IRS Permits Extended Grace Period for FSAs

After much anticipation, the Internal Revenue Service has issued Notice 2005-42 on May 18, 2005.

Notice 2005-42 permits employers to extend the date for which FSA eligible claims can be incurred for a plan year to any time up to the fifteenth day of the third month after the end of the plan year - March 15 for calendar year plans.

In order for employers to take advantage of the newly established grace period, they must amend their existing plan documents. The new extension can be adopted for the current plan year so long as an amendment is made prior to the end of the plan year (therefore, to implement currently for a calendar year plan an amendment must be made by December 31, 2005 for a calendar year plan). Employers are not required to adopt a grace period. If an employer is considering adopting the extension, the following items should be considered:

• Enhanced employee communications will be required the year of the change.

• Adoption of a grace period could create some confusion amongst participants who are accustomed to a 12-month FSA period. They could be confused as to how much to defer into the FSA account now that more time is available.

• Lastly, employers should keep in mind that a longer reimbursement period may encourage employees to deposit more in their FSAs. For health care reimbursement FSAs, this may put employers at greater risk that an employee will leave employment before fully funding the FSA but having the legal right to draw on the FSA as though it were fully funded.

In order to implement this new provision, employers which sponsor FSAs must perform the following:
1. Amend the plan document to provide for a grace period not to exceed 2½ months;

2. Apply the grace period to all participants in the plan;

3. Forfeit any unused benefits or contributions that exceed the amount of expenses incurred during the claims period (which now includes the plan year plus the grace period) at the end of the grace period.

Countdown to the new HIPAA requirements - What the final portability regulations mean for your plan

The IRS, DOL, and HHS have jointly issued final regulations on the portability requirements for group health plans under HIPAA. The final regulations do not modify significantly the 1997 interim final rules, but include several important clarifications meant to ease plan compliance. The final regulations apply to plan years beginning on or after July 1, 2005. Calendar years are effective on January 1, 2006.

Both the plan sponsor and the carrier must implement several notice changes, wording changes, and definition clarifications before the plan’s effective date. Below is a summary of the clarifications made in the final regulations:

NOTICES AND CERTIFICATES

Initial Pre-existing Condition Exclusion Notices. The final regulations continue to require that plans include with the participant enrollment materials a written general notice of the plan’s preexisting condition exclusion before pre-existing condition exclusion can be imposed. The model notice language for a sample plan is enclosed and can be used as a basis for preparing your plan’s general notice of the existence and terms of a pre-existing condition exclusion limitation in the plan (if any applies).

Notice of Special Enrollment Rights. The final rules revise the model language from the 1997 interim rules describing special enrollment rights. This notice must also be provided to an employee at or before the time initial enrollment is offered.
The final regulations clarify that special enrollees (definition of special enrollee listed below) must be given the same treatment as employees who enrolled when first eligible. They must be offered the same benefit options, be subject to the same costs, and have coverage pursuant to the same pre-existing condition exclusions.
In addition, the final regulations offer guidance on additional situations in which special enrollment rights must be offered to an individual, as follows:
• An individual who reaches a plan’s lifetime limit on benefits may “special enroll” in another health plan
• An individual no longer resides or works in an HMO’s service area and there is no other access to any other benefit option
• An employee who enrolls in an option (e.g., HMO) and subsequently obtains a new dependent may enroll himself and the dependent in a different option under the plan (e.g., PPO)
• An employee enrolls in one option (e.g., HMO) but his dependent declines coverage due to other coverage and then loses that coverage. The dependent has the right to “special enroll” in the employee’s plan. In addition, the guidance indicates upon that event, the employee and dependent may both enroll in any option under the plan (e.g., PPO), not just the HMO option.
Certificate of Creditable Coverage. In addition to the current content of the Certificate of Creditable Coverage, the final regulations have added a requirement that an educational statement be included. The Model Certificate includes the educational language explaining individuals’ rights to health coverage portability.

In addition, plans are now required to have written procedures for individuals to request and receive Certificates of Creditable Coverage, which must include the contact information necessary to request a certificate. Previously, these procedures were not required to be in writing.

