Employers face several tricky issues in coordinating group health plan coverage with Medicare.

The Medicare Secondary Payer rules, COBRA interaction with Medicare, special enrollment periods for Medicare after termination, Part D creditable coverage status, and how Medicare affects HSA eligibility are all examples where employers should be versed in Medicare issues.

This session of Newfront Office Hours covers the Medicare issues related to group health plans that all employers should consider. 

How the MSP rules apply to active coverage vs. COBRA/retiree coverage

The prohibited incentives to encourage employees to enroll in Medicare

When Medicare cuts short and expand the COBRA maximum coverage period

How the new COBRA notices help inform employees of Medicare-related concerns

Why Medicare-eligible retirees should generally enroll in Medicare upon retirement

The employer responsibilities with respect to Part D creditable coverage disclosures

How Medicare affects HSA eligibility—including where employees can lose eligibility retroactively

https://pages.newfront.com/WBN2022-12-06OfficeHoursMedicareforEmployers_LP-Registration.html

As California goes, so does the nation. As the fifth largest economy on the planet, California sets the tone and tempo for the rest of the country - quite often the world. As such, it is important to analyze why AB257 has garnered so much attention, especially due to its possible far-reaching implications beyond the Golden State and for all business owners. 

There are a number of issues that have been challenging the restaurant industry as of late including COVID, inflation, the dramatically rising cost of protein, produce, paper goods, and labor shortages, just to name a few.  Now there is a new challenge on the horizon, the Fast Recovery Act, signed by California Governor Gavin Newsom on September 5, 2022. 

Beginning January 1, 2023, a council will be established consisting of workers, corporate representatives, franchises, and state officials tasked with setting industry minimum wages, working hours and other conditions.  The law will apply to workers who are employed by fast food restaurants with at least 100 locations nationwide.  The minimum wage for groups at this size could rise as high as $22 next year, currently minimum wage is $15 an hour in California, with annual increases on the cap tied to inflation.

Many franchise owners are vehemently opposed to the bill as it significantly increases the cost to do business in the state, upends the franchise business model, and allows for a council of 10 unelected political appointees to run the fast-food restaurant industry. The act has an intended consequence of making the big box retailer responsible for reported wage theft instead of the individual franchise owner; similar to legislation that was passed previously in the garment industry. Ultimately, this could potentially result in the franchisee becoming an employee of the larger corporation instead of being an independent business owner. 

Alternatively, Union proponents argue that the fast-food industry is rife with labor violations and 85% of fast-food workers in California are experiencing wage theft, with 57% of workers experiencing multiple forms of wage theft. Per their estimates, approximately 425,000 workers are not being compensated correctly. Further, they argue, that the current model of franchise owners does too much to protect the global big box brand and often siphon off profits to evade liability. 

Regardless of which side of the argument you fall on, and with labor costs running between 20-30% of gross revenue, this can be a significant increase to the cost base with the inevitable result of food price increases and of course, cost to customers. With a recession looming, there are questions about how much can be absorbed with price increases.  Current estimates range from 2.3% to 20%.  It may appear, at first glance, that if you are under that 100-store mark this may not affect you, but it will as you will now be competing for employees earning a higher wage somewhere else.

There are definitive implications to the workers compensation marketplace, which is rated on payroll so an increase in wages translates into an identical increase in premium. For example, San Diego minimum wage is going from $15 per hour to $16.25 on January 1, which corresponds to an 8.3% increase in direct labor costs, but also an 8.3% increase in your workers compensation basis.  If you are subject to the FAST act, and your wages land on $22 an hour, that increase is 47%.

The council will also have the ability to establish new safety standards for workers which will require additional compliance issues for the employer.

Make certain handbooks are up to date, you have proper training in place, scheduling policies, and timekeeping.  

Either obtain or maintain an Employment Practices Liability insurance policy to protect yourself against allegations of discrimination, harassment, retaliation and more.  

Make a general review of all your cost centers to identify and moderate any waste in an effort to offset increase in labor costs.

