by Lexi Garcia | Jun 20, 2024 | Blog
When an employee passes away, employers often face challenging questions regarding benefits and compensation. A common question that arises is whether an employer can pay a deceased employee’s unused Health Reimbursement Arrangement (HRA) balance to the surviving spouse. This article delves into the regulations and best practices surrounding HRAs in such scenarios, ensuring compliance and clarity.
HRAs and Their Restrictions
Health Reimbursement Arrangements (HRAs) are designed to reimburse employees for qualifying medical expenses, as outlined in Code § 213(d). Importantly, HRAs are not allowed to disburse cash payments to employees or their beneficiaries at any time, including after the employee’s death. Any attempt to convert HRA balances into cash would disqualify the HRA for all participants, rendering all reimbursed amounts taxable—even those for legitimate medical expenses.
The Concept of Post-Death Spend-Downs
While direct cash payments are prohibited, HRAs can include a provision known as a post-death “spend-down.” This feature allows the remaining HRA balance to be used to cover qualifying medical expenses for the deceased employee’s surviving spouse, tax dependents, and qualifying children. Employers should check their HRA plan documents to see if this feature is included and, if not, consider amending the plan to incorporate it.
Compliance and Nondiscrimination Rules
Amending an HRA plan to include a post-death spend-down feature must comply with several nondiscrimination rules. These rules ensure that benefits are not skewed in favor of highly compensated individuals. Specifically, all benefits provided to highly compensated participants must also be made available to all other participants.
Additionally, IRS Notice 2015-87 casts some uncertainty on whether family members without major medical coverage can utilize a post-death spend-down feature. Until further clarification from the IRS, a cautious approach would be to limit these reimbursements to family members who also have major medical coverage.
Administering Post-Death Spend-Downs
Proper administration of the post-death spend-down feature is crucial. Only qualifying medical expenses for eligible individuals should be reimbursed. Failure to adhere to this can result in all HRA reimbursements becoming taxable, not just those for ineligible expenses. Employers must also remember their obligations under COBRA. If a deceased employee’s death triggers a COBRA qualifying event, then qualified beneficiaries must be given the opportunity to continue their HRA coverage for the duration prescribed by COBRA, regardless of the presence of a post-death spend-down feature.
Conclusion
While it may seem compassionate to pay out a deceased employee’s unused HRA balance to their surviving spouse, doing so would jeopardize the tax-advantaged status of the HRA for all participants. Instead, employers should explore the option of a post-death spend-down feature, ensuring they comply with all relevant nondiscrimination rules and administrative guidelines. By carefully navigating these regulations, employers can support their employees’ families while maintaining the integrity of their HRA plans.
Source: Thomson Reuters
by Lexi Garcia | Jun 13, 2024 | Blog
Introduction
The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides employees with the option to continue health insurance coverage after leaving their job. However, certain circumstances, such as gross misconduct, can affect the availability of this coverage. This blog post explores a unique case where an employee’s gross misconduct was discovered after retirement and the implications for COBRA coverage.
The Case
Three months ago, a bookkeeper retired from a company, electing COBRA coverage under the company’s medical plan. Recently, it was discovered that she had embezzled thousands of dollars during her tenure. The question arose: Could the company retroactively terminate her COBRA coverage due to this gross misconduct?
The Verdict
The short answer is probably not. While COBRA coverage need not be offered to employees terminated due to gross misconduct, in this case, the bookkeeper voluntarily retired and elected COBRA before her misconduct was discovered.
The Legal Perspective
If an employee is terminated for gross misconduct, there is no COBRA qualifying event for the employee or any covered dependents. However, employers should exercise caution when denying COBRA coverage due to gross misconduct. This is because COBRA does not clearly define “gross misconduct,” and courts have not agreed on a common standard. Therefore, denying COBRA coverage due to gross misconduct carries a higher-than-usual risk of litigation.
