7 Predictions About How COVID-19 Will Change Healthcare

Covid-19 has taken the world by storm, and a myriad of markets are being impacted significantly. Businesses of all sizes are having to implement layoffs, terminations and furloughs to stay afloat, even with the federal relief being offered. At the crux of it all is health care: where we look to save the lives of our friends and loved ones, where we rely on accessibility to care, where we put our hopes for a cure.

Some would argue that health care in the U.S. was broken before the pandemic hit. Whether you agree with that or not, Covid-19 has no doubt highlighted gaps in the health care system and our abilities to handle a catastrophe. Health care providers, insurance carriers, employers and consumers will all be impacted even after the dust settles and the urgency diminishes. Here are seven ways we expect the health care markets to be affected.

1. Telemedicine is here to stay

While early adopters were already utilizing telemedicine, everyone has come to see the real value of it. Covid-19 has instilled in most people a certain degree of germaphobia that isn’t likely to go away any time soon, so many are wondering why they would go to a hospital or clinic to get a diagnosis, consultation or prescription when they don’t need to. That said, there is a demographic divide here: older generations, who often have more medical needs and appointments, are generally less comfortable switching to a digital format.

A great advantage of telemedicine is its ability to even the playing field in terms of access. It doesn’t matter if you live in Manhattan or the rural countryside, you can get the same care at a comparable price. This is extremely important as we see the ways in which Covid-19 has widened the socioeconomic divides in our country.

Telemedicine will rise in popularity for mental and behavioral health issues as well. This at a time when anxiety, depression and hardships are at a recent high. We also anticipate a boost in concierge telemedicine services as well.

An increase in telemedicine utilization may yield cost savings in the long term. In the short term, however, details are blurry in terms of pricing for visits. Further, some people now using telemedicine may not have otherwise seen a doctor at all, which skews utilization rates.

2. Deferred health costs

There are still a lot of unknowns regarding the impact Covid-19 will have on health insurance costs. At a high level, we estimate the net impact on the cost of medical claims over 12 months (April 4, 2020 to March 3, 2021) for an “average employer” to be an increase of 6%-8%, with most simulation results in the range of 2%-14%. Member demographics, location and industry will impact these projections. Further, our proprietary modeling shows that short-term drug spend is up, while short-term medical spend is down.

3. Cost shifting

The April unemployment rate for the U.S. was 14.7%. For comparison’s sake, the average unemployment rate for the year of 2019 was 3.6%. This uptick in unemployment will cause many who were previously covered under employer-sponsored health plans to move to governmental programs, such as Medicaid or Medicaid, if eligible, as these are much less costly than the employer-sponsored plan’s COBRA. In fact, commercial prices are often far more than 50% above Medicare payment rates according to the Medicare Payment Policy report to Congress. As the unemployed struggle with finances and find themselves in different income brackets, this shift will be significant.

As a result, health care facilities, which are already losing revenue due to the lack of elective procedures during the pandemic, will face further financial woes because they make less money from patients who are insured through governmental programs than they do for those insured commercially. Meanwhile, the commercial insurers (i.e., Cigna, Blue Cross Blue Shield), may actually save money amid the crisis due to a lower volume of claims (which goes back to the delay of elective procedures). This point is important for employers to be aware of as a negotiating tactic as they approach their plan renewal.

4. Expansion of coverage

With the government and carriers making exceptions to existing health plan policies through 2020, it is clear that we were dealing with critical coverage gaps, and we anticipate these areas to stay written into health plans. This goes for telemedicine benefits, counseling and mental health, extra prescription refills, relaxed utilization management requirements, specialized treatment, vaccines and changes to flexible spending account (FSA), health savings account (HSA) and health reimbursement arrangement (HRA) eligible purchases. The result will be an overall broader offering of benefits at a higher cost.

5. Push for more government involvement

Throughout the crisis, we have learned that employer-sponsored programs can only get us so far. Especially with election season upon us, we’re predicting a jump in support for programs like Medicare For All, where a public program better suited and funded for “unprecedented circumstances” would already be established. We can see this in the recent grant of additional funding for Medicaid.

