For many employers and plan sponsors offering benefits to employees, this is a perfect time of year to review some end-of-year action items and reminders. As 2022 comes to a close and we get ready to welcome 2023, here’s a summary of recent government guidance, including what you need to know about the ongoing impact of the COVID-19 pandemic on benefit plans.
In addition to keeping you informed in these unprecedented times of relief and related regulations, I’ll include general refreshers regarding benefit plan compliance. For example, you’ll see important reminders concerning general compliance requirements of Internal Code § 125 cafeteria plans (at least these haven’t changed!): nondiscrimination testing, Form 5500 filing obligations, and updated San Francisco Health Care Expenditure Rates. Let’s get started.
Reminder: Cafeteria Plan Deadlines for Consolidated Appropriations Act, 2021 Amendments
Enacted on December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) introduced a number of temporary provisions with respect to health Flexible Spending Accounts (Health FSAs) and Dependent Care Flexible Spending Accounts (DCFSAs) during 2020 and 2021 plan years.1 On February 18, 2021, the Internal Revenue Service (IRS) released Notice 2021-152 to provide additional guidance and clarification concerning the CAA relief provisions.
The CAA and Notice 2021-15 collectively provided a number of discretionary relief provisions for Health FSAs and DCFSAs, including:
• Unlimited carryovers of unused benefits or contributions for plan years ending in 2020 and 2021 into plan years ending in 2021 or 2022, respectively;
• Extensions of grace periods for plan years ending in 2020 and 2021 for twelve months after the end of the plan year for both a Health FSA and a DCFSA;
• Spend down of unused contributions for Health FSAs (similar to DCFSAs) for employees who cease participation in the plan during calendar year 2020 or 2021;
• A special claims period and “carry-forward” rule for DCFSA dependents who “aged out” during calendar year 2020 or 2021, expanding the definition of an eligible dependent child to under age 14; and
• Permitting special mid-year prospective election changes to an employee’s contribution amounts to a Health FSA or DCFSA (but not in excess of any applicable dollar limitation) for plan years ending in 2021 irrespective of any change in status.
Your CAA action items
Employers who chose to offer any of these changes under CAA and Notice 2021-15 may amend their plan and the amendment may be retroactive, if (1) the amendment is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective (e.g., (i) plan amendments for the 2021 calendar plan year must be adopted on or before December 31, 2022; (ii) plan amendments for the 2020 non-calendar plan year must be adopted on or before December 31, 2022 or December 31, 2023 for the 2021 non-calendar plan year); and (2) the plan or arrangement must have been operated in accordance with the terms of the amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.
The bottom line: Employers who have opted to implement any of these changes must amend their cafeteria plans by the deadlines described above.
Non-Calendar Year Plan Limitation Removed from October 2022 “Family Glitch” Guidance
We previously reported3 the IRS had released Notice 2022-41, which revised a previous interpretation of an affordability test for employer-sponsored minimum essential coverage for purposes of premium tax credit eligibility under the Affordable Care Act (ACA). Furthermore, this finalized guidance clarifies that members of an employee’s family, who now may be eligible to receive subsidized coverage through the ACA Marketplace, can drop the employer’s family coverage to enroll in subsidized Marketplace coverage.
Previously, the IRS guidance applied only to non-calendar-year plans. However, the IRS published a revised version of Notice 2022-41 on November 8, 20224 that removed this non-calendar-year plan requirement. As such, cafeteria plans – irrespective of plan year – can be amended to allow prospective midyear election changes from family- to employee-only group health plan coverage that is not a health FSA and provides minimum essential coverage if one or more related individuals are eligible for a special enrollment period to enroll in an ACA Marketplace plan, or one or more currently-covered individuals seek to enroll in such a plan during the Marketplace’s annual open enrollment period; and that the election change relates to the intended ACA Marketplace enrollment for new coverage to be effective no later than the day immediately after the last day of the rescinded coverage. The IRS issued an announcement confirming the removal of the non-calendar plan year requirement on November 21, 2022.5
Your ACA Marketplace action items
Employers opting to implement this prospective mid-year election change must adopt amendments on or before the last day of the plan year in which the changes are allowed and may be effective retroactively to the first day of that plan year if the plan operates in accordance with the guidance and participants are informed of the amendment. However, amendments for a plan year beginning in 2023 can be adopted on or before the last day of the plan year beginning in 2024.
