- On January 15, 2024
This article is intended for ExpressLink broker partners to share with their clients.
Here is our list of the top problems that we see employers encounter and how to best mitigate them. You can
1. Ensure mid-year election changes are allowed.
Our most asked question is if an employee can change a pre-tax election for the health plan or a flexible spending account during the year.
Permitted mid-year cafeteria plan election changes are detailed in the IRC §125 regulations. In general, health plan and health FSA elections may be changed when the employee (or dependent) is gaining or losing eligibility for employer coverage and enrolling in or dropping coverage as a result. Dependent care FSAs are the most “flexible” regarding changing an election. For example, the dependent care FSA election can be changed if the employee experiences a change in daycare provider or cost.
To keep your cafeteria plan qualified, it is important to follow the IRS rules. In addition, your benefit plan contracts and policies govern when eligibility is gained or lost.
2. Know who is eligible for your benefit plans.
Only your insurance contracts and plan documents dictate eligibility. Other materials, such as your cafeteria plan, a Board resolution, employment agreement, severance agreement, or employee handbook, do not control eligibility or take precedence over group plan contract language.
Do not promise or offer benefits to someone who is not eligible–including a non-employee shareholder or board member or an employee on extended leave–without prior carrier or TPA/stop-loss approval. For an employee on leave or disability, be sure to check each benefits contract and federal/state leave laws to ensure that coverage is extended only for the correct period or not offered if not covered in the contract.
Many employees fail to remove former spouses or children over age 26 from coverage or may add an ineligible dependent (such as a grandchild) without your knowledge. Remind employees each year which family members may be added to coverage and when eligibility ceases. This way, you can properly offer COBRA when someone loses eligibility for the health plan and only subsidize premiums for eligible family members. If an issue exists, we recommend conducting a dependent audit through a third-party vendor.
3. Remember to perform nondiscrimination testing early in the year.
The IRS prohibits employers from favoring highly compensated and/or key employees for most tax-advantaged benefit plans. For cafeteria plans, annual nondiscrimination testing is necessary, and it is not uncommon for the dependent care FSA to fail. When a plan fails, you need to adjust pre-tax elections before the end of the plan year to correct the failure.
Reach out to your cafeteria plan vendor to initiate nondiscrimination testing. For calendar year plans, we recommend testing the 2024 elections now.
Note that other benefit plans also have testing requirements, including self-insured health plans. If you offer self-insured health coverage that provides more generous eligibility or benefits to highly compensated employees, benefits may be taxable to them. Your cafeteria plan vendor can assist with this testing as well.
4. Avoid making improper HSA contributions.
Employers have limited liability for making sure that employees who make or receive contributions to a Health Savings Account (HSA) are eligible for those contributions. You need to make sure employees are (1) enrolled in your HDHP, (2) not enrolled in any non-HDHP that you sponsor, and (3) aged 55+ if making catch-up contributions.
While the employer’s responsibility is limited, employers sometimes find out after contributions have been made to the HSA that the employee was not eligible for all or part of the year. We recommend educating employees at open enrollment and throughout the year about the IRS contribution limits and that each month of disqualifying non-HDHP coverage will reduce their annual contribution limit. Disqualifying coverage includes both general-purpose health FSAs (even under the spouse) and Medicare (even just Part A).
Employees should know that if they do have excess contributions, they face IRS penalties unless the contributions are removed from the account in a timely manner. While the employer is not responsible for determining excess contributions, employees often expect their employer to help them correct the mistake. You can direct them to your HSA bank or vendor for the appropriate forms. In most cases, any excess contributions attributed to the employer contribution can only be removed by the employee, not the employer.
5. Tax benefits correctly.
Most nondiscriminatory employer-provided benefits are excluded from employees’ income, but there are several situations that are different:
- The fair market value of health coverage must be treated as taxable income to an employee if the covered domestic partner and the domestic partner’s children are not the employee’s tax dependents. (DC and some state tax rules exclude domestic partner coverage from state income tax if the partnership is registered).
- Group term life insurance benefits over $50,000 are subject to imputed income rules.
If you offer either of these types of benefits or have discriminatory benefit plans, work with your tax advisor or payroll provider to make sure employees are properly taxed.
6. Administer group life insurance properly.
Many employers offer supplemental or voluntary life insurance plans. Late applicants and employees who apply for benefits over the guaranteed issue amounts must submit proof of good health–often called evidence of insurability (EOI)–to the carrier for approval. To avoid issues, it is important that employers:
- Do not take payroll deductions for these life insurance benefits until the carrier has issued approval. Coverage is not in effect unless and until the carrier medically approves the individual.
- Remind the employees that EOI is needed, including for employer-paid benefits that are over the guaranteed issue amounts, and provide employees access to the EOI forms.
If you are not sure if employees are paying for the proper benefits, audit the payroll elections against the carrier invoicing to ensure accuracy.
7. Know your employer size.
Benefit-related laws are usually based on how many employees work for an employer and often use an average count from the prior year. However, each law has its own calculation, and most require employers to count all employees in the “controlled group” when determining size. Controlled groups are based on common ownership as defined under IRC §414. Work with your tax or legal advisor to determine if your organization is part of a controlled group of other employers so that you properly count employees.
Some of the major benefit laws that depend on your employer size include the ACA, COBRA, Medicare Secondary Payer (MSP), and FMLA.
8. Know when your employee or retiree needs Medicare.
For employers with 20 or more employees, Medicare Secondary Payer rules state that the group health plan is the primary payer for working employees (and their covered spouses), and the employer cannot incentivize or force them to enroll in Medicare. Most working employees, in this case, go ahead and enroll in free Part A and delay Part B. (However, they should not enroll even in just Part A if they want to contribute to an HSA. See #4.)
For employers with fewer than 20 employees, Medicare is the primary payer, and enrollment in Medicare is almost always required for employees aged 65 and older (even if still working) and their covered spouses. However, do not forget: Medicare enrollment affects the employee’s HSA contribution limit.
In all cases, Medicare is the primary payer for individuals (and their covered spouses) whose coverage is not due to active work status. That means your retirees and anyone on COBRA who is aged 65+ must have Medicare.
When Medicare is the primary payer, and the aged 65+ individual is not enrolled in Medicare, the group health plan that pays as secondary will reduce its payments by what Medicare would have paid if the individual had properly enrolled. This leaves a large and unexpected gap in coverage. While it is not the employer’s responsibility to educate employees about when to enroll in Medicare, it reduces your headaches by letting your employees, former employees, and retirees know when it is necessary.
Different coordination and employer size rules apply when an employee or dependent has Medicare due to disability or End-Stage Renal Disease.
9. Take extra compliance steps for self-insured health plans.
When the health plan is self-insured, the employer, as the plan sponsor, is responsible for certain compliance issues that are typically handled by the insurance carrier for an insured health plan. If you have any self-insured health plans–including a level-funded medical plan–be aware of your responsibility for certain rules and filings under ERISA, ACA, HIPAA, CAA, and the tax code. For example, the plan sponsor must pay certain ACA fees directly to the IRS when the health plan is self-insured, while carriers handle the payments for insured plans.
Please contact your ExpressLink representative with any questions.