Voluntary benefits that are sold directly to employees may be subject to ERISA as employer-sponsored plans, or may be exempt under the voluntary plan safe harbor, which allows for only minimal involvement by the employer. The plaintiff in this case purchased a short-term disability policy after seeing a presentation by the insurer at his workplace. He later sued under state law after his claim for benefits was denied. The insurer argued that the state-law claims were preempted because the plan was subject to ERISA. The court disagreed, holding that the arrangement met the voluntary plan safe harbor. (As background, a plan falls within the safe harbor if 1) the employer makes no contributions; 2) participation is completely voluntary; 3) the employer’s involvement is limited to permitting the insurer to publicize the program and to collecting and remitting premiums; and 4) the employer receives no consideration for collecting and remitting premiums, other than reasonable compensation.)
The insurer claimed the plan did not meet the safe harbor requirements because the employer’s involvement went beyond that allowed by law. For example, the insurer claimed that the employer endorsed the plan by selecting this particular insurer. But the court found that there was no evidence that this employer went beyond permitting the insurer to publicize the program, distinguishing a case where the employer’s use of a consulting firm when selecting an insurer took the plan outside the safe harbor. Notably, in contrast to other courts, this court held that collecting premiums through the employer’s cafeteria plan did not take the plan out of the safe harbor.
Ballard v. Leone, 2012 WL 665987 (D. Md. 2012)
Court Finds Employer Met ERISA’s Voluntary Plan Safe Harbor, Despite Payment of Premiums Through Cafeteria Plan
Are You Really Saving Money By Self Administering Your HRA?
Do you think you’re saving money by administering your health reimbursement arrangement (HRA)? In our experience, many employers that self-administer an HRA often overlook important compliance obligations that put them at financial risk. Failure to comply with the following requirements is common and can be costly.
COBRA
An HRA is a group health plan subject to COBRA. Employees that experience a qualifying event are entitled to continue coverage under the employer’s HRA. An employer that fails to extend COBRA coverage to HRA participants can be subject to substantial fines. Employers can be fined up to $110 per day for failure to provide an initial notice or election notice.
HIPAA Privacy
An HRA is a self-funded health plan and governed by the HIPAA Privacy Rules. Employers that offer a fully-insured health plan and sponsor an HRA often overlook their HIPAA Privacy obligations. In order to administer an HRA, the entity processing the claims receives protected health information (PHI) which is protected by HIPAA. Employers that offer a fully-insured health plan will rely on the insurance carrier to comply with the HIPAA Privacy Rules. However, the HRA compliance obligations rest with the employer. Employers that do not comply can be subject to civil penalties of up to $100 per violation.
Medicare Reporting
An HRA is a group health plan subject to Medicare Secondary Payer (MSP) provisions. New reporting requirements went into effect in the fourth quarter of 2010. Employers are required to provide HRA coverage information to the Centers for Medicare and Medicaid Services (CMS). The information reported to CMS will allow better coordination of payer responsibilities between the group health plan and Medicare. Failure to comply could result in fines of up to $1,000 per day.
Plan Documents
An HRA is an employee welfare plan under ERISA. ERISA requires that every warfare plan be established and maintained pursuant to a written instrument. The written instrument or plan document serves to define what expenses are eligible for reimbursement, the amount of employer contribution, and whether the funds may be rolled over from year to year. Not only could an enforcement action be brought against an employer for failure to have a plan document, but it is difficult for the employer to prove plan terms and enforce its provisions.
If you are administering an HRA for your employees and are concerned about your compliance status, please feel free to contact support@amben.com or rcummings@amben.com
IRS Issues 2011 Version of Publication 969 on HSAs, HRAs, Health FSAs and MSAs
Publication 969 has been updated for use in preparing 2011 tax returns. This publication provides basic information about HSAs, HRAs, health FSAs, Archer MSAs and Medicare Advantage MSAs, including brief descriptions of benefits, eligibility requirements, contribution limits and distribution issues. There are very few changes to the 2011 version. The publication has been updated to reflect two changes that apply beginning in 2011: the prescription requirement for OTC drugs (other than insulin) purchased after 2010, and the increase (to 20 percent) in the additional tax on HSA and MSA distributions not used for qualified medical expenses.
Click here to view IRS Publication 969.
no comments >HSA Contributions Changes and the Last Month Rule
Q. How much can an individual contribute if she’s HSA eligible all year but changes from self-only to family coverage after her May 18, 2011, wedding?
A. This individual can take one of two approaches.
General Rule: “Sum of the Monthly Contribution Limits Rule.” Accountholders’ annual HSA contributions are pro-rated based on the number of months they are HSA eligible under each contract type during the year. When this individual is enrolled in a self-only contract, she can contribute $254.17 per month (the statutory maximum annual contribution of $3,050 divided by 12 months). During the months that she is enrolled on a family contract, she can contribute $512.50 per month (the $6,150 statutory maximum annual contribution divided by 12 months). In this case, her month-by-month maximum contribution is as follows:
| Month | Maximum Contribution |
| January | $254.17 |
| February | $254.17 |
| March | $254.17 |
| April | $254.17 |
| May | $254.17 |
| June | $512.50 |
| July | $512.50 |
| August | $512.50 |
| September | $512.50 |
| October | $512.50 |
| November | $512.50 |
| December | $512.50 |
| Total | $4,858.33 |
Special Rule: “Last-Month Rule.” This special rule (which comes with a testing period requirement noted below) permits the individual to make a full year’s family contribution as long as she is enrolled in a family contract as of Dec. 1, 2011, regardless of when during the first 11 months of 2011 she is married and switches to a family contract. If she takes this approach, she must remain eligible through the end of the following 12-month “testing period.” The testing period ends on December 31 of the following year (2012 in the above example). If she loses HSA eligibility any time before December 31, 2012, she must include any contributions for months during which they were not eligible, except for the last-month rule, in her taxable income in the year she loses eligibility. In addition, excess contributions are subject to a 10% additional tax that year. Accountholders incur this penalty regardless of age.
