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HomeMy WebLinkAboutADMINISTRATION ACTION SUMMARY 04-02-146-,a)o Central Contra Costa Sanitary District ,\ ... SPECIAL MEETING OF THE BOARD OF DIRECTORS: CENTRAL CONTRA COSTA DAVID R. WILLIAMS SANITARY DISTRICT President ADMINISTRATION COMMITTEE MICHAEL dentProTein Presides! Pro Tenr PAUL H. CAUSCY ACTION SUMMARY JAMLSA. NLJ &DL TAD J. PI /,L•C'KI PHONE. (925) 228 -9500 Chair McGill FAX. (925) 372 -0192 Member Williams www.centralsan.org Wednesday, April 2, 2014 8:00 a.m. Executive Conference Room 5019 Imhoff Place Martinez, California PRESENT: Chair Mike McGill, Member David Williams, General Manager Roger Bailey, Finance Manager Thea Vassallo, Human Resources Manager Teji O'Malley, Secretary of the District Elaine Boehme, Human Resources Analyst Twila Mullenix (left during Item 4 discussion), Assistant to the Secretary of the District Donna Anderson; Accounting Technician III David Rolley, District Counsel Kent Alm (via teleconference for Item 3.), John Bartel of Bartel and Associates (for Item 4.), Brian Gilmore of Trucker Huss (for Item 5.), Communication Services Manager Michael Scahill (for Item 9.a.), and Senior Principal of Consultants to Management, Inc. Larry Bienati, Ph.D., (for Item 9.a.), Call Meeting to Order Chair McGill called the meeting to order at 8:04 a.m. 2. Public Comments None. Chair McGill announced that several items on the agenda would be taken out of order to accommodate various attendees. Item 9.a. was taken first, followed by Items 3, 6, 7, 8, 4, 5, and 9.b., in that order. 3. Discuss recommended changes to Resolution 2008 -109 regarding the appointment to and establishment of Board Committees and meeting compensation requirements for Board Members pursuant to AB 1234 Administration Committee Action Summary April 2, 2014 Page 2 District Counsel Kent Alm participated via telephone for this agenda item. He explained that the most recent resolution setting forth procedures for appointment to and establishment of Board committees and meeting compensation requirements for Board Members was adopted in October 2008. Since then, a number of procedural changes have taken place and, more recently, the Board Committees have been consolidated and Committee charters have been adopted. Therefore, it was time to revisit the issue and adopt an updated resolution. With regard to meeting stipends, Mr. Alm pointed out that Chair McGill had recently represented the District at an event at the Pleasant Hill Recreation & Park District for which no stipend was paid. Mr. Alm noted that while the City of Pleasant Hill was one of Chair McGill's liaison cities, the Park District was not part of the City and thus not considered stipendable under the current Board compensation resolution. Chair McGill explained that the event was to celebrate the new Park opening, which honored the District's participation in helping provide recycled water to the Park. Thus, he believed the event was of interest and value to the District. For this reason, he suggested that such future events for the Pleasant Hill Recreation & Park District should be added to the new resolution. Member Williams questioned the necessity of including meetings of the California Association of Sanitation Agencies (CASA) executive board when any Board Members serving on the CASA executive board would already be in attendance at the conference. It was explained that there have been times in the past when a Board Member had to take time off work to attend meetings of the CASA executive board, so it was deemed appropriate to pay a stipend. Given that payment of a stipend in such instances is merely permitted but not required, Member Williams said he did not object to leaving it in the proposed resolution. Chair McGill suggested that, as a separate discussion from the draft resolution under consideration, the Committee hold a future discussion about areas where Board representation is most desired (i.e., CASA, California Special Districts Association (CSDA), the National Association of Clean Water Agencies (NACWA), etc.) and consider formulating a philosophy as to when the use of stipends might encourage that representation. Member Williams agreed that a focused discussion would be worthwhile. With regard to paragraph 11 in the proposed resolution, stating that Board Members may receive a stipend for attendance at a meeting, conference or event not specifically listed in the resolution where such attendance is of significant benefit to the District and when approved by the Board in advance, Administration Committee Action Summary April 2, 2014 Page 3 Mr. Alm noted that Board Member advance requests for stipends could be added as a regular item on future Board agendas if the Committee and Board so desired. COMMITTEE ACTION: Recommended a future discussion be agendized with regard to adopting a philosophy about where best to focus Board representation in the future and how the use of stipends might encourage such representation. The Committee