In addition to their regular job duties, HR professionals who work on their company’s health and welfare benefits are tasked with navigating a wide array of complex federal laws that govern those benefits. This task has become increasingly important and challenging in recent years due to rising health care costs, a competitive labor market and the expanding importance of health insurance to employees.
The consequences of non-compliance with these rules can be costly and administratively burdensome on an employer and its resources, including its HR department. This non-compliance liability may include, for example, potentially hefty taxes and penalties, employee lawsuits and time-consuming government audits.
As explained below, many of the more common compliance mistakes can be avoided or mitigated through careful planning and raising HR awareness of the applicable rules and regulations through internal trainings and third-party reviews by consultants and other benefits specialists.
Review Service Provider Agreements Carefully Before Signing Them
Selecting a health and welfare service provider (e.g., a health plan administrator) is an important business decision that can have significant financial implications for companies. Many employers, however, fail to appreciate the importance of the process of contracting with that service provider—and the implications under the Federal laws (e.g., ERISA) that govern the employer’s relationship with the service provider.
Insufficient review and negotiation of these service provider agreements can lead to direct liability under ERISA because certain requirements must be met for the services arrangement to be exempt from ERISA’s “prohibited transaction” rules. An inadequate review can also leave the employer needlessly unprotected from ERISA or other liabilities. Some examples of important contract provisions include:
- Fees (e.g., adequate disclosure of both direct and indirect compensation);
- Indemnification (e.g., is reasonable to the company, sufficient scope, etc.);
- Representations regarding standard of care (e.g., ERISA compliance) and other important matters (e.g., applicable licenses);
- Audit rights (to ensure the providers compliance with the agreement and applicable law);
- Contract termination rules (e.g., advance-notice requirements, responsibilities upon termination, etc.);
- Confidentiality (e.g., security safeguards); and
- Dispute resolution (e.g., whether a particular method such as arbitration is reasonable to the employer).
Keep Track of Any Taxable Wellness and Fringe Benefits
Some wellness and fringe benefits cannot be provided tax-free to employees (or can only be provided tax-free under certain limited circumstances). Mistakenly treating those benefits as tax-free to employees can create a number of administrative and tax-compliance headaches for employers (e.g., IRS liability for under-withholding income and employment taxes). These headaches can be particularly burdensome when the error is discovered in a later taxable year (e.g., requiring the employer to prepare corrected Forms W-2).
Some examples of taxable wellness and fringe benefits that are often mistakenly treated as non-taxable by employers include:
- Gift cards;
- Holiday gifts that are more than “de minimis” (e.g., season sports tickets);
- Wellness “indemnity” plans (e.g., where employees pay premiums pre-tax and receive tax-free cash payments for completing wellness activities); and
- Employer payments or reimbursements of gym memberships (generally do not qualify as non-taxable medical care).
Make Sure Participant Communications Are Timely, Complete and Accurate
Federal laws governing certain employee benefit plans such as medical plans (e.g., the Employee Retirement Income Security Act of 1974 or “ERISA”) require sponsors of those plans to provide various disclosures to employees and other plan participants (e.g., notices when material plan terms change, such as eligibility or deductibles).
Employers that are not careful when preparing and distributing employee communications (or that fail to distribute them entirely) can run into a number of problems, such as:
- Potential taxes, penalties and participant lawsuits where disclosures are improper, late or incomplete (e.g., failing to timely provide notices of COBRA continuation coverage to employees who terminate employment);
- Potentially being unable to enforce a plan change (e.g., a medical service that is no longer covered) because the change was not disclosed (or disclosed in a timely way) to participants; and
- Potentially being unable to reduce/eliminate benefits (e.g., retiree health care) because the communication failed to include “reservation of rights” language (i.e., stating that the employer may amend or terminate the plan at any time and for any reason).
The key to preventing these potentially costly and burdensome issues is to follow a compliance calendar related to the communications and complete a proper review of communications before they are sent out, with a particular focus on aspects that carry a high non-compliance risk (including timing and content requirements). Relevant questions in such an analysis can include:
- Is there a legal deadline that needs to be met for this communication (as is the case with certain annual notices)?
- Does the communication meet the legal content requirements (e.g., the various disclosures that must be included in a summary plan description)?
- Is the communication accurate (e.g., does it match the terms of the “official” plan document)?
- Does the communication include the proper caveats (e.g., the employer’s right to amend or terminate the benefits)?
- Is the communication being distributed in accordance with legal requirements (e.g., specific rules apply to sending certain communications electronically rather than as paper copies)?
Stay on Top of ACA Employer Mandate Tracking and Reporting
The employer mandate under the ACA imposes tax penalties on an employer with the equivalent of 50 or more full-time employees if the employer either:
– Fails to offer at least 95 percent of its full-time employees the opportunity to enroll in certain medical coverage for themselves and their dependents, and one or more of those employees receives a Federal tax subsidy to purchase individual health insurance coverage on a State or Federal ACA exchange (the “no offer” penalty); or
– The employer offers this coverage, but it is either not “affordable” or does not provide “minimum value” to the full-time employee, and the employee buys ACA exchange coverage with a subsidy (the “unaffordable” penalty).
The “no offer” penalty can be particularly significant because the penalty amount (roughly $208 per month or $2,500 annually for 2019) is multiplied by the number of all the employer’s full-time employees (less 30 such employees). These large employers must also comply with related reporting requirements under the ACA, which carry separate tax penalties for non-compliance.
Because of the complexity of these rules (e.g., determine whether, when, and for how long a particular employee is “full-time”), a number of employers have begun—to their surprise—to receive penalty notices (Letter 226-J) from the IRS. Common compliance mistakes include, for example, incorrect ACA reporting that erroneously triggers an employer mandate penalty in the IRS system (i.e., where the employer actually offered the required health coverage but incorrectly reported to the IRS).
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.