If she loses HSA eligibility during the testing period, she must include in her 2012 taxable income any contribution she made in 2011 that is in excess of the pro-rated contribution maximum. Her maximum contribution would be $4,858.33, and any amount above that figure would be included in her 2012 taxable income, and she would pay an additional 10% tax on the excess contribution as well.
no comments >New Guidance on Group Health Insurance Coverage Informational Reporting
The IRS has issued new guidance to clarify how employers and benefit plan administrators will need to meet Form W2 health benefit cost reporting requirements, including the treatment of FSAs, HRAs, EAPs and wellness programs, and supplemental coverage.
The W2 reporting requirements were created under PPACA and for informational purposes only so that employees are provided with comparable consumer information on the cost of their health care coverage. Notice 2012-9 restates and amends the interim guidance initially provided in Notice 2011-28 and includes the following changes:
- States that the reporting requirement does not apply to coverage under a health FSA if contributions occur only through employee salary reduction elections (Q&A-19).
- Clarifies that employers may include the cost of coverage under programs not required to be included under applicable interim relief, such as the cost of coverage under an HRA (Q&A-33).
- Employers are not required to include the cost of coverage under an employee assistance program, wellness program, or on-site medical clinic in the reportable amount if the employer does not charge a premium with respect to that type of coverage provided under COBRA to a qualifying beneficiary (Q&A-32).
- Employers do have to include the cost of any supplemental health benefits, such as cancer insurance that they pay for, but they do not have to include the cost of supplemental health benefits that the employees pay for with after-tax dollars (Q&A-38).
The guidance is applicable beginning with 2012 Forms W2 (forms required for the 2012 calendar year that employers are required to give employees by the end of January 2013). In addition, employers may rely on the guidance provided in this notice if they voluntarily choose to report the cost of coverage on 2011 Forms W2, even though this reporting is not required for 2011.
Click here to read Notice 2012-9.
1 comment >May owners of an LLC (usually called “LLC members”) participate in the LLC’s medical or cafeteria plan and receive employer HSA contributions?
A limited liability company’s (LLC’s) health plans may create special issues with respect to LLC member participation. This is because LLCs may be treated as either a partnership or a corporation (depending on how the LLC has elected to be treated), and for tax purposes the IRC treats partnerships and corporations differently. No IRS guidance specifically addresses the status of LLC members for purposes of health plan participation, including participation in a medical or cafeteria plan. But the general rules of Section 125 (also known as the cafeteria plan rules) would likely apply as described below.
LLC Structured as a Partnership
Pre-tax premium payroll deductions are subject to IRC Section 125. Under Section 125, as a general rule only employees are eligible to participate in the cafeteria plan. Partners in a partnership are considered self-employed individuals, not employees. Thus, for LLCs that are taxed as partnerships, members of the LLC generally cannot participate in a cafeteria plan. This means that the LLC members would not be eligible to benefit from the tax advantages of paying premiums on a pre-tax basis. But those LLC members may still be eligible to participate (on an after-tax basis) in the medical policy/plan as an eligible person, depending on the definition of eligibility under the plan.
If, however, the plan is offered on a post-tax basis outside of a cafeteria plan, or on a non-contributory basis (where the employer pays all of the premiums), then the owner may participate in the group health plan. In addition, if they are self-employed as LLC members, the members may be able to take a deduction on their federal income tax returns; this would really be a taxation issue best addressed by an accountant or tax counsel.
LLC Structured as a C Corporation Where LLC Members Are Considered Employees Because They Are Receiving W-2 Reportable Wages
If the LLC has elected to be taxed as a C Corporation, then the LLC member may be considered an employee eligible to participate in the cafeteria plan. That said, the salary reduction under the cafeteria plan may only be from the individual’s compensation as an employee.
Employer HSA Contributions
With respect to an HSA, if the HSA contributions are made through the cafeteria plan, then the same rules as above would apply and the answer would depend on whether the LLC is treated as a partnership or a C Corporation. If the LLC is treated as a partnership, then the employer could not make a pre-tax contribution to the LLC member’s HSA account. However, if the LLC is treated as a corporation, and the LLC member is considered an employee, then the employer could make pre-tax contributions to the LLC member’s HSA accounts (although those members would likely be considered highly compensated, so there may be nondiscrimination issues if non-highly compensated individuals are not also receiving employer HSA contributions).
If the HSA contributions are made on an after-tax basis, then the employer would not be bound by the Section 125 restrictions with respect to the LLC members. However, the comparability rules would then apply. The comparability requirements basically require employees to make comparable contributions for all comparable participating employees. Comparable participating employees are employees who are in the same group with respect to benefits (i.e., self-coverage, self-plus-one coverage, etc.). Thus, so long as the employer satisfies the comparability rules, the employer could contribute to the LLC members’ HSA accounts.
Finally, regardless of the LLC structure, the LLC members could always make their own HSA contributions on a post-tax basis and take the contributed amount as a deduction on their own individual federal income tax return. Again, this may necessitate guidance from the member’s own tax professional.
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