HEALTH & WELFARE PLAN
LUNCH GROUP
May 3, 2007
ALSTON & BIRD LLP
One Atlantic Center
1201 W. Peachtree Street
Atlanta, GA 30309-3424
(404) 881-7885
E-mail: john.hickman@alston.com
©
2007 All Rights Reserved
INDEX
Article 1 .....................What Expenses Can Be Paid From Plan Assets? Summary of
Department of Labor (DOL) Guidance
Article 2 .....................Getting Back To Basics: Health FSA Funding And ERISA Plan
Asset Requirements
Article 3 .....................Massachusetts Health Care Reform and the Cafeteria Plan Mandate
What Expenses Can be Paid From Plan Assets?
Summary of Department of Labor (DOL) Guidance
The Employee Retirement Income Security Act of 1974 (ERISA) provides that, subject
to certain exceptions, plan assets of an employee benefit plan (e.g., VEBA trust fund)
may not inure the benefit of the employer and MUST be used exclusively for one or both
of the following purposes:
1)
Providing benefits to plan participants and/or beneficiaries; and/or
2)
Defraying reasonable expenses of administering the benefit plan.
It is requirement #2 that is discussed in this summary. When making decisions as to
whether an expense is a reasonable expense of administering the benefit plan, plan
fiduciaries (i.e. the plan administrator) must act prudently and solely in the interests of
participants/beneficiaries and in accordance with the terms of the governing instruments
(i.e. trust document, plan documents and/or summary plan descriptions).
Thus, there is a two-part analysis as to whether an expense is properly payable:
1)
Is the expense payable pursuant to the terms of the governing instruments?
If no, then STOP. It is not payable from the trust. If yes, then Go to #2;
2)
Is the expense a reasonable expense of administering the plan pursuant to
Department of Labor regulations and guidance? If no, then STOP. It is
not reimbursable. If yes, then it is reimbursable.
Is the expense payable pursuant to the terms of the governing instruments?
Many plans are generally silent on the issue; fortunately, however, it is the DOL’s view
that reasonable expenses of administering the plan may be paid with plan assets if the
plan is silent on the issue (See DOL Opinion Letter 97-03). Obviously it is better to
specifically state that expenses are the obligation of the plan (to the extent not voluntarily
assume by the employer).
In any event, the plan administrator must undertake the analysis set forth in #2 above to
determine whether an expense is payable with plan assets.
Is the expense a reasonable expense of administering the plan pursuant to Department
of Labor regulations and guidance?
The general rule under DOL guidance is that reasonable expenses of administering a plan
include direct expenses properly and actually (i.e. able to be substantiated) incurred in the
performance of a fiduciary’s discretionary duties to the plan. For purposes of
determining expenses that are properly payable with plan assets, the DOL has segregated
ADMIN/20096835v1
fiduciary duties into two functions: (i) formation or “settlor” functions and (ii)
management/administrative functions. For the reasons described below, expenses
incurred in connection with settlor functions are NOT reasonable expenses of
administering the Plan.
Settlor vs. Management/Administrative Functions
Settlor functions are discretionary activities that relate to the following three types of
actions:
1)
Decisions to establish a new plan
2)
Decisions regarding plan design (except where required by law)
3)
Decisions to terminate the plan.
Settlor functions are deemed to involve services for which the employer is reasonably
expected to bear the cost in the normal course of its business.
While expenses incurred in conducting settlor activities are not properly payable with
plan assets, costs incurred in implementing settlor decisions may be reasonable expenses
of administering the plan. For example, expenses incurred to assist the employer in
deciding whether to establish a POS option vs. a PPO option with respect to a particular
plan relate to formation of a plan or plan option and/or plan design and are thus “settlor”
functions that are not reimbursable with plan assets. However, expenses incurred to
implement the employer’s decision to implement a POS over a PPO option may be
reimbursable (e.g. participant communication).
Whether such management/administrative expenses are payable with plan assets depends
on whether the expenses meet the following requirements:
Payments to Parties in Interest (e.g., claims administrators) for Expenses of
Administering the Plan
Payment of management/administrative expenses by a plan to a “party in interest” (e.g.,
claims administrators) is properly payable if the expense meets all three of the following
requirements (as set forth in ERISA Sec. 408(b)):
1)
Are the services provided by the third party pursuant to a contract or
reasonable arrangement? The contract or arrangement is not reasonable,
at a minimum, if it does not permit termination of the arrangement/contact
without a penalty to the plan on reasonably short notice (DOL Reg.
2550.408b-2(c)). Other facts may also be relevant.
2)
Are the services necessary for the operation of the Plan? A service is
necessary if the service is helpful to the plan in carrying out the purposes
-2-
ADMIN/20096835v1
for which the plan is established or maintained (D Reg. 2550.408b-2(b)).
Expenses that are not necessary for the operation of the plan are the
expenses incurred in connection with the typical settlor type functions
discussed
above;
however,
expenses
incurred
with
management/administrative functions could also be unnecessary.
3)
Is no more than reasonable compensation being paid for the services?
The analysis of whether these three conditions have been satisfied is inherently factual in
nature. As such, the plan administrator must base its decision on all of the relevant facts
and circumstances [NOTE: the DOL will not issue opinions as to whether an expense
satisfies any of the three conditions described above due to the factual nature of the
analysis. Section 5.01 of ERISA Advisory Opinion 76-1].
The DOL has begun to pay increased attention to compensation (e.g., indirect payments)
received by service providers that are related to the use of plan assets. For example,
recent investigations (and litigation) related to PBM compensation and “bundled” 401(k)
fee arrangements have brought increased focus to this issue. Soon, the Form 5500
(Schedule C) will require disclosure of such outside compensation. Plan sponsors should
inquire (perhaps require disclosure contractually) and ensure that compensation received
from all sources is reasonable in the aggregate.
Special Rules Regarding Payments to the Employer
Even if an expense is incurred in the administration of the plan and meets the three
requirements set forth in ERISA Sec. 408(b)(2), the payment of the expense from plan
assets to the employer is prohibited under ERISA if the payment constitutes self-dealing.