6. Greater focus on claims control strategies

We expect employers to take a closer look at how they can minimize volatility and improve population health management. This might involve a stronger emphasis on risk management strategies and programs and advanced data and reporting procedures. More companies will be turning to consultants and actuaries for things like trend analyses, audits, repricing and projections. We anticipate that more businesses will be considering population health management programs as a long-term strategy for a healthier population that will, in turn, lower claims costs and lessen operational risk in the face of a similar catastrophe. More than ever, the key to a business’s success will stem in part from its ability to encourage and facilitate a healthy workforce.

7. Rethinking long-term care

Among the many hardships the world faces today lies the fear instilled in those who have loved ones in nursing homes or like facilities. Based on the observations from the current crisis, they are hubs for exposure and infection among an already high-risk population. We predict the health care system of the future to include an overhaul of home health care programs and assistance, as many will not feel comfortable in larger care facilities, something once commonplace.

In summary, the outlook for the health care industry post Covid-19 will be a mix of positives and negatives. We do expect a hike in plan costs and mentality shifts that move people beyond traditional health care. Further, organizations of all types will be carefully analyzing their health care spend and loss history, gaining a better understanding of where each dollar is going and if it can be spent more strategically. These factors and more will constitute what will gradually become the new normal.

Legal Alert: Carrier Premium Credits and ERISA Fiduciary Obligations

Due to COVID-19 and state and local stay-at-home orders, utilization of group medical and dental insurance benefits is down.  As a result, some carriers recently notified employers that they will be issued premium credits. When asking how these premium credits should be treated by the employer, we often compare then to the ACA’s medical loss ratio (MLR) rebates.  While these premium credits are not MLR rebates, a similar decision must be made to determine whether they, like MLR rebates, are ERISA plan assets.COVID-19 law

Background

As background, the Affordable Care Act’s MLR rule requires health insurers to spend a certain percentage of premium dollars on claims or activities that improve health care quality, otherwise they must provide a rebate to employers. At the same time the U.S. Department of Health and Human Services issued the MLR rule, the U.S. Department of Labor (DOL) issued Technical Release 2011-04 (TR 2011-04), which clarifies how rebates should be treated under ERISA.  Under ERISA, anyone who has control over plan assets, such as the plan sponsor, has fiduciary obligations and must act accordingly.

Clearly, the premium credits we are seeing are not subject to the MLR rule; however, a similar analysis applies.   TR 2011-04 clarified that insurers must provide any MLR rebates to the policyholder of an ERISA plan.  However, while the DOL’s analysis was focused on MLR rebates, it recognized that distributions from carriers can take a variety of forms, such as “refunds, dividends, excess surplus distributions, and premium rebates.”  Regardless of the form or how the carrier describes them, to the extent that a carrier credit, rebate, dividend, or distribution is provided to a plan governed by ERISA, then the employer must always consider whether it is a “plan asset” subject to Title I of ERISA.  If it is, then as the party with authority and control over the “plan assets,” the employer is a fiduciary subject to Section 404 of ERISA and bound by the prohibited transactions provisions of Section 406.  In other words, to the extent that a refund is a plan asset, it must be used for the exclusive benefit of plan participants, which may include using it to enhance plan benefits or returning it to employees in the form of a premium reduction or cash refund.

Treatment of Premium Credits to Employers

In situations where an employer uses a trust to hold the insurance policies, the DOL’s position is that the rebates are generally assets of the plan.  However, in situations where the employer is the policyholder, the employer may, under certain circumstances, retain some or all of a rebate, credit, refund, or dividend.  When considering whether a rebate is a plan asset, the terms of the plan should be reviewed.  As discussed below, some employers draft their plan documents in a manner that allows them to retain these types of refunds.  If the terms of the plan are ambiguous, the DOL recommends employers use “ordinary notions of property rights” as a guide.

When determining whether carrier credits, dividends, distributions or rebates are ERISA plan assets, the DOL will look to the terms of the documents governing the plan, including the insurance policy.  If these governing documents are silent on the issue or unclear, then the DOL will take into consideration the source of funding for the insurance premium payments.  In such situations, the amount of a premium credit that is not a plan asset (and that the employer may therefore retain) is generally proportional to the amount that the employer contributed to the cost of insurance coverage.  For example, if an employer and its employees each pay a fixed percentage of the cost, a percentage of the premium credit equal to the percentage of participants’ cost would be attributable to participant contributions.  In the event that there are multiple benefit options, a premium credit attributable to one benefit option cannot be used to benefit enrollees in another benefit option.

