IRS Suspends 6039D Filing Requirement for Cafeteria Plans!

The Internal Revenue Service (IRS) announced on April 5, 2002 via Notice 2002-24 that the Form 5500 and Schedule F requirements imposed for cafeteria plans under Code Section 6039D have been suspended. Therefore, employers are no longer required to file Form 5500 and the Schedule F for their cafeteria plans, if the employer was filing this information to solely satisfy the 6039D requirements. Educational assistance and adoption programs are also exempt from the 6039D filing requirements as well.

However, it is important to note that employers who are required to file the Form 5500 under the Employment Retirement Income Security Act (ERISA) must continue to do so. A welfare benefit plan (e.g. Health FSA) with 100 or more participants as of the beginning of the plan year and is unfunded, fully insured, or a combination of insured and unfunded must continue to file the Form 5500 and Schedule C to satisfy ERISA filing requirements. Welfare benefit plans with less than 100 participants, as outlined above, will not be required to file a Form 5500 under the 6039D or ERISA requirements. ERISA specifically exempts such plans, "small plans," from the filing requirements mandated by ERISA.

It is also important to note that stand alone Dependent Care Spending Account (DSCA) plans administered through a cafeteria plan would also be exempt from the filing requirements regardless of their participation level. DCSA plans previous to Notice 2002-24 were required to file under 6039D since they were funded through a cafeteria plan, however DCSA plans have always been exempt from ERISA, except in cases where the child care facility is maintained by the employer.

ProBusiness will notify its cafeteria plan clients, via letter, well in advance of the client's next scheduled Form 5500 filing date to advise the client whether they are required, or not required, to file the Form 5500 under ERISA. This advisement will be based on the Health FSA participation data provided to ProBusiness by the client, and the client is ultimately responsible for determining whether the plan is required to file under ERISA. ProBusiness Premium Payment Plan (PPP) clients will be exempt from the 6039D requirements. Employers still must file under ERISA if the underlying welfare benefit plan (e.g., health, dental, vision plan) has 100 or more participants. However, ProBusiness has never processed ERISA Form 5500 and Schedule A's ("Insurance Information") for its PPP clients and is not a service we offer. PPP plan sponsors that are required to file under ERISA, should continue their ERISA Form 5500 filing process as in the past.

Notice 2002-24 was published in the April 22, 2002 Internal Revenue Bulletin 2002-16, and is available online at http://www.irs.gov/pub/irs-drop/n-02-24.pdf.

The press release from the IRS regarding the release of Notice 2002-24 can be found online at
http://www.irs.gov/pub/irs-news/ir-02-43.pdf.

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COBRA Initial Notices and New Spouses

Under the COBRA regulations, an initial COBRA notice must be provided "at the time of commencement of coverage under the plan…[to]…each covered employee and spouse of the employee (if any)." (ERISA Section 606(a)(1); Code Section 4980B(f)(6)(A)). The COBRA initial notice informs each covered employee and spouse, in writing, of his or her rights under COBRA. A plan is only required to provide the notice once, and that is at the time when the individual's coverage commences under the plan. Generally, mailing one notice, addressed to both the covered employee and covered spouse satisfies the COBRA initial notice requirement. However, if an unmarried covered employee marries after becoming covered under the plan, the plan is required to give the new spouse the COBRA initial notice at the time he or she becomes covered under the plan. The fact that the covered employee received the initial COBRA notice when he or she became first covered under the plan is not sufficient to satisfy the requirements of notice to the new spouse. Failure to provide the initial COBRA notice could result in fines being levied against the plan sponsor (normally the employer) in the amount of $110 per day. If you are the plan sponsor, you should determine how you will give initial COBRA notice to new spouses.

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HIPAA EDI and Privacy Regulations

The Health Insurance Portability and Accountability Act (HIPAA) is currently focused on two specific portions of the law because their effective dates are just around the corner. First, electronic data interchange (EDI) requires the standardization of electronic transactions conducted within the health care industry. The purpose of EDI is to improve the efficiency and effectiveness of the health care system. The EDI rules are effective October 16, 2002, with a possible extension until October 16, 2003. Plans with less than $5 million in annual receipts have until October 16, 2003 to comply.

The second provision, commonly known as the privacy regulations, imposes rules regarding the use and disclosure of individually identifiable health information in various situations. These rules are effective April 14, 2003, with small health plans (plans with less than $5 million in annual receipts) having until April 14, 2004 to comply.

Covered Entities:

HIPAA stipulates that the "Covered Entities," listed below must comply with the EDI and privacy regulations.

Health Plans - defined as an individual or group that provides, or pays the cost of medial care. This includes virtually all arrangements that pay the cost of medical care, including group health plans, health insurance issuers, managed care organizations, HMOs, and ERISA plans.

Health Care Provider - defined as a provider of medical or other services, or one that furnishes medical or health care services or supplies, or any entity that furnishes, bills, or is paid for health care in the normal course of business.