Section 406(b) of ERISA prohibits fiduciaries from making decisions that conflict with
the interests of the plan. Due to the control exercised by most employers over plans,
employers are almost always considered to be fiduciaries. Therefore, a decision by the
employer to use plan assets (e.g., VEBA trust fund) to reimburse itself for services
provided to the plan would generally be considered to be a self-dealing transaction
prohibited by Section 406(b). There is, however, an exception for the reimbursement of
direct expenses incurred in connection with necessary plan services.
An expense is not a direct expense to the extent it would have been sustained had service
not been provided or if it represents an allocable portion of overhead costs. Thus, the
direct costs of a fiduciary, including the plan sponsor, are generally chargeable to the plan
if such costs are incurred exclusively for the administration or maintenance of the plan
and would not have been sustained but for the service provided by the employer or its
agents. Therefore, expenses for stationery, copying, envelopes, postage, next-day air
deliveries, long distance telephone calls, or other separate and discrete expenses that are
incurred solely in the administration of the plan should be chargeable to the plan to the
extent that such expenses can be properly allocated to plan administration. However,
overhead expenses such as rent and the use of computer equipment, fax machines, or
telephone lines, which would have been incurred absent the plan’s existence, would
-3ADMIN/20096835v1
generally not be considered direct expenses. In addition, where services are performed
by an employee of the plan sponsor for two or more plans sponsored by the employer,
expenses must be properly allocated to the various plans.
Prior to seeking reimbursement for compensation, fringe benefits and other expenses
incurred in connection with providing services to the plan, fiduciaries and plan sponsors
must establish safeguards similar to those addressed in various DOL opinions and other
guidance. For example, the following procedural safeguards were noted in the various
opinions and other guidance issued by the DOL:
•
Hiring an independent consultant for advice on whether services provided
to the plan were necessary and whether the quality and charges were
equivalent to those provided by third parties;
•
Maintaining contemporaneous records that demonstrate allocation of time,
costs, and expenses attributable solely to plan administration, e.g.,
postage, long distance calls, mailings, and transportation, for verification
by outside auditors;
•
Establishing a mechanism for allocating expenses to the proper plan where
multiple plans are sponsored by the employer, and keeping records of that
allocation;
•
Hiring an independent consultant (plan auditor) to confirm the accuracy of
affected employee timekeeping and cost allocation;
•
Adopting a written policy that if the plan sponsor ceased providing
services to the plan, the plan-dedicated employees’ positions would be
eliminated and those employees would either be laid off or allowed to
compete for other open positions within the plan sponsor; and
•
Providing to the plan administrator a detailed list of the duties and names
of each employee providing services to the plan.
We have attached hereto a table of common plan expenses and an indication as to
whether such expenses are properly payable from plan assets.
-4ADMIN/20096835v1
TABLE OF COMMON EXPENSES
The following is a list of common expenses incurred in the day-to-day operation of
employee benefit plans. This table includes expenses that may be paid directly to an
unrelated third party/vendor as well as internal expenses for which the employer is
seeking reimbursement under the “direct expense” rationale outlined above.
Notwithstanding this table, all expenses should be evaluated in accordance with the DOL
guidelines before payment/reimbursement is made with plan assets.
Expense
Profit analysis/cost evaluation of various
design options.
Presentation of Plan to corporate
management.
Completion of corporate steps required to
authorize adoption of the Plan.
Drafting of initial Plan document.
Drafting trust document if separate from
Plan.
Bonding and liability insurance.
Amendments to Plan that involve settlortype functions.
Legal fees for discretionary alterations to
the Plan that are not of a fiduciary nature
and are not necessary to conform the Plan to
a change in the law and/or that serve a
“settlor function” (e.g., for economic,
employee relations, or other employer
considerations).
Amendments to Plan that involve fiduciary
functions (e.g., amendments by VEBA
trustee).
Legal fees incurred in the operation of the
Plan, such as advice on plan administration
matters, or incurred in changing or
amending the Plan to conform to new legal
requirements maintain legal compliance (as
opposed to elective plan design changes).
Plan actuary fees for work done for Plan and
not for employer.
Actuarial report with financial impact on
employer.
Plan Pays
√
√
√
√
√
√
√
√
√
√
--5-ADMIN/20096835v1
Employer Pays
√
√
Expense
Direct administrative costs of the Plan (not
overhead) incurred by employer that would
not have been incurred but for the Plan (see
below for discussion of salary and benefits
costs).
Reasonable charges made by VEBA trustee
and any unrelated third party administrator
for their services.
Expenses incurred due to provision of phone
services for the exclusive benefit of the Plan
and its participants, including the cost of
maintaining a toll-free line as well as the
cost of calls on that line.
Expenses incurred for dedicated software
and information services to the extent these
are direct costs that would not have been
incurred but for the services provided to the
Plan
Pro-rata portion of the cost of general
telephone line installation or maintenance.
Pass-through expenses such as postage and
custom forms incurred in the normal
administration of the Plan.
Out of pocket expenses, such as telegraph
wires and next-day air charges, that are
incurred in the normal administration of the
Plan.
Plan audits, provided that the expenses
charged are reasonable.1
Cost of copying, producing, and distributing
Plan documents that ERISA requires the
Plan to distribute to participants (e.g.,
summary plan descriptions and annual
statements) and documents that must be
provided upon request.
Recordkeeping, reporting, and disclosure
expenses.
1
Plan Pays
√
Employer Pays
√
√
√
√
√
√
√
√
√
Not all audits are proper plan expenses, however. See DOL/PWBA Letter of Jul. 28, 1998, which
involved a request by a multiemployer plan to use plan assets to purchase a package comprising
compliance audits linked to a specific insurance product. (“Because the contemplated audits may
confer a benefit on the employers of the employees in the plan, the trustees have a duty to ensure
that the plan’s payment for the audit is reasonable in light of the benefit conferred on the plan.”)
--6-ADMIN/20096835v1
Expense
The cost of producing and distributing
annual benefit statements made available to
each participant (e.g., spending account
statements).
Costs attributable to the benefit education of
Plan participants.
Generally, internal costs associated with
employer overhead or the compensation of
employees who provide Plan administration
but not on a substantially full-time (more
than 80% of time) basis.
Salary and benefit costs of an employee who
spends substantially all (more than 80%) of
his or her time providing services to the
Plan if such employee would not be
presently in his or her position absent the
work performed on behalf of the Plan.
Handling or investing assets (e.g., trustee,
custodial,
investment
advisory,
and
management
fees
and
brokerage
commissions).