also reviewed and recommended the Board: 1. Adopt the proposed Board compensation resolution, with the addition of Pleasant Hill Recreation & Park District to paragraph 10; and 2. Add a standing item to future Board meeting agendas under Board Member Reports as follows: Board Member requests for advance authorization to receive a stipend for meeting attendance not specifically addressed in the current Board Compensation Resolution. *4. Receive presentation from John Bartel of Bartel and Associates regarding Contra Costa Employees Retirement Association (CCCERA)/ California Public Employees' Retirement System (CalPERS), including pros and cons of defined benefit versus defined contribution plans Mr. Bartel distributed backup material (attached) concerning comparisons between CCCERA and CaIPERS and factors to consider when comparing defined benefit versus defined contribution plans. In comparing the CCCERA and CaIPERS systems, Mr. Bartel focused on differences in cost and safety. The cost of any system is the benefits paid plus expenses offset by investment returns. But, for comparison purposes, the single biggest driver of costs is investment return less expenses, because the benefits structure would be the same under either system. He also noted that investment return (including inflation) is by far the most significant factor affecting unfunded actuarial accrued liability (UAAL). Page 2 of his handout included a comparison of investment returns for both systems; each yielded an average 6.5% between 1999 and 2013 (net of expenses and after factoring for inflation). While both systems suffered significant drops during the dot -com bubble and the Great Recession, the net returns for both have been very similar. Mr. Bartel explained that CCCERA and CaIPERS use different approaches in terms of smoothing; CCCERA uses a five -year smoothing period, while CaIPERS Administration Committee Action Summary April 2, 2014 Page 4 has historically used a 15 -year period, which has effectively lowered the amount of required contributions. He said the Governmental Accounting Standards Board (GASB) is moving in the direction of no smoothing, and CaIPERS has recently reduced its smoothing period to roughly the same as CCCERA's. In response to a question from Accounting Technician 111 David Rolley, Mr. Bartel said favorable investment returns since 2008 will undoubtedly have a positive impact on the District's UAAL, but perhaps not to the extent one might think, because gains and losses are built around an assumed rate of return. For example, using an assumed rate of return of 7.75 %, a 30% investment loss, such as in 2008, would really be a 37.75% loss. Conversely, a 20% gain, such as in 2011, would really equate to a 12.25% gain. Therefore, it should not be expected that investment gains will fully absorb the UAAL. Mr. Bartel added that if the District were to move to CaIPERS, the UAAL would follow. He also noted that terminal pay (spiking) is not an option at CaIPERS. Human Resources Manager Teji O'Malley and Finance Manager Thea Vassallo pointed out that, from a customer service standpoint, CCCERA has been very responsive to District staff. Conversely, it has been very difficult to get ahold of anyone at Ca1PERS, in fact, their voicemail recording indicates they will call back within 10 working days. Bottom line, Mr. Bartel said that while he would be happy to conduct further analysis on this issue, his research thus far indicates that it would be difficult to argue from cost and safety standpoints that switching from CCCERA to CaIPERS would be in the ratepayers' best interest. In the interest of time, the Committee tabled the second portion of Mr. Bartel's presentation on defined benefit versus defined contribution plans to a future meeting, and held off on making any recommendation on the CCCERA versus CaIPERS issue until that time, noting that the subject would be moot if the District were to move to a defined contribution plan. Mr. Bartel left the meeting. COMMITTEE ACTION: Received presentation and requested Mr. Bartel come back in May 2014 to speak about defined benefit versus defined contribution plans. *5. Review memo from Trucker Huss regarding compliance of the District's Health Flexible Spending Accounts (FSA) with the Affordable Care Act (ACA) Ms. O'Malley said the District only recently became aware of a potential compliance issue with the District's Health FSA, most likely because the situation Administration Committee Action Summary April 2, 2014 Page 5 is uncommon among other agencies, since most employers do not make contributions to FSAs on behalf their employees. Attorney Brian Gilmore from Trucker Huss, the District's benefits counsel, explained and responded to questions from Committee Members on the attached memorandum dated March 21, 2014, concerning compliance issues under the ACA with the District's Health FSA component of the Section 125 Cafeteria Plan. The plan feature in question was the maximum $600 the District pays each year