Payment Directly to Provider (or The Plot Thickens...)

[Guest AEA]

A follow-up to a recent post....

A medical provider sponsors a cafeteria plan with a medical reimbursement plan. The provider is upset because several of its employees have submitted bills for medical services owed to the provider or a related entity to the medical reimbursement plan, received reimbursement, then not paid the provider. We have explored requiring that all medical expenses be paid prior to reimbursement and requiring payment be made only to the service provider directly. While the medical provider likes the latter option, the question raised was could this provision be limited to only the medical provider and its related entities? Either in the plan document itself or by operation.

My instinctive response was no because it "smells" like self-dealing with plan assets. However, I am finding it very difficult to find anything (law, regulation, opinion, etc.) on whether the Department of Labor considers cafeteria plan (or medical reimbursement plan) assets to be "plan assets" for purposes of its fiduciary duties and prohibited transaction rules. While there is a moratorium on the trust requirement from 1992, I understood that the DOL has not gone as far as to say that these assets AREN'T plan assets for other ERISA purposes, especially the fiduciary rules.

Anyone run across this or have any insights, quotes from the law, or cites to opinions (DOL or otherwise)?

[Guest TXCafe]

According to the Preamble to DOL Reg. § 2510.3-102 (definition of plan assets or participant contributions), 61 Fed. Reg. 41220, n.1 (1996), for ERISA purposes, salary reduction amounts are participant contributions

and, therefore, plan assets. This is true regardless if the participant contributions are ever ACTUALLY segregated from the general assets. ERISA Technical Release 92-01 releases those small, unfunded plans which qualify for this release from Trust requirements. However, the existence of participant salary reductions (and/or COBRA after-tax contributions) creates plan assets thereby triggering ERISA protections and fiduciary duties. As far as I've seen in guidance (mainly EBIA), it's perfectly acceptable to pay providers directly and the 1099 reporting obligation associated with such payments does not apply to payments made directly to providers from Medical FSAs after Dec 31, 2002 (IRS Code § 6041(f)(1)). Judging by the fact that the IRS has issued guidance on reporting obligations associated with the practice of paying medical providers directly, it would seem they do not find the practice out of compliance. Also, I believe the recent Notice released in July of this year addressed paying medical providers directly using information from EOBs (IRS Notice 2006-69, 2006-31 I.R.B. 107, Part IV.A). I would say though you may want to check if paying service providers directly is going to in any way go against HIPAA provisions. Hope that helps!

[Guest AEA]

Thanks for the response!

I may be paranoid, but you don't think that ONLY directly paying the employer who sponsors the plan and its related entities sounds a little ... off? Use of plan assets to the sponsor's own benefit keeps coming to mind, even though I can not find a single DOL opinion or case where the DOL raised this type of a fiduciary breach against a medical reimbursement plan sponsor.

[Guest TXCafe]

Well here I was congratulating myself on the thorough response I had given you (my first time to reply on this board actually) and I responded to your earlier question but not this one! Here are my best suggestions:

Check out ERISA § 402(b)(4). This part of ERISA outlines the rule on specifying the basis on which payments are made to and from the plan.

Check out ERISA § 403©. This is the exclusive benefit rule. “The assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.”

As outlined in my earlier reply (to the wrong question apparently), the Health FSA has assets by virtue of having participant salary reductions. I would say what the employer is proposing would "inure to the benefit of [the] employer" though I realize it's probably not exactly what this rule is referring to and may be a bit of a stretch. Maybe it would at least give you a good place to start.

Also, there are issues such as the ERISA rule that claims procedures be adminstered uniformly. The employer could potentially step over other lines (nondiscriminaton testing comes to mind though it might be a stretch...it's just one example) depending on who uses the providers in question and if there are any eligibility requirements for those providers. It also could trigger HIPAA if the providers in question cover certain illnesses and not others. And yes, I also would instinctively say this plan is very bad and has the potential to put this plan out of compliance in many ways. I hope that helps (now that I answered the right question).

[leevena]

I posted to your earlier question awhile ago, and would like to expand on that response after reading the others comments.

If you/employer does decide to pay the medical providers (yourselves) directly, I believe that you could be opening a can of worms. After reading the posts, I do not see any definitive answer. So why bother? You could have employees coming in and complaining, maybe even suing you/employer. If you have employees who are not paying their bills to you, can you look at holding the funds from their pay as opposed to their FSA account? Could you put them on a 'cash only" basis with your providers? And, as I said earlier, why not fire them, they are stealing from you. Just some thoughts.