Processing claims.
Attorney fees or IRS/DOL penalties when
plan administrator is liable.
Processing distributions.
Costs incurred in deciding to terminate Plan.
Cost incurred in actually terminating and
liquidating the Plan (e.g., communication
with participants, determining benefits, and
transferring assets).
Plan Pays
√
√
√
√
√
√
√
√
√
√
--7-ADMIN/20096835v1
Employer Pays
SELECTED PROHIBITED TRANSACTION ISSUES
INVOLVING WELFARE BENEFIT PLANS
Prohibited Transactions in a Nutshell
Party-in-Interest Transactions (ERISA §406(a)): Unless an exemption applies, fiduciaries must not cause a plan to engage in
a transaction if the fiduciary knows (or should know) that the transaction (directly or indirectly) constitutes any of the
following:
• Sale/exchange/leasing of property between the plan and a “party in interest” (e.g., service provider, employer,
employee, fiduciary, etc.)
• A loan between the plan and a party in interest
• Furnishing of goods, services, or facilities between the plan and a party in interest
• Transfer to, or use by or for the benefit of, a party in interest of any plan assets
• Acquisition, on behalf of a plan, of any employer security or real property in violation of ERISA Section 407(a).
Self-Dealing Transactions (ERISA §406(b)): Unless an exemption applies, fiduciaries must not:
• Deal with plan assets in the fiduciary’s own interest
• Act in a transaction involving the plan and a party whose interests conflict with the plan or its participants and
beneficiaries
• Receive any consideration for his or her personal account from any party dealing with the plan in connection with a
transaction involving plan assets
Identification of Plan Assets.
•
Participant contributions generally become plan assets on the earliest date they
can reasonably be segregated from the employer’s general assets, not to
exceed 90 days after being withheld from pay or contributed by the
participant.
•
Funds in a VEBA or other formal, irrevocable trust used as a funding
mechanism for the plan are, of course, plan assets. Even where the trust is a
revocable trust (i.e., a grantor trust), funds in the trust may be deemed plan
assets if employer control and discretion over the funds are not clearly
documented and communicated.
•
Insurance company reserves (e.g., premium stabilization reserve) in
connection with insured welfare benefits are generally plan assets.
•
In the context of insured welfare benefits, insurance company distributions
(even if not benefit distributions) may be plan assets, particularly where the
insurance coverage requires participant contributions. Examples include
demutualization proceeds, refunds, rebates, dividends, etc.
•
Separate bank or trust accounts that are in the name of the plan are plan assets.
Even where the separate account is in the name of a third party, it could be
deemed plan assets depending on the circumstances based upon “ordinary
notions of property rights” (e.g., prepayment reserve with a claims
administrator).
--8--
ADMIN/20096835v1
•
For plans with self-funded prescription drug programs, prescription drug
manufacturer’s rebates are generally plan assets.
Common Prohibited Transactions in Welfare Plan Contexts. The transactions
described below raise prohibited transaction concerns. Therefore, in the absence of an
exemption in ERISA (i.e., a “statutory exemption”) or a regulatory exemption by the
DOL (through a “class exemption” or through an individual exemption obtained in
advance), these transactions will in most cases subject the responsible fiduciaries to
liabilities under ERISA. (In some cases, certain non-fiduciaries involved in the
transaction may also be liable.)
•
Distribution or reversion to employer of plan assets in a trust
•
Use of experience gains in one insured benefit program to offset experience
loss in another insured program, where the two programs are not a part of the
same ERISA plan. Example, use of health FSA forfeitures to fund DCAP
administration expenses.
•
Employer retention of prescription drug manufacturer’s rebates when
prescription and PBM expenses paid for with plan assets; or service provider’s
(e.g., pharmacy benefit manager’s) retention of any portion of such rebate
without prior disclosure and review of reasonableness
•
Insurance commissions retained by the plan’s insurance broker without prior
disclosure and review of reasonableness
•
For plan sponsors who are health care providers (e.g., hospitals), offering
discounts and other incentives that may steer plan participants and
beneficiaries to utilize the plan sponsor’s health care facilities over unrelated
health care providers.
•
Where the plan sponsor has two or more funded plans, conducting certain
securities sales, exchanges or similar transactions directly between two trusts
without an independent intermediary (e.g., so as to save on fees, etc.)
•
Third party claim administrator’s retention of interest earnings – “float” –
from a reserve or conduit account from which plan benefits are paid, unless
such floats are properly disclosed, described and approved in advance
--9-ADMIN/20096835v1
Getting Back To Basics: Health FSA Funding
And ERISA Plan Asset Requirements
Health FSA administration is becoming more complex every year. For example,
the last six months brought new IRS guidance governing electronic claims processing and
expanding eligible expenses to include over-the-counter medications. With all of the
new-fangled rules, plan sponsors and third-party administrators should take care not to
lose sight of basic compliance requirements – such as ERISA’s plan asset and trust
requirements. Failure to follow the rules could result in serious consequences – Form
5500 penalties and deficiencies, fiduciary liability, and even criminal conversion claims.
This article summarizes the applicable rules, and sorts out how they apply to
traditional FSA funding approaches. A subsequent article will focus on the intricacies of
electronic payment mechanisms (e.g., ACH) and issues that may arise with facilitating
funding for electronic payment cards.
1.
SUMMARY OF ERISA REQUIREMENTS
The ERISA trust requirement (ERISA § 403) applies to all employee benefit plans
that have plan assets. A health FSA is deemed to have plan assets if it accepts participant
contributions (including salary reductions).1 Although an FSA that accepts participant
contributions has plan assets, the Department of Labor (DOL), announced in ERISA
Technical Release 92-012 that it will not enforce the trust requirement for certain
employee welfare benefit plans that would be considered “funded” solely because there
are participant contributions to the plan made through a cafeteria plan. This nonenforcement relief is not available if the employer segregates participant contributions
from the employer’s general assets (e.g., in a trust or account established in the name of
the FSA plan) or transmits plan assets to an intermediary account outside of the
employer’s general assets to pay benefits. 3
This article outlines the “trust moratorium” relief under Technical Release 92-01
and identifies common situations where a health FSA plan may be considered to pay
benefits from other than the general assets of the employer causing the FSA to fall
outside of the trust moratorium and to be subject to the trust requirement under ERISA.