to employees under its Cafeteria Plan, the ACA limits the amount to $500 per year. While the plan can be amended going forward, there was a question whether a mid -year amendment would be permitted since cafeteria plan elections must be made at the beginning of the plan year (January 1) and are irrevocable. Mr. Gilmore noted that the matter is quite complex, and there is little guidance available to address this particular issue. Amending the District's plan mid -year may involve more issues than being non - compliant for the remainder of the plan year. The Committee discussed the merits of asking the Internal Revenue Service for a private letter ruling, but Mr. Gilmore noted that is usually a two -year process. General Manager Roger Bailey said the situation is unfortunate, but his recommendation would be to (1) leave the existing plan in place, (2) amend the plan beginning with the next plan year, and (3) bring the matter to the full Board as an informational item. Ms. O'Malley said she could bring to the Committee a proposed plan amendment to take effect January 1, 2015, noting that any such amendment first would need to be vetted with the District's bargaining units. The Committee could then make a recommendation to the full Board. Given the lack of available guidance, and potential problems associated with a mid -year plan amendment, Mr. Gilmore concurred with Mr. Bailey's recommendation. Mr. Gilmore left the meeting. COMMITTEE ACTION: Reviewed memo and recommended that a proposed plan amendment be brought to the Committee for bringing the District's Health FSA into compliance with the ACA effective January 1, 2015. 6. Review draft position paper recommending the addition and authorization to fill a Human Resources Analyst (S -72, $7,239 - $8,763) position and the establishment, addition, and authorization to fill a Senior Accountant (S -70, $6,899 - $8,352) position and cancel vacant Assistant Land Surveyor (G -71, $7,030 - $8,512) position and a vacant Engineering Technician 1 /11 (G -64, $5,957- $7,207) position Ms. O'Malley explained that the two recommended positions, which will replace two vacant positions that are no longer needed, are necessary to fully staff the affected departments. Administration Committee Action Summary April 2, 2014 Page 6 COMMITTEE ACTION: Reviewed and recommended Board approval. 7. Review Fiscal Year 2014 -15 Staffing Plan amendment made subsequent to recommendation for Board approval made by Administration Committee on March 11, 2014 Ms. O'Malley explained that after further consideration of the proposed new Internal Auditor position previously approved by the Committee, it was staff's recommendation, for parity purposes, to reclassify the position to a higher pay grade, the net budget effect of which would be an additional $14, 000 per year. COMMITTEE ACTION: Reviewed and recommended Board adoption, inclusive of amendment. Secretary of the District Elaine Boehme left the meeting. 8. Review request from California Association of Sanitation Agencies (CASA) for monetary support from the District to help fund UC Berkeley research into Clean Water Act (CWA) citizen lawsuits General Manager Roger Bailey noted that this item was informational only in that he has responded to CASA's request for financial support from the District in the recommended amount of $5, 000 (based on the District's dues level with CASA). He said participating in the research may aid in the development of some sort of model or template to sort through these types of issues going forward. Chair McGill and Member Williams were supportive of this action, noting that having an independent party conduct the research may provide insight into whether the third party citizen lawsuits are achieving their stated goals. COMMITTEE ACTION: Reviewed request and expressed support for the District's participation in funding the research. 9. Announcements a. Receive draft 2014 Strategic Plan in advance of discussion at April 21, 2014 Committee meeting. Communication Services Manager Michael Scahill noted that the initial draft Strategic Plan for Fiscal Years 2014 -15 and 2015 -16 had been distributed with the agenda packet for this meeting. While no Committee action was sought at this meeting, he and consultant Larry Bienati estimated that it would take several meetings of the Committee to fully Administration Committee Action Summary April 2, 2014 Page 7 review the draft Strategic Plan before any recommendation could be made to the full Board. Mr. Scahill and Mr. Bienati left the meeting. b. Next meeting scheduled for Monday, April 21, 2014 at 8:00 a.m. (Special meeting, as it was originally scheduled for Wednesday, April 23). COMMITTEE ACTION: Received the announcements. 