by Lexi Garcia | Feb 29, 2024 | Blog
QUESTION: I am reviewing our company’s employee benefit programs and confirming that they are treated appropriately for ERISA compliance purposes. Our disability program provides income-replacement benefits to employees who are unable to work because of illness or injury; payments commence once an employee is out of work for more than two weeks. Benefits are paid from the company’s general assets, not from a trust or separate account. Am I right that for this reason, our program is not an ERISA plan, or do additional conditions apply?
ANSWER: You are correct that a DOL regulation exempts certain “payroll practices,” including disability payments, from ERISA-plan status. You are also correct that the main condition of this regulatory exemption (often referred to as a safe harbor) is that the payments come from the employer’s general assets. It sounds like your program meets this requirement—but several other elements also must be considered to determine whether your program falls within the exemption. If a disability program has any of the following features, the payroll practice safe harbor is not available, and the program is most likely subject to ERISA:
- Trust or Separate Account. As noted above, making payments from the employer’s general assets is a key component of the exemption, so funding the program through a trust or separate account will take it outside the safe harbor. It is, however, generally permissible to earmark funds for the program within the employer’s general assets, so long as the funds remain available for other purposes, such as to pay the employer’s creditors.
- Insurance. Payment of benefits through insurance is not payment from the employer’s general assets, so using insurance will take the program outside the safe harbor.
- Paying More Than Normal Compensation. To fall within the safe harbor, the program may pay eligible employees only their normal compensation, or less (for example, 60% of normal compensation).
- Paying Benefits to Former Employees. The safe harbor covers only payments to employees while absent from work, not to former employees—the exemption does not apply if payments continue after an individual terminates employment. You will need to consider the duration of benefits available under the program and ensure that it does not extend beyond when the company considers termination of employment to occur. For example, if an employee who does not return to work is treated as having terminated employment before exhaustion of the disability benefits available under the program, the program does not fall within the safe harbor. As a practical matter, long-term disability programs are more likely to provide benefits beyond termination of employment and thus not meet the requirements, even if paid from the employer’s general assets.
Although it is possible that an arrangement that does not fall within the regulatory exemption may still avoid ERISA’s application under the general standard (a plan, fund, or program established or maintained by an employer to provide ERISA-listed benefits to employees), such a result is unlikely. Thus, any variations from the safe harbor requirements should be discussed with legal counsel. As a final caution, if your company wishes to treat this program as not subject to ERISA, make sure that any program documents, descriptions, and employee communications are consistent with this intent. Even though an employer generally cannot make a non-ERISA arrangement subject to ERISA by simply calling it an ERISA plan, the employer’s treatment is a factor—at least one court has found that treating a potentially exempt payroll practice as an ERISA plan was a “strong reason to find ERISA coverage.” If the company uses a single “umbrella” or “wrap” document to bundle multiple benefit programs, the document should specify which programs are—and are not—intended to be subject to ERISA.
Source: Thomson Reuters
by Lexi Garcia | Feb 22, 2024 | Blog
QUESTION: We are planning to add an HDHP and to make company contributions to employees’ HSAs. We have been told that an HSA contribution program—unlike the HDHP coverage—would not be subject to ERISA. Is that always true, or are there circumstances in which ERISA might apply?
ANSWER: Employer-facilitated HSA contribution programs generally are not subject to ERISA. Even though HSA funds may be intended to provide medical care, HSAs are viewed as personal accounts that are not ERISA-covered welfare benefit plans, so long as employee participation is completely voluntary and the employer’s involvement is limited. However, there are ways in which an HSA contribution program could become subject to ERISA. Those ERISA triggers should be avoided because ERISA’s compliance obligations were not crafted with HSAs in mind, and it is not clear how and whether all of ERISA’s requirements could be satisfied by an HSA program.
The DOL has established two safe harbors from ERISA coverage that may apply to workplace HSA programs. One, the voluntary plan safe harbor for group or group-type insurance programs, does not allow employer contributions, so for your purposes, we will focus instead on the HSA-specific safe harbor, which allows employer contributions. Under that safe harbor, employer contributions will not result in ERISA’s application if all of the following requirements are met:
- Voluntary Employee Contributions. An employer using the safe harbor can unilaterally establish HSAs for employees and deposit employer funds into those accounts. But any contributions made by employees, including salary reduction contributions, must be voluntary.