For purposes of this article we assume that: i) the employer is subject to ERISA (i.e., it is
not a church or governmental entity); and ii) the funds contributed to the FSA are
employee salary reductions (or cashable employer credits). Keep in mind that certain
benefits (e.g., dependent care FSAs) are not subject to ERISA at all.
1
29 C.F.R. 2510.3-102.
57 Fed. Reg. 23272 (June 2, 1992) and 58 Fed. Reg. 45359 (Aug. 27, 1993).
3
This interpretation may work a hardship on some ACH transfer arrangements where a common funding
source (e.g., the TPA account) may be necessary or convenient. One alternative may be for the employer
or TPA to fund such ACH transfers in advance and seek plan reimbursement in arrears. Under such an
approach extra precautions must be taken to ensure that funds advanced are not comprised of employee
salary reductions. See discussion in Section 4.C. below
2
Alston & Bird
2.
ERISA TRUST REQUIREMENTS FOR PLAN ASSETS
Most health FSAs are ERISA welfare benefit plans and are subject to ERISA
unless an exemption applies, such as the exemption for government and church plans.4
Fortunately, welfare benefit plans are not subject to the funding and vesting standards
under Title I of ERISA like pension plans. As a result, an employer may maintain an
unfunded welfare benefit plan, i.e. a plan where benefits are paid solely from the general
assets of the employer. Unfunded welfare benefit plans do not have plan assets.5 This is
important, because ERISA §403 requires all employee benefit plans to hold plan assets in
trust. Thus, unfunded welfare benefit plans are not subject to the trust requirement in
ERISA §403 because they do not have plan assets.
Although “plan asset” is not statutorily defined in ERISA,6 the Department of
Labor (DOL) has published regulations clarifying that participant contributions
(including any contributions made by plan beneficiaries like covered spouses and
dependents) are always plan assets:
[T]he assets of the plan include amounts . . . that a participant or beneficiary pays
to an employer, or amounts that a participant has withheld from his wages by an
employer, for contribution to the plan as of the earliest date on which such contributions
can reasonably be segregated from the employer’s general assets.7
Where participant contributions to a health FSA are made by deductions from the
participant’s wages or pursuant to a salary reduction agreement under a cafeteria plan,
they become plan assets at the earliest date they can reasonably be segregated from the
employer’s general assets, but in no event later than 90 days from the date of withholding
from the wages or the date the contributions are paid.8 Note that under the DOL
regulations, participant contributions made to a health FSA pursuant to salary reduction
agreements are considered employee contributions even though the cafeteria plan
regulations issued by the IRS consider salary reduction amounts to be employer
contributions.9
In order to determine if assets other than participant contributions are plan assets,
the DOL has stated that plan assets are to be identified “applying ordinary notions of
property rights” and “the assets of a welfare benefit plan generally include any property .
. . in which the plan has a beneficial ownership interest.” 10 In determining if a plan has a
beneficial ownership interest, the DOL will consider contracts or other legal instruments
involving the plan (such as service agreements with TPAs) as well as the actions and
representations of the parties involved, particularly the employer. The DOL has
4
ERISA § 4(b).
29 C.F.R. § § 2520.104-44, 2520.104-20, Instructions to Form 5500, Section 1;
6
See DOL Advisory Opinion, 92-24A (Nov. 6, 1992)
7
29 C.F.R. §2510.3-102
8
29 C.F.R. §2510.3-102
9
Prop. 26 C.F.R. § 1.125-1, Q/A-6.
10
DOL Advisory Opinion 92-24A (Nov. 6, 1992).
5
-2Alston & Bird
concluded that a welfare plan had a beneficial interest in assets where the employer sets
up a separate account with a bank or third party in the name of the plan, or specifically
indicates in the plan documents or instruments that separately maintained funds belong to
the plan.11 For example, the DOL found that separately maintained funds belonged to a
plan where the plan document obligated the employer to deposit employer assets
sufficient to pay plan benefits and expenses in a separate account along with participant
contributions.12
3.
ERISA TECHNICAL RELEASE 92-01 (T.R. 92-01)
The DOL recognized that ERISA’s trust requirement presents special burdens for
sponsors of cafeteria plans and certain welfare benefit plans because such plans accept
participant contributions. As a result, the DOL issued ERISA Technical Release 92-0113
(“T.R. 92-01”), providing an “enforcement moratorium” from the ERISA trust
requirements:
In the case of a cafeteria plan described in Section 125 of the Internal Revenue
Code, the DOL will not assert a violation in any enforcement proceeding solely because
of a failure to hold participant contributions in trust. Nor, in the absence of a trust, will
the Department assert a violation in any enforcement proceeding or assess as civil penalty
with respect to a cafeteria plan because of a failure to meet the reporting requirements by
reason of not coming within the exemptions set forth in §§ 2520.104-20 and 2520.104-44
solely as a result of using participant contributions to pay plan benefits or expenses
attendant to the provision of benefits.14
Under the DOL’s non-enforcement policy, if a health FSA is part of a cafeteria
plan and makes reimbursements directly from the employer’s general assets, the plan will
not be required to hold participant contributions in trust. In addition, the DOL has also
clarified that the nonenforcement policy continues to apply even if some participants or
beneficiaries make after-tax COBRA contributions for health FSA coverage.15
In order for a health FSA to qualify for the exemption in T.R. 92-01, the health
FSA must be unfunded except for the presence of participant contributions retained in the
plan sponsor’s general assets. According to DOL, this means that participant
contributions cannot be segregated from the employer’s general assets and transmitted to
an intermediary account.16 Also, the plan documents or other instruments cannot provide
that any of the employer’s assets belong to the plan (i.e., a bank account should not be
termed the “FSA” or “plan” account) or the trust moratorium may not apply. It should be
11
DOL Advisory Opinion, 92-24A (Nov. 6, 1992)
DOL Advisory Opinion 92-24A, citing DOL Advisory Opinion 84-10 (Feb. 24, 1984).
13
57 Fed. Reg. 23272 (June 2, 1992) and 58 Fed. Reg. 45359 (Aug. 27, 1993).
14
ERISA Technical Release 92-01.