10. Suggestions for future agenda items None. 11. Adjournment — at 10:00 a.m. Hand' u� h T £ L CENTRAL COSTA COUNTY SANITATION DISTRICT Pension Issues Presented by John E. Bartel, President Bartel Associates, LLC April 2, 2014 Tonic Agenda CCCERA Compared to Ca1PERS 1 Is one system safer, cheaper, etc. than the other? Defined Benefit versus Defined Contribution 3 Major risks for each? Who assumes risk? Cost if target benefit at retirement is the same? Benefit at retirement if cost (annual contribution) is the same? q odclientakentral contra costa sanitary distriMprojectst20Mba centralsa t 14- 04- 02.docx CCCERA COMPARED TO CALPERS ■ Cost for any retirement system Contributions = Benefit Payments + Expenses — Investment Return • Contribution policy can result in short term volatility • Ultimately, if benefits are the same then Investment Return — Expenses drives plan cost (B-A) ) April 2, 2014 CCCERA COMPARED TO CALPERS Tnvestment Retnrn (NPt of F.Yn,-ncnel cC S 30.0% — 20.0% _ ----- .._ — - 10.0% — 0.0% - -- - — -10.0% °0 0 0 °o 0 0 0 0 0 \ N N \ N N N N N N N N N N N N N N N N N N N N N �D N N CCCERA (12,13 1) -20.0% 30.0% _F CaIPERS (6/30) - (B/j� April 2, 2014 2 MS DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION PA, April 2, 2014 3 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Can vary from year to year Can vary from year to year Employee Contributions Always 100% Employer Contributions Typically 100% after 5 or 10 years. '' l 1 April 2, 2014 Employee Employer Vestin (How much of the promise does employee "own" ?) 4 Usually set by statute but can be negotiated Varies from one year to the next — "Whatever is Necessarv" Employee Contributions Always 100% Retirement Benefit Typically 100% after 5 or 10 years. M3 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Met", .. ,. ......... e�M. .............. ..., µ.m.. ----- x ... rr..r'.'.r rxrrrwrrww�...+..w.vw.. ............... ........ rruwrww Very Portable Retirement Generally Very Portable Employee takes vested Employee chooses account balance with between them when leaving. 1. deferred retirement Significant tax benefit (benefit earned disadvantage for amounts while at City, protected distributed and not by "salary" inflation if "rolled over" < age 59%2. working for most CA public agencies) or 2. accumulated employee contributions with interest BA'` Apri12, 2014 5 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Pre - retirement - Same as retirement, except employer contributions become 100% vested at death C)April 2, 2014 Death Who Accepts Risk. & Reward Investment Return Mortality Retirement Inflation i0 F FQ KS Pre - retirement — Employee contribution with interest Post - retirement — Employee can elect lower benefit to provide survivor continuance DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION ■ Studies consistently show defined contribution plans earn 1 to 2 percentage points less (net of expenses) than defined benefit plans • DC plan investments tend to be more conservative • DC plan expenses tend to be higher as a percentage of assets ■ For individual to be certain they get benefit for life they must: • buy an annuity • accumulate more than is necessary on average or • run the risk of outliving balance VAApril 2, 2014 F @7 S 0 q COST IF TARGET BENEFIT AT RETIREMENT IS THE SAME ■ If target is to replace 60% of earnings at age 65 retirement • DB plan does this with 13% of pay (7% assumed earnings) • DC plan does this with 18% of pay (6% assumed earnings) • DC plan does this with 21% of pay (5% assumed earnings) BA) ' April 2, 2014 V71"CW4,06 e' BENEFIT AT RETIREMENT IF CONTRIBUTION IS' SAME ■ If contribution each year is 10% of earnings the benefit for age 65 retirement • DB plan gets to 50% of pay replacement (7% assumed earnings) • DC plan gets to 35% of pay replacement (7% assumed earnings) • DC plan gets to 30% of pay replacement (7% assumed earnings) ` rBz)lApril 2, 2014 M3 gg r ti�:ir14 1 �t a T Lw IC ER. Ra, "i 'F. S< = ART7 EiStWV ",Di"m��:1DaUa s. t.N�. K *'tii 7' N1FK'1 °., l i j 5,. J, INIARkC 1 t3S: E 0 f 13ei?cw,ffi Judith Wicney MEMORANDUM pC c ;,a.Ec�=i < ,::: TO: Teji O'Malley; Thea Vassallo FROM: Brian Gilmore; Eric Schillinger DATE: March 21, 2014 RE: CCCSD Health FSA —PPACA Issues ATTORNY – CLIENT COMMUNICATION PRIVILEGED AND CONFIDENTIAL You have asked us to analyze potential Patient Protection and Affordable Care Act ( "PPACA ") compliance issues raised by the Central Contra Costa County Sanitary District Section 125 Cafeteria Plan (the "Cafeteria Plan). The issue is whether the Health Flexible Spending Arrangement Plan (the "Health FSA ") component of the Cafeteria Plan is currently noncompliant with PPACA, and, if so, whether it may be amended mid -year to avoid any applicable penalties. I. Summary of Cafeteria Plan and Health FSA Flex Credit Provisions. A. Cafeteria Plan Provisions. Under the Cafeteria Plan, CCCSD maintains a bookkeeping account for each participant that consists of several subaccounts.l CCCSD makes employer contributions ( "Flex Credits ") to each participant's account.2 Each participant then decides the amount of Flex Credits to be credited to each subaccount.3 Although it varies by group, participants generally receive a total of $1,200 in Flex Credits under the Cafeteria Plan. A participant may elect to receive all but $600 of his or her annual Flex Credits as cash .4 1 See Cafeteria Plan, § 3.1. The subaccounts include the (1) Health FSA, (2) Dependent Care Assistance subaccount, (3) Premium Conversion subaccount, and (4) Taxable Benefit subaccount. 