ADDITIONAL GUIDANCE IN FINAL REGULATIONS

A definition of Dependent was added to include any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to the employee.
The pre-existing condition definition was slightly modified to include conditions that were present before the effective date of coverage, whether or not diagnosis or treatment occurred. A plan exclusion may not be designated as a pre-existing condition exclusion, but nevertheless may satisfy the definition of a pre-existing condition exclusion under the final regulations and be subject to the portability rules.
Clarification was added that a plan may not impose any limit on the amount of time an individual has to present a certificate or other evidence of creditable coverage.

Important Dates to Remember

April 20, 2005 - HIPAA Security Regulations become effective for remaining covered entities (Large group was effective April 2005).

July 1, 2005 – New HIPAA Portability regulations go into effect.

December 31, 2005 – Plan Sponsors must amend existing plan documents if they wish to adopt the extension set forth in IRS Notice 2005-42.

FSA Rollover Bill passes under the House

In an effort to keep Flexible Spending Accounts (FSA) viable against the newly implemented Health Savings Accounts (HSA), and to also encourage the use of HSAs, the Federal Government has been working on passing a bill that would remove the "use it or lose it" rule from the cafeteria plan regulations.

The bill, H.R. 4279, passed by the House of Representatives on May 12. The senate must now take up the measure. If enacted the bill's provisions would apply to taxable years beginning after December 31, 2003.

The bill would allow up to $500 of unused health benefits in cafeteria plans and FSAs to rollover into the plan or into a Health Savings Account. The current provisions of the Section 125 regulations do not allow the rollover of unused funds in a FSA. If this bill were to pass the Senate, it would definitely increase participations in FSAs and would also encourage employees to save their health dollars.

No timeline has been issued as to when the Senate will approve. We will continue to monitor this development.

Medicare Prescription Drug Discount Card schedule to begin use

Beginning in May, Medicare beneficiaries who do not already have Medicaid drug coverage, will be able to enroll in a Medicare-approved prescription drug discount card, which will help to lower their prescription drug costs. Effective June 1, 2004, the discount cards will provide discounts off the regular cash price of prescription drugs. The discount card program is not intended to be a prescription drug benefit, but rather a discount card program to help people until the Medicare drug benefit takes effect on January 1, 2006.

In addition, beginning in June 2004, Medicare will provide $600 in 2004 and up to an additional $600 in 2005 to Medicare beneficiaries whose incomes are not more than 135 percent of the poverty line ($12,123 for single individuals or $16,362 for married individuals in 2003 - these income levels will vary slightly for subsequent years) if they do not have certain other drug coverage. These funds will be provided through the Medicare-approved drug discount card in which the beneficiary enrolls. When applying the $600 toward prescription drug purchases, beneficiaries at or below 100 percent of poverty will pay 5 percent coinsurance and beneficiaries above 100 percent of poverty will pay a 10 percent coinsurance. The discounts will be of substantial help.

Medicare Beneficiaries will have several sources to choose from when selecting a prescription discount card. Medicare will make sure that beneficiaries have at least two choices of approved cards in each State. Private sector discount card programs that meet standards set by Medicare can qualify for a Medicare approval/endorsement to provide discounts.

Medicare-approved discount card programs can charge a beneficiary an enrollment fee up to $30 per year. Medicare will pay the enrollment fee for beneficiaries who qualify for the $600.

In an effort to ensure that Medicare Beneficiaries receive the best deals possible, Medicare has created a web site designed to help compare the prices of prescription drugs. DestinationRx was hired by Medicare to design and run the system. If the site functions, Medicare enrollees will be able to visit the site to find prices of their particular medications at nearby stores that accept Medicare-certified discount cards.
Medicare enrollees should also be conscious of the number of scams that will appear surrounding the drug benefit cards. They should be sure to verify the sponsor of the card before they purchase it.

Lessons Learned From CDHC Plans Discussed by Researchers (from Thompson Publishing Group)

To achieve its stated promise, consumer-driven health care (CDHC) plans have to appeal to a broad cross section of employees and be priced competitively to traditional health plans, according to researchers who presented their findings at a recent meeting of the International Foundation of Employee Benefit Plans in Washington, D.C.