15
See the preamble to the proposed amendments to 29 C.F.R. § 2510, 61 Fed. Reg. 41223 (Aug. 7, 1996)
16
Technical Release 92-01 “does not apply to . . . participant contributions after they have been segregated
from an employer’s general assets and transmitted to an intermediary account.” Preamble to the 1998
proposed amendments to certain regulations regarding annual reporting and disclosure requirements, 63
Fed. Reg. 68374, at footnote 5 (Dec. 10, 1998).
12
-3Alston & Bird
noted that, although the trust requirement does not apply to health FSAs that meet the
T.R. 92-01 requirements, ERISA’s fiduciary rules, including the exclusive benefit and
bonding rules, continue to apply to the salary reduction contributions held in the
employer’s general assets.
4.
COMMON FSA FUNDING EXAMPLES AND WHETHER A
TRUST IS REQUIRED
While many funding variations exist for FSA benefits, we identify below several
of the more common FSA funding techniques and address ERISA’s trust requirement. At
the outset, it should noted that the DOL guidance in this area is limited, and at times
conflicting. Moreover, case law in the plan asset arena is even more limited. As a result,
each plan sponsor and administrator should consult with its own legal counsel to assess
the relative risk associated with any funding arrangement.
A.
Funding Arrangements Where The Plan Pays Benefits From
the Employer’s General Assets (No Trust Required)
Under ERISA T.R. 92-01, either of the following funding arrangements could be
utilized to fund health FSA claims without violating ERISA’s trust requirement.
Employer (or TPA) Funds Benefits From Employer General Asset Account: If
the employer reimburses health FSA claims by writing checks (or making ACH
payments) from its general asset account, the employer will not have created plan assets.
This assumes that the plan documents, and other participant communications such as the
SPD or enrollment materials do not give participants or beneficiaries the appearance that
funds held in the employer’s account are to be used exclusively for the payment of
benefits.17 In addition, the employer may contract with a third party administer (TPA) to
pay health FSA claims with funds from the employer’s general asset account by giving
the TPA check-writing (or ACH withdrawal) authority on the account. In either of these
situations, the employer does not create plan assets other than the participant
contributions.
Employer (or TPA) Funds Benefits From Conduit Account That is Part of
Employer’s General Assets An employer may also create a separate account in its name
for plan administration, and make contributions to the account from its general assets
(including participant salary reduction contributions) that will be used to pay plan
benefits. The DOL concluded that “mere segregation of employer funds to facilitate
administration of the plan would not in itself demonstrate an intent to create a beneficial
interest in those assets on behalf of the plan.” 18 However, the employer must make sure
that the account is held in the employer’s name (and not the plan’s name). Plan sponsors
should affirmatively inform employees that all reimbursements are paid out of the
employer’s general assets and that no separate fund or account secures the promised
benefits. It is important to note that in determining whether a separate account creates
17
18
DOL Advisory Opinion 92-24A, 93-14A and 94-31A.
DOL Advisory Opinion 94-31A (Sept. 9, 1994).
-4Alston & Bird
plan assets, the DOL looks at whether the assets in the account are subject to the claims
of the employer’s general creditors because the employer’s general assets are subject to
creditor claims.19 The employer may also allow a TPA to pay benefits directly from the
separate checking account by giving the TPA check writing authority over the account.
Regardless of whether the employer or TPA administers claims, the salary reduction
amounts must be retained in the employer’s general assets (albeit in a separate general
asset account).
B.
Funding Arrangements Where the ERISA Trust Requirement
Applies
DOL has indicated that any segregation of plan assets (including salary
reductions) from employer general assets may result in a loss of the ERISA trust
enforcement moratorium. Under this view, the following funding arrangements would
likely cause a plan to be considered to be “funded” and possibly violate ERISA’s trust
requirement. As noted in subsection C, below, additional steps could be taken to help
ensure that segregated funds are employer funds separate and distinct from the salary
reductions. With regard to the second arrangement (the “zero balance funding
arrangement”) the additional steps would help facilitate an argument that the arrangement
is not funded.
Employer Sends Salary Reductions to TPA for Deposit in TPA-Owned Account:
In this example, the employer uses a TPA to process benefit claims. The TPA has a
separate account in its own name. A few days after each pay period, the employer wire
transfers to the TPA’s checking account all the participant salary reductions for the health
FSA. As claims are processed, the TPA writes reimbursement checks against its own
account. If there are not enough funds in the TPA’s account to pay claims for a particular
employer, the TPA requests the employer to transfer additional funds (e.g. when large
claims are made early in the year exceeding the year-to-date participant contributions).
In this situation, the salary reduction amounts are plan assets. The employer
segregates the salary reductions from its general assets by transferring them to the
separate TPA account. This likely destroys the enforcement moratorium of T. R. 92-01
because the moratorium does not apply to participant contributions after they have been
segregated from an employer’s general assets and transmitted to an intermediary
account.20 In addition, drawing reimbursement checks on a TPA account as opposed to
an employer account may suggest to participants that there is an independent source of
funds securing payment of their benefits under the plan, which could independently give
rise to a trust requirement.
Employer Sends Salary Reduction Funds to TPA to Cover FSA Checks Issued:
Another impermissible arrangement is known as the “zero balance” TPA Account
19
20
DOL Advisory Opinion 92-01A (Jan. 17, 1992).
63 Fed. Reg. 68374, at footnote 5 (Dec. 10, 1998).
-5Alston & Bird
arrangement.21 In this arrangement, the employer uses a TPA to process benefits claims.
The TPA reimburses medical expenses submitted by health FSA participants by drawing
checks on a separate checking account in the TPA’s name. Each week, the TPA
calculates the benefit payments due under its clients’ health FSAs. It notifies each
employer how much to transfer to the TPA account to cover the reimbursement checks to
be issued for the week. The employer then transfers the necessary amount from its
general checking account consisting of salary reduction amounts and, if needed,
additional employer contributions to cover any shortfall. When the employer’s wiretransfer is complete, the TPA prepares the reimbursement checks against its account, then
signs and mails them. This arrangement is commonly known as a “zero balance” account
because the TPA account is drawn completely down each month – that is, assuming all
issued checks are cashed.