Research technology: the tools available to the fast-food restaurant are constantly growing, such as kiosks and automated frying technology.

Stay informed. Restaurant groups and associations, such as the California Restaurant Association (CRA), are great resources for information for navigating the intricacies and evolution of the bill.  

In conclusion, AB 257 will impose an additional strain to the fast-food industry already plagued with challenges.  With a little planning and that incredible resilience I have come to know from the fast-food industry, the industry can continue to thrive.  Reach out to your trusted advisors now, in the insurance industry or otherwise, to start planning for all of the changes coming this January.

Beginning January 1, 2023, a council will be established consisting of workers, corporate representatives, franchises, and state officials tasked with setting industry minimum wages, working hours and other conditions for food service workers in California.

Fast Recovery Act (AB257): Facing $22 Minimum Wage in California Food Service

Question: What are the main employer considerations when responding to employee requests to make an election change after the end of the employer’s open enrollment deadline but before the start of the plan year?

Short Answer: The Section 125 cafeteria plan rules allow employers to permit election changes all the way through the last moment before the start of the new plan year.  However, because of the ERISA plan precedent concerns and administrative challenges, employers should at a minimum consider imposing a hard outer deadline sufficiently in advance of the start of the plan year to process elections. 

Note: This is the eighth in a ten-part series addressing employee health plan exception requests.

Part I: Mid-Year Enrollment Requests Outside of Permitted Election Change Event

Part II: Ineligible Part-Time Employee Enrollment Exception Requests

Part III: New Hire Exception Requests to Enroll Prior to Satisfying the Plan’s Waiting Period

Part IV: Independent Contractor Exception Requests to Enroll Non-Employees in the Health Plan

Part V: Employee Exception Requests to Enroll an Ineligible Dependent

Part VI: Specialty HRAs Address Requests for Employer to Reimburse Health Expenses

Part VII: Correcting Erroneous Elections Under the IRS Doctrine of Mistake

General Rule: Section 125 Cafeteria Plan Irrevocable Election

Employees’ elections to pay the employee-share of the premium for health and welfare plan coverage on a pre-tax basis or make pre-tax FSA contributions are governed by Section 125 of the Internal Revenue Code. The Section 125 cafeteria plan rules are very strict when it comes to the irrevocability of employees’ elections. 

That general rule under Section 125 is that all pre-tax elections (including an affirmative or default election not to participate) must be: 

a)    made prior to the start of the plan year, and

b)    irrevocable for the plan year unless the employee experiences a permitted election change event.

The permitted election change events are set forth in Treas. Reg. §1.125-4 (e.g., marriage, divorce, birth, adoption, change in employment status affecting eligibility). 

 For an overview of these events: Newfront Section 125 Permitted Election Change Event Chart.

For more details on everything related to cafeteria plans, see our Newfront Office Hours Webinar: Section 125 Cafeteria Plans.

The Open Enrollment Period: Set at Employer’s Discretion 

Employers need to hold an open enrollment period annually because the Section 125 cafeteria plan rules do not permit elections to remain irrevocable beyond the standard 12-month plan year, the ACA employer mandate rules require ALEs to provide an effective opportunity to elect to enroll at least once per plan year, and to satisfy basic employee expectations of the ability to change plan options each year.

However, the Section 125 cafeteria plan rules do not specify any period during which an employer is required to offer its open enrollment for the next plan year, nor do ERISA or other applicable law.  The only requirement is that the open enrollment period end before the start of the plan year, upon which employee elections become irrevocable.

In theory, employers could therefore hold open enrollment periods that extend all the way until the last moment before the start of the new plan year.  For a calendar plan year, employers could quite literally rely on the Times Square New Year’s Eve ball drop countdown to conclude open enrollment.

The reason employers uniformly end their open enrollment period well in advance of the start of the plan year therefore is not to satisfy a compliance requirement, but for administrative purposes.  If employers permitted employees to make election changes all the way through the last day of the current plan year (i.e., through December 31 for a calendar plan year), it would be very difficult to implement their elections prior to the start of the next plan year.

