Benefit Resources
EMPLOYEE BENEFIT NEWSLETTER
COBRA, HRA AND CAFETERIA PLAN UPDATE
This newsletter is for informational purposes and should in no way be construed as legal advice or opinion.
2nd Quarter 2008
COBRA: When the employer is not the employer any more
Recently, in our business, this question keeps coming up more and more: “What happens to the health plan coverage for Employees and COBRA participants when a company is sold or goes out of business?” Unfortunately, many times the question comes after the fact. Often when an employer is dealing with these issues, health plan continuation is an afterthought and not an important factor in the planning Our answer to the question is: “It depends.” The Company Closes Its Doors. The answer may seem simple...If there is no health plan, then there is no COBRA. However, with a closer look, it may be more complicated. If a company is part of a controlled group of businesses, then COBRA may continue for these ex-employees and COBRA participants. It is important to remember that some companies with fewer employees than 20 become subject to COBRA because of common ownership of the companies. For example, Company 1 has 100 employees, Company 2 has 8 employees. Mr. Johnson owns 80% of both so both are subject to COBRA. So, if Company 2 goes out of business, it’s exemployees have COBRA rights because Company 1 is continuing their health plan. In our opinion, it is important to communicate with the health plan carriers regarding smaller companies being subject to COBRA to make sure that they are aware of common ownership relationships so that there are no questions when COBRA is offered or, in some cases, extended to another smaller company as in the case above. Another time that continuation coverage may still be available when a company closes its doors is if there is a successor plan. If a company has another company “spin off” from it, the spin off company may be subject to COBRA from the start. If the first company then goes out of business, then the successor company may pick up the COBRA liability for the whole group. If a company goes out of business than restructures and forms a new business and hires 50% or more of the employees, then an argument can be made that a successor plan would apply and the ex-employees of the previous company would have COBRA rights. If there is no health plan for continuation when a company closes its doors, then care should be taken to give the COBRA participants and employees immediate notice to limit liability as much as possible. The Company is Sold. 1. A Portion is Sold. If a company sells a portion of its business, then it still has ongoing COBRA responsibilities for qualifying events and current COBRA participants before the sale. Cont’d on pg. 2
Inside this issue: COBRA: Not Employer Don’t Forget 5500’s Church Plans/COBRA HRA’s vs. HSA’s New 125 Regs About BR More Information 1 2 2 2 3 4 4
REMINDERS to Benefit Resources’ Clients— • COBRA. If you haven’t given our new COBRA Website Access a try, check it out today. Many of our clients are using it to notify us of terminations and new hires and loving it! • Cafeteria Plans. Remember HSA deductions may be pre-taxed, however, the 125 Plan Document has to be updated for this change to be allowed. • HRA’s. HRA Plans can be simple deductible plans or more elaborate with co-pays, % pay plans, etc. BR offers two levels of service, Basic and Options. For more information, please contact your agent.
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NEWSLETTER
COBRA: WHEN THE EMPLOYER IS Not the employer any More ...CONTINUED
So, what happens as a result of the sale? Well, it depends on whether it is a stock sale or asset sale. A. Stock Sale. If the employer sells the stock of a subsidiary, then the sale is not considered a qualifying event obligating him to offer COBRA to the employees affected by the sale. If the buyer chooses not to provide coverage for the affected employees then it is treated as a decision to terminate coverage for a group of employees. Again, this is because there is no qualifying event. B. Asset Sale. If the employer sells the assets of a portion of his/her business, then there is a qualifying event which obligates the employer to offer COBRA to those employees affected. 2. The Whole Company is Sold. In addition to the basic rules about stock and asset sales, the COBRA regulations strongly encourage buyers and sellers to negotiate over COBRA liability as part of Buy/Sell arrangements Sometimes it makes more sense for the seller to take on the COBRA responsibilities, sometimes the buyer. If neither claims responsibility, then both may be exposed to liability. If the seller is not maintaining a plan, then the buyer may be required to take the responsibility as the only alternative for coverage. It is best to negotiate in advance rather than to wait until there’s a problem. And, remember to keep the carriers in the loop. It is their liability as well. When dealing with ex-employees’ and COBRA participants’ health coverage, there should a number of business, legal and ethical considerations. It is best to take them into account so that the employer doesn’t add legal problems on top of economic concerns.