New Indexed PCORI Fees Issued
Under the Affordable Care Act, (ACA), a fund for a nonprofit corporation to assist in clinical effectiveness research was created. To aid in the financial support for this endeavor, certain health insurance carriers and health plan sponsors are required to pay fees based on the average number of lives covered by welfare benefits plans. These fees are referred to as either Patient- Centered Outcome Research Institute or Clinical Effectiveness Research fees (PCORI).
On November 14, 2022, the IRS published Notice 2022-596 updating the amount of the PCORI fees that must be paid by self-insured health plans for plan years ending on or after October 1, 2022, and before October 1, 2023. For plan years ending on or after October 1, 2022, and before October 1, 2023, the fee is increased to $3.00, up from $2.79.
Fees are reported and paid annually through IRS Form 720 (Quarterly Federal Excise Tax Return). These fees are due by July 31 of the year following the end of the plan year along with IRS Form 720. Indexed each year, the fee amount is determined by the value of national health expenditures. The fee phases out for plan years ending after September 30, 2029.
As a reminder, fees are required for all group health plans including Health Reimbursement Arrangements (HRAs) but are not required for Health FSAs that are considered excepted benefits. To be an excepted benefit, Health FSA participants must be eligible for their employer’s group health insurance plan and may include employer contributions in addition to employee salary reductions. However, the employer contributions may only be $500 per participant or up to a dollar-for-dollar match of each participant’s election.
HRAs exempt from other regulations would be subject to the PCORI fee. For instance, an HRA that only covered retirees would be subject to this fee, but those covering dental or vision expenses only would not be, nor would Employee Assistance Programs (EAPs), disease management programs, and wellness programs be required to pay PCORI fees.
Outbreak Period Deadline Relief Continues, But for How Long?
As you may recall, two separate emergency declarations have been in effect since 2020 in response to the ongoing COVID-19 pandemic. Keep reading to get updates on the Public Health Emergency and the National Emergency period.
The Public Health Emergency
In January 2020, Health and Human Services (HHS) Secretary Alex Azar II declared a Public Health Emergency (PHE) as of January 27, 2020. These PHE declarations last for 90 days unless an extension is issued. Since January 2020, the PHE has been renewed every 90 days. Most recently, HHS extended the COVID-19 PHE on October 13, 2022, for an additional 90 days. This means that the current PHE will remain in effect until January 11, 2023, unless another extension is granted.
HHS Secretary Xavier Becerra has promised to give a 60-day alert when the PHE period will be allowed to expire.7 In the meantime, employer plans are still required to cover COVID-19 testing and out-of-network vaccines without cost-sharing, prior authorization, or other medical management requirements. Furthermore, the PHE suspended certain enforcement actions under the Mental Health Parity and Addiction Equity Act (MHPAEA) related to the coverage of COVID-19 testing items and services without cost-sharing, prior authorization, or other medical management requirements.
The National Emergency Period
The extension of the PHE should not be conflated with the ongoing National Emergency, which is currently set to expire February 28, 2023. This national emergency began in March 2020 under President Donald Trump.
On April 29, 2020, the Department of Labor Employee Benefits Security Administration (EBSA) issued Disaster Relief Notice 2020-018, which provides relief during the COVID-19 “Outbreak Period” (defined as the period beginning March 1, 2020 and ending sixty days after the date on which the President declares the COVID-19 national emergency has ended) for all disclosures and notifications required under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) (except those referenced in the “Joint Notification of Extensions of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak” [the “Final Rule”]9) and states that a plan will not be in violation of ERISA as long as these disclosures and notifications are provided “as soon as administratively practicable under the circumstances.”
The Final Rule and subsequent agency guidance provides that, for all group health plans, disability and other employee welfare plans, and all pension plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) or the Internal Revenue Code (the Code), applicable deadlines for individuals and plans that fall within the Outbreak Period will be extended on a case-by-case basis until the earlier of (1) the end of the Outbreak Period; or (2) one year from the date the plan or individual’s deadline period would have commenced (which will vary by individual occurrence).
