Compliance Questions of the Month

Q: Is there an extension available for COBRA continuation coverage when a former employee on COBRA becomes disabled?

A: Yes. COBRA allows for an 11-month extension of the maximum period of continuation coverage when a qualified beneficiary becomes disabled. The total period of continuation coverage would be 29 months (18 months for the original COBRA period plus the 11-month extension). See question 13 of the DOL FAQs on COBRA Continuation Coverage for more information.

Q: What contact information for federal agencies should go in the No Surprises Act disclosure?

A: The No Surprises Act requires group health plans and insurance issuers to provide information on balance billing restrictions and protections. Plans and issuers can use the CMS model notice to meet this requirement. The model notice contains instructions to contact the applicable federal or state agency for more information about consumer rights under the law. CMS issued a memo with information regarding the federal contact information for consumers: help will be available online at www.cms.gov/nosurprises/consumers or via telephone at 1-800-985-3059. The memo notes that functionality for complaints inquiry and resources will be available beginning January 1, 2022.

A downloadable copy of the CMS model notice is available on the Community Compliance page in the Sample Open Enrollment Notices Packet.

Q: What is the current status of the Affordable Care Act’s “Cadillac Tax?”

A: The Cadillac Tax – the excise tax on high-cost health coverage enacted as part of the Affordable Care Act – was repealed as part of the Further Consolidated Appropriations Act of 2020. The tax would have imposed a 40% tax on the cost of employer-sponsored health coverage that exceeded the statutory threshold. The Cadillac Tax had previously been delayed until 2022.

Q: What rules and regulations do I need to be aware of when designing a cash in lieu of benefits program?

A: First, the IRS requires the program to be set up under a section 125 plan. This includes having a plan document in place and ensuring nondiscrimination requirements are met. If there is already a section 125 plan in place, an amendment can be used to add the cash in lieu of benefits program.

Next, any cash in lieu of benefits must be offered to all similarly-situated employees equitably and cannot be used to target employees that are high users of benefits – this could be seen as discrimination based on a health factor.

It also may not incentivize the employees to drop plan coverage and purchase individual coverage elsewhere (such as the exchange). The cash benefit should therefore be limited; most plans offer less than the employee’s cost for self-only coverage. Employees should only be allowed to waive coverage if they have minimum essential coverage available (such as through a spouse’s employment) and should provide proof of enrollment. Take extra caution with Medicare-eligible populations, as Medicare Secondary Payer Rules state employers with 20 or more employees cannot incentivize Medicare-eligible employees to disenroll from the employer coverage and enroll in Medicare.

If an employer is an ALE under the Affordable Care Act, any cash in lieu of benefits amount will be counted in the affordability determination unless it qualifies as an eligible opt out arrangement.

Finally, be aware that under the Fair Labor Standards Act (FLSA), a cash in lieu of benefits payment can be considered compensation for work and included in overtime compensation calculations (see Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016)).

Q: What rules and regulations do I need to be aware of when designing a cash in lieu of benefits program?

A: First, the IRS requires the program to be set up under a section 125 plan. This includes having a plan document in place and ensuring nondiscrimination requirements are met. If there is already a section 125 plan in place, an amendment can be used to add the cash in lieu of benefits program.

Next, any cash in lieu of benefits must be offered to all similarly-situated employees equitably and cannot be used to target employees that are high users of benefits – this could be seen as discrimination based on a health factor.

It also may not incentivize the employees to drop plan coverage and purchase individual coverage elsewhere (such as the exchange). The cash benefit should therefore be limited; most plans offer less than the employee’s cost for self-only coverage. Employees should only be allowed to waive coverage if they have minimum essential coverage available (such as through a spouse’s employment) and should provide proof of enrollment. Take extra caution with Medicare-eligible populations, as Medicare Secondary Payer Rules state employers with 20 or more employees cannot incentivize Medicare-eligible employees to disenroll from the employer coverage and enroll in Medicare.

If an employer is an ALE under the Affordable Care Act, any cash in lieu of benefits amount will be counted in the affordability determination unless it qualifies as an eligible opt out arrangement.