2 See Cafeteria Plan, § 3.2. 3 See Cafeteria Plan, § 3.4. 4 See Cafeteria Plan Summary Plan Description. i, #1408895 = H. PPACA Treatment of Health FSAs. A. A Health FSA That is an Excepted Benefit is Not Subject to Certain PPACA Requirements. A health FSA is a group health plan subject to PPACA, unless an exception applies. Health FSAs that meet the definition of an excepted benefit are not subject to the PPACA market reform requirements.5 This includes, among others, an exemption from the general PPACA requirement that non - grandfathered group health plans provide certain preventive services without imposing any cost - sharing requirements for these services.6 A health FSA cannot meet this requirement.? B. Requirements for a Health FSA to be Considered an Excepted Benefit. A health FSA is an excepted benefit if it satisfies the following "availability" and "maximum benefit" requirements: (1) Availability. Other group health plan coverage, not limited to excepted benefits (e.g., major medical coverage), must be made available for the year to the class of participants by reason of their employment.$ (2) Maximum Benefit. The "maximum benefit payable" to any participant in the class for a year cannot exceed: a. Two times the participant's salary reduction election under the arrangement for the year, or b. If greater, $500 plus the amount of the participant's salary reduction election.9 The participant's "salary reduction election" is the maximum amount that the participant can apply towards his or her health FSA that would have been taxable income but for the participant's election. Any flex credits directed to the health FSA that could have been cashed -out (i.e., received by the employee as taxable compensation) are treated as salary reduction elections.10 The "maximum benefit payable" is the entire health FSA benefit amount, which includes the sum of the participant's salary reduction and any employer contributions. C. The Health FSA Likely Fails the Maximum Benefit Requirement. Under the Cafeteria Plan, Participants generally may elect to receive all but $600 of the annual Flex Credits as cash.I I 5 IRS Notice 2013 -54, Q &A #7; Technical Release No. 2013 -03, Q &A V. See http: / /www.dol .gov /ebsa/newsroom /trl3- 03.html 6 PHSA § 2713 7 IRS Notice 2013 -54, Q &A #7; Technical Release No. 2013 -03, Q &A 47. See http: / /www.dol .gov /ebsa/newsroom /trl3- 03.html 8 Treas. Reg. § 54.9831- 1(c)(3)(v)(A) 9 Treas. Reg. § 54.983 1 - I (c)(3)(v)(B) 10 Treas. Reg. § 54.983 1 -1 (c)(3)(v)(B) 11 See Cafeteria Plan Summary Plan Description. -2- #1408895 Although it is not entirely clear, we interpret "maximum benefit payable" to refer to the amount the participant could receive in reimbursements from his or her health FSA in any instance. This means we must look to the worst case scenario under the Cafeteria Plan's Flex Credits structure to determine whether it is possible if any situations could exist where the "maximum benefit payable" would exceed the greater of two times the participant's salary reduction elections or the amount of the participant's salary reduction elections plus $500. In other words, if there is any possibility that a participant's elections could result in the Health FSA's maximum benefit payable exceeding those limits, the Health FSA is not an excepted benefit. Unfortunately, this is a possibility under the Cafeteria Plan. Assuming the standard structure, a participant receiving $1,200 of Flex Credits could elect to cash -out $600 and direct the remaining $600 to the Health FSA. If the participant makes no supplemental salary reduction elections to the Health FSA, then the only amounts directed to the Health FSA are Flex Credits. Under this scenario, the participant has cashed -out the maximum amount possible under the Cafeteria Plan ($600), meaning that all $600 of the amount directed to the Health FSA was in the form of non - cashable Flex Credits (i.e., he or she could not have elected to receive that $600 amount directed toward the Health FSA in cash). This point is important because non - cashable Flex Credits are not treated as salary reduction elections. The "maximum benefit payable" under the Health FSA in this example would be $600, and the participant would be treated as making $0 in salary reduction elections. Two times the participant's salary reduction election under the Health FSA is $0 (2 x $0 = $0), and the amount of the participant's salary reduction election plus $500 is $500 ($0 + $500 = $500). Therefore, the maximum benefit payable could not exceed $500 for the Health FSA to be an excepted benefit. In this case, the maximum benefit payable under the Health FSA would be $600, which exceeds that $500 limit. This means that the Health FSA is not an excepted benefit. D. A Health FSA That is Not an Excepted Benefit Will Fail to Meet the Preventive Services Requirements Under PPACA. As discussed above, PPACA requires that group health plans and insurers provide certain preventive services without imposing any cost- sharing.12 The agencies have stated that because a health FSA that is not an excepted benefit is not integrated with a group health plan, it will fail to comply with the preventive services requirements. 