This means the following deadlines – on an individual-by-individual basis - will be extended for the duration of the Outbreak Period relief:
• The 30-day period (or 60-day period, in some cases) to exercise HIPAA special enrollment rights in a group health plan following birth, adoption, or placement for adoption of a child; marriage, loss of other health coverage; or eligibility for a state premium assistance subsidy;
• The 60-day deadline by which a participant or qualified beneficiary must provide notice of divorce or legal separation, a dependent child that ceases to be an eligible dependent under the terms of the plan), or a Social Security disability determination used to extend COBRA coverage;
• The 60-day deadline in which to elect COBRA coverage;
• Individuals electing COBRA outside of the initial 60-day election period (as referenced above) generally have one year and 105 days after the election notice is provided to make the initial premium payment; and individuals electing COBRA within the generally applicable 60-day election period have one year and 45 days after the date of their election to make the initial payment10;
• The date by which monthly COBRA premium payments are due; and
• The deadline under the plan by which participants may file a benefit claim (under the terms of the plan) and the deadlines for appealing an adverse benefit determination or requesting an external review.
The National Emergency has been extended each subsequent year. Until Congress or the President acts to declare the National Emergency has ended, this plan deadline relief will continue into 2023. Should the National Emergency be allowed to expire on February 28, 2023, the plan deadlines described above will resume as of the earlier of one year after each individual’s applicable deadline or 60 days from February 28, 2023 (i.e., April 29, 2023).
We will continue to monitor this issue as it develops. As February 2023 approaches, HealthEquity/WageWorks will prepare updated participant notices advising that the plan deadlines described above will no longer be extended by the end of the Outbreak Period.
What you need to know about nondiscrimination testing
What are nondiscrimination tests? All employers, irrespective of business type or size, that offer a cafeteria plan are required by the IRS to perform various nondiscrimination tests on a cafeteria plan that includes benefits like a Health FSA, or a DCFSA to ensure the plan is not offered in a discriminatory fashion (i.e., unduly favoring highly-compensated and/or “key employees”).
The overall “25% Concentration” test compares all the pre-tax benefits elected by key employees with all the pre-tax benefits elected by non-key employees. Not more than 25% of the total benefits elected by all employees may be attributed to key employees.
Example of the 25% Concentration test All elections to the cafeteria plan add up to $35,000. Of those total elections, key employee elections equal $5,000. Key employee elections are about 14 percent of the total elections to the plan (14.3% - $5.000 / $35,000). In this example, the cafeteria plan passes the 25% Concentration Test.
The “55% Average Benefits” test involves only the dependent care portion of the cafeteria plan. The average dollar amount of benefits elected by non-highly compensated employees must be at least 55% of the average dollar amount of benefits elected by highly compensated employees.
Example of the 55% Average Benefits test Assume that highly compensated employees’ elections are $10,000 to the dependent care portion of the plan and there are five highly compensated employees in the company. Non-highly compensated employees elect $19,500 to the dependent care portion of the plan and there are 13 non-highly compensated employees. The highly compensated average dollar amount is $2,000 (= $10,000 / 5). The non-highly compensated average dollar amount is $1,500 (= $19,500 / 13). The average dollar amount of benefits elected by non-highly compensated employees is 75% of the average dollar amount of benefits elected by highly compensated employees ($1,500/$2,000). In this example, the dependent portion of the cafeteria plan passes the 55% Average Benefits test.
The “5% Owner” test compares the dependent care benefits elected by more-than-5% owners of a company with dependent care benefits elected by non-owners. Not more than 25% of the total dependent care benefits elected by everyone in the dependent care benefit may be attributed to more-than-5% owners.
Example of the 5% Owners test Assume a $5,000 election to the dependent care portion of the plan by a more- than-5% owner and elections in the amount of $19,500 made by all non-owners. The more-than-5% owner’s election is 20% of the total benefits elected to the dependent care portion of the plan (20% = $5,000 / ($24,500 [=$5,000 + 19,500]). In this case, the dependent care portion of the plan passes the 25% Owner test because only 20% of the dependent care benefits were elected by the more-than-5% owner.
The “Eligibility, Benefits Available, and Contribution and Benefits” tests ensure that employers offer all benefits to an adequate number of employees and benefits do not discriminate in favor of highly compensated or key employees.
In the event the cafeteria plan does not meet all the nondiscrimination requirements, employers may need to change benefit elections and payroll amounts to bring the plan into compliance. It is important to test prior to the end of the cafeteria plan year. Generally, if testing is completed after the end of the plan year, it’s too late to take corrective action. Instead of reducing key or highly compensated elections to pass the nondiscrimination test(s), the affected employees would be taxed on their total election amount.
