Eligibility. Sue Sieger, ACFCI, CAS. Senior Compliance Consultant Employee Benefits Corporation

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1 Eligibility 1 Sue Sieger, ACFCI, CAS Senior Compliance Consultant Employee Benefits Corporation The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form. 2 1

2 3 Glossary of Acronyms Acronym Definition FSA Flexible Spending Account HRA Health Reimbursement Arrangement HDHP High Deductible Health Plan HSA Health Savings Account DOL Department of Labor IRS Internal Revenue Service HIPAA Health Insurance Portability and Accountability Act of 1996 ACA Affordable Care Act HHS Health and Human Services ERISA Employee Retirement Income Security Act 4 2

3 Today s Agenda Who is the Employer? How control group rules impact eligibility Cafeteria plan, HRA and HSA eligibility rules Who is a dependent and why does it matter Why domestic partners may or may not participate in employer-sponsored benefits How same-sex marriage rulings impact benefit plan eligibility and tax free status Tax consequences for those found to be ineligible 5 5 Who is the Employer? 6 3

4 Who is the Employer? Employer is the entity that sponsors and maintains employee benefit plans. Public sector governmental employers do not incorporate and are subject to the Public Health and Services Act (PHSA) for general operation of the health plans (i.e. medical, dental, health FSA, HRA, etc.) Private sector employers file incorporation papers with the state(s) they do business in and are subject to the Employee Retirement Income Security Act (ERISA) for general operation of the health plans they sponsor (i.e. medical, dental, health FSA, HRA, etc.) 7 Who is the Employer? Non-profits, cooperatives and church controlled organizations do not have owners and all of the individuals who work for the employer are considered to be employees. Professional Employer Organization (PEO) provides integrated services to effectively manage critical human resource responsibilities and employer risks for clients. PEOs enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation. 8 4

5 Who is the Employer? Types of Employers Sole Proprietor Partnership C Corporation Nonprofit Church Subchapter S Corporation Cooperative Limited Liability Company (LLC) Taxed as C Corp Taxed as S Corp Taxed as Partnership (Limited Liability Partnership (LLP)) 9 Who is the Employer? Controlled Group Controlled Group of Corporations ( 414(b)) Two or more corporations that are under common control* Trades or Businesses under common control ( 414(c)) Two or more trades or businesses, such as partnerships or proprietorships, that are under common control* Affiliated Service Group (ASG) ( 414(m)) Two or more employers linked through joint activity or a combination of activity and common ownership All U.S. employees of a group of corporations, trades or businesses with common control or ASG are treated as employed by the same employer *Common control = common ownership or common capital interest 10 5

6 Who is the Employer? Determining the employer s status The employer should know if they are part of a Controlled Group or an ASG We can assist in determination under simple business arrangements Ultimately, determination falls to the employer s legal counsel and/or IRS 11 Who is the Employer? Controlled Group impact on Plan administration Affordable Care Act (ACA) Employees are aggregated for purposes of determining if employer is Applicable Large Employer for Play or Pay purposes. Penalty for failure to offer coverage to all eligible fulltime employees, the penalty is assessed to the employer that fails, not the control group. BESTflex Plan and EBC HRA Plan Design and Documentation $2,500 Health Care FSA cap is per employer (controlled group employer) 12 6

7 Who is the Employer? Controlled Group impact on Plan administration (cont.) Nondiscrimination testing Controlled group combined for purposes of testing Form 5500 and Summary Annual Report (SAR) Form 5500 required for each plan number. Possible to have multiple plans within the controlled group (i.e. different eligibility, waiting periods, or benefits) # of forms for the controlled group also depends upon whether or not the controlled group has a wrap plan document COBRASecure All employees of the controlled group aggregated for purposes of counting employees for federal or state continuation determination 13 Who is the Employer? Individual organizations that make up a controlled group are called members of the controlled group and each member has its own corporate status. Each member of the controlled group can sponsor and maintain benefit plans for its employees or two or more of the members can sponsor and maintain a common plan to cover the employees of those members. Note: Ineligible owner of one member of the controlled group can actually perform work for another member of the controlled group as an employee of that other member and be eligible for tax free benefits through that employer. 14 7