Post Open Enrollment (But Pre-Plan Year) Election Change Requests: ERISA Considerations 

ERISA requires that employers administer and maintain the plan pursuant to its written terms. Within this framework, employers should not make exceptions to the plan terms because doing so could be considered a breach of fiduciary duty.  Rather, employers can exercise their discretionary authority to interpret plan terms.  Employers that permit election changes after the close of the plan’s open enrollment period have therefore interpreted the plan’s terms to be flexible enough to accommodate the post-open enrollment elections.

This expanded interpretation of the plan’s terms to permit the election after the open enrollment period has ended effectively acts in the same manner as a plan amendment because the employer must apply that approach consistently for all similarly situated employees.  For example, assume an employer’s open enrollment period for a calendar plan year ends November 15.  An employer permitting an employee to make post-open enrollment elections on November 30 would generally have to accommodate the same requests from all other eligible employees making the same types of requests.

To summarize: Allowing a post-open enrollment election change will create an ERISA plan precedent requiring the plan to permit the post-open enrollment elections for all employees in similar circumstances.  An employee denied the ability to make a post-open enrollment election in similar circumstances would have a potential claim for ERISA breach of fiduciary duty or claim for benefits.

For more details: Newfront Office Hours Webinar: ERISA for Employers.


Post Open Enrollment (But Pre-Plan Year) Election Change Requests: Best Practices 

Employers have two best practice options for handling post-open enrollment (but pre-plan year) election change requests:

1.    Enforce the end of open enrollment as a hard deadline after which no employees may change their elections without experiencing a permitted election change event.  This approach maximizes the administrative convenience of the employer by preserving the intent of the designated open enrollment period; or 

2.    Permit post-open enrollment changes with a hard outer limit (prior to the start of the plan year) after which the employer will not accept any other post-open enrollment election changes without experiencing a permitted election change event—regardless of the circumstances.

An example of a hard outer limit under the second approach for a calendar plan year would be to accept election changes made no later than December 15.  That approach would ensure the ERISA plan precedent established is managed in a manner to still provide sufficient time for the employer to timely implement all elections for the new plan year.

What Happens Once the Plan Year Starts? Multiple Issues Related to Mid-Year Exceptions

Once the plan year begins, there are multiple issues for employers to consider upon receiving a request to change pre-tax elections mid-year outside of a permitted election change event or after the end of the (typically 30-day) window upon experiencing a permitted election change event.

Among the primary concerns are that if an employer’s cafeteria plan were to permit employees to make any mid-year (i.e., after the start of the plan year) pre-tax election changes without experiencing a permitted election change event, or after the close of the plan’s election change timing window (typically 30 days), the plan would violate the irrevocable election rule.  

In this scenario, the Section 125 rules provide that the IRS could cause the entire cafeteria plan to lose its tax-advantaged status (i.e., lose the safe harbor from constructive receipt) if discovered on audit.  That could result in all elections becoming taxable for all employees.

For more details: Addressing Mid-Year Enrollment Requests Outside of a Permitted Election Change Event

In some rare circumstances, the IRS informal “doctrine of mistake” may apply to permit a late election change after the plan year has started.  This requires “clear and convincing evidence” of a mistaken election, which is a very high bar to clear.

For more details: Correcting Erroneous Elections Under the IRS Doctrine of Mistake.

Although employers make best efforts to communicate the plan’s designated open enrollment period as the time for employees to set their elections for the upcoming plan year, employees frequently request an exception to enroll or otherwise change an election after the open enrollment period has closed.  Employers should consider either enforcing the open enrollment period as the only available timeframe to make elections for the new plan year, or enforcing a hard outer deadline following open enrollment after which they will not accept any post-open enrollment (but pre-plan year) election changes.

In determining the appropriate course, employers should keep in mind that the approach must preserve the administrative ability to timely implement employees’ elections by avoiding establishment of an impracticable plan precedent. 