Finally, be aware that under the Fair Labor Standards Act (FLSA), a cash in lieu of benefits payment can be considered compensation for work and included in overtime compensation calculations (see Flores v. City of San Gabriel, 824 F.3d 890 (9^th Cir. 2016)).

Q: How can an employer distribute a Medical Loss Ratio (MLR) rebate?

A: First, check the applicable plan documents and insurance contracts to see if they contain provisions on MLR rebate distributions.

If the plan documents and insurance contracts are silent, employers have some discretion in how to divide the rebate. The division and distribution must be done on a reasonable basis and follow the general guidance given by the Department of Labor and the IRS.

Initially, the MLR rebate should be divided between employer and employees based on their respective shares of premiums paid. For example, if the employer pays 20% and employees pay 80% of the premiums, then 20% of the rebate is attributable to the employer and 80% is attributable to employees.

Employers generally have discretion in how to use their share of the rebate, though usually the employers’ portion is used to reduce future employer contributions. Options for distributing the employees’ share of the MLR rebate include paying the rebate in cash, using it to reduce premiums in the current year (known as a premium holiday), or using it to enhance benefits. Cash distributions generally will result in tax consequences to the employee if premiums are paid on a pre-tax basis.

Important to note: the rebate should be applied or distributed within 90 days after it is received, or it will need to be placed into a trust.

Question: We are starting to receive files from our vendors that show which members are on the ARPA subsidy for their payroll tax reporting. We have been charged a per notice fee for each ARPA notice and we were wondering if (or how) that would be reimbursable to the company?

Answer: No. According to the Instructions for Form 941 (Rev. June 2021) (irs.gov), the credit is allowed only for the premium assistance.

Question: Buyer purchases all of the outstanding stock of Seller in a stock sale. Post-closing Seller’s health plan remains in place covering the acquired group. Several years later Buyer terminates Seller’s health plan, which has several qualified beneficiaries on COBRA. Additionally, Buyer decides to terminate several of Seller employees. What happens to the qualified beneficiaries on COBRA under Seller’s health plan? 

Answer: The obligation to provide COBRA is the responsibility of the entire controlled group. Accordingly, when one health plan terminates the qualified beneficiaries are eligible to complete the remainder of the COBRA continuation period under a health plan maintained by another member of the controlled group. Under the facts presented, terminated Seller employees must be given the opportunity to elect COBRA under a health plan sponsored by Buyer. COBRA participants under Seller’s health plan upon plan termination must be given the opportunity to continue the remainder of the COBRA term under Buyer’s health plan. 

Question: What happens if a self-funded plan is not tested for discrimination under Section 105(h) of the Code?

Answer: If an employer fails to test a self-funded plan for discrimination, the employer has no way of knowing whether the plan is discriminatory in favor of highly compensated individuals (HCIs) and whether the benefits provided to HCIs are entitled to favorable tax treatment. If an IRS audit of the employer, or an HCI, reveals that the plan was in fact discriminatory, both the employer and the HCI are subject to additional taxes and penalties. The absence of nondiscrimination testing could also jeopardize a corporate transaction if revealed during due diligence. Employers are encouraged to conduct nondiscrimination testing annually to help prevent any costly and embarrassing liability

Question: Under American Rescue Plan Act (ARPA), do employers have the option to extend FFCRA leave and get tax credits? Are they free to choose EPSL, EFML or both? Or must they do all or nothing?

Answer: An employer is not required to extend FFCRA leave under ARPA. They have the option to choose either EPSL, EMFL or both. The tax credits are extended through 9/30/2021 for an employer that chooses to offer the leave.

Question: When a group health plan changes, when should I generally give notice to participants?

Answer: Depending on the change that is made, an employer must provide notice within one of three time frames:

• 60 days prior to the change
• No later than 60 days after the change (or, within 60 days of the change)
• Within 210 days after the end of the plan year

For modifications to the summary plan description (SPD) that constitute a material reduction in covered services or benefits, notice is required within 60 days of adoption of the material reduction in group health plan services or benefits. For example, a decrease in employer contribution would be a material reduction in covered services or benefits so notice should be provided within 60 days of the change in employer contribution. As a best practice, an employer should give advance notice of the change. For practical purposes, employees should be told prior to the first increased withholding.

