Cafeteria Plans and Retroactive Elections

ProBusiness receives many questions from its clients and the broker community regarding the issue of retroactive cafeteria plan elections. An example of a retroactive election is when a participant is benefit eligible on their date of hire and is given 30 days to enroll and even though the participant enrolls by electing the benefit sometime after their date of hire, they are enrolled back to the date of hire. ProBusiness believes, based on the applicable statutes below, that retroactive election of benefits are only allowable under one circumstance - as a result of the HIPAA Special Open Enrollment rights afforded in the event of birth, adoption or placement for adoption of a child. All other elections must be on a prospective basis. In our example above, that means that since the participant didn't enroll by their first day of work, but did enroll within the allowable 30 day election period, the participant should be enrolled prospectively starting with the next pay period or as otherwise set out in their plan.

Prop. Treas. Reg. 1.125-1 Q/A 15

"Generally, in order for participants to avoid constructive receipt with respect to taxable benefits offered under a cafeteria plan, the taxable benefits must at no time become currently available to participants. Thus, a cafeteria plan should require participants to elect the specific benefits that they will receive before the taxable benefits become currently available. A benefit will not be treated as currently available as of the time of the election if the election specifies the future period for which the benefit will be provided and the election is made before the beginning of this period."

Prop. Treas. Reg. Section 1.125-1 Q/A 17

"Also for the purposes of this rule, medical expenses that are incurred before…the date the participant is enrolled in the plan will not be treated as having been incurred during the period for which the participant is covered under the plan."

We have also provided some insight into how the IRS thinks regarding this issue and in relation to these regulations. Mr. Harry Beker, IRS Employee Benefits Branch Chief, has informally stated that IRS officials have become aware that some cafeteria plans permit retroactive coverage in non-HIPAA situations. For example, some cafeteria plans give new hires a 30-day window to enroll retroactively to their date of hire. Mr. Beker restated his long-standing position that the regulations are very clear regarding retroactive election, and with the exception of HIPAA statutory retroactive periods for birth or adoption, ordinarily a cafeteria plan cannot permit such retroactive enrollments. However, the employer could subsidize the cost of the retroactive coverage outside of the cafeteria plan or the employee could be required to pay the extra cost with after-tax dollars outside of the cafeteria plan.

We recommend that you consult your legal counsel should you have any questions or concerns regarding retroactive elections under your cafeteria plans.

Transportation Benefits and the Readily Available Voucher Rule

Internal Revenue Code Section 132(f)(3) requires transit pass vouchers to be used as opposed to cash reimbursements where vouchers are "readily available" for direct distribution by an employer to its employees. Vouchers are considered "readily available" when an employer can obtain them on terms just as favorable as those available to the individual employees and without incurring a "significant administrative cost." The regulations also state that the employer's internal distribution costs cannot be taken into account to determine whether the "significant administrative cost" standard has been exceeded. If the employer's administrative costs do not exceed the "significant administrative cost," and the vouchers are thus available on terms just as favorable as those available to the individual employees, the employer is precluded from utilizing cash reimbursements regarding transit expenses. Effective January 1, 2004, the definition of "significant administrative cost" will change. The new definition will state that an employer has a "significant administrative cost" if the administrative cost imposed by the "fare media provider" (e.g. BART) to acquire the vouchers is more than 1% of the average annual value of the vouchers for a transit system such as a bus, train, or subway.

Under the current subjective definition, it is wise, as a plan sponsor, to make sure you have a plan that will work for you. You did your research with your attorney, broker or consultant prior to seeking out a transit reimbursement plan, but things can change quickly in relation to costs and in relation to the tax status of your cash reimbursement plan. Because of this, and because of the new definition going into effect next year, ProBusiness recommends that you review your Section 132(f) plan at least annually, before the beginning of each plan year, with your legal counsel, broker or consultant to determine if the cash reimbursement method for transit passes is still allowable in your particular geographical area based on the prices related to acquiring vouchers.

Return to Top

COBRA and the "In Anticipation" Rule

Under the final COBRA regulations effective January 1, 2000, the "anticipation-of-qualifying event" rule goes beyond events such as plant shutdowns and other types of employment terminations to include the elimination of an employee's spouse's coverage in anticipation of a divorce or legal separation.

Treas. Reg. § 54.4980B-4, Q/A-1(c) states:

"If coverage is reduced or eliminated in anticipation of an event (for example, an employer's eliminating an employee's coverage in anticipation of the termination of the employee's employment, or an employee's eliminating the coverage of the employee's spouse in anticipation of a divorce or legal separation), the reduction or elimination is disregarded in determining whether the event causes a loss of coverage."