Jon Gabel, vice president, health system studies at the Health Research & Educational Trust, surveyed 1,856 employers for a Kaiser Family Foundation/HRET study. He discussed lessons learned from the first year of Humana's "SmartSuite" enrollment results. These include:

Employer support for CDHC plans ultimately depends on consumer acceptance, according to Jon Christianson, a professor at the University of Minnesota's Carlson School of Management. Specifically:

New H S A Guidance Issued (from AHI Benefits Alert)

Some important details about new tax-favored health savings accounts (HSAs) were revealed in recent guidance issued by the Department of Labor (DOL) and the Internal Revenue Service (IRS). Here's the lowdown, but stay tuned. The IRS expects to release more guidance this summer.

THE DOL SPEAKS ABOUT...

ERISA: April guidance from the DOL provides a "safe harbor" in which an employer-funded HSA is not a covered health plan under the Employee Retirement Income Security Act (ERISA). According to John Barlament, an employee benefits attorney with Milwaukee, WI-based Michael Best & Friedrich, Field Assistance Bulletin (FAB) 2004-1 "creates a roadmap for avoiding violations under ERISA."

The safe harbor allows employers to make contributions to HSAs and avoid ERISA's reporting, disclosure, and fiduciary requirements, explains Barlament. To take advantage of the safe harbor, an HSA must be structured so that employee participation is voluntary and employer involvement is limited. The DOL considers an employer's involvement to be truly limited if the employer does not:

a. limit the ability of eligible individuals to move their funds to another HSA, although the employer may impose the same limits imposed by the IRS;

b. impose conditions on the use of HSA funds beyond those permitted by the IRS;

c. make or influence the investment decisions for funds contributed to an HSA;

d. represent that HSAs are an employee welfare benefit plan established or maintained by the employer; or

e. receive any payment or compensation in connection with an HSA.

But what about the high-deductible health plans (HDHPs) that must be linked with HSAs? The DOL cautions that HDHPs - not HSAs - sponsored by employers are subject to ERISA.

THE IRS SPEAKS ABOUT...

Preventive benefits: The HSA law requires that benefits offered by an HDHP be subject to minimum deductibles of $1,000 (self-only coverage) or $2,000 (family coverage) except for "preventive care" and other excepted insurance. But the law didn't specifically define the term "preventive care" or explain how to deal with the cost.

In Notice 2004-23, the IRS provides a list of services it considers preventive care (e.g., periodic health evaluations with associated tests and diagnostic procedures, routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs, obesity weight-loss programs, and numerous health screening services).

The IRS maintains that an HDHP may offer first dollar coverage for preventive care benefits or have a deductible lower than the minimum for all other benefits. The agency is struggling with more controversial services that may or may not prevent future health problems, Barlament observes. The IRS is asking for comments about whether employee assistance plans, mental health benefits, wellness programs, and certain drug therapies should be treated as preventive care.

Prescription drug benefits: In a blow to insurers, Rev. Rul. 2004-38 maintains that HDHPs may not "carve out" prescription drug coverage, or any other type of benefit, in a separate no-deductible or low-deductible plan. Insurers had marketed HDHPs that provided prescription drug coverage in a separate rider - or plan - with separate, lower deductibles and co-pay schedules hoping that this would be allowed.
In Rev. Proc. 2004-22, the IRS has provided transition relief to give insurers and employers time to make adjustments to the plans. During 2004 and 2005, an individual may contribute to an HSA even if the HDHP has a separate prescription drug plan that provides benefits before the minimum deductible is satisfied. This will end January 1, 2006.

Medical expense transition relief: In previous guidance, the IRS indicated that no tax-free distributions may be taken from an HSA for qualified medical expenses incurred before the date an HSA is established. Many individuals who would be eligible to make deductible HSA contributions have been unable to locate trustees or custodians to sponsor HSAs.

In Notice 2004-25, the IRS has provided relief - individuals may be reimbursed from an HSA as long as the account is established at any time on or before April 15, 2005. Employees who are waiting for their employer to fund HSAs may avail themselves of this transition relief as well.

Ruling passed clarifying Medicare Entitlement and COBRA Second Qualifying Event

On February 13, 2004, the Internal Revenue Service (IRS) issued a Revenue Ruling that addressed the length of COBRA coverage for a spouse of an employee when the employee, after leaving employment, becomes entitled to Medicare because he or she reaches age 65.

