Got COBRA Subsidy Questions? The IRS Has Answers

Since COBRA premium assistance under the American Rescue Plan Act of 2021 became available to Assistance Eligible Individuals as of April 1, 2021, employers and benefits advisers have had a number of questions about the mechanics of the subsidy and tax credit scheme, among other issues. In Notice 2021-31 the IRS addresses a number of the key issues in a question and answer format. Below is a selection of key points that emerge from the new guidance:

Involuntary Termination and Reduction in Hours

  • The definition of involuntary termination of employment qualifying an individual for the subsidy is the same as was used in connection with a prior COBRA subsidy under the American Recovery and Reinvestment Act of 2009:  “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.”  This is a facts and circumstances test.  (Q&A 24)
  • Examples of involuntary termination of employment include:
    • A termination designated as voluntary quit or a resignation, where the employee was willing and able to continue performing services, so that, absent the voluntary termination, the employer would have terminated the employee’s services, and the employee had knowledge that they would be terminated. (Q&A 24)
    • Employer action to end an individual’s employment while the individual is absent from work due to illness or disability, if before the action there is a reasonable expectation that the employee will return to work. (Q&A 25)
    • Involuntary termination for cause, other than gross misconduct. (Q&A 27)
    • Resignation as a result of a material change in the employment relationship analogous to a constructive discharge, including a material change in the geographic location of employment or a material reduction in hours that did not result in a loss of coverage.  (Q&As 24, 28, 32) 
    • An employer’s decision not to renew an employee’s contract, if the employee was otherwise willing and able to continue the employment relationship and was willing either to execute a contract with terms similar to those of the expiring contract or to continue employment without a contract.  By contrast, expiration of a contract that was for a set term that was not to be renewed, would not qualify.(Q&A 34)
  • Retirement would not ordinarily constitute involuntary termination of employment, but could do so where the employee was willing and able to continue employment and had knowledge that they would be terminated absent the retirement. (Q&A 26)
  • The COBRA subsidy is available to individuals whose reduction in hours of service was voluntary or involuntary, including due to a furlough, with “furlough” defined as a “temporary loss of employment or complete reduction in hours with a reasonable expectation of return to employment or resumption of hours of service such that the employer and employee intend to maintain the employment relationship.”   This rule holds whether the furlough is imposed by the employer on an employee, or the employee agreed to participate in a furlough (Q&As 21 & 22).
  • It is possible to become an Assistance Eligible Individual (AEI) more than once, for instance due to your own involuntary termination, followed by coverage under a spouse’s employer’s plan, followed by the spouse’s involuntary termination triggering COBRA continuation coverage with premium assistance. (Q&A 3)

Substantiation of Premium Assistance Eligibility

  • Employers who claim the tax credit must retain some documentation to substantiate that the individual was eligible for the COBRA premium assistance.  Substantiation may include collecting self-certifications or attestations from individuals that they experienced a reduction in hours or involuntary termination, or employment records of same, and that they are not eligible for other group coverage or Medicare. Employer reliance on such attestations/self-certifications is permitted so long as the employer does not have actual knowledge that the information provided is incorrect. (Q&As 4 -7)

Other Subsidy Eligibility Issues

  • Ability to enroll under a spouse’s group health plan under a loss of coverage special enrollment period, extended by the Emergency Relief Notices, may disqualify an individual from receiving the COBRA subsidy.  (Q&A 9, Example 3).
  • So long as the original qualifying event was a reduction in hours or involuntary termination of employment, the COBRA subsidy is available during extensions of COBRA coverage due to a second qualifying event, disability determination, or under State mini-COBRA laws.  (Q&A 17)
  • Individuals are subsidy-eligible during eligibility waiting periods that overlap with the subsidy period and while outside open enrollment cycles for a spouse’s employer’s plan (Q&A 9)

Coverage Eligible for Subsidy

  • COBRA premium assistance is available for vision-only or dental-only coverage, and for health reimbursement arrangements, but not health flexible spending accounts. (Q&A 36, 37).
  • If an AEI elects COBRA continuation coverage during the extended election period but the employer no longer offers the health plan they were enrolled in at the time of their qualifying event, the employer must place them in option that is most similar to the discontinued plan, even if the premium is higher.  The subsidy will still apply in such instances.  (Q&A 42)
  • Employers who are no longer subject to federal COBRA due to a reduction in the number of employees (for instance, due to COVID-19-related staff reductions) are still required to provide the extended COBRA election period to individuals who had a reduction in hours of service or involuntary termination while the employer was subject to federal COBRA. For instance, an employer that was subject to federal COBRA in 2020 and had reduced staff in 2020 due to COVID-19 may not be subject to federal COBRA in 2021, but must offer the subsidy to individuals who had reductions in hours or involuntary terminations in 2020 when the employer was subject to federal COBRA. (Q&A 45) Very generally, federal COBRA applies to employers who had 20 or more employees in the preceding calendar year. 

