Topic 7 Part 2 Articles and Holman

What are voluntary benefits and how are they funded?

They are optional, supplemental insurance products that employees can choose to purchase. Employees pay the full premium through payroll deduction, making them cost-free for employers to offer.

What is the primary financial protection voluntary benefits provide to employees?

They pay lump-sum cash benefits directly to employees to help cover medical expenses and household costs not fully covered by major medical insurance, acting as a shield against unexpected medical bills.

How does the enrollment process work for voluntary benefits?

Employers add them as optional offerings in their benefits portal. During open enrollment, employees can pick and choose which specific voluntary benefits they want for themselves and their dependents.

How do claims and payouts differ from traditional health insurance?

Unlike health insurance that pays providers, voluntary benefits pay cash directly to employees via direct deposit after they submit an Explanation of Benefits (EOB). Employees can use the money for any purpose.

What competitive advantage do voluntary benefits offer employers, especially smaller ones?

They provide a "free wellbeing booster" that enhances benefits offerings at no direct cost, helping smaller employers compete with larger companies and improving employee retention and morale

What are the four requirements for a voluntary plan to qualify for the ERISA safe harbor exemption?

The plan must be completely voluntary for employees.

The plan must be 100% employee-paid (no employer contributions).

The employer must not endorse the plan.

The employer must not receive compensation beyond reasonable administrative reimbursement.

What specific actions constitute "endorsing" a plan and would void the safe harbor?

Selecting the insurer

Negotiating plan terms

Limiting coverage to specific employee groups

Assisting employees with claims

Why must employee contributions be made after-tax to qualify for the safe harbor?

Because pre-tax contributions through a Section 125 cafeteria plan are considered employer contributions, which violates the "100% employee-paid" requirement.

What compliance obligations would apply if a voluntary plan becomes subject to ERISA?

Written plan document

Summary Plan Description (SPD)

Annual reporting (Form 5500)

COBRA, HIPAA, and other legal compliance

What legal risk do employers face if their "voluntary" plan doesn't qualify for the ERISA safe harbor?

Insurers may argue the plan is subject to ERISA to avoid state law claims, potentially dragging the employer into expensive litigation as the plan sponsor and fiduciary

Based on the case summary provided, here are the key flashcards about the ERISA voluntary plan safe harbor requirements:

What was the key missing allegation that prevented the employee from qualifying for the ERISA voluntary plan safe harbor?

The employee failed to allege that the employer did not endorse the program, which is one of the four required elements of the safe harbor.

What specific evidence did the court use to conclude the employer had "endorsed" the plan?

The insurance documents named the employer as the plan sponsor and administrator

The Summary Plan Description (SPD) stated the plan was governed by ERISA

The SPD was provided "at the employer's request"

What was the practical consequence of the court finding that ERISA applied to the plan?

The employee's state-law claims were preempted (dismissed), limiting him to ERISA remedies which typically offer lower potential damages than state law.

What strategic lesson should employers learn from this case regarding plan documentation?

They must review all plan documents to eliminate unintended references to ERISA, including avoiding statements that they "sponsor" or "administer" the plan, and remove any "canned" ERISA language provided by insurers.

Why did the insurer argue for ERISA preemption in this case?

To avoid the broader claims and higher potential damages available under state law, limiting the employee's remedies to the more restrictive ERISA framework

Based on the IRS memorandum provided, here are the key flashcards about the taxation of supplemental benefits:

Under what conditions are fixed indemnity health plan benefits taxable to employees?

When either:

The employer pays the premiums for the coverage

Employees pay premiums using pre-tax dollars through a Section 125 cafeteria plan

What tax consequence applies when supplemental benefits are funded with pre-tax dollars?

The benefits become fully taxable income to employees and are subject to income tax withholding, FICA, and FUTA taxes.

How can employers structure supplemental benefits to maintain tax-free status for employees?

Require employees to pay premiums with after-tax dollars - this allows benefits to be excluded from income under IRC §104(a)(3).

What makes fixed indemnity plans different from traditional health insurance for tax purposes?

They pay fixed cash amounts unrelated to actual medical expenses, so they don't qualify for the §105(b) medical expense reimbursement exclusion.

What specific wellness program payments did the IRS identify as taxable?

Fixed cash payments for activities like:

Completing health risk assessments ($100)

Participating in health screenings ($100)

Preventive care activities ($100)
When funded with pre-tax dollar

What is the primary business problem that leads employers to consider tiered health plan contributions?