The Plan Document

Employers can draft their plans to make it clear that the employer retains all rebates, credits, distributions, etc. if the rebates, credits, distributions, etc. do not exceed the employer’s contribution towards the benefit.  If given this flexibility in the plan, the employer may not have to return a portion of the premium credit to employees or use the credit to provide a premium reduction.  While this gives employers more flexibility, employers should consider that carriers communicate some premium refunds, such as an MLR rebates, to both the policyholder and participants, therefore employees know the employer received money back from the carrier and they may expect something in return.   Therefore, there is the potential for employee relations issues with this approach.

If the plan document does not provide this flexibility to the employer, is silent with regard to the use of such funds, or is unclear about how such funds are allocated, then the employer should treat any premium credits like they are ERISA plan assets (to the extent they’re attributable to employee contributions) and allocate them accordingly.

Allocating the Employees’ Share of a Premium Credit

The portion of the premium credit that is considered a plan asset must be handled according to ERISA’s general standards of fiduciary conduct.  However, as long as the employer adheres to these standards, it has some discretion when allocating the premium credit.

If an ERISA plan is 100 percent employee paid, then the premium credit must be used for the benefit of employees. If the cost of the benefit is shared between the employer and participants, then the premium credit can be shared between the employer and plan participants.

There is some flexibility here.  For example, if the employer finds that the cost of distributing shares of a premium credit to former participants approximates the amount of the proceeds, the employer may decide to distribute the portion of a premium credit attributable to employee contributions to current participants using a “reasonable, fair, and objective” method of allocation.  Similarly, if distributing cash payments to participants is not cost-effective (for example, the payments would be de minimis amounts, or would have tax consequences for participants) the employer may apply the premium credit toward future premium payments or benefit enhancements.  An employer may also vary the premium credit so that employees who paid a larger share of the premium will receive a larger share of the premium credit.

Ultimately, many employers provide the employees’ share of the premium credit in the form of a premium reduction or discount to all employees participating in the plan at the time the premium credit is distributed.  Employers should review all relevant facts and circumstances when determining how such a credit will be distributed.

Regardless, to avoid ERISA’s trust requirement, the portion of a premium credit that is plan assets must be used within three months of receipt by the policyholder.

Conclusion

Employers that would like additional flexibility in how to treat carrier premium credits should work with counsel to update their plan documents. Even for plans with flexibility built into the terms, we encourage consultation with counsel to review the facts and circumstances surrounding any such premium credits to ensure compliance with ERISA.

 

About the Authors.  This alert was prepared for Alera Group by Marathas Barrow Weatherhead Lent LLP, a national law firm with recognized experts on the Affordable Care Act.  Contact Stacy Barrow or Nicole Quinn-Gato at sbarrow@marbarlaw.com or nquinngato@marbarlaw.com.

The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our lawyers or our clients.  This is not legal advice.  No client-lawyer relationship between you and our lawyers is or may be created by your use of this information.  Rather, the content is intended as a general overview of the subject matter covered.  This agency and Marathas Barrow Weatherhead Lent LLP are not obligated to provide updates on the information presented herein.  Those reading this alert are encouraged to seek direct counsel on legal questions.

© 2020 Marathas Barrow Weatherhead Lent LLP.  All Rights Reserved.

An Employer’s Path to the New Normal

Helping You Rebuild Better

COVID-19 Benefits Risk HRAs COVID-19 continues to put global society to the test, no organization or individual is the same as it was pre-pandemic. We have started to see some light at the end of the tunnel, but as you can see above, various hurdles remain for employers as they work toward their new normal. By taking shortcuts, the runner (that’s you, in the middle) would not arrive at a workplace that is truly Rebuilt Better and prepared for the future. This educational series is meant to guide you across these hurdles by providing tips, compliance advice, educated predictions for future market trends and shifts, and walking you through example scenarios. In some ways you’ve been given a clean slate, so throw on your metaphorical sneakers and let’s get to it!

Please note: we’ve labeled the segments as “chapters” below, but after the series intro, we encourage you to view them in which ever order makes sense for you. We know there is no set start and finish as an employer during this time, and your unique priorities might dictate how you prefer to listen along. 