- Portable Funds. An employer’s program may limit forwarding of HSA contributions to a single HSA provider without triggering ERISA. But the employer cannot limit what happens after that initial deposit; employees must be able to move funds to another HSA if they desire.
- Unrestricted Use of Funds. Some employers may wish to impose conditions on how HSA funds are used, such as a requirement that funds be used only for qualified medical expenses. Any such restrictions, however, will cause the arrangement to fall outside the safe harbor.
- No Employer Influence. When selecting an HSA provider, employers may choose trustees or custodians that offer only a limited selection of investment options or options replicating those available under the employer’s 401(k) plan. Generally, however, the employer cannot make or attempt to influence employees’ investment decisions.
- Not Represented as an ERISA Plan. This requirement seems simple, but it is also easily violated. Participant communications must not represent the HSA program as part of an ERISA plan, or as an ERISA plan of its own, and should include appropriate disclaimers indicating that the HSA is not part of an ERISA plan. From a drafting perspective, the HSA provisions should not be included in an ERISA plan document. While bundling non-ERISA and ERISA benefits will normally not make the non-ERISA benefits subject to ERISA, careful drafting and communications are required to ensure that the HSA satisfies the safe harbor.
- No Employer Compensation. The employer cannot receive any direct or indirect payment or compensation in connection with its employees’ HSAs. This rule precludes discounts on other products that the employer may purchase from the HSA vendor, and may raise questions in other situations (e.g., bundled arrangements). This prohibition does not preclude making HSA contributions through a cafeteria plan; the employment tax savings realized by the employer is not considered compensation for this purpose.
Failure to meet any one of these elements will cause the program to fall outside the safe harbor. Although a program involving employer actions or program rules not specifically authorized by the safe harbor might still avoid ERISA, any variations should be discussed in advance with counsel.
Source: Thomson Reuters
by Lexi Garcia | Feb 15, 2024 | Blog
QUESTION: Our group health plan uses a copay accumulator program that does not count drug manufacturers’ financial assistance toward participants’ cost-sharing limits. We’ve heard that the agencies have restricted the use of these programs. Can we continue to exclude drug manufacturers’ coupons from cost-sharing?
ANSWER: The guidance in this area is in flux, and it is currently uncertain whether your plan may continue to exclude drug manufacturers’ coupons from cost-sharing using a “copay accumulator” program. To review, prescription drug manufacturers sometimes offer financial assistance to individuals for certain drugs to help defray costs that might otherwise be an impediment to obtaining the drug. Traditionally, this financial assistance reduced the participant’s cost-sharing under the plan. That is, the drug manufacturers would cover all or a portion of the participant’s deductible and copayment or other required cost-sharing under the plan (sometimes up to a specified dollar amount), and the manufacturers’ payments would count toward the participant’s satisfaction of the plan’s deductible and cost-sharing limit. Under a copay accumulator program, however, the drug manufacturers’ financial assistance does not count toward the plan’s deductible and cost-sharing limits. This can result in cost savings to the plan because more of the financial burden is placed on participants and drug manufacturers.
Plan sponsors must ensure that their copay accumulator programs do not violate the requirement that plans adhere to an established annual cost-sharing limit with respect to essential health benefits. Beginning in 2021, HHS regulations permitted, but did not require, plans and insurers to count drug manufacturers’ assistance toward the cost-sharing limit. However, in 2023 a court vacated the applicable provision in the regulations. This effectively revives a potential conflict that the vacated regulations were intended to address. Earlier HHS guidance had stated that manufacturers’ assistance need not be counted toward a plan’s annual cost-sharing limit when a medically appropriate generic equivalent was available, which some stakeholders viewed as implying that manufacturers’ assistance must be counted absent a medically appropriate generic equivalent. However, this interpretation potentially conflicts with the rules for high-deductible health plans (HDHPs), under which only amounts actually paid by the individual (i.e., not manufacturers’ assistance) may be taken into account when determining whether the HDHP deductible is satisfied.