When an employer has both low-wage and high-wage employees, they must set contributions low enough to be affordable for the lowest-paid workers, resulting in over-subsidizing coverage for higher-paid employees.

How does tiered contribution structuring typically work?

Employers create 2-5 compensation bands (e.g.,

What are the main potential downsides of implementing tiered contributions?

Employee morale issues from "winners" and "losers"

Compensation band "cliffs" where small raises trigger large premium increases

Geographic cost-of-living disparities not reflected in national salary bands

Nondiscrimination testing risks if bands don't properly account for total compensation

What nondiscrimination compliance consideration is critical when designing tiered contributions?

Bands must be based on total compensation (including bonuses), not just base salary, to avoid accidentally favoring highly compensated employees who might pay lower rates than non-highly compensated employees.

What administrative factors should employers consider before implementing tiered contributions?

Payroll system capabilities to handle multiple contribution rates

Optimal number of bands (more bands = more complexity)

Employee distribution across bands to justify administrative effort

Geographic cost-of-living variations that might make national bands unfai

What is the primary communication failure identified by the LIMRA study?

60% of employees felt employer benefits communications were ineffective, largely because information is only provided during open enrollment rather than year-round.

What three strategies do experts recommend for improving benefits communication?

Communicate frequently and directly to build trust

Use a multi-channel approach (videos, webinars, emails, meetings)

Tailor messaging to different employee demographics and literacy levels

How can plan sponsors measure communication effectiveness beyond open enrollment metrics?

Track web traffic and email click-through rates

Monitor whether employees are taking appropriate actions

Analyze retirement plan balances by demographic to identify disengaged groups

What are two innovative digital strategies companies have used successfully?

BlackRock: Used banners, screen savers, and infographics to drive traffic to their benefits website

Krispy Kreme: Created a mobile-accessible benefits microsite that replaced printed materials

What is the key advantage of personalized communications like Delta Air Lines' approach?

Showing employees their individual retirement balance compared to age-based targets creates personal relevance, making them more likely to engage with the material and take action

What triggers the requirement to provide SBCs in a "culturally and linguistically appropriate" manner?

If the plan provides SBCs to individuals in any county where at least 10% of the population is literate only in the same non-English language, based on U.S. Census data.

What are the three key compliance actions required in triggered counties?

Provide interpretive services in the applicable non-English language

Include a one-sentence statement in the applicable language on the SBC explaining how to access language services

Provide a written translation of the SBC upon request

Where must the non-English language statement be placed on the SBC?

On the page containing the "Your Rights to Continue Coverage" and "Your Grievance and Appeals Rights" sections.

What important distinction exists between these SBC requirements and ERISA's SPD language rules?

These are separate requirements from ERISA's rules for SPDs and SMMs, and compliance with one doesn't guarantee compliance with the other.

What updated compliance resource applies for plan years beginning on or after January 1, 2025?

An updated list of applicable counties and languages based on new Census data, which may change which counties trigger the requirement

What is the official legal standard for Summary Plan Description (SPD) readability?

It must be "written in a manner calculated to be understood by the average plan participant."

What three specific writing techniques can improve SPD comprehension?

Remove technical jargon

Break long sentences into shorter ones

Provide plenty of examples to explain complex topics

Does the SPD requirement guarantee that every employee will understand all plan details?

No. The standard only requires that the SPD be understandable to the "average plan participant" - not every single employee.

How should employers assess whether their SPD meets the readability standard?

By considering their workforce's education and comprehension levels and evaluating whether the SPD is clear enough for typical employees to understand the plan's terms

Who must automatically receive an SPD for an ERISA health and welfare plan?

All plan participants, which includes current employees, former employees (like retirees), COBRA qualified beneficiaries, alternate recipients under QMCSOs, and surviving spouses/dependents who remain covered.

What defines when an individual becomes a "covered" participant requiring an SPD?

The earliest date they: (1) begin participation, (2) become eligible for a benefit (even if contingent, like LTD coverage), or (3) make a plan contribution.

How should SPDs be handled for a family on COBRA?

Generally, a single SPD can be sent to the household address for all qualified beneficiaries living there.

Who receives the SPD for an alternate recipient under a QMCSO?

The child's custodial parent or guardian, as the DOL treats the alternate recipient as a plan participant.

Besides automatic distribution, when else must SPDs be provided?

They must be provided to any participant or beneficiary who requests one, even if they previously received an automatic copy

What is the fundamental difference between active and passive open enrollment?