Extended Election Period

  • An employee who had an involuntary termination of employment or reduction in hours before April 1, 2021 and who elected self-only COBRA coverage which later lapsed, can add a spouse or dependent under the extended election period, and receive the subsidy for their coverage, if the spouse or dependent were beneficiaries under the group health plan at the time of the qualifying event. (Q&A 51)

Outbreak Period Extension

  • If an AEI elects retroactive COBRA coverage, the Outbreak Period extension applies to premium payments for the retroactive periods of coverage.  If someone fails to pay the full amount due for retroactive premiums the plan can credit the premiums received to the earliest months of coverage.  A coverage gap will exist until the period of subsidized coverage resumes on April 1, 2021.  (Q&A 58)

Claiming the Tax Credit

  • Premium payees (employers, in the case of fully insured or self-insured group health plans, other than multiemployer plans) become entitled to the premium assistance credit as follows:
    • As of the date on which the payee receives an AEI’s election of COBRA continuation coverage, it is entitled to a credit for premiums not paid by an AEI (plus the administrative charge) for any period of coverage that began before that date.  So, for an AEI who on June 17, 2021 retroactively elects COBRA as of April 1, 2021, the payee is entitled to credit as of June 17, 2021 for premiums not paid by the AEI for coverage for April through June, 2021 (Q&A 74) 
    • As of the first day of each subsequent period of coverage (e.g., calendar month), it is entitled to a credit for premiums not paid by an AEI for that coverage period.  So, for example, it is entitled to a credit on August 1, 2021, for premiums the AEI will not pay for the month of August.  (Q&A 74)
  • A payee claims the credit by reporting the credit (both nonrefundable and refundable portions) and the number of individuals receiving COBRA premium assistance on Form 941, Employer’s Quarterly Federal Tax Return, and in anticipation of receiving the credit may reduce deposits of federal employment taxes, including withheld taxes, up to the amount of the anticipated credit.  It may also request an advance of the amount of the anticipate credit that exceeds the federal employment tax deposits available for reduction by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
    • Thus, in the prior example involving a retroactive election on June 17, 2021, the employer would report the credit for April through June 2021 on the Form 941 for the second quarter of 2021.  If instead the AEI had elected on July 17, 2021 to start COBRA as of June 1, 2021, the payee would be entitled to a credit as of July 17, 2021 for premiums payable for June and July 2021, and would report the total credit on Form 941 for the third quarter of 2021, including the credit for the periods of coverage from June 1, 2021 through June 30, 2021.  (Q&A 75)
  • It is not permissible to reduce deposits or request an advance for a credit for a period of coverage that has not begun.  (Q&A 76). 
  • When an AEI fails to report loss of eligibility for the COBRA subsidy (for instance due to eligibility for coverage under another group health plan) the premium payee is still entitled to the credit for the period of ineligibility, unless the payee know of the individual’s eligibility for other coverage.  (Q&A 78)
  • Premium payees that use a third party payer such as a payroll service provider or PEO to report and pay employment taxes may are still entitled to the credit, but different rules apply depending on the type of third-party payer arrangement.  Generally the third party payer will be treated as a premium payee for purposes of claiming the premium assistance credit only if the third party payer:
    • maintains the group health plan;
    • is considered the sponsor of the group health plan and is subject to the applicable DOL COBRA guidance, including providing the COBRA election notices to qualified beneficiaries, and
    • would have received the COBRA premium payments directly from the AEIs were it not for the COBRA premium assistance.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: James Lee, Unsplash

How Employers With 51 -100 Employees Can Meet Their CalSavers Deadline

The CalSavers Program applies to employers that do not maintain a retirement plan.  It automatically enrolls eligible employees in a state-managed system of Roth IRA accounts. June 30, 2021 is the deadline by which employers with 51 to 100 California employees must either establish that they are exempt from CalSavers (for instance, because they have their own plan) or enroll in the program.  Employers with more than 100 California employees were required to enroll by September 30, 2020

Although under legal attack for some time, on the grounds that the federal benefits law, ERISA, prohibited a state-run retirement program, the CalSavers program was just upheld by the Ninth Circuit Court of Appeals.  Money penalties apply to employers who don’t timely either establish their exempt status, or participate in the program.  Below is a how-to for employers in the 51+ group, who have approximately six weeks until their CalSavers deadline arrives:

  1. Already have a retirement plan (including a SEP or SIMPLE)?  Register or certify your exemption.  The link is here.  You will need your federal Employer Identification Number or Tax Identification Number and an access code that is provided on a notice you should have received from CalSavers via email or snail mail.  If you can’t find your notice, call (855) 650-6916. 
  2. Don’t have a retirement plan?  Consider establishing one in the time period left.  IRS Publication 560 contains information about setting up a SEP, SIMPLE, or a 401(k) plan for your small business.  Investment advisors to your business and even business CPAs can also help.  Don’t do it on your own, get expert advice as your choice of plan will have consequences!
  3. Don’t have a plan and don’t want one?  Register with CalSavers.  Again, you need your EIN, or TIN, and an access code.  If you don’t have an access code you can request one using this link. After you register, you will have 30 days to upload your employee roster and facilitate payroll contributions.  If you use an outside payroll provider, you will need to add them as your payroll representative.  More information on adding payroll representatives is provided once you register.
  4. Need more information about counting employees towards the 51 employee threshold?  Check out our prior blog post on the topic, which includes a discussion of use of staffing companies and the like, and also visit the CalSavers FAQ re eligibility.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit Levi Meir Clancy, Unsplash

IRS FAQs Address COVID-19 Partial Plan Termination Issues

On April 27, 2021 the IRS supplemented its online FAQs on COVID-19 relief for retirement plans and IRAs with information related to relief from partial plan terminations.  Under Division 33, Section 209 of the Consolidated Appropriations Act of 2021 (CAA), a plan is not treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.  For employers with a calendar year, this buys them three months of additional time to recover and add back participants, as usually a partial termination would have been determined based on participant levels as of their plan year end on December 31, 2020.  We reviewed the partial termination relief provisions of the CAA in this earlier post.

The new FAQs clarify the following issues:

  1. Definition of Active Participants Covered by the Plan  For purposes of the 80% retention rule, the FAQ advises that plan sponsors use a “reasonable, good-faith interpretation,” of the term “active participant covered by the plan,” applied in a consistent manner, when determining the number of participants covered by the plan on the March starting and ending dates.   In 401(k) plans, participants who meet the eligibility requirements to make salary deferrals generally have been required to be counted as active participants covered by the plan (See Q&A 40), even if they do not actively defer.   The FAQ does not address the distinction between “eligible” versus actively deferring.  Plan sponsors with questions about counting active participants should consult benefit counsel or other benefit advisors.
  2. Application of March to March Period to Calendar Plan Year  The FAQ clarifies that if any part of the plan year falls within the March 13, 2020 to March 31, 2021 period, then the relief applies to any partial termination determination for that entire plan year.   For a plan with a calendar plan year, the relief therefore applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year, because both years include a portion of the March 13, 2020 to March 31, 2021 determination period.
  3. Impact of New Hires on 80% Test  The FAQs make clear that the 80% test looks at the total population of active participants and not only at the pool of active participants who were covered on March 13, 2020.   In other words, new hires that met eligibility under the plan by March 31, 2021 may be counted, and plan sponsors do not need to take a snapshot of active participants as of March 13, 2020 and ensure that 80% of those exact people were still employed on March 31, 2021, in order for the relief to apply.  This is an expansion of normal rules for partial terminations, which would ordinarily require that a participant who is terminated be individually rehired in order not to count as having been affected by the partial termination.
  4. Relief Not Limited to COVID-Related Staff Reduction  The FAQs make clear that although March 13, 2020 happens to be the date that the COVID-19 national emergency was declared, the relief applies regardless of the reason for the reductions in active plan participants; the reductions need not be related to the COVID-19 pandemic. 

Plan sponsors should take heed of the CAA partial termination relief and make use of it when possible.  Form 5500 Return/Reports require plan sponsors to report the number of active participants at the beginning, and end, of each plan year, which permits IRS to IRS FAQs Address COVID-19 Partial Plan Termination Issues possible partial plan terminations.  Armed with this data, IRS earlier this year announced a compliance check program focused on partial terminations.  This is a form of soft audit that could lead to a more formal audit program in the future.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Andrew Winkler, Unsplash

IRS Lists Solo 401(k) Plans as Audit Target

If your business sponsors a “solo 401(k)” plan, it may be in the crosshairs of the Internal Revenue Service.  The Service’s TE/GE (Tax Exempt and Government Entities) division has identified one-participant 401(k) plans as among its current audit initiatives.  In its web posting announcing the initiative, TE/GE states:  “[t]he focus of this strategy is to review one-participant 401(k) plans to determine if there are operational or qualification failures, income and excise tax adjustments, or plan document violations.”