 Start Below – Prologue: Series Intro   

Chapter 1: Risk Evaluation and Liability

Chapter 2: Returning to and Staying at Work

Chapter 3: Your Shifting Workforce

Chapter 4: Disability and Absence Management

Chapter 5: The Future of Healthcare

Chapter 6: Financial Benefits and Recovery

 

 

 

 

 

Weekly Recap: COVID-19 News 4/27-5/1

Legal Alerts

Agencies Extend Deadline to Pay COBRA Premiums and Certain Other ERISA and Internal Revenue Codes Due to COVID-19
COVID-19 and Cafeteria Plan Considerations

Articles & Other Resources

CARES Act Part 3
Seasonal Employees and COVID-19
Coronavirus and HSA Eligibility
Qualified Life Events: What Are They?
Washington State Expands Rights for High-Risk Workers


Webinars

(Recording) Talent Strategy for the Crisis and Beyond
(Recording) HR Technology & COVID-19
(Recording) Alera Cost Estimator Tool

 

Legal Alert: Agencies Extend Deadline to Pay COBRA Premiums and Certain Other ERISA and Internal Revenue Codes Due to COVID-19

This legal alert was updated May 13, 2020.

A cafeteria plan, or Section 125 plan, sometimes referred to as a POP plan, allows employees to pay for certain expenses on a pretax basis. Employees choose between a taxable benefit (cash, typically distributed via payroll) and two or more pre-tax qualified benefits. Just like standing in line at a cafeteria and selecting a salad, a plate of meatloaf, and a carton of milk, employees can “stand in line” and select health insurance, vision insurance, and dental insurance – and more! The IRS limits the benefits that can be offered through a cafeteria plan.COVID-19 law

  • Coverage under an accident or health plan (traditional health insurance, self-insured reimbursement plans, dental, vision, etc.)
  • Health care expense reimbursement plans (FSAs)
  • Dependent care assistance benefits
  • Paid time off
  • Adoption assistance benefits
  • Health savings accounts (HSAs)
  • Group term life
  • 401(k) contributions

 

Employees can make elections and select which of the offered benefits they would like to enroll in. Employees can choose to cover other individuals, including spouses and dependents, if the employer’s plan allows. These elections are prospective, with an exception for birth, adoption and placement for adoption as well as new hires, when the employer’s plan does not impose a waiting period for new employees. The IRS considers pretax elections to generally be irrevocable unless a permitted event occurs or there is an exception. These events sometimes overlap and fall into three general categories, HIPAA special enrollment events, change in status events, and other triggering events.

A plan sponsor is not required to recognize any midyear changes to pretax elections. However, for practical purposes, because HIPAA requires group health plans to provide a special enrollment opportunity to an employee upon the occurrence of specific events (e.g. marriage, birth, adoption, etc.)¹ most plan sponsors at a minimum will design their plan to recognize HIPAA special enrollment events, permitting changes to pretax elections midyear. All of the events however are optional, and a plan sponsor must ensure their plan documents affirmatively indicate which of the events are recognized.

QUALIFYING EVENTS
Gain dependent(s) due to marriage Employee or dependent becomes entitled to Medicare or Medicaid Employee/dependent status change results in gaining eligibility under the plan (e.g., new job; part-time to full-time) Plan makes SIGNIFICANT cost change Plan makes automatics small cost change(s)
Lose spouse (e.g., divorce, legal separation, death of spouse) Employee or dependent becomes entitled to premium assistance subsidy for Medicaid or CHIP Employee/dependent employment change results in losing eligibility under employer plan (e.g., full to part-time; unpaid leave) Plan makes SIGNIFICANT curtailment in coverage Other employer’s plan increases/decreases/ceases coverage
Gain/lose child (e.g., birth adoption or placement for adoption/death) Employee or dependent loses entitlement for Medicare, Medicaid, or CHIP Employee hours of reduced to average less than 30 hours a week Plan eliminates/adds new benefit or coverage option Other employer’s plan offers open enrollment
Dependent loses/gains eligibility (e.g., child reaches age limit/becomes student after age 26) Change in residence triggers gain/loss eligibility (e.g., move in/out of a plan services area Employee becomes eligible to enroll in a QHP in the Marketplace Order requiring plan to add child(ren) to health plan coverage Order requiring another employer’s plan to add child(ren) to health plan coverage

 

The following situations are not cafeteria plan qualifying events:

  • Change in employee’s finances
  • Change in employee’s medical condition (worsens/heals)
  • Provider leaves network, unless it results in a significant reduction of coverage (e.g., the only gastroenterologist in the network leaves)
  • Legal separation, unless it causes the spouse to lose eligibility under the terms of the plan. (Many plans eligibility isn’t lost until divorce is final.)
  • Commencement of domestic partner relationship
  • Dependent or spouse leaves/returns from prison/jail, unless it causes the individual to lose HMO eligibility due to change in residence

On May 12, 2020, the IRS issued Notice 2020-29 which, among other things, allow employees to amend their cafeteria plans to permit employees to make mid-year changes for the following purposes:

  • For employer-sponsored health coverage:
    • Make a new, prospective election if the employee had previously declined coverage;
    • Revoke an existing election and make a new, prospective election to enroll in different health coverage sponsored by the employer; or
    • Prospectively revoke coverage if the employee attests in writing that they are enrolled in, or immediately enroll in, other health coverage not sponsored by the employer. The Notice provides a sample attestation employers can use and may rely on the written attestation unless the employer has actual knowledge the employee is not, or will not be, enrolled in other comprehensive health coverage.
  • For FSA coverage:
    • Prospectively revoke an election, make a new election, or decrease or increase an election to a health FSA (including a limited purpose health FSA) or DCAP.

Notice 2020-29 provides that employers may amend their plans to allow each eligible employee to make prospective election changes or an initial election regardless of whether the election change satisfies one of the permitted election changes under applicable Treasury regulations. The Notice is very clear that this is not a free-for-all. The employer has the discretion to impose parameters for these election changes, including the extent to which the election changes are permitted and applied, and they can limit the period during which election changes may be made.

The relief may be applied retroactively to January 1, 2020; however, as set forth above, all election changes must be prospective. The retroactive application of the relief is to cover any employer who may have allowed an election change that may not have been consistent with Section 125 (but would be consistent with one of the permitted election changes discussed above).

Finally, employers must ensure the election changes do not result in failure to comply with the nondiscrimination rules. The Notice provides strategies an employer may use to ensure there is no adverse selection of health coverage, such as limiting elections to circumstances in which an employee’s coverage will be increased or improved as a result of the election change (ex. switching from self-only to family coverage).

For more COVID-19 legal alerts, please visit our resource center at aleragroup.com/coronavirus/#legalalerts.

If you have any questions related to this alert, please reach out to your Alera Group advisor or email us at info@aleragroup.com to be connected with your local firm.

 

¹Special Enrollment rights are not required for “HIPAA-excepted benefits” which generally include stand-alone dental, vision and most health care FSAs.

 

The information contained herein should be understood to be general insurance brokerage information only and does not constitute advice for any particular situation or fact pattern and cannot be relied upon as such. Statements concerning financial, regulatory or legal matters are based on general observations as an insurance broker and may not be relied upon as financial, regulatory or legal advice. This document is owned by Alera Group, Inc., and its contents may not be reproduced, in whole or in part, without the written permission of Alera Group, Inc. Reviewed as of 05/13/2020.

Legal Alert: COVID-19 and Cafeteria Plan Considerations

This alert was updated on 04/29/20. 

A cafeteria plan, or Section 125 plan, sometimes referred to as a POP plan, allows employees to pay for certain expenses on a pretax basis. Employees choose between a taxable benefit (cash, typically distributed via payroll) and two or more pre-tax qualified benefits. Just like standing in line at a cafeteria and selecting a salad, a plate of meatloaf, and a carton of milk, employees can “stand in line” and select health insurance, vision insurance, and dental insurance – and more! The IRS limits the benefits that can be offered through a cafeteria plan.

  • Coverage under an accident or health plan (tCOVID-19 lawraditional health insurance, self-insured reimbursement plans, dental, vision, etc.)
  • Health care expense reimbursement plans (FSAs)
  • Dependent care assistance benefits
  • Paid time off
  • Adoption assistance benefits
  • Health savings accounts (HSAs)
  • Group term life
  • 401(k) contributions

Employees can make elections and select which of the offered benefits they would like to enroll in. Employees can choose to cover other individuals, including spouses and dependents, if the employer’s plan allows. These elections are prospective, with an exception for new hires. The IRS considers pre-tax elections to be irrevocable unless a permitted event occurs. These events sometimes overlap and fall into 3 general categories, HIPAA Special Enrollment Events, Change in Status Events, and Other Triggering Events.

