The Department of Labor (“DOL”) posted new model notices on its website which employers may use to satisfy notice obligations under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), along with a short series of FAQs regarding the model notices.  The main changes to both the general and the election model notices clarify the interaction between Medicare and COBRA.  A newly inserted paragraph does not reflect any changes in the law, but provides more information to employees about when they can enroll in Medicare and under what conditions enrolling in Medicare can terminate COBRA coverage.
In particular, the DOL notes that employees who become eligible for Medicare while they are working may enroll immediately, or they may delay enrollment to an eight-month special enrollment window that starts at the earlier of 1) the date that the employee’s employment terminates, or 2) the date that the employee’s group health plan coverage through the employee’s employment terminates (which would include COBRA coverage). 
If an employee terminates employment, elects COBRA coverage, and delays signing up for Medicare for at least eight months after termination, the employee may be subject to a Part B late enrollment penalty and/or a gap in coverage when the employee eventually signs up for Part B Medicare coverage.  If an employee elects Medicare coverage while receiving COBRA coverage, the employer’s group health plan may terminate the employee’s COBRA coverage. 
However, if an employee is already enrolled in Medicare Part A or B before the date that the employee enrolls in COBRA, then COBRA coverage does not terminate on account of the Medicare enrollment.  The DOL also notes that Medicare will generally pay first (i.e., will be the primary payer) and COBRA will pay second when both Medicare and COBRA cover the same health expenses.
Key Takeaway
Even though the DOL updated the COBRA notices, the sample notices have been and continue to remain deficient in many areas.  Further, the DOL has made it abundantly clear that use of the notices are not mandatory, but would be considered good faith compliance – except only by the DOL.  Because qualified beneficiaries have an independent right to sue under ERISA for COBRA violations, the recent trend in COBRA notice litigation will not be affected.  Use of the DOL COBRA notices does not insulate a plan sponsor from becoming a target of COBRA notice litigation. 
If a plan sponsor has undergone furloughs, the threat of COBRA notice litigation will only increase due to the larger number of outstanding notices and the larger number of potential plaintiffs.  This puts more pressure on plan sponsors to properly review and vet their COBRA notices.

A former employee says that he and others did not receive proper notice of the Consolidated Omnibus Budget Reconciliation Act (COBRA) in a newly filed Best Buy class action lawsuit.  Lead plaintiff Daniel Pruitt alleges in his complaint that in order to save money paying for insurance coverage for former employees, Best Buy failed to provide proper notice.  Pruitt claims that this failure is a violation of federal employment law, specifically the Employee Retirement Income Security Act of 1974 (ERISA).  According to the Best Buy class action lawsuit, Pruitt is a former employee who elected into the company’s health plan. Upon his separation from employment, he received a COBRA notice. However, Pruitt says that when he received the COBRA notice from Best Buy, he was confused because of the lack of required information.  According to the complaint, Best Buy provided some information about employees’ rights to continue health insurance coverage. However not all the required information was present, which resulted in confusing and misleading workers.

Pruitt says the company’s failure to include all required information resulted in his inability to elect COBRA continuation of his health insurance coverage through Best Buy. As a result, he says he lost coverage and incurred additional health care costs.  “Best Buy, the plan sponsor and plan administrator of the Best Buy Health and Welfare Plan (‘Plan’), has repeatedly violated ERISA by failing to provide participants and beneficiaries in the Plan with adequate notice, as prescribed by COBRA, of their right to continue their health coverage upon the occurrence of a ‘qualifying event,’” states the Best Buy class action lawsuit.  Best Buy’s COBRA notice omits several important pieces of information, alleges the complaint. These items include an address indicating where COBRA payment should be mailed. Further, plan administrators are not identified.
“Defendant’s COBRA enrollment notice merely directs plan participants to a ‘catch-all’ general H.R. phone number to enroll in COBRA, and website, operated by a third-party disguised as Best Buy’s HR department, rather than explaining how to actually enroll in COBRA,” alleges the Best Buy class action lawsuit.  In addition, the notice does not include information about how people who claim COBRA benefits can lose their benefits. The notice allegedly fails to provide all required explanatory information required by law.

