In the past two weeks, we have presented a few items that plan sponsors can review in hopes of curbing common employee benefits and executive compensation errors. This week in our Employee Retirement Income Security Act of 1974 (“ERISA”) series, we touch on a small sample of common health and welfare flukes which may lead to surprising consequences.
Maintaining Other Health Care Offerings With Health Savings Accounts
The old verbiage “no good deed goes unpunished” is often true in the employee benefits world and sometimes most harshly felt in the context of health savings accounts. Health savings accounts (“HSAs”) are an exciting vehicle that marries a healthcare and retirement benefit into a single fund that the employee may port around. At not even 20 years old, HSAs have gained popularity with both employers and employees; employers will often find HSAs a cost effective offering along with a high deductible health plan and employees will have a new financial planning tool that serves as a triple tax advantage. The problem is that HSAs contain specific rules that cause otherwise HSA-eligible individuals to lose eligibility when receiving other coverage, subject to a few narrow exceptions. For individuals enrolled in HSAs, employers have to exercise caution to ensure that these individuals are not receiving medical benefits above and beyond what is permitted in the patchwork of Internal Revenue Service guidance that exists for HSAs. For example, an employer (who wishes to better the working environment and productivity of its workforce) may decide to implement a free or discounted on-site clinic for its workforce. Making the onsite clinic available to an employee who has enrolled in the HSA could trigger a loss of HSA eligibility depending on the extent of the benefits offered at the clinic. The employee, who the employer had hoped to offer enhanced benefits, is now left bearing the tax consequences of having made unpermitted contributions to their HSA.
Triggering ERISA Without Knowing
Despite otherwise implying that ERISA is a looming elephant in the room in part one of this series, a plan triggering ERISA coverage is no longer automatically considered a negative result by employers. For example, one advantage of ERISA application is defense against the patchwork of state law claims. On the other hand, employers could become subject to large penalties from the Department of Labor when they are not aware that a plan is covered by ERISA. Consequently, one of the most important preventive steps an employer can take is determining whether ERISA applies in the first instance.
One example where this is often seen is with voluntary benefits. In a changing world of health care costs, employers often consider offering additional benefits (voluntary benefits) in an effort to provide additional value to employees. These coverages range dramatically but examples could be cancer coverage or hospital indemnification. Qualification as “voluntary” benefits under the applicable ERISA safe harbor means that an employer is not considered to offer or maintain the voluntary plan and, accordingly, ERISA, and all of its requirements, would not apply. There is a very narrow compliance path that an employer must walk to fit into the voluntary benefits safe harbor. Not only must an employee pay all of the coverage (according to the Department of Labor’s standards), the employer also must not endorse the plan. Meaning that, under a facts and circumstances analysis, the employer cannot be holding itself out as maintaining the plan. The employer may in many instances permit the insurer to publicize the plan or run benefits through payroll, but the employer must tread lightly in how it interacts with the voluntary benefits vendor and cannot affirmatively recommend the plan (consider even the potential implications of putting a company logo on a benefit summary of the voluntary benefit). Other benefits which also frequently face similar questions of ERISA application (but have their own respective analyses) are employee assistance programs and severance plans.
Extending Active Employee Health Care Coverage
The Consolidated Omnibus Budget Reconciliation Act of 1985, referred to as COBRA, provides continuation of coverage for employees. Moreover, the marketplace may also offer more affordable health coverage options for former employees. Nonetheless, employers still sometimes want to provide additional coverage beyond what is allowed under the eligibility provisions of the coverage without consultation with the health insurance and stop loss carriers. Although the interest in continuing to cover the individual beyond the terms of the coverage may be motivated by good intentions, the health insurance or stop loss carriers may opt not to cover the claims. The result is that the employer potentially bears the cost of the excess claims.
The above is not intended to serve as a complete list of every common concern for health and welfare plans, but is intended to serve as a quick reminder list for plan sponsors.