C h u rc h p l a n s : st il l not su bje ct to cobra
Recently, a federal district court decision reiterated that a church plan is exempt from COBRA requirements. In Coleman-Edwards v. Simpson, 2008 WL 820021 (E.D.N.Y., March 25, 2008). ERISA and the tax code define a “ church plan” as: A plan established and maintained...for its employees...by a church or by a convention or associate of churches which is exempt from tax under Section 501 of Title 26. In the case, a church employee, Coleman-Edwards was terminated from employment in December, 2002. She sued Concord Baptist Church of Christ, the employer, for not notifying her that her health coverage had expired. The court determined that Concord is a church and its health plan, a church health plan, under the ERISA and tax code definition. As a result, the court dismissed her claim. While church plans are exempt from COBRA, it is important not to just assume that continuation is not available. It is important to remember that they may be subject to state continuation requirements depending on the location of the church. Also, some churches may elect to offer COBRA anyway as it is important to employees and churches often compete with businesses for employees. Of course, arrangements should be made with the church’s carrier(s) to support any COBRA offerings. Please feel free to contact our office if you have questions about whether or not COBRA applies.
D o n ’ t f o rg e t the 5500
IRS Form 5500 filings are required for employee benefit plans having 100 or more participants at the beginning of the plan year. The filings are due by the end of the seventh month after the plan year. For example, for a plan with a January effective date, the filings would be due on July 31. Liability for not filing these returns can be tremendous. A few years ago, the IRS introduced a Delinquent Filers Program to help lower the penalties for late filers who are willing to follow certain guidelines in filing the late returns. Benefit Resources prepares Employee Benefit Plan Form 5500’s for many of our clients. If you would like more information about our 5500 preparation fees and services, please contact Sharon Hawkins (at 864) 295-9225, extension 13 or sharon@benefitresources.biz.
HRA’s vs. HsA’s
Increases in Health Insurance Premium Renewals have reached an all-time high, forcing Employers to look for creative alternatives. One option for reducing costs is introducing a High Deductible Health Plan and adding an HSA or HRA. There are some benefits to offering an HRA over an HSA, such as no minimum deductibles and no maximum out-of-pocket limits. HRA’s are Employer owned and can be discontinued at termination of employment, unlike HSA’s. HRA’s are not required to be tied to a High Deductible Health Plan. If an HRA is tied to a HDHP, it is not restricted by HSA rules. We recommend that Employers consult their agents regarding all benefit plan choices. We hope, if you choose HRA’s you’ll consider Benefit Resources as your HRA plan service provider.
COBRA, HRA AND CAFETERIA PLAN UPDATE
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Effective 1/1/09 and after: S e c t i o n 1 2 5 C o m p r e h e n s i v e n e w i r s r e g u l at i o n s
Many of our clients and brokers are asking for information about the new 125 regs, so we are reprinting this summary from a previous issue of this newsletter. On August 6, 2007, the IRS published new proposed cafeteria plan regulations which are effective for plan years starting on or after January 1, 2009. They replace older proposed regulations and incorporate prior IRS guidance issued over the last 23 years. They address cafeteria plans, health and dependent care flexible spending plans and other benefits. Regarding the much awaited repeal of the “use it or lose it” or “uniform coverage” rules, well let’s just say “We’re still waiting”. It didn’t happen. The new proposed regulations consist of five sections: general rules, elections, flexible spending arrangements, substantiation and nondiscrimination rules. The new proposed regulations did not address leaves of absence under FMLA and permissible election changes. Many requirements stayed the same but there were various changes and clarifications to current rules. We’ve prepared a summary of some of the highlights. 125-1) General Rules: One important aspect of the new regulations is that, unless the plan is a written plan meeting certain regulatory requirements and is operated in accordance with the written plan, then it is not considered a Cafeteria Plan. This means that income to employees would be taxable. It was clarified that Section 125 plan year changes and short plan years are allowed for business purposes. The rules reiterate that a Cafeteria Plan is the only way to offer an employee a choice between taxable and non-taxable benefits. 