Just so you know, Benefit Services by MoneyWise Solutions, Inc. only uses the DOL (U.S. Department of Labor) Model Notices in our letter productions when available.  Here is why.

​In a growing wave of class action lawsuits, plaintiffs are targeting employers who have allegedly failed to provide proper notice of health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).  The wave prompted at least six new lawsuits in 2019 alone, and some have already netted seven-figure settlements.  To avoid this litigation trend, employers should take a hard look at their COBRA notices to ensure they comply with governing regulations.

COBRA requires employers who sponsor group health plans to allow plan participants to continue coverage at their own cost when a “qualifying event” occurs that would otherwise terminate coverage.  29 U.S.C. § 1161(a).  The most common “qualifying event” is termination of employment, but there are several others, including the death or divorce of a covered employee.  Under COBRA, plan administrators must provide an individual with notice of the right to continued COBRA coverage (a) when the individual first joins the plan and (b) when a qualifying event occurs.  29 U.S.C. § 1166(a).

That COBRA notice must explain the right to continue coverage “in a matter calculated to be understood by the average plan participant.”  29 C.F.R. § 2590.606-4(b)(4).  Federal regulations specify 14 items that the notice should include—for example, an explanation of how to enroll in COBRA.  29 C.F.R. § 2590.606-4(b)(4)(i)-(xiv).  In addition, the Department of Labor (“DOL”) has published a model COBRA notice.  Use of the DOL model notice “is not mandatory.”  29 C.F.R. § 2590.606-4(g).  But according to DOL official publications, use of the model notice represents “good faith compliance with COBRA’s general notice content requirements.”

The recent wave of class action lawsuits challenges whether employers’ COBRA notices were sufficient.  While the precise allegations differ, the plaintiffs generally allege that the notice they received did not include all the information set forth in the regulations or in the DOL’s model notice, and that the average plan participant could not understand the notice.

​Failure to comply with COBRA’s notice requirements can be costly, especially in the context of a class action.  COBRA provides a statutory penalty up to $110 per day per person for failure to provide the required notices.  29 U.S.C. § 1132(c)(1).  The penalty adds up quickly.  Take, for example, a class of 100 employee who lost their coverage one year ago and received a deficient COBRA notice.  The penalty for the employer could be several million dollars, before accounting for an award of legal fees and costs (which COBRA allows).

​Thus far, employers have been unsuccessful in defeating these COBRA notice lawsuits at the pleading stage.  Some employers have argued that the plaintiff lacked constitutional standing to sue because the alleged defects in the notice—often seemingly innocuous—did not cause any concrete injury.  Other employers have argued they were in substantial compliance with the DOL regulations.  To date, however, those arguments have not convinced courts to dismiss complaints at the pleading stage.  A few of the lawsuits have already settled for seven- and six-figure numbers.  The rest are proceeding forward.

There are steps employers can take now to minimize the risk of being swept into this COBRA notice litigation.  To begin, employers should check whether their COBRA notices contain the 14 items suggested by the regulations.  See 29 C.F.R. § 2590.606-4(b)(4) (i)-(xiv).  Employers should also draft their notices in as simple, straightforward language as possible.  In addition, employers should seriously consider using the DOL’s model notice to gain the protection of “good faith compliance.”  Even when using the model notice, it may be appropriate to supplement with additional, plan-specific information.

Regardless of whether your COBRA notices could use minor or major changes, now is the time to make those changes.  Doing so could save you from a class action complaint.

This may be the best plan for employers under 50 FTE's that are NOT required to offer and plan and want to manage their costs ... simply.

MoneyWise can full administer these plans as well.