The only events that a plan sponsor must recognize are HIPAA special enrollment events, as long as the plan is subject to HIPAA. Almost all plans are subject to HIPAA. All of the other events are optional, and a plan sponsor must ensure their plan documents affirmatively indicate which of the vents are recognized.

QUALIFYING EVENTS

Gain dependent(s) due to marriage Employee or dependent becomes entitled to Medicare or Medicaid Employee/dependent status change results in gaining eligibility under the plan (e.g., new job; part-time to full-time) Plan makes SIGNIFICANT cost change Plan makes automatics small cost change(s)
Lose spouse (e.g., divorce, legal separation, death of spouse) Employee or dependent becomes entitled to premium assistance subsidy for Medicaid or CHIP Employee/dependent employment change results in losing eligibility under employer plan (e.g., full to part-time; unpaid leave) Plan makes SIGNIFICANT curtailment in coverage Other employer’s plan increases/decreases/ceases coverage
Gain/lose child (e.g., birth adoption or placement for adoption/death) Employee or dependent loses entitlement for Medicare, Medicaid, or CHIP Employee hours of reduced to average less than 30 hours a week Plan eliminates/adds new benefit or coverage option Other employer’s plan offers open enrollment
Dependent loses/gains eligibility (e.g., child reaches age limit/becomes student after age 26) Change in residence triggers gain/loss eligibility (e.g., move in/out of a plan services area Employee becomes eligible to enroll in a QHP in the Marketplace Order requiring plan to add child(ren) to health plan coverage Order requiring another employer’s plan to add child(ren) to health plan coverage

The following situations are not cafeteria plan qualifying events:

  • Change in employee’s finances
  • Change in employee’s medical condition (worsens/heals)
  • Health insurance carrier permitting special open enrollment (for example, during COVID-19 pandemic)
  • Provider leaves network, unless it results in a significant reduction of coverage (e.g., only gastroenterologist in the network leaves)
  • Legal separation, unless it causes the spouse to lose eligibility
  • Commencement of domestic partner relationship
  • Dependent or spouse leaves/returns from prison/jail, unless it causes the individual to lose HMO eligibility due to change in residence

The IRS may be less likely to penalize plan sponsors that allow a special open enrollment given the unprecedented circumstances; however, employers need to be aware that there is still risk and provide it on a uniform and reasonable basis. As there is potential risk, an employer should strongly consider having contributions be post-tax as it can help reduce risk of allowing employees enroll in a plan without having a

qualifying event. If employers choose to allow a special open enrollment due to COVID-19 concerns, they may want to update their plan documents to reflect this period.

Employers who are considering allowing employees to come onto the plan due to a non-qualifying event (such as carrier’s open enrollment) should consider the following:
  • It is recommended the enrollment be done on a post-tax basis
  • If the plan’s ERISA plan documents identify the situations in which an employee is eligible to enroll in the plan, and it mirrors cafeteria plan language, the plan document should be amended to ensure the administrator is enrolling people in accordance with its governing documentation
  • The cafeteria plan document should be reviewed to ensure it indicates the special circumstanced relating to the pandemic time period

Dependent care accounts (DCAPs) and flexible spending arrangements (FSAs) also create unique issues due to the cafeteria plan regulations.

DEPENDENT CARE ASSISTANCE PROGRAMS

DCAPs, sometimes referred to as “dependent flex spending accounts” are an employer-sponsored plan to provide the exclusive benefit of dependent care assistance. Under the Internal Revenue Code (IRC) employees can exclude up to $5,000 annually from the gross income for dependent care. DCAPs are subject to flexible spending arrangement rules under the IRC. These arrangements can cause issues when employees are no longer working and not in need of childcare, or alternatively, an employee’s childcare program/center/provider has closed due to the pandemic.