8 Cafeteria plan, HRA and HSA Eligibility Rules 15 Who is Eligible to Participate? An Eligible Employee is an employee who has satisfied the eligibility criteria established by the employer in order to participate in the plan. Generally includes current and former common law employees. Carefully draft definition of eligible employee for plan purposes. Independent contractors reclassified as employees by IRS or DOL. See Vizcaino v. Microsoft Corporation, 120 F.3d 1006 (9 th Cir. 1997); Administrative Committee of Time Warner, Inc. Benefit Plans v. Biscardi, 2000 U.S. Dist. Lexis (S.D.N.Y. 2000). 16 8

9 Who is Eligible to Participate? Individuals Eligible to Participate in a Cafeteria Plan: Current and former common law employees; Spouses and dependents may have coverage under the eligible employee Cafeteria plan cannot be established primarily for former employees. Retirees cannot use qualified retirement plan distributions to pay for medical coverage on a pre-tax basis through a cafeteria plan. Rev. Rul Controlled group member employees 17 Who is Eligible to Participate? Individuals Eligible to Participate in a Cafeteria Plan: Employer defines eligibility Affordable Care Act (ACA) Rules 2014 Health premiums (over 100 employees) New 30 hour per week full-time employee status New maximum 90 day waiting period Health FSA No Stand Alone Health FSA permitted Must be eligible for group medical plan in order to be eligible for Health FSA. If employer contributions to the Health FSA, must meet excepted benefit rules under HIPAA Caution: Make sure your eligibility for the Health FSA is not earlier than group medical plan. 18 9

10 Who is Eligible to Participate? IRS Notice Elimination of Stand Alone Health FSAs Application of the Market Reforms to Certain Health FSAs Question 7: How do the market reforms apply to a health FSA that does not qualify as excepted benefits? Answer 7: The market reforms do not apply to a group health plans that are excepted benefits. Health FSAs are group health plans but will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant s salary reduction election). If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements. 19 Who is Not Eligible to Participate? Individuals who are Not Eligible to Participate in a Cafeteria Plan. Self-employed individuals as defined in Code 401(c); Prop. Treas. Reg (g)(2)(i). Sole proprietors, partners in a partnership and more than 2% shareholders of an S Corporation (including their family members of lineal ascent and descent); Note: Unlike the more than 2% Subchapter S owner rules, the family members of sole proprietors and partners can participate in a cafeteria plan maintained by the partnership or sole proprietorship 20 10

11 Who is Not Eligible to Participate? Individuals who are Not Eligible to Participate in a Cafeteria Plan. b) Sole proprietor; c) Partner in a partnership; d) Member of Limited Liability Company (LLC); or e) Non-employee director of a corporation. Note: Spouse and/or dependents of sole proprietor, partner, or member of LLC is eligible to participate if also an employee. 21 Who is Eligible to Participate? Individuals who are Eligible to Participate in a Health Reimbursement Arrangement (HRA). Current and former common law employees Full-time or Part-time Employees. Coordinate with eligibility for insurance. E.g., Participants in Employer-sponsored health plan Spouses and dependents may have coverage under the eligible employee Former employees or employees no longer eligible can spend down accumulated HRA funds Retirees 22 11

12 Who is Eligible to Participate? Individuals Eligible to Participate in Health Reimbursement Arrangement: Employer defines eligibility Affordable Care Act (ACA) Rules 2014 Employee must participate in employer sponsored medical plan to get HRA benefits New 30 hour per week full-time employee status New maximum 90 day waiting period Caution: Make sure your eligibility for the HRA is consistent with your group medical plan. 23 Who is Eligible to Participate? Treasury FAQ 1/24/13 Compliance of Health Reimbursement Arrangements with Public Health Service Act (PHS Act) section The preamble distinguished between HRAs that are integrated with other coverage as part of a group health plan and HRAs that are not so integrated ( stand-alone HRAs). The preamble stated that [w]hen HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the requirements of PHS Act section 2711, the fact that benefits under the HRA by itself are limited does not violate PHS Act section 2711 because the combined benefit satisfies the requirements. (75 FR 37188, at ). An HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section (no annual or lifetime limits) 24 12