Benefits of the Plan
A Section 105 Plan allows a qualified business owner to deduct:

• Health insurance and dental insurance premiums for eligible employee(s) and family. This also includes qualified long-term care insurance.
• Out-of-pocket medical, dental, and vision care expenses for eligible employee(s) and family.
• Life, disability income, contact lens, hearing aid, Medicare Part A, Medicare Supplemental, optical/vision, and cancer insurance premiums for eligible employee(s).

Qualified Filing StatusesWhile the above rulings specifically address family employment in a sole proprietorship, corporations and partnerships may also take advantage of a Section 105 Plan. Additionally, employers seeking to offer non-related employees a medical benefits package may also implement such a plan. Here is how a Section 105 Plan works within the various filing statuses.
Sole Proprietorships
Section 105 works well for sole proprietors who are able to legitimately employ a spouse who is active in the business. An employed spouse will be treated as any other employee, with the business owner offering medical benefits as part of the employee's compensation package.
Partnerships
A partner in a partnership will operate similarly to a sole proprietorship. The spouse of the partner must be a bona fide employee, thus receiving the benefits of the plan. However, a partnership between a husband and a wife will not qualify for the plan.
C-Corporations
Unlike the sole proprietorship or partnership, it is not necessary for spousal employment to occur within the corporation. The corporate entity may provide and deduct benefits for the owner-employee director. Although sometimes misunderstood, even if a business is incorporated, all the proper components must be in place in order for a Section 105 medical reimbursement plan to be in compliance with Internal Revenue Code, DOL, and ERISA.
S-Corporations
S-Corporations can qualify for the Plan without spousal employment; the owners/shareholders are considered employeees if they are active in the business. Restrictions apply to any shareholder owning more than two percent: they will be unable to receive medical benefits on a completely tax-free basis. These benefits are subject to state and federal income tax, but are not subject to FICA taxes. Family members (ncluding children and spouses) who do not have ownership are treated as if they did. Thus, they are not able to receive the benefits on a completely tax-free basis either.
Limited Liability Company
Treatment of a Limited Liability Company (LLC) with respect to a Section 105 medical reimbursement plan depends upon how the entity files for purposes of its federal tax return. They may file as a partnership, a corporation, or a sole proprietorship. Once the filing status is determined, the appropriate rules for each filing status apply.
Plan YearSection 105 Plans generally run on a calendar (tax) year, January-December. Tax deductions are then taken during tax filing the following year.
Carry OverRevenue Ruling 2002-41 includes an option for a Section 105 Plan to manage and capitalize on future deductibility of unused portions of a medical expense account. If an employee does not use their maximum, they can carry it over to future years, insuring future deductions for "shock" years of healthcare expenses.
The Carry Over applies to all employees on the plan. The maximum amount available under this benefit will accumulate over plan years and will be managed on an employee-by-employee basis. The business owner may choose to set a maximum Carry Over amount. Meanwhile, employees who utilize the Carry Over will have the amount available to them until the business ceases to exist, the plan terminates, there are zero Carry Over dollars remaining, or the employee becomes ineligible.
Employee Compensation Under a Section 105 PlanThe Internal Revenue Code allows self-employed business owners to compensate employees for services rendered in various forms. The most common form of course is cash wages, subject to the appropriate withholding taxes. In addition to wages, the IRS Code clearly explains that an employer may compensate employees in the form of medical benefits for services rendered. Pursuant to the Code, eligible and qualifying paid-for benefits are tax-free to the employee.
When the business owner compensates employees in the form of cash wages and medical benefits, they must ensure that the combination of the two equal the employee's total compensation package. When establishing benefit maximums, it is vital that the business owner understands that the benefits and the cash combined may not exceed what would normally be considered reasonable compensation for the job the employed-spouse is doing. The following example illustrates how a typical compensation package is determined...
...Jim owns his own business. Jim's wife, Mary, provides a valuable service to the farm by helping out in the field, running errands, and keeping the books. Jim decides to formally employ Mary and take advantage of a Section 105 medical plan (Health Reimbursement Arrangement). When establishing a compensation package for Mary, Jim evaluates her experience and the vital role she plays in the business. Jim compensates Mary $19,668 total per year in the following way...
1. Reimbursement for family health premiums:$9,859
2. Reimbursements for uninsured medical expenses:$5,809
3. W-2 Cash Wages:$4,000
TOTAL$19,668By allowing for a federal, state, and FICA tax deduction of the $15,340 of reimbursed expenses, Jim would receive $5,484 in actual tax dollar savings by taking advantage the Section 105 Plan.
NOTE: If Jim's farm files its taxes as a corporation, he would be the employee and a similar tax savings plan could be established without hiring Mary.
Qualified Medical ExpensesMedical expenses included under this type of plan are those defined in Section 213 of the Internal Revenue Code. As a general rule, medical care includes amounts paid for diagnosis, cure, mitigation, treatment, or prevention of a disease. Appropriate expenses include, but are not limited to...