By way of background, a solo 401(k) plan is a traditional 401(k) plan covering a 100% business owner with no employees, or that person and their spouse.  As this handy IRS info page describes, solo 401(k) plans are subject to the same rules and requirements as any other 401(k) plan, however because no common law employees participate, you do not have to worry about minimum coverage and nondiscrimination testing, top heavy rules, or most of the requirements of Title I of ERISA.  Solo 401(k) plans can be a great fit for some businesses, but those that stray outside the strict eligibility requirements for these plans have potentially high exposure to correction costs and sanctions in an audit setting.    

Below we list some common solo 401(k) compliance pitfalls.   If you are a solo 401(k) sponsor, check your plan design and operations to determine if these might be issues for you.  Take steps now to correct any compliance failures through use of EPCRS and other voluntary compliance programs, where applicable, so that, if an IRS audit does occur, it is resolved without incident.

  1. Employees Eligible for Benefits: One of the most frequent errors with solo 401(k) plans is that they lose their solo status when the business sponsoring them acquires employees, and the employees work the necessary number of hours required for eligibility under the plan.  (These generally cannot exceed 1,000 hours in a year of service.)  This will trigger application of minimum coverage, nondiscrimination, and top heavy rules, as well as ERISA reporting and disclosure requirements (Summary Plan Description, Form 5500-SF, etc.).  Failure to meet requirements under any of these sets of rules will be fodder for the IRS in an audit setting.  Business owners who need employees should probably avoid solo 401(k) plans unless they can be certain that the employees’ work hours never reach or exceed 1,000 hours in a year.   
  2. Controlled Group/Affiliated Service Group: This issue is related to the first in that, if the business that sponsors the solo 401(k) plan is under common control with a business that has common law employees, the answer to the question “who is the employer” — and who has employees — will be both businesses under common control, not just the business that sponsors the solo 401(k).  Generally, solo 401(k) status will be lost as a result.  The same potential coverage, testing, and top-heavy issues listed above can apply. Potentially, employees of the other business could be eligible for benefits under the (formerly) solo plan.
  3. Form 5500 Filing Duties: Solo 401(k) plans are exempt from filing Form 5500-EZ so long as plan assets remain under $250,000.  If plan assets exceed this threshold and a Form 5500-EZ is not filed, significant penalties could be assessed by IRS and by Department of Labor.  Participation in the Department of Labor Penalty Relief Program for Form 5500-EZ Late Filers should be considered in such instances. 
  4. Exceeding Contribution and Deduction Limits: The contribution and deduction limits that apply to group 401(k) plans apply to a solo 401(k) plan.  Employee salary deferrals cannot exceed the applicable dollar limit under Internal Revenue Code (“Code”) § 402(g) ($19,500 in 2021, plus $6,500 for those 50 and older).  The 415(c) limit equal to the lesser of 100% of compensation or $58,000 (in 2021) applies (and is increased by the age 50 catch-up limit, for a total of $64,500).  The maximum Code § 404(a) deduction of 25% of eligible plan compensation also applies, but in general the 415(c) limit will be reached first.  Failure to observe any of these dollar limits could be picked up on audit.
  5. Plan Document Errors: Businesses that sponsor a solo 401(k) need to update their plan document periodically to comply with the law just like any plan sponsor, meeting the adoption deadlines for preapproved plan remedial amendment cycles (the next one falls on July 31, 2022). Voluntary plan amendments also have to be properly documented and timely adopted.  Failure to meet these document requirements may be able to be corrected under EPCRS. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo Credit:  Markus Spiske, Unsplash

Fast Facts About the COBRA Subsidy

The recently enacted American Rescue Plan Act of 2021 (ARPA) contains a number of financial aid measures to help Americans coping with the economic fallout of the COVID-19 pandemic, including a 100% subsidy of COBRA continuation coverage premiums for a period of up to six months.  The subsidy provisions are set forth at Title IX, Subsection F of ARPA, Section 9501, titled “Preserving health benefits for workers.”  The following fast facts on the COBRA subsidy will help employers and benefit advisors prepare for more detailed guidance and model notices that are soon to follow from the Department of Labor. 

Subsidy Period

  • The subsidy is first available April 1, 2021 and ends, unless terminated earlier as described below, on September 30, 2021 (the “subsidy period,” as used herein).  The subsidy covers 100% of COBRA premiums, including the 2% administrative fee, for medical, dental and vision coverage during that time.  It does not apply to continuation coverage under a health flexible spending account.

Assistance Eligible Individuals

  • The subsidy applies to “assistance eligible individuals.”  This means someone who is eligible for continuation coverage during some or all of the subsidy period, by reason of an involuntary termination of employment or a reduction of hours.  The subsidy would also appear to apply to that person’s dependents.  
  • The subsidy is not available to those who resign or voluntarily quit employment.  
  • The change in employment status need not be directly related to COVID-19.  The usual exception for termination due to gross misconduct applies, but remember that that exception is applied sparingly.

