax-free dollars deducted from their pay to supplement the employer contribution, and forfeits any monies not spent at the end of the plan year. If the employee does not want to use the money for the above expenses, they can elect to deposit the funds tax free into a 401K or to take the employer contribution as taxable income.

Did the $400 amount fund a health flexible spending account? Yes. It is my understanding that a cafeteria plan and FSA are one in the same. Please correct if I am wrong.

Is there a health fexible spending account, and what was the amount elected or provided for the year? Yes. He elected $165/month for medical insurance and $235/month for medical expenses.

Did the employer $400 fund some other benefit, such as some other health benefit? No. Only what I've mentioned above.

Did the employee elect to have pay reduced in order to get some benefit? No. Pay deductions are voluntary and not required to receive the employer contribution. The employee did not think he would need more than the $400 contribution by employer.

What are the terms of eligibility for the benefit plan (separate from the section 125 plan, although the terms are usually the same). Both are the same. "Commencement of Participation: Each employee whose customary employment is at least 1000 hours per year and who has completed at least three months of service with the company will be elibile to participate in the Plan. An employee will become a participant on the later of (a) the effective date [of the plan] or (b) the first day of the month following the date he/she becomes elibile to participate under the preceding sentence." "Cessation of Participation: "A participant will cease to be a participant as of the earlier of (a) the date on which the Plan terminates or (b) the date on which he/she ceases to be an employee eligible to participate [as stated above]."

Does any plan provide COBRA rights, even though not required? No.

If the employee was covered by a health flexible spending account and the amount for the year is $4800, then eligible expenses (those incurred before November) would be covered up to $4800. But there are other possible benefit designs that would cause health benefits to be limited to $1600. What would these be? The plan does not specify but my boss and I (initiators of the plan) were told when the plan was first implemented that the company is liable for the total benefit (e.g. $4800 plus any the employee contributes [no limit specified]. My boss clearly explained this to our board of directors in the meeting in which they approved the plan (and it's stated in the minutes of the meeting}. I have spoken to him (privately) about our discussion with the CPA and while he initially agreed that was his understanding, he now denies the conversation and says the plan document doesn't specify whether to use the accumulated monthly amount ($1600) or the total amount the employee would have available at the end of the plan year ($4800); and therefore the decision is subject to his (administrator) interpretation. I have not pushed it as he is my boss.

Under the ERISA standards, the denial of claims should have identified the plan terms that control the decision on benefits. It did not.

It would be appropriate to ask for a step by step explanation if the denial does not adequately explain. Good idea. or request review of the denial and submit an explantion of why the denial is wrong. Another good idea. The reponse on reivew should explain the decison and identify plan provisions.

[QDROphile]

Don't rely on any of this response, but it looks like the employee was eligible from July through November (Janet M is correct; I misread the facts -- but November coverage is uncertain depending on how the plan handles a partial month). The employee changed to an ineligible class (not employed in a position that is expected to have 1000 hours in a year) for periods after November and was ineligible for any contribution by the employer and ineligible for any health benefits.

The health FSA is a plan separate from the cafeteria plan. The annual FSA amount elected was $3180 (12 x $265), so the employee has that much coverage for expenses incurred before December. This is my best guess. It is possible that the plan was designed differently.

The health insurance plan is separate from the cafeteria plan. Premiums were paid through November and eligible expenses incurred before December should be covered.

The employer probably has the ability to change the employee's status, but that depends on many things. Terms of employment are ripe for dispute. If the employer changed the employee's status for the purpose of preventing the employee from receiving benefits, the employee may have a claim under ERISA with respect to the ERISA plans. The FSA and the insured health plan are ERISA plans. The cafeteria plan is not. Such claims can be very difficult to win.

[Guest CheiAnn]

Thank you for your help in answering my questions. I know this takes time and I appreciate your willingness to take that time in order to help me better understand what all this means!!