Source: Thomson Reuters
by Lexi Garcia | Jan 11, 2024 | Blog
QUESTION: Our company sponsors a calendar-year self-insured major medical plan subject to ERISA. Are we permitted to treat Patient-Centered Outcomes Research (PCOR) fees as plan expenses?
ANSWER: The DOL has indicated that PCOR fees generally are not permissible plan expenses under ERISA since they are imposed on the plan sponsor and not the plan. As background, PCOR fees, which are used to fund research on patient-centered outcomes, are payable annually by sponsors of self-insured plans (and insurers, but we focus here on plan sponsors) through plan years ending before October 1, 2029. By statute, the fee for a self-insured plan is to be paid by the “plan sponsor,” which in most cases means the employer or employee organization that established or maintains the plan.
This means that plan assets (e.g., trust assets or participant contributions) should not be used to pay PCOR fees since ERISA’s prohibited transaction rules prohibit plan assets from being used to offset employer obligations. However, multiemployer plan assets may be used to pay PCOR fees since the plan sponsor liable for a multiemployer plan’s fee is generally an independent joint board of trustees with no source of funding other than plan assets.
Source: Thomson Reuters
by Lexi Garcia | Jan 4, 2024 | Blog
QUESTION: When employees drop coverage for dependents or spouses under our company’s group health plan during open enrollment, our practice has been to provide the dropped individuals with COBRA election materials. However, our new COBRA TPA says this is not necessary. Must our plan offer COBRA coverage to these individuals?
ANSWER: In most cases, you do not have to provide COBRA election notices to spouses and dependents whose coverage is dropped at open enrollment, but complexities can arise in some situations. COBRA requires a plan to offer continuation coverage to qualified beneficiaries only if coverage is lost due to certain triggering events such as termination or reduction of hours of the covered employee’s employment, divorce or legal separation, death of the covered employee, or a dependent child’s ceasing to be a dependent under the plan. (When a triggering event results in a loss of coverage, it is called a COBRA “qualifying event.”) But an employee might drop a spouse or dependent from coverage for other reasons—for example, because the spouse or dependent has enrolled in another employer’s health plan. Only COBRA qualifying events give rise to an obligation to provide a COBRA election notice.
Caution is needed because sometimes, dependents or spouses are dropped from coverage during open enrollment due to a COBRA triggering event. For example, dependents may be dropped because they have ceased to be dependents under the plan’s terms, or a spouse may be dropped because of a divorce or legal separation. If these COBRA triggering events result in a loss of coverage, they may also be COBRA qualifying events that give rise to an obligation to offer COBRA coverage. A plan is generally not required to provide a COBRA election notice unless the plan administrator is notified of a divorce (or legal separation) or a child’s ceasing to be a dependent within 60 days after the event occurs—provided that the notice requirement is communicated through the plan’s SPD and COBRA initial notice. Nevertheless, a plan administrator that becomes aware that one of these qualifying events (such as a divorce) has occurred may wish to act on that information and provide a COBRA election notice immediately, even without formal notice. Sending the election notice will start the 60-day COBRA election period running at the earliest possible time. And a court could hold a plan administrator responsible for providing an election notice to a qualified beneficiary if the plan administrator knew or should have known that a qualifying event occurred, regardless of whether the administrator received the required notice.
An employee might also drop a spouse or dependent from coverage during open enrollment because he or she “anticipates” a triggering event such as a divorce. When coverage has been eliminated or reduced in anticipation of a divorce, COBRA must be offered to the spouse beginning with the date of the actual divorce, even though the spouse was not covered immediately before the divorce and did not lose coverage because of the divorce. Because the anticipation rule can create administrative and legal complexities, plan administrators should consult their legal counsel and insurers when applying it to particular situations. Although not required by COBRA, some plan administrators send a letter to spouses or dependents who have been dropped during open enrollment, advising them that they no longer have coverage and reminding them that, to protect their COBRA rights, they must notify the plan administrator if they lost coverage due to divorce, legal separation, or a dependent child’s loss of eligibility, as applicable.
Source: Thomson Reuters
