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HomeMy WebLinkAbout03. FSA Spending Account Changes for Plan Year 20153 ' Central Contra Costa Sanita ry District October 3, 2014 TO: ADMINISTRATION COMMITTEE VIA: ROGER S. BAILEY, GENERAL MANAGER h DAVID HEATH, DIRECTOR OF ADMINISTRATION JL) FROM: TEJI O'MALLEY, HUMAN RESOURCES MANAGER SUBJECT: FLEXIBLE SPENDING ACCOUNT CHANGES NEEDED FOR PLAN YEAR 2015 (January 1, 2015 - December 31, 2015) In April 2014, staff informed the Administration Committee that the District's Section 125 Health Flexible Spending Account (FSA) was not in compliance with a regulation within the Affordable Care Act (ACA). Brian Gilmore of Trucker Huss, the District's benefit counsel, provided the Committee with a memorandum (copy attached) explaining the issue and it was determined at that time that the District would amend the FSA plan for Plan Year 2015 in order to comply with the ACA regulation. In summary, the ACA provision prohibits employers from contributing more than $500 a year to a Section 125 Health FSA. The District currently contributes well above the $500 annual maximum based upon each of the Memoranda of Understanding (MOUs) (Local 1: $1200, MS /CG: $2,640, and Management: $5,100). However, the fact that the District requires that $600 annually (for all three bargaining groups) be allocated to an option within the Cafeteria plan and cannot be elected to be taken as cash is what exceeds the maximum. Anything above the $600 can be taken as cash by the employees; thus, it is considered a "salary reduction" and no longer an employer contribution as defined by the IRS. At the time Mr. Gilmore provided the Committee with this information, the District's Health FSA plan was not in compliance. However, staff announced at a subsequent Administration Committee meeting on June 18, 2014, that the IRS had revised its ruling and allowed employers transitional relief in 2014, which brought the District's plan into compliance for Plan Year 2014. This transitional relief is expected to be eliminated beginning in 2015, at which time the ACA provision will be imposed. Staff is requesting direction from the Committee at this time to ensure that changes are made to the Health FSA plan prior to the beginning of Plan Year 2015. One of the following options can be chosen to ensure compliance with the ACA provision: • Lift the non -cash restriction on the entire annual amount of $600. • Amend the restriction to no more than $500 annually. Central Contra Costa Sanitary District FSA Changes Needed For Plan Year 2015 (January 1, 2015 - December 31, 2015) Page 2 of 2 Once the Committee has provided direction, staff will need to meet and confer with all three bargaining units. Once agreement has been reached with the bargaining units, staff will bring a position paper authorizing the amendment to the District's Section 125 Health FSA plan and the applicable provisions of the MOUs to the full Board for approval. Staff will be available to answer any questions or provide clarification during the meeting. Attached Supportinq Document., 1. Trucker Huss Letter dated March 21, 2014 Lv rk I'lucke r L. l.(1Fi (<.. f3radti�C +J lltiss :1 ;l 3 Stl'i1' f.. (n-:;' U. N C: hurls, A. �ro:f:c TRU R + Huss Nil" Iwi.t.i i:r' �t tA_ut 1.i:\.!s 13rn;:tn,i:! 1 -. Sl,aler CK Mar} E. Pw.\ell - J!iNmrEt; DM:K BR(_0K l t'Rc Fr�•t,ri -4[ ; 7..x011 TION C. !3" `,. OQis T1FF iii \. SANTny ek)S.t AND r +.1P1 �lvrl_>3f- .Lr1?•� �rr�ft»;:.1>>-s RiT. ^.IiR'r ft. Gwxi_!t fl1-1 F N0; T Mni .;In. \ U. I);om, Ct \PISS \ A. K :\li T. ii.%TI It: f A,T CIL RT.Fr ; M. DYKE L 1117 NOFI. J. "A t;1' 1:,"SSL tinge) L- t:;arrctz Scan T, Stra!1;; Off outu-cl Frcentan L. L.evinrad Barbara B crced Vric uehorah Judith'Wi,n MEMORANDUM Spc,Jai counsei RAIF.BAR..- 11. I'LL] CHF1, N 'icllal. is J. i4 °ti;'rr 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 $600 of his or her annual Flex Credits as cash.4 I See Cafeteria Plan, § 3 1 The subaccounts Include the (1) Health FSA, (2) Dependent Care Assistance subaccount, (3) Premium Conversion subaccount, and (4) Taxable Beneftsubaccount 2 See Cafeteria Plan, § 3 2 3 See Cafeteria Plan, § 3 4 4 See Cafeteria Plan Summary Plan Description #1408895 II. PPACA Treatment of Health FSAs. A. A Health FSA That is an Excepted Benefit is Not Subject to Certain PPACA Requirements. A health FSA is a group health plan subject to PPACA, unless an exception applies. Health FSAs that meet the definition of an excepted benefit are not subject to the PPACA market reform requirements.5 This includes, among others, an exemption from the general PPACA requirement that non - grandfathered group health plans provide certain preventive services without imposing any cost - sharing requirements for these services.6 A health FSA cannot meet this requirement.7 B. Requirements for a Health FSA to be Considered an Excepted Benefit. A health FSA is an excepted benefit if it satisfies the following "availability" and "maximum benefit" requirements: (1) Availability. Other group health plan coverage, not limited to excepted benefits (e.g., major medical coverage), must be made available for the year to the class of participants by reason of their employment.$ (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 47. See http: / /wtivw dol gov /ebsa/newsroom /tr13 -03 hunl 6 PHSA § 2713 7 IRS Notice 2013 -54, Q &A #7, Technical Release No. 2013 -03, Q &A 47. See http: /hvww dol gov /ebsa/nc%vsroom /trl3 -03 html 8 Treas. Reg. § 54.983 1 - I (c)(3)(v)(A) 9 Treas. Reg. § 54.983 1 -1 (c)(3)(v)(B) 10 Treas. Reg. § 54.9831- 1(c)(3xv)(B) I I 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 M. 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 117, Technical Release No 2013 -03, Q &A #17 -3- 91408895 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. Is 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 t17; 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 #7; Technical Release No. 2013 -03, Q &A #4. 19 1& 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 Oualifies 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- ((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. Amending the Cafeteria Plan and Health FSA to Change the "Cashable" Nature of Certain Flex Credits Likely Does Not Create a Permitted Election Change Event. 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. § 1.1254(f)(3xiii) 27 See Cafeteria Plan, § 16(f)(ui) 28 Treas. Reg. § 1.125- 4(f)(I ) 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 pennitted 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- 41408895