• Health Insurance Premiums
  
• Dental Care Fees
  
• Hospital Bills
• Deductibles
  
• Vision Care Fees
  
• Laboratory Fees
• Physician Fees
  
• Chiropractor Care Fees
  
• Orthodontia Costs
• Prescription Costs
  
• Psychiatric Care Fees
  
• Medical Supplies Costs

Managing the PlanThe most important concept surrounding a Section 105 Plan is legitimate employment between spouses or any other named employee. This issue is closely scrutinized by the IRS, and it is absolutely vital that the relationship be in existence. Fabricated relationships are absolutely discouraged. Therefore, the following items must be in place to ensure the plan operates smoothly and the tax advantages are maximized:

• A written employment agreement
• A log of hours worked by the employee
• An established cash (salary) compensation payment amount and schedule

In addition, it is recommended to:

• Name the insured (it is preferred that the insurance policy be in the employee's name).
• Maintain separate checking accounts (one for business use and the second for personal use).
• Pay for medical expenses (all medical expenses for the family should be paid by the employee from her/her personal account), and document all payments.

On June 13, 2019, the Departments of Health and Human Services, Labor and Treasury released final regulations that will expand the use of Health Reimbursement Arrangements (HRAs), starting in January of 2020. The regulations will allow the integration of HRAs with individual health insurance coverage and also allow certain HRAs to be recognized as “excepted benefits,” which are exempt from many provisions of the Affordable Care Act (ACA).

Individual Coverage HRAs will enable employers to provide their workers with a fixed amount of money in a tax-preferred account each year that the worker can then use to buy coverage in the individual market. In an attempt to prevent employers from using the new HRAs to steer their sicker workers into the individual market, regulators have built certain “guardrails” into the rules. These include a prohibition on offering both a traditional group health plan and an Individual Coverage HRA to workers within the same class as well as a requirement that the HRA must be offered on the same terms and conditions to all workers within a given class. (However, the dollar amount of the Individual Coverage HRA may differ based on age or number of eligible dependents.)

Since enrollment in an Individual Coverage HRA would cause a worker to lose eligibility for a premium tax credit when purchasing individual health insurance through a public exchange, the regulations also require that workers be allowed to opt out of coverage and reimbursement at least once each plan year.

Proponents of the regulations contend that they will offer businesses, particularly small businesses, and their workers greater options and control over their health coverage.  Since the new HRAs will be more affordable than traditional group health coverage, these new options are expected to make it easier for small businesses to compete with larger businesses for talent. The most ardent supporters also believe that the expected increase in the individual market will spur competition, resulting in better options for consumers.

Others have expressed several areas of concern with regard to the new regulations. First, limitations on age variations in HRA contributions mean that older workers will always pay more than younger workers for the same coverage, unless the HRA contributions are large enough to cover the full premium.

Second, while the regulations require that workers be enrolled in a suitable individual health plan in order to participate in an Individual Coverage HRA, substantiation requirements are virtually non-existent. This is likely to result in healthier workers choosing coverage under non-compliant plans or purchasing no insurance at all. This could significantly increase the risk to the individual market and result in large premium increases.