Extended Election Period

  • Under a special extended election period, the subsidy is available not only to assistance eligible individuals who newly become COBRA eligible as of April 1, 2021, but also to persons who earlier declined COBRA, or elected COBRA but let it expire.  For instance, this group may include assistance eligible individuals who first became COBRA on or after November 1, 2019 (April 2021 would be the 18th month of COBRA coverage).  
  • The subsidized continuation coverage would apply prospectively only, in such instance.
  • A notice of the extended election period must be provided, triggering a 60-day period to elect to re-instate COBRA .  The Department of Labor is required to provide a model notice within 30 days of the March 11 ARPA enactment date.  

Option to Change Coverage

  • Assistance eligible individuals may receive the subsidy for the same coverage they were enrolled in at the time of their qualifying event, or they may elect a different coverage option so long the applicable premium does not exceed the premium for the coverage they had at the time of the qualifying event.  This is an optional feature of the subsidy provisions and an employer may choose not to extend the option to change coverage.

Termination of Subsidy Period

  • The subsidy period will end prior to September 30, 2021 in the event the assistance eligible individual’s maximum COBRA period ends (for instance, with regard to someone who made a special extended COBRA election).
  • Alternatively, it will end when an assistance eligible individual becomes eligible for coverage under another group health plan, or becomes eligible for Medicare.  
  • Eligibility under other group coverage or Medicare triggers a duty to notify the group health plan providing the COBRA subsidy.  The Department of Labor will further define the form and timing of the notice.  
  • A $250 penalty applies to each failure to provide the notice, and a higher penalty, equal to 110% of the applicable COBRA premium, may apply to an intentional failure to notify.  An exception to the penalty applies in the case the failure to notify was due to reasonable cause and not willful neglect.

Notification Duties

  • ARPA requires an update to COBRA notices sent to assistance eligible individuals who first became eligible for COBRA before the subsidy period, describing the premium assistance and the option to enroll in different coverage, if that latter option is extended by the employer, as well as the duty to provide notice of eligibility for other group coverage or Medicare.   The deadline to provide the new information is 60 days from April 1, 2021.  
  • This information must also be added to new COBRA qualifying event notices for assistance eligible individuals.  The new information may either be provided as part of amended qualifying event notices or in a separate document provided with the qualifying event notice.
  • As mentioned above, a special notice about the extended election period must be provided, and triggers a 60-day election period.  If the option to choose different coverage of an equal or lower premium is extended, an additional 30-day election period, for a total of 90 days, applies.
  • Advance notice of the expiration of the subsidy period is also required to be provided.  The Secretary of Labor will provide a model notice no later than 45 days from the March 11 enactment date.  

Subsidy is Not Taxable Income

  • The dollar value of the COBRA subsidy is excluded from the gross income of assistance eligible individuals.

Payment for Subsidy:  Credit Against Medicare Taxes

  • The person to whom COBRA premiums are payable will be entitled to reimbursement for the subsidy, in the form of a credit against the Medicare component of Social Security taxes.  
  • The employer is the person to whom premiums are payable, and who may claim the credit, in the case of a self-insured plan or an insured plan subject to federal COBRA  It is the plan itself in the case of a multiemployer plan.  
  • If the credit exceeds taxes payable the excess is treated as a refundable overpayment.   

DOL Outreach

  • ARPA allots $10 million to the Department of Labor to help implement the COBRA subsidy, enabling it to provide outreach in the form of public education and enrollment assistance to employers, group health plan administrators, and other stakeholders.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo Credit:  Marten Bjork, Unsplash

Happy 10th Birthday, EforERISA

December 16, 2020 marks the 10th anniversary of our first post on this blog and this week EforERISA is debuting a fresh new look and redesign courtesy of Ashli Smith and her team at Spotted Monkey Marketing. We are always looking for ways to make this site better and more impactful so your constructive criticism and comments on the redesign are welcome. We also welcome suggestions on topics to cover in our future posts.

2021 promises to be a busy year on the benefits front, with a new administration in gear and light at the end of the tunnel for our economy as vaccination becomes more widespread. We look forward to keeping you posted on the benefits news you need to have, whether you are an employer sponsoring benefit plans for your employees, or a benefits broker or consultant for whom compliance is your stock in trade.

Photo Credit: Robert Anderson, Unsplash

In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan

If your business is one of the many that reduced employees in the early days of the COVID-19 pandemic, you need to keep March 31, 2021 marked on your calendar, particularly if you are fortunate enough to be ramping up activity and adding workers back to your payroll.

As explained in our earlier post, when employer action, including as the result of an economic downturn, results in 20% or more of the population of an employee retirement plan being terminated from employment, a presumption arises that a “partial plan termination” has occurred, with the result that everyone affected by the partial termination must be fully vested in their plan accounts.