13 III. Integrating a Health FSA With Another Group Health Plan in Order to Comply With the PPACA Preventive Services Requirements. A. IRS Guidance on HRAs Integrated With Another Group Health Plan. The IRS has stated that a Health Reimbursement Arrangement ( "HRA ") that is "integrated" with another group health plan complies with the PPACA market reform requirements if the group health plan that the HRA is integrated with complies with the PPACA market reform 12 PHSA § 2713 13 IRS Notice 2013 -54, Q &A #7; Technical Release No. 2013 -03, Q &A V. -3- #1408895 requirements. 14 Note that while this IRS guidance addresses whether a HRA may be integrated with another group health plan, it does not explicitly address whether a health FSA may also be integrated in the same manner. The guidance appears to assume that a non - excepted benefit health FSA will not be integrated with another group health plan, without directly stating the legal consequences if the health FSA was in fact integrated with another group health plan. 15 We believe there are two reasons why the guidance does not address whether a health FSA can be integrated with another group health plan. The first reason is that in the vast majority of cases, a health FSA is an excepted benefit (now all health FSAs must be excepted to comply with PPACA, but that was not necessarily the case prior to 2014). This is in contrast to a HRA, which is generally only an excepted benefit if its reimbursements are limited to dental /vision expenses, or if the HRA is limited to retiree participants. In other words, while there were very few health FSAs that were non - excepted prior to 2014 (and therefore not in need of this alternative "integration" approach to comply with PPACA), most HRAs are and have been non - excepted, and they would cease to be viable as of 2014 without the "integration" structure. The other reason we believe the guidance does not address whether a health FSA can be integrated with another group health plan is that in those unusual cases prior to 2014 where a health FSA was non - excepted, it was usually a result of the health FSA's failure to meet the "availability" test rather than the "maximum benefit" test. 16 Under the availability test (as described above), the employer must also sponsor other group health plan coverage that is not an excepted benefit. Many (typically smaller) employers in the past would offer only a health FSA but no major medical coverage. That structure is of course no longer permitted because it would result in a non - excepted health FSA. More importantly, it would be almost impossible to structure a stand -alone (and thereby non - excepted) health FSA as an integrated benefit if the employer did not offer a non - excepted group health plan. This is because, as discussed in more detail below, the integration rules require integration with a non - excepted group health plan. Individual health plans cannot be used to integrate. Because many employees will not have access to a non - excepted group health plan through a spouse or domestic partner, it would drastically limit the ability to participate in a stand- alone health FSA if it attempted to integrate. However, in our analysis below we make the argument that it is possible the IRS would treat a health FSA as integrated with another group health plan if it met the same requirements that apply to a HRA. B. Requirements for a HRA to be Integrated With Another Group Health Plan. A HRA will be integrated with another group health plan if it meets certain general requirements as well as additional requirements depending on whether the group health plan integrating with the HRA provides minimum value. 17 14 IRS Notice 2013 -54, Q &A #7; Technical Release No. 2013 -03, Q &A 41-2. 15 IRS Notice 2013 -54, Q &A #7; Technical Release No. 2013 -03, Q &A 47. 16 We note that while it is not uncommon to have flex credits, it is unusual to make any portion of those flex credits non - cashable. A health FSA generally does not lose excepted benefit status unless at least $500 of flex credits are non - cashable, which is rarely the case outside of the CCCSD Cafeteria Plan. 17 A plan offers "minimum value" if it is designed to pay at least 60% of the total cost of medical services for a standard population. -4- #1408895 (1) General Requirements. 