In this situation, the salary reduction amounts are also plan assets because they
have been segregated from the employer’s general assets and transferred to the TPA’s
account (albeit for the short period of time until the issued checks are presented and/or
ACH transfers completed). This likely destroys the enforcement moratorium of T. R. 9201 because the moratorium does not apply to participant contributions after they have
been segregated from an employer’s general assets and transmitted to an intermediary
account.22 While some TPAs may argue that a “zero-balance” account is essentially
“unfunded”, the limited DOL authority is contrary.23 The DOL may consider this health
FSA to be funded (and an ERISA trust required). The arrangement arguably violates the
otherwise unfunded condition, because participant contributions have been segregated
from the employer’s general assets and transmitted to an intermediary account.24
C.
Pushing the Envelope: Can Steps be Taken to Ensure
Segregated Funds Are Employer Funds ?
The key issue causing the arrangements in Section B above to be considered
“funded” was the segregation of “plan assets” from the employer’s general assets.
However, notwithstanding DOL’s best efforts, money in the employer’s hands is
fungible, and the line of demarcation between employer funds and salary reductions/plan
assets is far from clear. Could one overcome the conclusion that a health FSA is funded
(and an ERISA trust required) by arguing that the TPA is a mere claims paying agent of
the employer, and that all the monies sent to the TPA are employer monies (not
participant contributions segregated from the employer’s general assets)? At first
impression, it seems difficult to make this argument because if the health FSA is funded
21
DOL Advisory Opinion 92-24A (Nov.6, 1992). This Advisory Opinion dealt primarily with zero-balance
accounts with only employer contributions. Similar principles would apply to health FSAs with participant
contributions.
22
63 Fed. Reg. 68374, at footnote 5 (Dec. 10, 1998).
23
Technical Release 92-01 “does not apply to . . . participant contributions after they have been segregated
from an employer’s general assets and transmitted to an intermediary account.” Preamble to the 1998
proposed amendments to certain regulations regarding annual reporting and disclosure requirements, 63
Fed. Reg. 68374, at footnote 5 (Dec. 10, 1998).
24
63 Fed. Reg. 68369, at footnote 9 (Dec. 10, 1998).
-6Alston & Bird
by participant salary reduction contributions, how could one say that the monies
transferred to the TPA are anything other than participant contributions?
There may be several precautions an employer should consider to give some
substance to the argument. For example, prior to inception of the FSA arrangement (or
possibly even the beginning of a plan year) and participant salary reductions, the
employer could send the TPA employer funds to be retained in a TPA operating account
and used to facilitate claims funding. Even if subsequent funds are sent to the TPA to
replenish the operating account, the employer would merely be reimbursing itself for
funds it has advanced. If this approach is taken, the employer would need to carefully
structure its zero-balance TPA arrangement and establish special procedures for handling
participant contributions. For example, an employer could set up a separate checking
account in the employer’s name and deposit all participant salary reductions to that
account. When the TPA notifies the employer how much to wire transfer to the TPA
account to cover the reimbursement checks to be issued for the week, the employer
would wire transfer the requested amount from its general checking account (not from its
separate checking account), which arguably shows the monies sent to the TPA are
employer monies. Then the employer would seek reimbursement from the separate
account for the amount it has already paid to the TPA out of its general assets (i.e., out of
its general checking account).
Structuring the arrangement this way may preserve the argument that the relief in
ERISA T.R. 92-01 is available (and no trust required) because participant contributions
have not technically been segregated from the employer’s general assets and transmitted
to an intermediary account. Participant contributions arguably remain in the separate
employer checking account (considered part of the employer’s general assets) until
needed to reimburse the employer for amounts the employer (through its paying agent)
paid for benefits. However, the arrangement does not eliminate the concern that drawing
benefit reimbursement checks on a TPA account as opposed to an employer account, may
suggest to participants that there is an independent source of funds securing payments of
their benefits under the plan.25 If participants believe that a separate fund exists, the
perception could independently give rise to a trust requirement. An employer may be able
to overcome such improper suggestion through careful documentation and
communications to employees. So long as the employer does nothing to create or express
an intent to create a beneficial interest for the health FSA in the TPA account, and so long
as the employer takes no actions and makes no representations to lead participants and
beneficiaries of the plan to reasonably believe that funds are set aside in the TPA account
to secure the promised benefits, then the mere use of the TPA account to pay claims may
not create a trust requirement. It would be advisable to tell employees that the TPA is a
mere claims paying agent of the employer, and that all reimbursements are paid out of the
general assets of the employer, and that there is no separate fund or account that secures
the promised benefits.
25
DOL Advisory Opinion 92-24A. This Advisory Opinion dealt primarily with zero-balance accounts with
only employer contributions. Similar principles would apply to health FSAs with participant contributions.
-7Alston & Bird
Employers should, of course, consult with their legal counsel before attempting to
structure their TPA arrangement along the above lines. Some supportive DOL guidance
exists for such an approach.26 Conservative employers may be unwilling to accept the
uncertainties inherent in this restructured “zero-balance” arrangement and instead, elect
to use the arrangements described in Section A. above. Alternatively, conservative
employers that want to continue the practice of having the TPA make reimbursements
from a TPA account should seek to have the TPA set up an ERISA trust from which
reimbursements are made.27
5.
POTENTIAL RISK TO EMPLOYER
MORATORIUM IS VIOLATED
IF
THE
T.R.
92-01
If a health FSA loses the trust enforcement moratorium under T. R. 92-01
(i.e., plan assets are found not to be held in trust) the fiduciaries of the plan could be held
liable if plan assets are unavailable (or insufficient) to fund benefits. Thus, the plan
fiduciaries could be held liable in the event of the TPA’s insolvency. In addition, if the
health FSA does not qualify for the trust enforcement moratorium certain Form 5500
reporting and disclosure exemptions would be lost. More specifically, health FSAs with
fewer than 100 participants must file Form 5500s (where no return would be required for
a compliant plan) and health FSAs with 100 or more participants must submit audited
financial statements with the plan’s Form 5500. Thus, in addition to a possible violation
of the trust requirements, the employer could face additional failure to file Form 5500s
penalties (up to $1,100 per day).
26
In fact, recent DOL guidance seems to accommodate a more aggressive approach whereby an
intermediary account may be used to handle the “float” associated with payments made by check. See
DOL Field Assistance Bulletin 2003-2. http://www.dol.gov/ebsa/regs/fab_2002-3.html
27
Note that it is permissible for a TPA to hold the assets of two or more employee welfare benefit plans in
a commingled trust provided that a separate accounting of the interests of each plan is maintained in order
to avoid violating the exclusive benefit rule by using assets of one plan to pay benefits or expenses in
connection with another. DOL Advisory Opinion 81-62A.