The partial termination rule is therefore relevant to plans that include employer contributions that are subject to a vesting schedule.

March 31, 2021 comes into play because it is the date set under Division EE, Section 1, Title II, Section 209 of the Consolidated Appropriations Act, 2021 as the snapshot date on which a partial plan termination may be avoided through rehires that restore earlier plan participation levels.  Specifically, a plan will not be treated as having experienced a partial plan termination if on March 31, 2021, the number of active plan participants is at least 80 percent of the number covered by the plan on March 13, 2020 (the beginning of pandemic-related stay at home orders).  For purposes of this rule, “active” status relates to the plan, not payroll, meaning that the individual maintains a plan account but may or may not be actively employed.  Clearly, however, adding new hires who establish accounts under the plan will result in increased plan participant numbers as the March 31, 2021 date approaches.

The partial plan termination relief applies during any plan year which includes March 13, 2020 to March 31, 2021 period.  If you have questions about application of this new rule to your 401(k) or other benefit plan, don’t hesitate to contact us. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Booke Lark, Unsplash

Honey, I Shrunk the Incentive: EEOC Proposes Wellness Regulations

EEOC regulations proposed in the final days of the Trump Administration would, if finalized, reduce the permissible incentive for participatory wellness programs to a de minimis amount – such as a water bottle or T-shirt.  The current incentive cap is equal to 30% of an individual group health premium, which works out to around $180 per month.  The Biden Administration has withdrawn the proposed regulations from publication in the Federal Register under a regulatory freeze pending review.  Although they may not be finalized in their current form, the proposed regulations reflect the thinking of the EEOC on how small an incentive must remain (answer:  very small) in order to preserve the voluntariness of a participatory wellness program.  As such, employers cannot afford to ignore them.  Below are some key questions and answers about the proposed measures.  

Q. 1:  What wellness programs are subject to the de minimis incentive limit?

A. 1: “Participatory” wellness programs would be subject to the de minimis limit, if it is published in final form.  A participatory wellness program requires no physical activity or health outcome in order to receive the incentive.  For instance, completion of a Health Risk Assessment (HRA) or undergoing biometric testing, with no requirement to improve the results, are examples of participatory wellness activities.  

Q. 2:  What types of incentives qualify as de minimis?

A. 2:   The proposed regulations give the example of a water bottle or gift card of modest value, and indicate that premium surcharges of $50 per month ($600 per year), an annual gym membership, or airline tickets would be more than de minimis.  If a water bottle suffices, presumably other low-cost items  such as a t-shirt, towel, or stress ball would also work.  “Modest value” gift cards probably mean $10 or $15 or less.  See Q&A 7 below, re tax treatment of de minimis incentives.

Q. 3:  What is the safe harbor exception to the de minimis incentive limit?

A. 3:   An incentive may be more than de minimis under a health-contingent wellness program that is part of, or that qualifies as a group health plan.  Let’s break that down.  “Health-contingent” means that the program conditions the reward either on a physical activity (such as completing a walking program), or on satisfying a standard related to a health factor, such as reducing blood pressure or cholesterol levels.   As for “comprising part of, or qualifying as a group health plan,” the proposed regulations list four factors that, if present, may indicate when this is the case:  (1) the wellness program is offered only to employees who are enrolled in an employer-sponsored health plan; (2) the wellness incentive is tied to cost-sharing or premium reductions (or increases) under the employer’s group health plan; (3) the wellness program is offered by a vendor that has contracted with the employer group health plan (or, in the case of an insured plan, with the insurance carrier); and (4) the wellness program is a “term of coverage” under the group health plan.  It is not very clear what is meant by the last criteria.  It may mean that the terms of the wellness program are set forth in the group health plan documentation, for instance.  More clarification from EEOC would be welcome.

Q. 4:  What is an example of a wellness program that can continue to use a higher incentive under the safe harbor?  

A. 4:  An example of a wellness program that might qualify for the safe harbor exception, and be able to offer a more than de minimis incentive, would be a biometric testing program that awards a premium reduction to participants who successfully lower their blood pressure and cholesterol readings, that is administered by a vendor of the health insurer that provides the coverage, and under which participation is limited to employees who participate in the group health plan.  Another example would be a program of walking or exercise, that also meets the other criteria listed.  Note also that the de minimis rule, and EEOC regulations in general, do not apply to wellness programs that do not include disability-related questions or medical examinations, so would not apply to wellness programs that provide general health and educational information, such as classes on nutrition or smoking cessation.  Note also that both HIPAA and EEOC regulations require that an alternative means of earning a wellness incentive be made available to persons who are prevented from meeting (or attempting to meet) the original criteria due to medical conditions or issues.