18 Regardless of whether the group health plan accompanying the HRA provides minimum value, the following requirements must be met: a. The employer sponsoring the HRA must offer a group health plan (other than the HRA) that does not consist solely of excepted benefits; b. The HRA must be available only to employees who are actually enrolled in another group health plan that does not consist solely of excepted benefits (regardless of who offers that other plan —e.g., it could be the plan of a spouse's employer); C. Employees (and former employees) must be offered the opportunity to opt -out of and waive future reimbursements from the HRA at least annually; and d. On termination of employment, the HRA must either be forfeited or it must allow the employee to opt out and waive future reimbursements. (2) If the Group Health Plan Accompanying the HRA Does Not Provide Minimum Value. 19 In addition to the general requirements above, the HRA can only reimburse co- payments, co- insurance, deductibles, premiums under the non -HRA with which it is integrated, and medical care expenses that are not "essential health benefits." (3) If the Group Health Plan Accompanying the HRA Does Provide Minimum Value. The HRA can reimburse any otherwise permissible expense.20 C. Arguing That the Health FSA May be Integrated With Another Group Health Plan to Satisfy the PPACA Market Reform Provisions. The only way that a non - excepted health FSA could satisfy the PPACA market reform provisions would be to rely on the argument that it is integrated with other non - excepted group health coverage in a manner similar to a HRA. It is our understanding that CCCSD's major medical health plan requires employees to enroll in the CCCSD major medical plan or demonstrate enrollment in a different major medical plan. This means that all CCCSD employees are either enrolled in the CCCSD major medical plan or have demonstrated coverage in an alternative major health plan.21 We assume that the CCCSD major medical plan's eligibility requirements are the same for the Health FSA. We also assume that CCCSD's major medical coverage provides minimum value, and any alternative group coverage demonstrated by those who opted -out would also likely provide minimum value (although we 18 IRS Notice 2013 -54, Q &A 47; Technical Release No. 2013 -03, Q &A 44. 19 Id: 20 Id. 21 Please note that we have not reviewed CCCSD's health plan document. While it is our understanding that the plan does not explicitly require such alternative coverage to be a group health plan (as opposed to an individual policy, which cannot be used to "integrate "), we also understand that all such individuals who have opted -out have shown alternative coverage in a group health plan (e.g., a spouse's employer - sponsored group health plan). -5- #1408895 would like that confirmed on any opt -out form, if this option is relied on). Furthermore, we do not believe that the general requirements of Sections B.1(c) and (d) above regarding the opportunity for employees to "opt -out" are applicable to a health FSA. Under these circumstances, we think there is a reasonable argument that the Health FSA may be treated as integrated with CCCSD's group health plan or an alternative group health plan. If this argument is correct, the Health FSA does not violate any of the PPACA market reform provisions. Although it is not excepted and therefore subject to those requirements, the Health FSA can rely on the other non - excepted group health plan coverage with which it is integrated (primarily the CCCSD major medical plan) to satisfy the PPACA market reform provisions (primarily the preventive services mandate) under this approach. IV. Amending the Cafeteria Plan and Health FSA to Comply With PPACA. A. CCCSD May Be Able to Amend the Cafeteria Plan Mid -Year to Make the Health FSA an Excepted Benefit on a Prospective Basis. CCCSD could argue that amending the Cafeteria Plan mid -year to increase the amount Flex Credits that can be cashed -out effectively creates an excepted health FSA on a prospective basis. The mid -year amendment would limit the amount of Flex Credits that cannot be cashed out to $500 (or lower). As discussed in more detail below, there are numerous issues with this approach. Regardless, even if a mid -year amendment could make the Health FSA an excepted benefit, the Health FSA would not qualify as an excepted benefit for the portion of the year prior to such amendment. B. The Cafeteria Plan and Health FSA May be Amended Only on a Prospective Basis. Absent specific guidance to the contrary, the cafeteria plan rules only permit plan amendments to be made on a prospective basis 22 The failure to follow this requirement could cause the cafeteria plan to be disqualified, meaning that all participants would be taxed on the value of the otherwise nontaxable benefits they elected.23 C. Effect of Prospective Amendment on Whether the Health FSA Qualifies as an Excepted Benefit. Reducing the limit on the amount of Flex Credits that a participant may cash -out will not likely permit an election change for participants to cash -out additional Flex Credits. It is unclear whether participants must actually be able to cash -out the additional Flex Credits mid -year for the Health FSA to qualify as an excepted benefit (see below). 