Health Care Clearinghouse - defined as public or private entities that process, or facilitate the processing of, non-standard formats and data into standard formats and data, and vice versa.

ProBusiness does not meet the definition of any of the above, but EDI and privacy rules apply, in some measure, to outside entities such as ProBusiness when Covered Entities utilize such entities to perform certain contracted administration duties. Entities such as ProBusiness are defined as "Business Associates," not Covered Entities and as such, have different requirements in relation to HIPAA as noted below:

The assurances that Covered Entities must obtain prior to disclosing protected health information (PHI) to Business Associates create a set of contractual obligations far narrower that the provisions of the rule, to protect information generally and help the Covered Entity comply with its obligations under the rule. For example, Covered Entities do not need to ask their Business Associates to agree to appoint a privacy officer, or develop policies and procedures for use and disclosure of PHI. ("Standards for Privacy of Individually Identifiable Health Information" (July 6, 2001)).

Employers should seek counsel regarding the Business Associate issue since they will be required to have entities such as ProBusiness sign a Business Associate Addendum which will need to be appended to any current Services Agreement.

In summary, the requirements under both the EDI and privacy regulations are continuously evolving. ProBusiness continues to closely monitor the regulatory environment and take the appropriate actions. ProBusiness has already implemented all currently required changes that affect operations. We will be implementing future requirements in a timely fashion as we have done with all other requirements. Specifically, we have analyzed and summarized all of the new regulations related to Summary Plan Document requirements, claims requirements, EDI requirements and other HIPAA privacy regulations. We are currently making required system changes, preparing the appropriate communication documents and setting up training related to these new rules. All changes will be reflected in the proper policy and procedure and in the CSR database to ensure timely, consistent and correct information to clients and continuants. We look forward to discussing Business Associate Addendum's with clients as they progress in their work to comply with these new requirements.

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California Senate Bill 168

The State of California has enacted legislation that will limit the use of social security numbers (SSN) as an identifier for most goods and services, including health care services. Persons or entities that provide non-health care services and who currently use SSN's as identifiers may continue to do so, only if they inform their customers of the practice and allow the customers to use alternative identifiers if the customer requests. However, this option is not available to entities that are classified as health insurers, health care service plans, health care providers, and pharmacy benefits managers who do business in California.

Effective Date:

Generally, the law is effective July 1, 2002. However, the statute allows various delayed implementation, as outlined below, for health insurers, health care service plans, health care providers, and pharmacy benefits managers based on the type of policy and type of health plan.

Effects of California SB 168:

The statute prohibits "a person or entity, not including a state or local agency," from
doing any of the following:

1. Publicly post or publicly display in any manner an individual's SSN. "Publicly post" or "publicly display" means to intentionally communicate or otherwise make available to the general public.
2. Print an individual's SSN on any card required for the individual to access products or services provided by the person or entity.
3. Require an individual to transmit his or her SSN over the Internet unless the connection is secure or the social security number is encrypted.
4. Require an individual to use his or her SSN to access an Internet Web site, unless a password or unique personal identification number or other authentication device is also required to access the Web site.
5. Print an individual's SSN on any materials that are mailed to the individual, unless state or federal law requires the SSN to be on the document to be mailed.

As with all legislation, ProBusiness will take the measures necessary to ensure compliance with the portions of California SB 168, which are applicable to the services ProBusiness provides its clients.

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Mistaken Reimbursement under FSA's

A question that is often asked of ProBusiness is; "If a FSA participant is reimbursed for an expense in error, do the regulations instruct in what manner this erroneous reimbursement must be recovered?" Although the regulations do not specifically address this issue, the Internal Revenue Service (IRS) has given some informal guidance. At a recent benefits seminar, Harry Beker of the IRS stated that it would not be permissible for the plan to merely add the mistaken reimbursement on the employee's W-2 as imputed income. The mistaken reimbursement amounts constitute plan assets and therefore the plan sponsor, as fiduciary of the plan, is required under ERISA to recoup such amounts, which a participant is not entitled. Therefore, the participant is required to reimburse the plan, with after-tax dollars, for example, by writing a check to the plan in the amount of the erroneous reimbursement.

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Guidance for FSA's in Cases of Merger and Acquisitions

Section 125 does not currently address the issue of how a seller's FSA plan must be handled by the buyer in the case of a merger or acquisition. The IRS has indicated that formal guidance in this matter will be released in "upcoming months." This guidance will address how to handle health FSA's in corporate transactions, such as where one entity sells its assets to another entity. We are hopeful that the IRS release may provide safe harbors for a purchasing entity that wishes to continue the health FSA of the selling entity. ProBusiness will be monitoring this situation closely and will inform our client's and their brokers promptly once the IRS has released its guidance on this matter.

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Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (425) 417-4795
e-mail: bsa@probusiness.com

(ProBusiness does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

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