Finally, the January 1, 2020 effective date gives exchanges little time to make the necessary changes to enrollment systems and materials. Many state-based exchanges have already made it clear that they will not be ready, and it is highly unlikely that the federal exchange will be ready either. This may result in some consumers receiving financial assistance for which they are not eligible, and which they will ultimately be expected to pay back.

​It will probably take several years before the true effect of these new regulations is known. In the meantime, it’s important to note that they make no changes to the existing HRA options currently available to employers.

The Affordable Care Act (“ACA”) requires larger employers (50 or more full-time equivalents) to offer “affordable” “minimum-value” health care to employees working 30 or more hours per week or face the possibility of significant penalties.  In response, some employers cut employee hours to avoid offering health insurance.  The recent class action settlement proposed by Dave & Buster’s (Marin v. Dave & Buster’s, Inc.) should serve as a cautionary reminder to employers who have cut or who are considering cutting employee hours to avoid the ACA employer mandate.

ERISA Section 510 makes it unlawful to retaliate or discriminate against a participant for exercising any right to which he or she is entitled under the provisions of an employee benefit plan or for the purpose of interfering with the attainment of any right to which the participant may become entitled under the plan.  The employees claimed that they were covered under the restaurant’s health insurance plan prior to the enactment of the ACA and that managers told them their hours would be cut to avoid the ACA. The ACA employer mandate would have represented an added cost to the company in excess of $2 million.  Avoiding this expense proved to be a false economy.
On December 7, the court gave preliminary approval to Dave & Buster’s for a $7.4 million settlement.  A hearing is scheduled for May 9, 2019 to determine if the settlement will be formally approved.
Although the future of the ACA is in question, it is in effect, and employers should assume that it will be enforced. Employers should review and document any changes to employee work schedules, be sure that reductions in employee hours are for legitimate business purposes, and avoid making comments that suggest staffing and scheduling decisions are made on the basis of health care costs or avoiding the ACA employer mandate. Employers who have already made such changes should consult with legal counsel to consider any steps that should be taken to avoid liability.

According to a 2013 study published in JAMA in March, people with Medicare Part D drug insurance unknowingly overpaid for prescriptions by $135 million. Copays in those plans were higher than the cash price for nearly 25% of drugs purchased. Patients overpaid by more than 33% for 12 of the 20 most commonly prescribed drugs.
President Trump recently signed two bills passed by Congress with broad bipartisan support, “Know the Lowest Price Act of 2018” (for Medicare and Medicare Advantage beneficiaries) and “Patient Right to Know Drug Prices Act” (for commercial employer-based and individual policies).

When the cash price for a prescription is less than what you would pay using your insurance plan, pharmacists may no longer be required to keep that a secret. In the past, pharmacists could have been fined for violating their contracts with pharmacy benefit managers and even dropped from insurance networks for disclosing cheaper drug options to consumers. There is a catch, though: pharmacists will be permitted, but not required, to tell patients about lower-cost options. It’s up to the customer to ask.

COBRA offers employee and/or covered dependents an eleven month extension to the current COBRA completion date if certain criteria are met. The extension is provided so qualified beneficiaries may remain on COBRA until they become entitled to Medicare. In theory, affected individuals will meet Medicare’s requirements and be entitled within these eleven months. During the extension, Plan Administrators may charge up to a 50% fee on the applicable premium. The following are the eleven month extension criteria:

1. The original qualifying event must have been: Termination of Employment or Reduction in Work Hours.
   
2. Either the employee or covered dependent (spouse or child) must have been considered “disabled” by the Social Security Administration (SSA) on or prior to the 60th day on COBRA.
3. The Plan Administrator must be notified of the SSA’s disability determination within 60 days after the latest of: a. The date of the SSA determination; b. The date of the COBRA qualifying event; c. The date the employee’s group coverage was lost as a result of the COBRA qualifying event; or d. The date the employee and covered spouse are informed through the carrier’s Summary Plan Description of both the responsibility of providing the “disability” determination and the procedures for providing the notice; and
4. The SSA “disability” notification must be provided to the Plan Administrator prior to the COBRA completion date.