The After-Acquired Evidence
In this case, the company faces an additional obstacle. While embezzlement likely constitutes gross misconduct for COBRA purposes, the employee’s termination was due to voluntary retirement, not gross misconduct. Courts generally evaluate an employer’s decision to deny COBRA based on evidence available at the time of the employee’s discharge. The use of after-acquired evidence of gross misconduct to justify termination of employment has been rejected by the U.S. Supreme Court and several other courts in the COBRA context. Therefore, it is unlikely that a court would allow COBRA coverage to be terminated—retroactively or going forward—when gross misconduct is discovered after an employee has elected COBRA.
Conclusion
This case serves as a reminder for employers to consult with legal counsel and insurers when considering the denial of COBRA coverage due to gross misconduct. It also highlights the complexities involved in COBRA coverage termination, especially when evidence of misconduct is discovered post-employment. As always, each case is unique and should be evaluated on its own merits.
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
by Lexi Garcia | Dec 28, 2023 | Blog
QUESTION: Our company will soon begin offering coverage under our group health plan to employees’ domestic partners. What rights do domestic partners have under COBRA? May terminating employees elect to continue coverage for their domestic partners?
ANSWER: A terminating employee who elects to continue group health plan coverage under COBRA may also elect coverage for a domestic partner who was covered under the plan immediately before the employee’s termination. The domestic partner’s COBRA coverage will be contingent on the employee’s, meaning that the domestic partner will be entitled to coverage until the employee’s COBRA coverage ends (e.g., for failure to pay required premiums or at the end of the maximum coverage period). This is based on the general principle that COBRA coverage must ordinarily be the same coverage that the qualified beneficiary (in this case, the terminating employee) had on the day before a qualifying event. In addition, under general principles, a qualified beneficiary receiving COBRA coverage under a plan that provides domestic partner benefits would have the right to add an otherwise eligible domestic partner to his or her COBRA coverage at open enrollment if active employees are permitted to do the same.
That being said, domestic partners—unlike spouses—do not qualify as qualified beneficiaries under COBRA and, therefore, do not have independent COBRA rights. But if you wish to provide continuation coverage rights like those provided to spouses, you may do so through plan design. Many employers choose to extend “COBRA-like” rights to domestic partners, including the right to make continuation coverage elections independent of the employee (e.g., upon the employee’s termination of employment or upon termination of the domestic partnership). In general, sponsors of self-insured plans may have more flexibility in this area than sponsors of insured plans, who must obtain agreement from their insurers before they can provide fully equivalent continuation coverage rights. As you implement domestic partner coverage, you will want to consult with your insurer or stop-loss carrier, as applicable, and confirm that your plan document and summary plan description explicitly address COBRA and other continuation coverage rights and any notice requirements that will be imposed (such as the requirement to notify the plan within a specified period that a domestic partnership has terminated).
Source: Thomson Reuters
by Lexi Garcia | Oct 12, 2023 | Blog
QUESTION: We understand that our group health plan can terminate COBRA coverage early if a qualified beneficiary becomes entitled to Medicare after electing COBRA. What does it mean to be “entitled” to Medicare?
ANSWER: When qualified beneficiaries (including covered employees) first become entitled to Medicare after electing COBRA coverage, their COBRA coverage can be terminated early—before the end of the maximum coverage period. For this purpose, the Medicare terms “eligibility” and “entitlement” are not synonymous, and it is important to understand the difference. “Entitlement” means that an individual who is eligible for Medicare has actually enrolled in Medicare and may currently receive benefits. An individual who must take additional steps to enroll in Medicare before receiving benefits is not yet “entitled” to Medicare for purposes of the COBRA rules.
Individuals who become eligible for Medicare Part A (hospital insurance) based on age, disability, or end-stage renal disease (ESRD) must apply to become entitled to Part A coverage in many cases, but entitlement is automatic for individuals who have already applied for and are receiving Social Security or Railroad Retirement Act benefits. Individuals become entitled to Medicare Part B (physicians’ services and other health expenses) either automatically when they become entitled to Part A, or later during specified enrollment periods.
Although group health plans are allowed to terminate a qualified beneficiary’s COBRA coverage early upon Medicare entitlement, it is important to remember that the COBRA rights of other qualified beneficiaries in the family unit who are not entitled to Medicare are not affected. For example, the plan could not terminate the COBRA coverage of the spouse and dependent children of a Medicare-entitled former employee.
Source: Thomson Reuters