-8Alston & Bird
Massachusetts Health Care Reform and the Cafeteria Plan Mandate
In 2006, Massachusetts passed the Massachusetts Health Care Reform Act ("the
Act"), a sweeping healthcare reform effort that imposes new responsibilities on
individuals, employers, health plans and state agencies alike. The Act is far-reaching—its
mandates apply not only to Massachusetts employers, but also to out-of-state employers
that have 11 or more employees working in Massachusetts, even if those employees are
not Massachusetts residents.
Among the new responsibilities for certain employers is the requirement to
establish a cafeteria plan pursuant to Section 125 of the Internal Revenue Code (the
"Code") by July 1, 2007, or face penalties. On March 20, 2007, Massachusetts'
Commonwealth Healthcare Connector Authority (the "Connector") issued an emergency
regulation detailing the employer requirements regarding the establishment of a cafeteria
plan (the "Regulation").1 Generally, the requirements will not be too burdensome for
employers that already have a cafeteria plan in place, and the Regulation does not
mandate that employers make any contributions toward cafeteria plan funded benefits.
The most onerous aspect of this Regulation for employers that currently have cafeteria
plans is the requirement to file their plan document with the Connector— by July 1, 2007
for employers with 11 or more "full-time equivalents." A cafeteria plan that does not
comply with the Regulation must be amended prior to the July 1 filing deadline.
Conceivably, there could be an ERISA preemption challenge to the filing requirement -but such a challenge could take years to make its way through the courts, and it is unclear
whether it would be successful since this is merely a filing requirement.
Employers that Must Comply with the Regulation
The cafeteria plan requirement is only applicable to employers that are
determined to be "151F Employers" under the Regulation (the Massachusetts code
section that sets forth the cafeteria plan mandate is M.G.L. c. 151F). 151F Employers are
those that had 11 or more "full-time equivalents" (see below for details on this formula)
working in Massachusetts from April 1, 2006 through March 31, 2007 (the
"Determination Period"). Employers that meet this definition will become "151F
Employers" effective July 1, 2007 (the "Effective Date"). Subsequent Determination
Periods will run from July 1 through June 30 of the following year. Accordingly, if an
employer determines that it was not a "151F Employer" based on the initial
Determination Period, it does not have to revisit the issue until July 1, 2008, when it will
look back on the period from July 1, 2007 through June 30, 2008 to determine whether it
had 11 or more fulltime equivalents. The Effective Date of 151F Employer status for
subsequent periods is October 1 following the applicable Determination Period.
1
The Connector subsequently issued a handbook about the 125 plan requirement for employers. A copy
can be obtained at http://www.mass.gov/Qhic/docs/section125_handbook.pdf (last visited May 2, 2007),
and will likely also be available at www.MAhealthconnector.org once that website is launched. The
handbook includes a copy of the Regulation along with a sample plan document.
ADMIN/20097078v1
The Regulation provides an exception from the cafeteria plan requirement for
certain employers, even after an employer has 151F Employer status. An employer will
not be considered a 151F Employer for each month the employer provides medical
coverage to all of its employees (presumably, this means only the Massachusetts
employees) and the employer pays the full monthly cost of that medical coverage. The
Regulation provides that this exemption no longer applies as soon as the employer ceases
to provide medical coverage or ceases to pay the full monthly cost of the coverage, and
151F status will be re-determined on the following July 1.
Employees that Must Be Counted for Determining 151F Status
Employees, for purposes of determining whether the employer is a 151F
Employer, include full-time employees, part-time employees, temporary employees,
certain leased employees (see discussion below) and seasonal employees, regardless of
whether the employees are subject to a collective bargaining agreement. Employees also
include individuals who are considered self-employed for benefit plan purposes under
Internal Code § 401(c); independent contractors are excluded. Although these employees
must be counted for purposes of the 151F Employer formula, not all of these employees
actually need to be offered coverage under the cafeteria plan (employees that may be
excluded from coverage are discussed below).
The Regulation makes it clear that an "employee" is "any individual employed by
any employer at a Massachusetts location, whether or not the individual is a
Massachusetts resident." There is currently no guidance available regarding questions
that may be raised by telecommuting to a Massachusetts location from outside the state,
or technically being employed at a Massachusetts location even though most work may
be performed outside the state.
In order to determine whether an employer has 11 full-time equivalents for
purposes of the Regulation, the employer must add all payroll hours for the
Determination Period for each employee (not to exceed 2,000 hours for any one
particular employee) and divide the total by 2,000. If the result is 11 or more, then the
employer is a "151F Employer."
Generally, leased employees will ultimately be the responsibility of the entity
leasing the employees if a co-employment arrangement exists between the employer and
the leasing company. The Regulation does permit the employer and leasing company to
contractually allocate to the leasing company the responsibility to adopt and maintain a
cafeteria plan for the benefit of the co-employed leased employees; however, the
Regulation specifically states that if the leasing company fails to comply with any such
agreement, the employer leasing the employees will be responsible for compliance with
the Regulation.
Section 125 Cafeteria Plan Requirements
The Regulation's requirements are generally in line with the Internal Revenue
Service's (IRS) requirements for cafeteria plans, mandating that all cafeteria plans satisfy
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applicable IRS Code § 125 requirements, any applicable U.S. Treasury Department
rulings, regulations and guidance, as determined by the IRS. The cafeteria plan must
consist of a written plan document (which may be a separate, stand-alone document or
combined with other employer-provided plans) containing at least the following six
elements:
1.
a specific description of each of the benefits available under the plan,
including the periods during which the benefits are provided. The benefit
description need not be self-contained; descriptions in other separate
written plans may be incorporated by reference into the plan document;
2.
the plan's eligibility rules regarding participation;
3.
the procedures governing participant elections under the plan, including
the period during which elections may be made, the extent to which
elections are irrevocable, and the periods with respect to which the
elections are effective;
4.
the manner in which employer contributions (which are not required) may
be made to the plan, such as by salary reduction agreement between the
participant and employer or by non-elective employer contributions to the
plan;
5.
the maximum amount of elective employer contributions available to any
participant under the plan either by stating the maximum dollar amount or
maximum percentage of compensation that a participant may contribute,
or by stating the method for determining the maximum amount or
percentage; and
6.
the plan year on which the cafeteria plan operates.