If a plan makes a material modification in any of the plan terms that would affect the content of the most recently provided summary of benefits and coverage (SBC), then notice must be provided no later than 60 days prior to the date on which the modification will become effective.

However, if the change is part of open enrollment, assuming you communicate the change during open enrollment, the open enrollment communication is considered acceptable notice, regardless of whether the SBC or the SPD, or both, are changing. Open enrollment is essentially a safe harbor for the 60-day prior/60-day post notice requirements.

Finally, changes that do not require more immediate notifications, because they do not affect the SBC and are not a material reduction in benefits, must be communicated through a summary of material modifications or an updated summary plan description within 210 days after the end of the plan year. Note, a group health plan may be able to extend the deadlines noted above due to COVID-19 under EBSA Disaster Relief Notice 2020-01 and HHS, DOL, and the Treasury FAQs Part 43.

Question: When can an employee be considered a seasonal employee for purposes of determining when to offer such employee employer-sponsored health coverage in compliance with the employer shared responsibility provisions under the Patient Protection and Affordable Care Act (ACA)?

Answer: An employee can be considered a seasonal employee if an employer is using the look-back measurement method and hires an employee (including a paid intern) for a position in which the customary annual employment is six months or less. Under the ACA, an applicable large employer (ALE) would not be required to offer this employee coverage during his or her initial measurement period.

Question: If an employee has a health savings account (HSA) with a high-deductible health plan (HDHP) through his or her employer (and is otherwise HSA eligible), and then during the year becomes entitled to Medicare, can the employee continue to contribute to his or her HSA?

Answer: HSA eligibility is measured on a monthly basis. The employee can contribute to his or her HSA for the months that the individual was HSA eligible so long as the contributions are not made later than the original filing due date (without extensions) for the individual’s tax return for that year (for calendar-year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made). The employee cannot contribute to his or her HSA for the months in which the employee was HSA ineligible (in this example, due to Medicare entitlement).

Question: We have an employee who was laid off in April due to COVID. During this time he elected COBRA. He currently owes $10,000 in COBRA premiums. We are in the processing of rehiring him. Can we make him pay the past due COBRA premiums now that he will be working again? 

Answer: No. On May 4, 2020, the DOL and IRS issues a joint ruling that temporarily extends the period in which eligible employees can elect COBRA and the deadline for them to begin making COBRA payments. The rule extends most COBRA deadlines to beyond the “Outbreak Period,” which it defined as March 1, 2020, to 60 days after the end of the declared COVID-10 national emergency, or another date if provided by the agencies in future guidance. If the emergency declaration expires on December 31, 2020, the Outbreak Period will end on March 1, 2021, for example. The participant/new employee has until 60 days after the end of the Outbreak Period. 

Side Note: Upon being hired and becoming active on the group plan, if the participant and his/her beneficiaries did not have any claims during the COBRA window, he could decline COBRA and not owe the balance due. For more information, click here.

Question: Has the IRS extended good-faith relief when employers furnish or file incorrect or incomplete 2020 Forms 1094/1095 and extended deadlines for furnishing statements to individuals similar to relief provided in prior years?

Answer: Yes. For an overview of the good-faith relief that has been extended and the extended deadlines for 2020 forms due in 2021, please see the full Advisor. The IRS notes that unless it receives comments as to why relief continues to be necessary, no relief for furnishing statements will be granted in future years. Comments must be submitted by February 1, 2021.

Question: The Department of Health and Human Services (HHS) has extended the duration of the public health emergency due to COVID-19 effective on October 23, 2020. Generally, a public health emergency declaration lasts for 90 days (this would make the new end date: January 21, 2021) How does this affect group health plans? 

Answer: Under the Families First Coronavirus Response Act (FFCRA), as amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a group health plan must provide coverage without cost sharing for in vitro diagnostic tests for detection of SARS-CoV-2 or the diagnosis of COVID-19 and the administration of such tests for the duration of the public health emergency due to COVID-19. HHS recently extended the duration of the public health emergency due to COVID-19 to January 21, 2021. HHS has previously extended the end date of the public health emergency multiple times so employers should stay apprised of any further extensions.