GENERAL PRINCIPLES

Because of their tax favored status, DCAPs are subject to many regulations. Any common law employee can participate in a DCAP. In order to have dependent care expenses reimbursed by the program the following general requirements must be met:

  • The expense must enable the employee (and their spouse) to be gainfully employed
  • The expense must be for a qualifying individual (a child under the age of 13)
  • The expense must be for care, not education (daycare is acceptable, private school tuition is not)
  • The expense must be incurred in the coverage period (the plan year)
  • The expense must be substantiated

EXCLUSION FROM INCOME

An employee’s exclusion from income for payments under a DCAP in a calendar year is limited to the smallest of the following amounts:

  • $5,000 if the employee is married and filing a joint return or if the employee is a single parent ($2,500 if the employee is married but filing separately);
  • the employee’s “earned income” for the year; or
  • if the employee is married at the end of the taxable year, the spouse’s earned income

The spouse of a married employee is deemed to be gainfully employed and to have an earned income of not less than $250 per month if there is one qualifying individual, or $500 per month if there are two or more qualifying individuals in each month during which they are a full-time student, or is incapable of self-care and has the same principal place of abode as the employee for more than half the year.

LEAVE OF ABSENCE

If an employee takes a leave of absence they may no longer be considered “gainfully employed” and eligible for dependent care reimbursements during their leave. In general, this is determined on a daily basis, however, there is an exception to the “daily basis” rule for certain short, temporary absences (e.g. Emergency Paid Sick Leave) and part-time employment.

This exception is based on the IRS regulations establishing a “safe harbor” under which an absence of up to two consecutive calendar weeks is treated as a short, temporary absence. However, whether an absence for longer than 2 weeks qualifies as short and temporary is determined on the basis of facts and circumstances.

Likewise, when it comes to FMLA, the IRS does not agree that one’s entire absence under FMLA (which guarantees eligible employees up to 12 weeks of unpaid leave for certain purposes) is appropriate as a temporary absence safe harbor, noting that an absence of 12 weeks “is not a short, temporary absence” within the meaning of the regulations.

REIMBURSEMENTS

Reimbursements are subject to the same rules as flexible spending arrangements (FSAs). The period of coverage must be 12 months unless there is a short plan year. DCAPs that are underspent lead to forfeited money, unused contributions cannot carry over from year to year. DCAPs are not subject to COBRA and the participant has no right to coverage after their plan participation terminates. Employers can provide for a spend- down provision in their plan documents to allow former employees to receive reimbursement through the end of the plan year in which they terminated employment and coverage. If the plan document does not provide for this spend down, the funds are forfeited.

REIMBURSEMENTS DURING LEAVE OF ABSENCE

Although the employee may not be eligible to reimburse dependent care expenses while on leave, an employee on LOA may be able to continue to participate in (and make contributions to) a DCAP but any reimbursements from the DCAP will still be subject to the gainfully employed rule and would have to fall within the exception for short, temporary absences.

CHANGES TO ELECTIONS

Under the cafeteria plan regulations, elections are irrevocable unless a permitted event occurs. For DCAPs this is:

  • A change in status
  • A change in cost and coverage
  • FMLA (employees taking FMLA leave can revoke elections of non-health benefits and reinstate their benefits upon return from leave)

REMINDER: Although IRS rules govern dependent care assistance programs (DCAPs) also known as dependent care FSAs, including the requirement that elections are irrevocable except in the case of a “change event”, an employer is not required to recognize all the IRS permitted election changes when designing their FSA plan. Therefore, if an employee requests to change their dependent care FSA election, employers need to be mindful of:

  • FSA plan document language – must explicitly permit changes to elections due to a change in cost. If it does not, an employer may want to consider prospectively amending their plan to include this change event.
  • Following their plan’s rules to avoid plan disqualification
  • Refunds for dependent care FSA contributions already taken from an employee’s paycheck are not permissible.
Dependent Care Change in Status, or Cost & Coverage Events DCAP Election Change
A new childcare provider is available at a different cost than current provider. Includes someone (e.g. parent, older sibling) agreeing/able to watch the child for free. Employee may increase or decrease election amount consistent with change in qualified dependent care expenses.

Employee may cancel the election if child is now being cared for at no cost.

Enrolling child at a childcare provider closer to home or new work location. Employee may increase or decrease election amount consistent with change in cost.
An employee or their spouse has a new work schedule (including to or from part-time status), and a different number of hours of childcare are required. Employee may increase or decrease election amount consistent with change in cost.
A child who wasn’t previously enrolled in childcare now needs a childcare provider due to schools being closed. Employee may enroll in dependent care FSA. Or increase their election if they are enrolling an additional child not previously enrolled in childcare.
Child’s daycare closed Employee may decrease or cancel their election.