Form 5500 Obligation
A frequently overlooked responsibility for cafeteria plan sponsors is to do Form 5500 filings under certain circumstances. In 2002, IRS Notice 2002-2411 suspended the filing requirement imposed on cafeteria and fringe benefit plans. However, don’t be misled! The filing requirement for welfare benefit plans remains unchanged.
What is a welfare benefit plan?
Welfare benefit plans provide benefits such as medical, dental, life insurance, apprenticeship and training, scholarship funds, severance pay, and disability. Health FSAs contained inside cafeteria plans and Health Reimbursement Arrangements (HRAs) qualify as welfare benefit plans.
Who must file a Form 5500?
Employers that sponsor welfare benefit plans covered by Title I of ERISA, with 100 or more participants at the beginning of the plan year, are required to file a Form 5500 for those plans. However, there are a couple of exceptions that apply, depending on the type of employer sponsoring the plan. A general exception applies to:
• A governmental plan; or
• A church plan under ERISA § 3(33).
The plan may not be exempt from filing if:
• It is deemed to have plan assets;
• Plan funds are separated from the employer’s general assets;
• Plan funds are held in trust; or
• Plan funds are forwarded to a third-party administrator.
Most non-exempt employer plans will complete all questions on Form 5500. Depending on the funding arrangement or payments from the plan, attaching Schedules may be applicable.
Since 2009, however, the “Instructions for Form 5500” were modified to make clear that plans that are paid from the general assets of the employer need not file Schedule C.
When does a welfare benefit plan need to file a Form 5500?
Forms must be filed by the last day of the seventh calendar month after the end of the plan year. A plan may obtain a one-time extension of time to file. Form 5558 must be sent by the original due date to gain a 2½ month extension of time in which to complete and file the Form 5500.
Disaster Relief Filing Extensions
Those in areas eligible for weather-related disaster relief as designated by the Federal Emergency Management Agency (FEMA) will now have until February 15, 2023, to file their Forms 5500 for the 2021 tax year:
• Hurricane Ian victims throughout both North and South Carolina12;
• Hurricane Ian victims in Florida13;
• Storm and flood victims in Alaska14;
• Hurricane Fiona victims in Puerto Rico15; and
• Mississippi water crisis victims16.
2023 Index Figures
On October 18, 2022, the Internal Revenue Service issued17 the 2023 annual inflation adjustments for many tax provisions of the IRS Code. These adjusted amounts will be used to prepare tax year 2023 returns in 2024. Also, on October 2118, the IRS released the dollar limitations for qualified retirement plans for tax year 2023, including 401(k) plans.
Indexed Compensation Levels
For highly compensated and Key Employee Definitions:
401(k), 403(b) or 457 Plans
Health Savings Account (HSA)
Expected Benefit Health Reimbursement Arrangement (EBHRA)
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Adoption Assistance Exclusion and Adoption Credit
2023 San Francisco Healthcare Expenditure Rates
The San Francisco Office of Labor Standards Enforcement recently released updated Health Care Security Ordinance (HCSO)19 required health expenditure rates for 2023.
The 2023 Healthcare Expenditure Rates – and previous years’ rate history20 – is as follows:
Be prepared for 2023
The past couple of years have been an eventful ride, and group health plans have much to consider and review as we get closer to December 31, 2022. These are just a few of the specific year-end deadlines and requirements that were required to have been completed—or are quickly approaching.
Compliance becomes clearer for employers through knowledge. It’s as easy as contacting HealthEquity for more information about its services, and your own accounting or legal sources for additional guidance.
The information shared here as a general summary is intended to educate employers and plan sponsors on the potential effects of recent government guidance on employee benefit plans. This summary is not and should not be construed as legal or tax advice. As always, we strongly encourage employers and plan sponsors to consult competent legal counsel for all guidance on how the actions apply in their circumstances.
Nothing in this communication is intended as legal, tax, financial or medical advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations. Always consult a professional when making life-changing decisions.
7 As no prior notice has been issued as of the date of this writing, it is reasonable to assume that the PHE will be extended again until at least April 2023.
20 More information concerning the San Francisco Office of Labor Standards Enforcement’s Health Care Security Ordinance required health expenditure rates, including developments related to the ongoing COVID-19 pandemic is available at https://www.wageworks.com/employers/employer-resources/compliance-briefing-center/regulatory-updates/2020/2021-san-francisco-health-care-expenditure-rates-released/ and https://sfgov.org/olse/health-care-security-ordinance-hcso.
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