BAN Blog

In Rev. Proc. 2020-32, the IRS released the inflation-adjusted amounts for 2020 relevant to HSAs and high deductible health plans (HDHPs).  The table below summarizes those adjustments and other applicable limits.

Out-of-Pocket Limits Applicable to Non-Grandfathered Plans

The ACA’s out-of-pocket limits for in-network essential health benefits have also been announced and have increased for 2021. 

Note that all non-grandfathered group health plans must contain an embedded individual out-of-pocket limit within family coverage if the family out-of-pocket limit is above $8,550 (2021 plan years) or $8,150 (2020 plan years).  Exceptions to the ACA’s out-of-pocket limit rule are available for certain small group plans eligible for transition relief (referred to as “Grandmothered” plans).  A one-year extension of transition relief was announced on January 31, extending the transition relief to policy years beginning on or before October 1, 2021, provided that all policies end by December 31, 2022. (This transition relief has been extended each year since the initial announcement on November 14, 2013.)

Next Steps for Employers

As employers prepare for the 2021 plan year, they should keep in mind the following rules and ensure that any plan materials and participant communications reflect the new limits: 

• HDHPs cannot have an embedded family deductible that is lower than the minimum HDHP family deductible of $2,800.
• The out-of-pocket maximum for family coverage for an HDHP cannot be higher than $14,000.
• All non-grandfathered plans (whether HDHP or non-HDHP) must cap out-of-pocket spending at $8,550 for any covered person. A family plan with an out-of-pocket maximum in excess of $8,550 can satisfy this rule by embedding an individual out-of-pocket maximum in the plan that is no higher than $8,550. This means that for the 2021 plan year, an HDHP subject to the ACA out-of-pocket limit rules may have a $7,000 (self-only)/$14,000 (family) out-of-pocket limit (and be HSA-compliant) so long as there is an embedded individual out-of-pocket limit in the family tier no greater than $8,550 (so that it is also ACA-compliant).

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About the Authors.  This alert was prepared 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.

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.

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 transaction 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 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 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. 

As the country continues to feel the impact of the COVID-19 National Emergency declared by President Trump on March 13, 2020, the IRS has provided some much-needed guidance and relief for employees.  On May 12, 2020, the IRS issued Notices 2020-29 and 2020-33, which, among other things, extend the claims period for health flexible spending arrangements (health FSAs) and dependent care assistance programs (DCAPs) and allow employees to make mid-year changes.  These Notices are summarized in more detail below. 

Notice 2020-29

Mid-Year Election Changes

Under Section 125 of the Internal Revenue Code, elections for qualified benefits are generally irrevocable for the plan year unless one of the permitted election change events applies.  Permitted election changes allow an employee to revoke their election mid-year and make a new election on account of certain events, such as a change in status, among others.

As a result of COVID-19, some carriers offered special enrollment opportunities for employees who were otherwise eligible for the employer’s coverage but declined coverage at open enrollment.  While this may have been appreciated by employees, many employers questioned whether there was a permitted election change event under Section 125 that matched this enrollment opportunity or whether it was safer to require employees who took advantage of the opportunity to participate in the plan with after-tax contributions for the remainder of the plan year. 

Additionally, many employees who previously elected to contribute to their health FSA have experienced a decrease in medical expenses as they comply with their state or local government stay-at-home orders.  Therefore, they have not been able to use their health FSA contributions.  The usage of DCAPs has also been disrupted due to daycare closures. 

Notice 2020-29 addresses these issues for the calendar year 2020 by allowing cafeteria plans to be amended to permit employees to make mid-year election 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 employer 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).

FSA Carryover Rules

Pursuant to Section 125, cafeteria plans may adopt a carryover, which allows participants to carry over unused amounts remaining at the end of the plan year.  The carryover allows the plan to reimburse participants for medical care expenses incurred during the following plan year (up to $550 – see the discussion of Notice 2020-33 below).  Alternatively, a plan may adopt a grace period, which gives plan participants up to an additional two and one-half months to apply any unused funds remaining in the health FSA or DCAP at the end of the plan year. The plan may adopt either carryover or the grace period (not both), or the plan can choose not to offer either option.