Active: Requires employees to make an affirmative election each year, even if they want to keep the same coverage.

Passive: Automatically re-enrolls employees in their previous elections unless they actively make a change.

What are the three primary advantages of an active enrollment strategy?

Higher employee engagement and understanding of benefits

Better recordkeeping with updated dependent/beneficiary information

Easier implementation of plan changes and new offerings

What are the main risks of using a passive enrollment approach?

Employees may make poor coverage choices by not reevaluating their needs

Potential for inadequate coverage if family situations have changed

Employees may not appreciate the value of their benefits package

What administrative burden makes passive enrollment attractive to HR departments?

It significantly reduces time and effort by automatically carrying over elections, eliminating one of the most time-consuming annual HR tasks.

What is the key communication challenge with active enrollment?

The higher risk of miscommunication and enrollment gaps if employees overlook communications, which could lead to dissatisfaction or coverage lapses

What is the key difference between an unconditional opt-out payment and an eligible (conditional) opt-out arrangement regarding ACA affordability?

Unconditional: Payment for declining coverage counts toward the employee's cost of coverage, potentially making it unaffordable.

Eligible/Conditional: Payment does NOT count if conditioned on the employee providing reasonable evidence of other group health coverage for their entire family.

How does an unconditional opt-out payment increase an employee's effective contribution for health coverage?

It creates an opportunity cost. For example: if an employee pays $200/month for coverage but would receive a $100/month opt-out payment, their effective cost is $300/month ($200 actual payment + $100 forgone cash).

What two conditions must be met for an opt-out payment to be excluded from affordability calculations?

The payment must be conditioned on declining employer coverage.

The employee must provide reasonable evidence that all family members have/will have other group health coverage (not individual market coverage).

What administrative requirement must employers follow to maintain the "eligible opt-out arrangement" status?

They must collect reasonable evidence of alternative coverage (e.g., attestation or documentation) at least once per plan year, typically during the open enrollment period.

What special transition relief applies to unconditional opt-out arrangements under collective bargaining agreements?

Arrangements under CBAs in effect before December 16, 2015 are exempt from these rules until the first plan year after the CBA expires (disregarding extensions after December 16, 2015)

How does an opt-out payment affect the calculation of health plan affordability under the ACA?

It increases the employee's effective contribution. For example: if coverage costs $100/month and the opt-out is $50/month, the affordable contribution is calculated as $150/month ($100 actual + $50 opportunity cost).

What are the two key requirements for the Limited Exception that allows opt-out payments to be excluded from affordability calculations?

The employee must decline the employer's health coverage

The employee must provide reasonable evidence that they and all tax dependents have alternative group coverage (not individual market)

What strategic risk might employers face when implementing opt-out payments?

They may inadvertently encourage healthy employees to drop coverage, potentially worsening the plan's risk pool and increasing overall claims costs.

What are two significant legal pitfalls to avoid when designing opt-out programs?

Prohibited incentives for Medicare-eligible employees to drop coverage

HIPAA discrimination if offered selectively based on health status

What administrative requirement applies to maintaining the Limited Exception status?

Employers must collect reasonable evidence of alternative coverage (e.g., attestation) at least annually, typically during open enrollment

Based on the detailed scenario described, here are the key compliance issues and considerations:

What is the critical ACA affordability problem with allowing employees to take unused cafeteria funds as cash?

The cashable flex credits would be treated as opt-out payments, increasing the employee's effective premium contribution for affordability calculations. If the cheapest plan is $500/month and employees can take $500 as cash, the affordable cost is calculated as $1,000/month.

How does this differ from a compliant "health flex contribution" approach?

Compliant health flex contributions must be:

Non-cashable (cannot be taken as taxable cash)

Restricted to paying for health coverage

Used only for medical/dental/vision expenses

What penalty risk does the employer face if many employees opt out?

The "A" penalty ($2,970 per full-time employee in 2024) could apply if:

Employer doesn't offer coverage to 95% of full-time employees

AND at least one employee gets a Marketplace subsidy
Even if employees voluntarily opt out, low participation could trigger this penalty.

What specific design flaw makes this arrangement problematic under IRS rules?

The ability to take premium-equivalent amounts as cash creates an "eligible opt-out arrangement" that must be added to employee contributions for affordability testing, potentially making coverage unaffordable.

What is the potential carrier impact of high opt-out rates?