In addition to the requirements above, the Connector has also added some of its
own requirements for the cafeteria plan:
•
Premium Only Plan. A cafeteria plan must, at a minimum, be a premium only
plan offering access to one or more medical care coverage options in lieu of
regular cash compensation. Cafeteria plans that function as flexible spending
accounts only, or as premium only plans offering access to benefit options that do
not include access to any medical care coverage options, will not satisfy the
Premium Only Plan requirement. Flexible spending accounts are not required to
be offered as a coverage option.
•
Waiting Periods. An employer can include an eligibility waiting period of up to
two months in its cafeteria plan so long as the waiting period does not exceed the
waiting period for enrollment in medical care coverage options available under
the cafeteria plan (waiting periods for enrollment in medical care coverage
options available under the cafeteria plan can be longer than 2 months). For
employers that are 151F Employers as of July 1, 2007, the eligibility waiting
-3-
ADMIN/20097078v1
period may be extended to no later than September 1, 2007 with respect to
employees that are employed on July 1, 2007.
•
Election Periods. An eligible employee must be offered participation in the
cafeteria plan during any applicable election period provided for in the cafeteria
plan document, without regard to whether the employee was previously eligible or
had previously waived participation in the plan during any prior election period.
•
Excludable Employees. A 151F Employer may specifically exclude the following
classes of employees from participation in the cafeteria plan (but note that these
employees must still be counted for purposes of determining an employer's 151F
status):
o employees who are less than 18 years of age;
o temporary employees;
o part-time employees working, on average, fewer than 64 hours per month;
o employees who are considered wait staff, service employees or service
bartenders and who earn, on average, less than $400 in monthly payroll
wages;
o student employees who are employed as interns or as cooperative
education student workers; and
o seasonal employees who are international workers with either a U.S. J-1
student visa, or a U.S. H2B visa and who are also enrolled in travel health
insurance.
Health care coverage options made available under the employer’s cafeteria plan
can include those offered through the Connector, but this is not a requirement; however,
employers that do make such coverage available can be sure that the coverage complies
the requirements under the Act.
The cafeteria plan can cover employees of two or more 151F Employers so long
as the employers are related to one another. Additionally, a 151F Employer can have
more than one cafeteria plan document, including a plan established solely for employees
not otherwise eligible for the 151F Employer’s subsidized medical care coverage options,
such as part-time employees or employees that do not work at a Massachusetts location.
Reminder Regarding the Act’s Penalties: Free-Rider Surcharge and the Fair Share
Contribution
Employers are subject to two types of penalties under the Act: the "Free-Rider
Surcharge" and the "Fair Share Contribution." While establishing a cafeteria plan will
prevent the employer from being subject to a "Free-Rider Surcharge,", the employer may
still be subject to making a "Fair Share Contribution" (capped at $295 per employee, but
-4ADMIN/20097078v1
subject to annual adjustment) if the employer does not make a "fair and reasonable"
premium contribution toward its employees' health coverage. A detailed discussion of the
Free-Rider Surcharge and Fair Share Contribution are beyond the scope of this bulletin,
but a brief description of each is provided.
Free-Rider Surcharge. An employer may be subject to the Free Rider Surcharge
if:
•
the employer has more than 10 employees;
•
employees or their dependents received "state-funded health services";
•
these employees were not offered a cafeteria plan that meets the
Regulation; and
•
these "state-funded health services” are at least $50,000 in one hospital
fiscal year.
If an employer adopts and maintains a cafeteria plan that covers all its
Massachusetts employees, then the employer is not subject to the Free Rider Surcharge.
An employer is not subject to the Free Rider Surcharge for those employees who are
covered by certain collective bargaining agreements, nor for those employees who
participate in the state’s Insurance Partnership program.
Fair Share Contribution. An employer must make a "fair and reasonable"
contribution toward the cost of its employees' health coverage in order to avoid paying a
Fair Share Contribution of up to $295 per employee. An employer generally will be
deemed to have a "fair and reasonable contribution" if 25% or more of its Massachusetts
employees (which can include non-Massachusetts residents) are enrolled in its health
plan (this is the "Primary Test"). If the employer does not pass the Primary Test, it can
pass the "Secondary Test" if it contributes at least 33% of the cost of the premium to
employees who have been employed 90 days or more. The first testing period for the fair
share contribution is October 1, 2006 through September 30, 2007. Enrollment data and
employer contribution data from that time period is what will be used to run the tests. If
the employer passes either test, it will not have to make a fair share contribution.
Establishing and Filing the Cafeteria Plan
Employers that will be establishing a cafeteria plan for the very first time must do
so no later than the date the employer becomes a 151F Employer (referred to above as the
"Effective Date"). For employers that had 11 or more employees between April 2006 and
March 2007, the Effective Date is July 1, 2007. For employers who do not become 151F
Employers until a subsequent year, October 1 following the applicable Determination
Period will be the Effective Date. The effective date of the written cafeteria plan
document must be no later than the date the Employer became a 151F Employer.
In addition to establishing the cafeteria plan, a copy of the plan must be filed with
the Connector by the 151F Employer's Effective Date. The Connector is responsible for
-5ADMIN/20097078v1
establishing the form and manner of the filing submission, but as of yet no formal
submission guidelines are available. Other guidance issued by the Connector has
indicated that once the filing requirements are finalized, information will be posted on the
Connector's website at www.MAhealthconnector.org (note that as of May 2, 2007, this
website had not yet been launched). The employer will be required to designate someone
authorized to verify and certify the accuracy of the documentation submitted. Only
cafeteria plans that include employees employed at a Massachusetts location are subject
to this filing requirement; any other cafeteria plan maintained by the employer need not
be filed.
Conclusion
Employers that already have cafeteria plans need only file the plan document with
the Connector. As stated above, the Connector has not yet released submission guidelines
or forms for this purpose, but is expected to do so soon. In the meantime, employers that
expect to be deemed 151F Employers should be reviewing their cafeteria plan for
complete compliance with the Regulation (and Code § 125 requirements) in order to
make any necessary amendments in advance of the July 1, 2007 filing deadline.
-6ADMIN/20097078v1