The IRS released further clarification of the in-anticipation rule in Revenue Ruling 2002-88, released on December 30, 2002. Revenue Ruling 2002-88 clarified, among other things, that COBRA must be made available to the spouse beginning on the date of the divorce and ending up to 36 months later and that the plan is not required to offer COBRA prior to the qualifying event. A link to this document has been provided below.

http://www.irs.gov/pub/irs-irbs/irb02-52.pdf

Return to Top

HIPAA Privacy Frequently Asked Questions

In the Tech Flex released February 2003, various aspects pertinent to the services ProBusiness provides its clients were discussed in relation to HIPAA EDI and privacy. Since that release, ProBusiness has received additional questions from clients about HIPAA privacy and how these regulations will affect ProBusiness' administration of their plans. ProBusiness has addressed these questions in the document below titled "HIPAA PRIVACY Frequently Asked Questions." It is important to note, that the following communication is based on ProBusiness' analysis regarding its role as a Service Provider and is not legal advice. We strongly recommend that you seek legal counsel regarding these issues and act accordingly based on your legal counsel's guidance.

http://www.probusiness.com/clients/viproom/documents/privacy_faq_03172003.pdf

ProBusiness will continue to monitor the regulatory environment and will timely communicate to its clients and the broker community any modifications in relation to the HIPAA regulations which affects the services ProBusiness provides to its clients.

Return to Top

HIPAA Privacy Notices

Under HIPAA, covered entities are required to provide to the plan's enrollees, a notice of its privacy practice (privacy notice) in relation to protected health information (PHI). The covered entity satisfies the requirements if notice is provided to the named insured of a policy under which coverage is provided to the named insured and one or more dependents.

The regulations state that a notice must be provided as follows:

The responsibility of sending the privacy notice rests with the insurer in cases where the group plan is insured and with the group health plan sponsor in self-insured arrangements.

ProBusiness would like to again remind its Flexible Spending Account (FSA) clients, that the clients themselves are responsible for sending out privacy notices to their FSA enrollees, since the FSA's are self-insured plans. Clients' carriers are required to send out the privacy notices related to the insured plans - it would be prudent to check with your carriers to make sure the notices are being sent. ProBusiness will not be creating privacy notices for its clients' FSA or group health plans. ProBusiness may distribute the client created notices for a fee and upon appropriate amendment to the services contract between ProBusiness and the client.

Return to Top

ProBusiness Business Practices under HIPAA

The HIPAA regulations prohibit covered entities and their business associates from using or disclosing protected health information (PHI) in excess of what is permitted under the regulations. Also, outside discussing information with the individual about his or her own PHI, covered entities must adhere to the minimum necessary standard. The minimum necessary standard requires PHI to be used, disclosed and received to the minimum amount necessary to accomplish the intended purpose of the use, disclosure, or request. Generally, the HIPAA regulations allows the use and disclosure of PHI in the following circumstances:

• as required with the individual's right to access his or her own PHI;
• pursuant to the individual's authorization to release his or her PHI to an individual whose right to access PHI is not explicitly allowed under HIPAA.
• for the functions of treatment, payment and health care operations;

As a result of the regulations, ProBusiness will adhere to the following in relation to its customer services practices. Clients are encouraged to advise employees about what they should expect when contacting ProBusiness customer service units.

Return to Top

Reminder to Clients: You Must Designate HIPAA Contact Personnel

As stated in the last issue of the Tech Flex the HIPAA regulations state that covered entities must designate who within its workforce is entitled to access PHI. If ProBusiness receives an inquiry about PHI regarding one of your organization's current or former employees, spouses, or dependents, from an individual not designated by your organization as a contact person for purposes of PHI, ProBusiness will be unable to release PHI to such a non-designated individual. If you have not yet completed the form, please do so immediately and return to ProBusiness as outlined below.

Instructions:

Complete the HIPAA Client Designated Contact Person form (hipaa_designated_contact.doc, Word format, approx. 23KB). Attach a completed copy to your Plan Document and return the electronic version to BenefitsAdmin@probusiness.com or print a copy and mail or fax to the following:

ProBusiness
20000 North Creek Parkway
Bothell, WA 98011
Attn: Benefits Administration Department
FAX: 1-800-269-5231

If returning via email, your email address shall be considered your signature.

Please Note: If ProBusiness does not receive a signed HIPAA Client Designated Contact Person Form from you by April 14, 2003, ProBusiness will assume that the client contact information previously provided by your organization contains the names of those individuals authorized by your organization to discuss PHI and will continue to utilize this contact information as current until notified in writing by your organization to the contrary. In any event, it is in the best interest of your company to review the individuals you wish to include as contacts, fill out the HIPAA Client Designated Contact Person Form and submit it to ProBusiness by April 14, 2003.

Return to Top

Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (800) 269-5231
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.)

Return to Top