125-2) Benefits: COBRA premiums, cafeteria plan administrative fees, HSA contributions and individual health insurance premium reimbursements may be pre-taxed. Pre-tax premiums may be deducted the last month of the Section 125 plan year for the first month’s coverage of the next plan year. A new provision is included for Group Term Life Insurance over $50,000. In addition to offering up to $50,000 on a pre-tax basis, an Employer can offer excess coverage. All salary reductions for excess coverage are excludable from the Employee’s gross income. Effective now, however, the value of the excess coverage is includible in the Employee’s income. This is to be determined by using Table 1 (Uniform Premiums for $1,000 or Group Term Life Insurance Protection) and the rules of Section 1.79-3. This inclusion is reduced by any after-tax premium deduction from the Employee. Please consult your accountant or payroll specialist for more information about this change. 125-3) Elections: Another important change is that new employees have 30 days to make a pre-tax election dating back to the date of their hire. This does not apply for rehires returning within 30 days. The proposed regulations also allow “default elections”, so a previous year’s election could continue if certain procedures are followed. Electronic elections and changes are permissible. Only Employees can make, change or revoke cafeteria plan elections (not their dependents). HSA Section 125 participants must be allowed to make changes to their elections at least monthly. 125-5) Flexible Spending Arrangements: Without violating the no-deferred-compensation rule, orthodontia expenses may be (but are not required to be) reimbursed before services are provided as long as the Employee has paid in advance. Medical equipment with an extended useful life, like wheelchairs, may also be reimbursed without violating this rule. (This raises questions about why prenatal and infertility treatments were not excepted.) Health Flexible Spending enrollment can be limited to those participating in the group’s health plans. A Cafeteria Plan can include a “spend-down” feature for Dependent Care to allow employees who terminated to be reimbursed for eligible expenses during the remainder of the plan year. It’s important to remember, if implementing this change, that eligible expenses are those which allow both the employee and spouse to work. 125-6) Substantiation: Electronic payment cards must be cancelled automatically when employees cease to participate in the Health FSA. However, with the new guidance, COBRA participants may be allowed to use the cards. Employers are responsible to ensure that any Inventory Information Approval System (IIAS) used with their card program is compliant with substantiation, reimbursement and record-keeping rules. 125-7) Nondiscrimination Rules: Although the proposed regulations did not have the comprehensive guidance hoped for regarding Nondiscrimination Testing, it did include a safe harbor provision for premium-only cafeteria plans and a more detailed definition of highly compensated individual and key employee. The proposed regulations are to apply for plan years beginning on January 1, 2009 or after, with a few exceptions. The requirements regarding taxation of Group Term Life Insurance over $50,000 are effective now and the previous guidance regarding electronic payment cards remain in force. Most of the changes are favorable. For a copy of the complete new proposed IRS Regulations, please visit: http:// edocket.access.gpo.gov/2007/pdf/E7-14827.pdf.
The Answer is:
yes
ABOUT US…
Benefit Resources
ü Personalized service for your clients from our experienced staff of professionals ü Comprehensive Turn-Key approach to Cafeteria Plan & COBRA Administration ü Licensed Third Party Administrator
Benefit Resources is a Greenville, South Carolina based, licensed third party administrator that specializes in COBRA, HRA and Cafeteria Plan Administration.
Life is a great big canvas, and you should throw all the paint on it you can. Danny Kaye
Professional staff with more than 25 years in employee benefit administration is capable of decision-making and special accommodations. Benefit Resources serves numerous Employers ranging in size from fewer than 10 employees to several thousands. Our mission is to provide quality administrative services to Employers of all sizes while complementing the role of their agents and health plans. For information on Benefit Resources’ fees and more detail on services, please contact Sharon Hawkins at ext. 13 or return the mailer below.
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YES! I’d like more information
Please mail request to: PLEASE PROVIDE INFORMATION ON THE FOLLOWING ITEMS: __ COBRA ADMINISTRATION __ HRA ADMINISTRATION __ PREMIUM CONVERSION CAFETERIA PLAN __ FLEXIBLE SPENDING CAFETERIA PLAN __ FORM 5500 PREPARATION NAME/____________________________________________________________________________________________ COMPANY_________________________________________________________________________________________ ADDRESS__________________________________________________________________________________________ CITY/STATE/ZIP_____________________________________________________________________________________ TELEPHONE_________________________________________E-MAIL_________________________________________
Benefit Resources
Post Office Box 168 Greenville, South Carolina 29602