Question: We have a full-time employee. Her hire date was 4/1/16. She is going to a part-time position as of 4/1/20. She is currently eligible for and on the group health plan.  When does her coverage end, and when do we offer COBRA?

Answer: The answer depends on if you are an Applicable Large Employer (ALE) or not. If you are an ALE, you will need to refer to your Standard Measurement Period (SMP). 

• The SMP is a period of time where all ongoing employees (including full-time) work and accumulate paid hours. 

• Typically, a 12-month* period of time where employees work. 
• A period of time that should be used year over year at the same time.  

• At the end of the SMP is the Standard Administrative Period. 

• During this time, the employer calculates paid hours to determine which employees have accumulated an average of 30 hours or more per week. 

• The Administrative Period cannot exceed 90 calendar days. 

• Once eligibility is determined, those paid for 30+ hours per week are eligible for coverage during the Standard Stability Period (SSP). 

• The SSP is typically a 12-month* period.  

To determine if an ongoing full-time employee is eligible to maintain coverage as is or be offered COBRA when moving to a part-time position, the above information is necessary to answer this question.  

Example: 

• The health plan renews 1/1 – 12/31. The SSP (period in which employees are eligible for coverage) typically follows the renewal period, although it can be any period of time between 6-12 months*.  
• Ongoing employees’ hours are calculated during the Administrative Period prior to the SSP.  The Administrative period in this example is 10/15-12/31. 

• The SMP (hours accumulating) is prior to the Administrative Period and should be the same length as the SSP. In this case, the SMP is 10/15 – 10/14. 

The employer asking this question uses the look-back measurement period*.  

SMP – 10/15/18 through 10/14/19 

Administrative Period – 10/15-12/31/19 

SSP – Calendar Year 2020 

As the employer stated, the employee’s hire date was 4/1/16. She is full-time and benefits eligible. She has decided she wants to work part-time. When does the employer terminate her health benefits and offer COBRA?  

Because the employee is considered ongoing and she chooses to work part-time in the same position, the employer would look at the prior SMP and see how long she is eligible in the SSP.  

She was considered full-time (30+hours per week) during the SMP, so she is eligible for benefits through the end of the SSP (12/31/20). 

• This means, she should be offered the option to retain benefits from 4/1 – 12/31/20. She would still be responsible for the share of the premium.  
• If she chooses to retain benefits through 12/31/20, she will be counted in the following SMP (10/15/19-10/14/20) to determine eligibility for 2021. If she fails to accumulate an average of 30+ hours per week during the SMP, she would be offered COBRA as of 1/1/21.  
• If she chooses to terminate her benefits (i.e., payroll deduction is too expensive, she has coverage through a spouse, etc.), COBRA would be offered 4/1/20.  

Even if an employer does not have any part-time or variable hour employees, it is important to maintain a Standard Measurement/Administrative/Stability Period for these situations. 

*This is one example of a look-back measurement. This is not all-inclusive. In addition to the look-back measurement period, employers have an option to use a monthly measurement. Please refer to The Play-or-Pay Penalty and Counting Employees under the ACA, Sections 6 and 7 for more detailed information.

This information is provided for educational purposes only; it’s not intended to provide legal advice. 

Question: What is the adjusted affordability percentage for employer-sponsored group health plan coverage for a 2021 plan year under the Patient Protection and Affordable Care Act (ACA)?

Answer: The adjusted affordability percentage, as announced in Internal Revenue Service Rev. Proc. 2020-36, is 9.83% for 2021. The affordability percentage applies on a plan year basis. Therefore, a plan that begins in 2020 will be able to use the 2020 percentage (9.78%) for the entire plan year. For a plan year beginning in 2021, the affordability percentage will be 9.83%.

Question: May a COBRA participant change plans during open enrollment?

Answer: Yes, at open enrollment, the plan must give a COBRA participant the same opportunity to change plans as it gives to active employees. This means that if active employees may select a different group health plan, then COBRA participants must also have the same opportunity to select a different group health plan.

As a best practice, when the plan sends enrollment forms and related documents to active employees, the plan should send these documents to COBRA participants to ensure that they have the opportunity to make open enrollment decisions.