Q. 5:  What is the maximum incentive under the safe harbor exception?

A .5:  Under EEOC regulations, the maximum incentive that may be offered under a health-contingent wellness program is an amount equal to 30% of the individual premium under the most affordable group health plan option, or 50% if the program is designed to reduce or stop tobacco use.   This is consistent with HIPAA regulations; note however that HIPAA regulations would not impose any maximum cap on incentives to take part in participatory wellness programs.

Q. 6:  I want to offer employees a PTO day if they get a COVID-19 vaccination.  Am I subject to the de minimis incentive limit?

A. 6:  Probably not.  Vaccination programs are participatory programs for purposes of the proposed EEOC regulations.  And a day’s wages, even at minimum wage, is more than a de minimis amount.  However, if you are offering a PTO day to employees who seek out their own COVID-19 vaccine from a third party, you are not administering a medical exam (i.e., the vaccine) for purposes of the EEOC voluntariness requirement and arguably the de minimis exception would not apply.   Conversely, if the vaccinations are offered through a clinic your company sponsors, then arguably the de minimis rule applies.   This a fact-intensive inquiry, however, so get individualized legal advice regarding the specific facts of your situation.

Q. 7:  Must I treat de minimis incentives as taxable income to my employees?  

A. 7:  That depends upon whether the item qualifies as a de minimis fringe benefit under Internal Revenue Code Section 132(a)(4).  This may be the case for a water bottle, t-shirt, and similar small items.  With regard to gift cards, however, note that he IRS has taken the position that gift cards that are redeemable for general merchandise, even if of nominal value, are treated as a cash equivalent and are taxable.  

Q. 8:  Do the EEOC’s proposed wellness regulations make any other changes?

A. 8:  They suggest potential changes to notice requirements.  The 2016 EEOC wellness regulations require issuance of a written notice that describes the types of medical information that the wellness program will collect and the purposes for which it will be used.  In the proposed regulations the EEOC opines that the notice no longer is necessary under the de minimis incentive standard, but requests public comment on whether the notice should be required nonetheless.  

Q. 9:  What do the proposed GINA rules require?

A. 9:  Proposed regulations under the Genetic Information Nondisclosure Act accompanied the wellness regulations. The proposed regulations under GINA would limit, to a de minimis amount, wellness incentives offered for information about manifestation of a disease or disorder in all family members – not just spouses, as was the case in 2016 GINA regulations.  The regulations continue prior prohibitions, under GINA, of questioning an employee about the employee’s family medical history or other genetic information.

Q. 10.  Is there a backstory to the EEOC’s de minimis incentive limit? 

A. 10:  How much time to do you have?   It all starts with the Americans with Disabilities Act, which permits employers to make disability-related inquiries (such as are set forth in an HRA) or require medical examinations (such as biometric testing) as part of employee health programs, so long as employees’ participation is “voluntary.”  42 U.S.C. § 12112(d)(4)(A).  Initially the EEOC simply stated that “voluntary” meant that participation was neither required, nor penalized.  A number of years went by. In 2014, the EEOC sued several employers, including Honeywell, on the grounds that their participatory wellness programs were not voluntary because the incentives were too large (one program conditioned payment of 100% of the monthly premium amount on participation in biometric testing and completion of the HRA).  These suits largely failed, and in final regulations published in 2016, the EEOC defined “voluntary” according to the 30% and 50% limits described above.  The AARP sued the EEOC over the regulations, arguing in relevant part that the 30% limit was arbitrary and too high.  As a result of the litigation, the EEOC ended up withdrawing the incentive portion of the regulations, and since that time (December 2018), the question of what constituted a “voluntary” wellness incentive under the ADA has remained open.  As mentioned the proposed regulations may be modified by the Biden Administration; certainly guidance that lessens the now considerable permissible incentive gap between de minimis, on the one hand, and approximately $200 per month, on the other, would be welcome.

Note: The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation.

(c) 2021 Christine P. Roberts, all rights reserved.

Photo Credit: Hello I’m Nik, Unsplash

COVID-19 Vaccines: Employer Mandate & Incentive Issues UPDATED

Regular readers of this blog know that I limit my practice to ERISA and employee benefit issues. However, my partner Paul Wilcox has stepped in as a guest co-author to address the employment law issues around COVID-19 vaccines and your workforce (Q&A 1 – 4, below). I follow up below with a few questions on using wellness incentives to encourage employees to get vaccinated. This updated post reflects EEOC guidance on COVID-19 vaccinations that was issued on December 16, 2020.