(i) In general. If the cafeteria plan fails to operate according to its written plan or otherwise fails to operate in compliance with section 125 and the regulations, the plan is not a cafeteria plan and employees' elections between taxable and nontaxable benefits result in gross income to the employees.

(ii) Failure to operate according to written cafeteria plan or section 125. Examples of failures resulting in section 125 not applying to a plan include the following—

(A) Paying or reimbursing expenses for qualified benefits incurred before the later of the adoption date or effective date of the cafeteria plan, before the beginning of a period of coverage or before the later of the date of adoption or effective date of a plan amendment adding a new benefit;

(B) Offering benefits other than permitted taxable benefits and qualified benefits;

(C) Operating to defer compensation (except as permitted in paragraph (o) of this section);

(D) Failing to comply with the uniform coverage rule in paragraph (d) in §1.125-5;

(E) Failing to comply with the use-or-lose rule in paragraph (c) in §1.125-5;

(F) Allowing employees to revoke elections or make new elections, except as provided in §1.125-4 and paragraph (a) in §1.125-2;

(G) Failing to comply with the substantiation requirements of § 1.125-6;

(H) Paying or reimbursing expenses in an FSA other than expenses expressly permitted in paragraph (h) in §1.125-5;

(I) Allocating experience gains other than as expressly permitted in paragraph (o) in §1.125-5;

(J) Failing to comply with the grace period rules in paragraph (e) of this section; or

(K) Failing to comply with the qualified HSA distribution rules in paragraph (n) in §1.125-5.

(a) Rules relating to making and revoking elections.

(1) Elections in general. A plan is not a cafeteria plan unless the plan provides in writing that employees are permitted to make elections among the permitted taxable benefits and qualified benefits offered through the plan for the plan year (and grace period, if applicable). All elections must be irrevocable by the date described in paragraph (a)(2) of this section except as provided in paragraph (a)(4) of this section. An election is not irrevocable if, after the earlier of the dates specified in paragraph (a)(2) of this section, employees have the right to revoke their elections of qualified benefits and instead receive the taxable benefits for such period, without regard to whether the employees actually revoke their elections.

(2) Timing of elections. In order for employees to exclude qualified benefits from employees' gross income, benefit elections in a cafeteria plan must be made before the earlier of—

(i) The date when taxable benefits are currently available; or

(ii) The first day of the plan year (or other coverage period).

(4) Exceptions to rule on making and revoking elections. If a cafeteria plan incorporates the change in status rules in §1.125-4, to the extent provided in those rules, an employee who experiences a change in status (as defined in §1.125-4) is permitted to revoke an existing election and to make a new election with respect to the remaining portion of the period of coverage, but only with respect to cash or other taxable benefits that are not yet currently available. See paragraph (c)(1) of this section for a special rule for changing elections prospectively for HSA contributions and paragraph (r)(4) in §1.125-1 for section 401(k) elections. Also, only an employee of the employer sponsoring a cafeteria plan is allowed to make, revoke or change elections in the employer's cafeteria plan. The employee's spouse, dependent or any other individual other than the employee may not make, revoke or change elections under the plan.

(1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.

(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.

Reviewing the main employer considerations when responding to employee requests to make an election change after the end of the employer’s open enrollment deadline but before the start of the plan year.

Addressing Employee Health Plan Exception Requests: Part VIII

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Fast Recovery Act (AB257): Facing $22 Minimum Wage in California Food Service

Addressing Employee Health Plan Exception Requests: Part VIII

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Newfront for Employee Benefits

Newfront for Private Clients

Connect with us.

Latest Articles

Upcoming Event

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Addressing Employee Health Plan Exception Requests: Part VIII

Office Hours: Medicare for Employers

You ‍
deserve ‍

a ‍
better ‍
insurance ‍
experience. ‍

Fast Recovery Act (AB257): Facing $22 Minimum Wage in California Food Service