Because the COVID-19 National Emergency will likely result in employees having unused health FSA or DCAP contributions at the end of the plan year, Notice 2020-29 allows an employer to amend its plan to permit employees to apply any unused amounts in a health FSA or DCAP at the end of a plan year ending in 2020 (or grace period ending in 2020, if applicable) to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred for the same qualified benefit through December 31, 2020.  Even plans with a carryover may adopt this grace period (despite the prohibition on having both a carryover and a grace period). 

This extension applies to all health FSAs (including limited purposes FSAs) and, if adopted, may potentially impact an employee’s eligibility to contribute to an HSA (unless the health FSA is a limited-purpose health FSA) during the extended period.

This relief can be applied on or after January 1, 2020, and on or before December 31, 2020, provided any elections made pursuant to the relief are made only on a prospective basis.

High Deductible Health Plans

COVID-19 testing and treatment

Under current law, with limited exceptions, a high deductible health plan (HDHP) will fail to be HSA-qualified if it allows certain medical care services or items to be purchased prior to meeting the applicable minimum deductible.  

Notice 2020-15, issued by the IRS in March, provided that an HDHP would not fail to meet its qualified status simply by allowing participants to receive testing and treatment of COVID-19 without having to meet the minimum deductible. 

Notice 2020-29 clarifies that this applies with respect to reimbursements incurred on or after January 1, 2020, and that the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items and services required to be covered with zero cost-sharing pursuant to the FFCRA, as amended by the CARES Act, are covered pursuant to Notice 2020-15.

Telemedicine

Similarly, for purposes of the temporary safe harbor (through plan years beginning on or before December 31, 2021) for a qualified HDHP to provide coverage for telehealth and other remote care services at no cost to employees without disrupting HSA eligibility, Notice 2020-29 provide that this will apply for purposes of services provided on or after January 1, 2020, with respect to plan years beginning on or before December 31, 2021. 

Employers have until December 31, 2021, to adopt any of the plan amendments described in Notices 2020-29 and 2020-33 and the plan amendment may apply retroactively to January 1, 2020; however, employers must inform their employees eligible to participate in the plan of these changes.

Notice 2020-33

Health FSA Carryover Limit

Notice 2020-33 modifies prior guidance by indexing the health FSA carryover limit ($500) for inflation consistent with the indexed limit for the health FSA contribution limit for 2020.  Therefore, the health FSA carryover limit increases by 20%, from $500 to $550 effective January 1, 2020.

If a cafeteria plan chooses to increase the carryover limit to $550, it must notify all individuals eligible to participate in the plan of this change and will have until December 31, 2021, to adopt a plan amendment. 

Individual Coverage HRAs (ICHRAs)

Individual coverage health reimbursement arrangements (ICHRAs) are HRAs an employer may adopt under certain circumstances to allow employees to reimburse premiums for individual health insurance (or Medicare premiums) and other medical care expenses if certain circumstances are satisfied.  An ICHRA is an employer-sponsored health plan and reimbursements for medical expenses incurred by a participating employee during the plan year are excluded from the employee’s gross income. 

The limitation on the ICHRA to reimburse only those medical care expenses incurred within the plan year creates an administrative issue when participants must pay their premiums before the first day of the plan year.  To overcome this administrative issue, Notice 2020-33 allows an ICHRA to treat an expense for a premium for health insurance coverage as incurred on:

• the first day of each month of coverage on a pro-rata basis
• the first day of the period of coverage, or
• the date the premium is paid.

Employers who would like to avail themselves of the relief provided in the Notices should work with their ERISA attorney, insurance broker, or cafeteria plan vendor to ensure the plan is amended to reflect any conditions or limitations the employer may apply.