Q.1: Now that COVID-19 vaccines are coming, can I require employees be vaccinated as a condition of employment?
A.1: The Equal Employment Opportunity Commission (EEOC) has recently issued guidance indicating that requiring vaccination of employees is generally permissible. However, the EEOC also says that employer must consider accommodation of disabilities and sincerely held religious beliefs that are inconsistent with vaccination.  Additionally, some commentators have questioned whether the fact that the current COVID-19 vaccine was approved by the FDA on an Emergency Use Authorization (EUA) might limit the employer’s authority to mandate vaccination.  Whether there is any merit to that argument has yet to be resolved, but the EEOC guidance indicating the mandating vaccination is generally permissible mentions the EUA status of the current vaccine but says nothing that directly indicates that EUA authorization by the FDA limits the right of employers to require vaccination.  This is an open question.

Q.2: Do we have to treat all employee objections to vaccination equally or do some types of objections trigger legal duties of accommodation, etc.?
Q.2: The law requires employers to consider reasonable accommodations for persons with disabilities who may be particularly impacted by vaccination and for people with religious beliefs that are inconsistent with vaccination. Whether an accommodation of a disability or religious belief is required depends on the circumstances, but the employer generally must consider the issue even if the ultimate answer is that the requested accommodation will not be granted. In its recent guidance on mandatory vaccinations, the EEOC noted that, however, accommodations which would result in a direct risk of harm to other persons are not required.

Q.3: Will I get in trouble if I only require some employees, such as customer-facing workers, get vaccinated but not other employee groups?
A.3: No, not necessarily. Making distinctions between employees based on job duties is generally permissible.

Q.4: Will my company face potential liability if an employee has a bad reaction to the vaccination? Does it matter that the current vaccine was approved by the FDA on an EUA?
A.4: The law also does not provide a clear answer to this question, although the general answer is that employer liability for work-related injuries is confined to the workers’ compensation system, so any liability might be covered by workers’ compensation insurance. Workers’ compensation is a “no fault” system, meaning that whether the injury was caused by negligence or in the absence of negligence is not a relevant issue.

Q.5: Can I offer wellness program incentives to encourage employees to get a COVID-19 vaccine?
A.5: Yes. The incentive could take the form of a cash reward or gift card, for instance. Note that cash and cash equivalent rewards are taxable to employees and are generally compensation counted under 401(k) and other retirement plans.

Q:6: Is there a dollar limit on the incentive I could offer?
A.6: Not a flat dollar amount or percentage, but the incentive must be reasonable in amount. As Paul noted above, vaccinations are characterized as medical examinations and therefore you must abide by ADA regulations governing wellness plans. Those regulations are aimed at insuring, among other things, that employee participation in work-related wellness programs that include medical examinations, such as health risk assessments, is voluntary on the part of the employee. In past years the EEOC has sued employers whose wellness rewards it deemed to be excessive. On January 7, 2021, the EEOC issued proposed regulations that would permit only de minimis incentives for participatory wellness programs such as a vaccination program. Examples of de minimis incentives include a water bottle or small gift card. The regulations will be reviewed by the Biden Administration and may not be finalized as currently drafted, but employers whose wellness programs include COVID-19 vaccinations should consult with counsel as to whether or not they should limit incentives to de minimis amounts or items. Employers that are offering an incentive to employees to obtain COVID-19 vaccinations from public agencies or third party vendors who are not part of the employer’s wellness program or group health plan may not be subject to the de minimis incentive limitation, but should confirm with independent legal advice.

Q.7: If employees have a disability that makes the vaccination inappropriate for them, do we still need to offer a way for them to earn the vaccination incentive?
A.7: Yes. Reasonable accommodation provisions in the ADA wellness regulations remain in effect, such that you must modify or adjust your wellness program for persons with disabilities that make the COVID-19 vaccine medically inadvisable. Examples might be virtual/remote attendance at a class on COVI9-19 mitigation measures such as mask wearing, hand washing, and social distancing.

Q.8: Do I have to notify employees about the special incentive offered for getting a COVID-19 vaccine?
Q.8: That is not clear at the present time. Notification duties under ADA wellness regulations form 2016 would have required a notice be provided when employees’ medical information is gathered, such as in a vaccination process. The 2016 regulations required that the notice be written in a language reasonably likely to be understood by the participating employees, describe the type of information that will be gathered, and describe the confidentiality measures that are in place to protect this information. In its proposed 2021 wellness regulations the EEOC waives the notice requirement as unnecessary when the de minimis incentive applies. Employers with participatory wellness programs that would be subject to the de minimis incentive limit, if enforced, should consult counsel as to whether or not to comply with the notice requirements from the 2016 EEOC wellness regulations.

Note: The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation.

(c) 2021 Christine P. Roberts and Paul K. Wilcox, all rights reserved.

Photo Credit: Top photo: Emin Baycan, Unsplash