It is likely that many of the reasons an employee no longer needs childcare as the result of the COVID-19 pandemic would allow them to change their DCAP contributions, potentially reducing them to zero dollars, particularly if their child has been pulled from care (change in cost and coverage), or they are taking FMLA leave (including the newly created emergency FMLA leave under the new Families First Coronavirus Response Act).

Therefore, employers should be lenient and allow employees to change their DCAP contributions within the above scenarios. Employers with employees who are laid off (not expected to return to work) should consult with counsel to see if their plan documents allow for a spend down, or if that change can be made mid-plan year.

HEALTHCARE FLEXIBLE SPENDING ACCOUNT PROGRAMS (HCFSAS)

Similar to DCAPs, health FSA elections generally are irrevocable and the IRS only permits mid-year changes when an IRS approved qualifying status change has occurred. Any change in employment status of the employee, spouse or dependent that affects eligibility for the health FSA is a qualified status change and the change in the election must be on account of the qualified status change.

REMINDER: A health care FSA may (but is not required) to permit an employee to change their health FSA election for IRS permitted qualifying change in status events. Employers should refer to their FSA plan documents to determine which events their plan recognizes

 

Change in Status Events

 

Health FSA Election Change

Spouse (or dependent) loses health insurance coverage Employee may increase election amount
Employee changes from FT to PT Employee may revoke election if the change affects eligibility for the health FSA (Note: Employee may lose coverage automatically when hours change to PT.) COBRA paperwork may need to be provided if the account is underspent. (The health FSA balance

is equal to or more than the amount of FSA premiums charged for the remainder of the plan year.)

Employee is on layoff or furlough If the employee stops getting paid, the FSA technically ends. COBRA should be offered to continue the FSA. The employer may keep the FSA active by providing contributions for the employee, having the employee send payments into the employer, or catching up the contributions upon return.
Employee is on an unpaid, unprotected leave of absence (e.g. not FMLA) If eligibility is lost, employee may revoke election. COBRA paperwork may need to be provided if the account is underspent.
Employee is on FMLA or Emergency FMLA Extension under FFCRA Employee may revoke election for the period of coverage provided for under FMLA or EFMLEA (or the employer may allow the employee to continue coverage but discontinue contributions during the leave period.)
Termination of employment – employee Employee’s coverage ends. COBRA paperwork may need to be provided if the account is underspent.
Termination of employment for spouse, dependent who had health insurance or health FSA. Employee may enroll or increase election
Termination and Rehire Within 30 Days Employee’s elections in effect at termination are reinstated unless another event has occurred that allows a change.
Termination and Rehire After 30 Days Depending on the FSA plan design, the employee may reinstate elections in effect at termination or make a new election under the plan. It is possible, though for the FSA plan to prohibit an employee from re-enrolling in the plan during that plan year.

Section 125 Operational Failure Exposure

According to the regulations, a plan that fails to operate in accordance with its terms or otherwise fails to comply with the Code or regulations “is not a cafeteria plan,” and employees’ elections between taxable and nontaxable benefits result in gross income to employees.

Furthermore, the IRS could choose to treat the plan as if it did not exist. This would disqualify the plan and result in employer employment tax withholding liability and penalties for all employee pre-tax and elective employer contributions. Employees could also be required to pay employment and income taxes and penalties on their pre-tax and elective employer contributions.

Errors in violation of ERISA, COBRA, and HIPAA could also expose a sponsor to damages from private lawsuits as well as penalties.

• Cafeteria plan disqualification – the plan would no longer exist and neither the employer nor employee can enjoy tax-preferred status on their benefits
• Requiring the cafeteria plan to comply with Section 125 and its regulations, including reversing transactions that caused noncompliance. This could have tax filing implications to the employer and the employee(s)
• Imposing employment tax withholding liability and penalties on the employer regarding pre-tax salary reductions and elective employer contributions. This could have tax filing implications to the employer.
• Imposing employment and income tax liability and penalties on employees regarding pre-tax salary reductions and elective employer contributions. This could have tax filing implications to the employee.

The information contained herein should be understood to be general insurance brokerage information only and does not constitute advice for any particular situation or fact pattern and cannot be relied upon as such. Statements concerning financial, regulatory or legal matters are based on general observations as an insurance broker and may not be relied upon as financial, regulatory or legal advice. This document is owned by Alera Group, Inc., and its contents may not be reproduced, in whole or in part, without the written permission of Alera Group, Inc. Reviewed as of 4/29/2020.