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Mid-year refund of welness program surcharge


ERISA guy

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A wellness program imposes a surcharge on tobacco users who do not complete a tobacco cessation course. If a person completes the requirements to have the surcharge removed mid-year, could the surcharge that has already been paid during the current plan year be refunded? 

I'm thinking that would be an impermissible, retroactive election change. Prospectively, the surcharge could be removed and the participant's election automatically decreased assuming it's an insignificant change in cost. 

Any thoughts on the refund of the surcharge previously charged during the year?  Thanks in advance. 

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This is a good question.  I agree that refunding prior YTD contributions attributable to the surcharge is aggressive because it's functionally the equivalent of a retroactive election change (employee paying a reduced EE-share of premium pre-tax through the POP for prior period), which is generally prohibited by the Section 125 cafeteria plan rules.  That could in theory potentially disqualify the entire cafeteria plan, resulting in all elections becoming taxable for all employees.

Prop. Treas. Reg. §1.125-2(a):

(4) Exceptions to rule on making and revoking elections. If a cafeteria plan incorporates the change in status rules in §1.125-4, to the extent provided in those rules, an employee who experiences a change in status (as defined in §1.125-4) is permitted to revoke an existing election and to make a new election with respect to the remaining portion of the period of coverage, but only with respect to cash or other taxable benefits that are not yet currently available. See paragraph (c)(1) of this section for a special rule for changing elections prospectively for HSA contributions and paragraph (r)(4) in §1.125-1 for section 401(k) elections. Also, only an employee of the employer sponsoring a cafeteria plan is allowed to make, revoke or change elections in the employer's cafeteria plan. The employee's spouse, dependent or any other individual other than the employee may not make, revoke or change elections under the plan.

So I agree that a prospective removal of the surcharge is the more prudent approach.

I will say that I've gone wobbly on this issue sometimes where employees are covering a DP, get married to that DP, then fail to inform the employer of their new married status for some months.  In some cases, employers want to retroactively undo the imputed income and permit pre-tax contributions for that period.  I think that generally presents the same issue you're raising here, but I haven't strongly advised against it.

Just as a reminder, there was a Tri-Agency FAQ clarifying that employers do not have to accommodate a mid-year wellness program incentive/reward/surcharge change in status.  They can have a once-per-year requirement to qualify.

Here's the guidance:

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/aca-part-xviii.pdf

 Q8: A group health plan charges participants a tobacco premium surcharge but also provides an opportunity to avoid the surcharge if, at the time of enrollment or annual reenrollment, the participant agrees to participate in (and subsequently completes within the plan year) a tobacco cessation educational program. A participant who is a tobacco user initially declines the opportunity to participate in the tobacco cessation program, but joins in the middle of the plan year. Is the plan required to provide the opportunity to avoid the surcharge or provide another reward to the individual for that plan year?

No. If a participant is provided a reasonable opportunity to enroll in the tobacco cessation program at the beginning of the plan year and qualify for the reward (i.e., avoiding the tobacco premium surcharge) under the program, the plan is not required (but is permitted) to provide another opportunity to avoid the tobacco premium surcharge until renewal or reenrollment for coverage for the next plan year. Nothing, however, prevents a plan or issuer from allowing rewards (including pro-rated rewards) for mid-year enrollment in a wellness program for that plan year.

Slide summary:

2023 Newfront Wellness Program Guide

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