The COBRA statute provides a special rule for multiple qualifying events. Generally, if a qualifying event, which is the termination or reduction in hours of an employee, is followed within the initial 18 month period by a second qualifying event (other than the employer's bankruptcy), then the maximum COBRA coverage period is extended from 18 months to 36 months for qualified beneficiaries.

In the scenario addressed by Revenue Ruling 2004-22, the spouse elected COBRA after the employee terminated employment. He or she was, therefore, entitled to 18 months of coverage. Pursuant to the COBRA statute, if Medicare entitlement were a qualifying event in this instance, then the spouse would be allowed to extend COBRA coverage to a total of 36 months. The IRS, however, concluded that an extension of COBRA to 36 months did not apply in this situation because the employee's Medicare entitlement was not a qualifying event.

The IRS states that in this case the plan must look at the situation as if the first qualifying event (the termination of employment) did not occur and the employee was still working. If the employee were still working, Medicare entitlement would not have been a qualifying event because the Medicare entitlement would not have resulted in a loss of coverage for the employee and his or her dependents. In order to comply with the Medicare Secondary Payer (MSP) provisions of the Social Security Act, the plan could not have terminated the employee's coverage because he or she reached age 65. MSP prohibits certain group health plans from taking into account the Medicare entitlement of current employees due to age in providing health benefits. In the scenario addressed in Revenue Ruling 2004-22, the plan complied with the MSP provisions. The IRS reasoned that because Medicare entitlement would not have been a qualifying event if it had occurred while the employee was working, it could not be a second qualifying event that would allow the spouse to extend her COBRA coverage to 36 months.

Some plans may currently have summary plan descriptions (SPDs), COBRA notices and plan documents that include specific language allowing qualified beneficiaries to extend COBRA coverage to 36 months in the situation addressed in Revenue Ruling 2004-22. The Revenue Ruling's holding that plans must look at the second qualifying event, "in the absence of the first qualifying event," (i.e., pretend that the first qualifying event never occurred) may not be something that plan administrators have done in the past. This standard is not set out in the COBRA statute or its regulations.

This Ruling seems to indicate that the IRS would allow plans to refuse to extend coverage to 36 months in the circumstance set out (provided plan documents are consistent). Plans may wish to change their terms to reflect the substance of this Revenue Ruling. However, the advice of legal counsel should be sought before making any amendments. A court may reject the IRS' interpretation of the COBRA statute and require that a plan provide 36 months of COBRA coverage.

In addition to legal issues associated with changing plan language, plans should be aware that this issue might have significant implications for employees who are thinking about retiring before age 65. For these employees, deciding how they will bridge the gap between private coverage and Medicare for themselves and their families is crucial. These employees need to know the exact duration of COBRA coverage for themselves and their dependents prior to retiring. It is important that plan information is clear on this point, including the information included in a COBRA election form.

Finally, plans can always be more generous than COBRA. They can provide the 36 months of coverage in this situation regardless of the conclusion in the Ruling.

IRS Addresses Design and Administration of 401(k) Automatic Enrollment Programs

In Revenue Ruling 2000-8, the IRS approved a program for automated enrollment or negative elections for 401(k) programs. Negative elections are normally when the plan imposes a 3% automatic compensation reduction on all eligible employees regardless of whether they elect to enroll in the plan. Negative elections are okay as long as the plan provides appropriate notice to participants at the time of their initial eligibility and each year thereafter, invested the elective deferrals in a balanced fund (unless the participant chooses otherwise), and permits changes to the compensation reduction percentage at any time.

In its ruling, the IRS also observed several other items of interest:

The Revenue Ruling is meant to be informal guidance by the IRS and your company should still carefully evaluate the practice of automated enrollments.

Mental Health Parity Act Regs Extended

The Department of Labor has amended its interim final regulations under the Mental Health Parity Act (MHPA) to extend the sunset date of the regulations to December 31, 2004.

The President signs the Medicare Prescription Drug,
Improvement and Modernization Act of 2003

On December 8, 2003 , President George W. Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. As its name implies, the focus of this act is to improve the current Medicare program by adding a much needed prescription drug benefit and also to update and improve several other non-Medicare issues.

Since its introduction, the Medicare prescription drug component of the act has been the most discussed; however, the bill has a significant impact on active employees doctors, hospitals, and other Medicare components.

Below is a summary of the three most important provisions outlined in the act.

Medicare Prescription Drug Benefits