13 Who is Not Eligible to Participate? Individuals who are Not Eligible to Participate in a Health Reimbursement Arrangement. Self-employed individuals as defined in Code 401(c); Prop. Treas. Reg (g)(2)(i). Sole proprietors, partners in a partnership and more than 2% shareholders of an S Corporation (including their family members of lineal ascent and descent); Note: Unlike the more than 2% Subchapter S owner rules, the family members of sole proprietors and partners can participate in a cafeteria plan maintained by the partnership or sole proprietorship 25 Who is Eligible to Participate? Individuals who are Eligible to Participate in a Health Savings Account (HSA). HSA eligibility is determined on a monthly basis. Must be covered under a qualified High Deductible Health Plan (HDHP) and not entitled to (enrolled in) Medicare Eligible Individuals cannot be covered by another plan that is not a qualified HDHP, including regular health flexible spending account (limited health FSA is OK), MSA, and HRA that reimburses prior to satisfaction of the minimum HDHP deductible. (Exceptions: Coverage for accident, disability, dental, vision, preventive care and long-term care, or for specified diseases are permissible.) An eligible individual is any taxpayer including sole proprietors, partners, members of LLC, and S Corp shareholders and family

14 Who is Eligible to Participate? Change in Corporate Status Business reorganization could result in owners gaining or losing eligibility mid plan year. Reorganization might also result in tax consequences for the owner(s) Individual becomes an owner of a C Corporation or LLC taxed as C Corp-no change in eligibility or impact on tax free benefits Individual sells a C Corporation or LLC taxed as C Corp but stays on as the CEO-no change in eligibility or impact on tax free benefits 27 Who is Eligible to Participate? Change in Corporate Status Reorganization might also result in tax consequences for the owner(s) (cont.) Individual becomes the owner of sole proprietorship, partnership, or LLP-immediately loses eligibility to continue participation in pre-tax benefits. Benefits provided or expenses incurred prior to date of change of ownership are eligible to remain tax free. Individual sells sole proprietorship, partnership, or LLPimmediately gains eligibility to continue participation in pretax benefits. Benefits provided or expenses incurred after date of change of ownership are eligible to remain tax free

15 Who is Eligible to Participate? Change in Corporate Status Reorganization might also result in tax consequences for the owner(s) (cont.) Individual becomes a more than 2% shareholder in a S Corporation or LLC taxed as S Corporation, the individual loses eligibility for their participation in benefits tax free retroactive to the first day of the tax year of the Subchapter S Corporation. Any tax free benefits provided or expenses reimbursed from that tax year date are not eligible for tax free consideration and need to be included in the owner s taxable income. Individual ceases to be a more than 2% shareholder in a S Corporation or LLC taxed as S Corporation, the individual does not become eligible until the first day of the next tax year of the Subchapter S Corporation. Expenses are not eligible for consideration until then. 29 Dependents 30 15

16 Dependent Defined Dependent the spouse of the employee or an individual that the employee could claim as a tax dependent for income tax purposes Federal regulation defines dependent differently depending on the purpose IRC 152 for the definition of a qualifying child or qualifying relative for income tax deduction purposes IRC 105(b) for tax-free health coverage purposes Patient Protection and Affordable Care Act (PPACA) for limiting age purposes for dependent health plan coverage IRC 129 for dependent care expense purposes 31 Dependent Defined Dependent IRC 152 A Qualifying Child is someone who: Is a child of the taxpayer (or a descendent of such a child), adopted child (including legally placed for adoption), brother, sister, stepbrother or stepsister of the taxpayer, or a descendent of any such relative; Is not yet 19, or is a student who is not yet 24 by the end of that year or is permanently and totally disabled at any time during the year; Has not provided more than half of his or her own support in that year; and has the same principal place of abode as the taxpayer for more than half of the relevant calendar year

17 Dependent Defined Dependent IRC 152 Qualifying relative Is a child of the taxpayer (or a descendant of such child), brother, sister, stepbrother, stepsister, father, mother (or ancestor), stepmother, stepfather, niece, nephew, aunt, uncle, in-law (father-inlaw, mother-in-law, sister-in-law, brother-in-law, son-in-law, or daughter-in-law) or who (other than a spouse) has the same principal place of abode as the taxpayer and is a member of his or her household (unless the relationship violates local law); Receives half or more of his or her support in the year from the taxpayer; and Is not a Qualifying Child of any taxpayer in the year 33 Dependent Defined Dependent IRC 152 Qualifying relative - Because the definition of qualifying relative is broad, unrelated individuals may be claimed as a dependent and domestic partners may qualify as a dependent, but not as a spouse