22 Prop. Treas. Reg. § 1.125- 1(c)(5) 23 Prop. Treas. Reg. § 1.125- 1(c)(6) -6- #1408895 V. Permitted Cafeteria Plan Election Changes. A. Generally, Cafeteria Plan Elections Must be Made at the Beginning of the Plan Year and are Irrevocable. The cafeteria plan rules generally require that all participant elections be made before the beginning of the plan year.24 Participant elections must be irrevocable for the duration of the plan year unless the participant experiences a permitted election change event 25 B. Amendinp, the Cafeteria Plan and Health FSA to Change the "Cashable" Nature of Certain Flex Credits Likely Does Not Create a Permitted Election Change . The only relevant instance where the cafeteria plan rules permit an election change is upon an addition or significant improvement of a "benefit package option. 1126 The Cafeteria Plan permits an election change if CCCSD adds or significantly improves the coverage provided under a "component plan. 1127 As with the cafeteria plan rules, the significant improvement addressed in the Cafeteria Plan relates to the underlying component plans, which are the Health FSA, DCAP, or the health and welfare benefits for which the employee can pay on a pre -tax basis under the POP. It is somewhat difficult to argue that the Flex Credits themselves (as opposed to the benefits described in the previous sentence that the flex credits can purchase) are a component plan (or, using the terminology of the regulations, a "benefit package option" or "other coverage option "). The argument would have to be that the Flex Credits are themselves a component plan that can be significantly improved by allowing more of them to be cashed -out. It is not clear whether the IRS would accept such an argument if ever challenged. Even if CCCSD did choose to interpret such a mid -year amendment to be a permitted election change event based on significant improvement of the Flex Credits offered, this permitted election change event would not allow any employees to change their Health FSA election. The cafeteria plan rules specifically state that the addition or significant improvement of a benefit package option does not permit an election change with respect to a health FSA.28 The Cafeteria Plan document also contains this limitation.29 C. Effect of a Participant's Inability to Make a Mid -Year Health FSA Election Change on Whether the Health FSA is an Excepted Benefit. CCCSD could argue that the inability to make a mid -year Health FSA election change would not be relevant to the determination of whether the Health FSA is an excepted benefit. In other words, the argument would be that the only relevant issue is that the employee could choose to reduce elections to other pre -tax benefits under the plan to instead receive taxable cash. Again, 24 Prop. Treas. Reg. § 1.125- 2(a)(2) 25 Prop. Treas. Reg. § 1.125- 2(a)(4) 26 Treas. Reg. § 1.125- 4(f)(3)(iii) 27 See Cafeteria Plan, § 3.6(f)(iii) 28 Treas. Reg. § 1.125- 4(f)(1) 29 See Cafeteria Plan, § 3.6(f)(iii) -7- 41408895 any Flex Credits directed to the Health FSA that could have been cashed -out are treated as an employee salary reduction rather than an employer contribution. The argument would be that by increasing the amount Flex Credits that can be cashed -out, the mid -year amendment effectively creates a non - excepted Health FSA on a prospective basis. In other words, the mid -year amendment would limit the amount of Flex Credits that cannot be cashed -out to $500 (or lower). At that level, there is no way that a participant's health FSA election could fail the maximum benefit requirement because there would be no more than $500 in employer contributions available to the employee. However, it is not clear if the IRS would agree with this interpretation, particularly in light of the fact that participants' Health FSA elections would have been required to remain unchanged. Essentially, the problem is that because there is no permitted election change with respect to the Health FSA, there could still exist a situation where a participant has directed $600 non - cashable flex credits in their Health FSA. As we have discussed previously, there is not a significant amount of guidance available to address this new issue. If CCCSD would like to make a mid -year change to the Cafeteria Plan, this is the only approach we are aware of that CCCSD could rely on to argue that the Health FSA is an excepted benefit for the remainder of 2014. VI. Applicable PPACA Enforcement Provisions Failure to comply with a PPACA mandate will potentially trigger an excise tax of $100 per day under the Internal Revenue Code "with respect to each individual to whom such failure relates. 1130 Failure for a non - excepted health FSA to meet the preventive services requirements under PPACA could result in DOL or participant lawsuits to enforce additional benefits.31 30 IRC § 49801)(c)(1) 31 ERISA § 502(a); ERISA § 715 -8- #1408895