Insurance carriers set rates based on expected participation. If opt-outs significantly reduce enrollment, it could: Disrupt actuarial assumptions Lead to premium increases in future years Particularly problematic in a two-carrier competitive environment

Based on the forum discussion, here are the key compliance points regarding the taxable status of cash payments in lieu of health insurance:

What is the tax status of cash payments to employees who decline health coverage?

Such payments are always taxable income to the employee and must be reported on Form W-2, regardless of whether they're called "opt-out credits" or "flex credits."

What legal doctrine makes these cash payments taxable?

The doctrine of constructive receipt - since employees could choose to receive cash instead of health benefits, the cash option is taxable unless structured through a Section 125 cafeteria plan.

What IRS guidance specifically addresses this issue?

IRS Notice 2015-87 (the "Potluck Guidance") confirms that cash payments for opting out of health coverage are taxable compensation and affect ACA affordability calculations.

What critical compliance requirement allows health benefits to be provided tax-free?

A properly adopted Section 125 cafeteria plan creates a safe harbor from constructive receipt, allowing employees to choose between taxable cash and tax-free benefits without the cash option being imputed as income.

What additional consideration applies if making such payments available to one employee?

ERISA non-discrimination rules generally require offering the same benefits to all similarly situated employees, so this option would likely need to be made available to all employees during the next plan year

Based on the comprehensive guide provided, here are the key flashcards about opt-out incentives:

What is the default tax treatment of cash opt-out incentives?

They are taxable compensation that must be included in the employee's income and run through a Section 125 cafeteria plan to avoid constructive receipt issues.

What are the three tax-favored alternatives to cash incentives?

Health FSA contributions (limited to greater of $500 or employee match)

HRA contributions (must be integrated with other group coverage)

HSA contributions (only for HSA-eligible employees)

What is the critical difference between an "unconditional" and "eligible" opt-out arrangement for ACA affordability?

Unconditional: Incentive amount must be added to employee premium for affordability calculation

Eligible: Incentive excluded from affordability if conditioned on proof of other group coverage (not individual market)

What two major legal prohibitions restrict opt-out incentive design?

HIPAA nondiscrimination: Cannot target high-risk individuals to discourage enrollment

Medicare Secondary Payer rules: Generally cannot incentivize Medicare-eligible employees to drop primary coverage

What documentation requirement applies to eligible opt-out arrangements?

Employers must obtain reasonable evidence (typically an employee attestation) that the employee and all tax family members have other group health coverage - required annually during enrollment

What medical plan choices does Holman offer?

Holman offers 4 Aetna/Caremark medical plans, all self-funded:

Traditional PPO

Tiered PPO (APCN+)

HDHP $1,650 (HSA eligible)

HDHP $5,000 (HSA eligible)

Who administers Holman’s medical and Rx benefits?

• Aetna administers medical
• Caremark administers Rx
• Holman pays the claims because the plan is self-funded

What dental and vision options does Holman offer?

• Dental (Guardian) — DPPO & DHMO (EE-paid)
• Vision (Aetna Vision Preferred) — EE-paid

What is an ADDITIONAL (buy-up) benefit?

A benefit where the employer provides a baseline amount and the employee can purchase more on an EE-pay-all basis.
Employee already has the coverage and can increase it.

What are Holman’s Additional benefits?

• Basic Life (GTLI – Unum):

ER pays for $12,000

EE may buy additional coverage (~$388,000), often no EOI
• Basic AD&D – Unum: buy-up available
• STD/LTD buy-ups for some job groups

What is an OPTIONAL (voluntary) benefit?

A benefit the EE receives only if they elect it and pay 100% of the cost.
Not connected to a baseline benefit.

What OPTIONAL benefits does Holman offer?

• Accident Insurance (MetLife)
• Critical Illness (MetLife)
• Hospital Indemnity (MetLife)
• ID & Fraud Protection (MetLife)
• Legal Plan (MetLife)
• Voluntary Supplemental Life / AD&D (Unum)
All are EE-paid and fully insured.

What FSA options does Holman provide?

• Health Care FSA (EE-paid)
• Limited Purpose FSA (for HDHP + HSA)
• Dependent Care FSA
Administered by WEX

How does Holman’s HSA work?

• HSA through Fidelity
• Holman seeds:

$600 individual

$1,000 family
• EE may contribute pre-tax

What commuter benefits does Holman offer?

• Parking and Transit accounts
• Administered by WEX
• EE-paid, pre-tax