18 Dependent Defined Dependent IRC 105(b) Eligible Child Is a son, daughter, stepson or stepdaughter of the taxpayer; Is an eligible foster child of the taxpayer; Is a legally adopted child of the taxpayer; Will not attain age 27 during the current tax year Medical Insurance generally until birthdate Adult children can stay on parents health plan even if married, working, living away from home, etc. FSA and HRA generally until the end of the year the adult child is 26 Note: HSA does not have same application, must meet IRC Domestic Partner and Same Sex Spouse Eligibility Issues 36 18

19 Domestic Partners Defined Domestic Partner Either individual of an unmarried same-sex or opposite-sex couple in a relationship considered as being equivalent to marriage for the purpose of extending certain legal rights and employment benefits. A domestic partner is the employee's sole spousal equivalent, lives together with the employee in the same residence, intends to do so indefinitely and is responsible with the employee for each other's welfare. 37 Domestic Partners Tax Consequences Domestic Partner Imputed income for federal and state tax purposes for premiums to cover the domestic partner Tax free reimbursement from Health FSA or HRA is not permitted unless domestic partner otherwise is an income tax dependent of the employee Domestic partners can each claim up to $5,000 in Dependent Care FSA for qualifying children Domestic partners covered under family HDHP can each set up an HSA and fund to the family maximum 38 19

20 Same Sex Marriage Issues DOMA changes Change in tax dependent status Same sex spouse recognized under federal law Plan documents and insurance contracts should be reviewed for definition of spouse Medical expenses eligible for same sex spouse under health FSA, HRA and HSA Caution: Annual limits on benefits may be different when married limits are applicable (DCAP, HSA, etc.) Payroll taxes For federal taxation purposes, same sex spouse recognized based upon state of ceremony not state of residence 39 Same Sex Marriage Issues DOMA changes Change in tax dependent status (continued) For purposes of state law, state may or may not recognize state of ceremony (imputed income issues) For Example: Wisconsin Marriage. Section 13. [As created Nov. 2006] Only a marriage between one man and one woman shall be valid or recognized as a marriage in this state. A legal status identical or substantially similar to that of marriage for unmarried individuals shall not be valid or recognized in this state. [2003 J.R. 29, 2005 J.R. 30, vote Nov. 2006]» Overturned 6/6/14 and subsequently Appealed» Legal status of couples who were married pending appeal? 40 20

21 Miscellaneous Eligibility Issues 41 Miscellaneous Eligibility Issues Group health plan eligibility COBRA qualifying events: Child ages off plan, divorce, Medicare entitlement Not a COBRA qualifying event if employer changes definition of eligibility. However, would be a special enrollment event for the Marketplace or another employer sponsored plan. Failure of Nondiscrimination Testing Employee ceases to be eligible due to testing failure All or a portion of pre-tax elections will be considered taxable and must be reported as imputed income on the Form W

22 Miscellaneous Eligibility Issues Employer fails to operate plan consistent with IRS Regulations will disqualify the plan Examples: Issuing pre-tax reimbursements to ineligible owners or ineligible employees Reimbursing HRA and health FSA balances without proof of qualified medical expenses Allowing an HRA participant to cash out his/her HRA balance upon termination Reimbursing the FSA participant for any forfeited balances at the end of the plan year Failing to correct nondiscrimination testing failures Disqualification of plan could mean tax consequences for employer and participants 43 Summary Who can participate in FSA, HRA and HSA varies Affordable Care Act impacts eligibility for FSA, HRA and HSA Examples: Tax-free coverage for children to age 26, No Stand Alone Health FSA, Integrated HRA Domestic Partners may have access to health benefits but generally benefits are subject to federal and state taxes Same Sex Marriage taxation issues still remain Tax free on a federal level based upon state of celebration State tax issues remain Miscellaneous Issues and tax consequences when eligibility status is changed mid plan year or for nondiscrimination testing failures 44 22

23 Questions? Thank you for attending!! Any questions can also be addressed by or phone: Compliance Department (800) Visit our online blog:

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