When the above criteria are met, all individuals enrolled under COBRA shall be eligible for the extension. The DOL and IRS have an interesting interpretation of this aspect of the extension. They have determined that the qualified beneficiary who is deemed disabled does not have to elect to continue under COBRA. So, if you receive a SSA disability determination of the employee or covered dependent that was enrolled on the group plan on the day prior to the qualifying event, it does not matter if they elect to continue under COBRA – all other qualified beneficiaries should be offered the extension. If this is the case, Plan Administrators may only charge the standard 2% (and not 50%) COBRA fee.

We would like to point of the importance of 3d above. If you review the DOL COBRA General Notice, the letter provides detailed instructions as to the notification requirement if a qualified beneficiary is deemed disabled by SSA. If the employee (and covered spouse) never received the General Notice upon enrollment in a group plan, they would have to be offered the eleven month extension even if they notified the Plan Administrator late.

Over the years, we have found the qualified beneficiary’s 60 day notification requirement to be the most often missed element for the disability extension. Some Administrators are adamant about meeting this requirement; others let it slide if all other criteria are met. In theory, an employee may have received his/her General Notice in 1986. Is it reasonable to assume anyone would retain the disability notification requirements after 32 years? Remember COBRA is a minimum requirement. If you wish to offer greater benefits than that required by law, you are welcome to do so. But, you need to make sure the group plan insurer is on board with your policy because they are ultimately responsible for the claims during the disability eleven month extension.

Eligible /Ineligible Plans for COBRA Continuation
With most organizations, it is easy to determine if a group plan is eligible for COBRA continuation. But some group plans might not be as obvious. First, it is important to understand the definition of a group plan. The IRS defines a group plan as “a plan maintained by an employer or employee organization to provide health care to individuals who have an employment-related connection to the employer or employee organization or to their families.” These individuals consist of employees, former employees and other associated or formerly associated with the employer or employee organization in a business relationship (including members of a union who are not current employees). Health care is provided under a plan whether provided directly or through insurance or reimbursement.

Group health plans must provide medical care (within the meaning of IRS Code, Section 213(d)). Medical care is defined as a diagnosis, cure, mitigation, treatment or prevention of disease and any other undertaking affecting any structure or function of the body. Lastly, the group health plan must be maintained by the employer.
Eligible Plans for COBRA Continuation
The following lists are plans you should be offering COBRA continuation.

1. Health Insurance Plans, HMOs and Self-funded Health Plans;
2. Dental Plans;
3. Vision Plans;
4. Indemnity type Cancer (or specific disease) Policies – plans that pay a dollar amount per incident and not an amount based upon actual claims;
5. Prescription Drug Plans;
6. Health Flexible Spending Arrangements (FSAs);
7. Health Reimbursement Plans (HRAs);
8. Executive Medical Reimbursement Self-funded Plans;
9. Drug or Alcohol Treatment Programs;
10. Wellness Plans; and
11. Employee Assistance Plans.

Ineligible Plans for COBRA Continuation
The following is a review of “group” plans that are not eligible for COBRA continuation. (Remember, COBRA is a minimum requirement placed on employers. If they chose to offer continuation coverage on these plans, they can do so provided they have the approval of the insurer/provider.)

1. Health Savings Account (HSAs) and Archer MSAs;
2. Long-term Care Plans;
3. Accidental Death and Dismemberment Plans (AD&D);
4. Group Term Life Plans (with the exception of Minnesota where state law requires it);
5. Short – and Long-term Disability Plans (STD & LTD);
6. Hospital Indemnity Plans (where payments are not directly associated with the cost of services). For example, the plan pays $200 per day the person is in the hospital;
7. Company Fitness Centers and On-site First Aid Facility; and
8. Employee Discount Plans.