Aiken & Aiken

Sheila Aiken May 9th, 2008

Today there are a number of tax advantaged vehicles available to employers and employees to help them control the spiraling costs of health care.  With all these acronyms floating around, how does one keep from getting confused by them all?

More importantly, with all these different plans available, how does an employer decide what will work best for its business and employees?  Below is a brief description of these plans.

Health Flexible Spending Arrangement (HFSA)

A Health Flexible Spending Arrangement, sometimes called a Flexible Spending Account, is a plan that allows an employee to set aside amounts from his or her paycheck to be used to pay for qualified medical expenses.  The money that an employee had deducted from his or her paycheck is deducted on a pre-tax basis, resulting in payroll tax savings.  These plans can be offered by employers in conjunction with any type of medical plans offered by the employer.  These plans run on a “plan year” basis, in many cases a calendar year.  One of the drawbacks of these plans is that there is a “use-it-or-lose-it” provision.  This means that if an employee does not use all of the funds in the plan by the end of the plan year (or the time claims must be submitted after then end of the plan year), the unused funds will be forfeited.

Health Reimbursement Arrangement (HRA)

A Health Reimbursement Arrangement, also know as a Health Reimbursement Account, is funded exclusively through employer contributions.  These plans can be used in conjunction with the employer’s medical plans to reimburse qualified medical expenses designated by the employer.  These plans can be used with any type of medical plan.  If allowed by the employer, the funds can be carried over from one plan year to the next.  Additionally, the employer decides how much to contribute the plan and when amounts in the plan will be forfeited.

Health Savings Account (HSA)

Used in conjunction with a High Deductible Health Plan (HDHP), this is a special account which is owned by an individual and is used to pay for current and future medical expenses.  In order to be eligible, an individual must be covered by a HDHP, not covered by other health insurance, not enrolled in Medicare and not able to be claimed as a dependent on someone else’s tax return.  Contributions may be made by the employee, the employer or others on behalf of the individual.  There are maximum amounts that can be contribution to the plan on a yearly basis.  Additionally, for individuals age 55 and older, catch-up contributions may be made.  Unused funds can be rolled over from one year to the next.  As opposed to the other types of plans, funds can be used for any expenses the individual chooses and the employer cannot chose how the funds are to be used.  However, if the individual chooses to use the funds in the plan for non-qualified medical expenses, tax consequences and penalties may apply. 

This information is a just very general and brief overview of these arrangements.  There are many specific rules surrounding each of these plans that can be offered including rules relating to the establishment and administration of the plans and rules on how these plans may interact with other benefit plans.  Employers interested in controlling their health care costs would be well-served to consider these types of plans.  However, because of their complexity, benefit counsel and benefit professionals should be consulted before any decision is made on which plan to implement.  A good understanding of how these plans work and a review of the individual needs of the employer is essential to ensure the right fit for the employer.

• Benefits , ERISA , Health Care
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Michele Aiken May 1st, 2008

The Employee Retirement Income Security Act (ERISA) of 1974 Section 404(c) states that individual account plan fiduciaries are not liable for the investment decisions made by participants provided that participants are allowed the right to control their investment decisions.  Plans that provided for default investment alternatives were considered to fall outside Section 404(c) because these alternatives do not require participants to exercise any control over the investment decisions.

As required by the Pension Protection Act (PPA) of 2006, the Department of Labor (DOL) issued final regulations (29 CFR § 2550.404c-5) in October 2007 which extend the ERISA Section 404(c) fiduciary protections to plans that allow for investments to be made on behalf of participants who fail to exercise control over their investment decisions.  These Qualified Default Investment Alternative (QDIA) regulations were effective as of December 24, 2007.

Under the QDIA regulations, plan sponsors may treat these participants, whose accounts are invested according to default rules because no investment direction was provided, as having exercised investment control.  To do so, plan sponsors must meet the specified notice requirements and the default investments must qualify as QDIAs.  If the plan complies with the QDIA regulations, plan fiduciaries will qualify for protection against liability for investment losses in the default investment accounts.

On April 29, 2008, the DOL released Field Assistance Bulletin No. 2008-03, which provides plan sponsors with additional guidance on the QDIA final regulations.  This bulletin provides answers to some of the most frequently asked questions about the QDIA regulations in areas such as the scope of the regulations, notice requirements, limitation on fees and restrictions, management and asset allocation, capital preservation, and “grandfather” relief.  Some of the issues that are clarified in the Field Assistance Bulletin include:

• A plan sponsor is not relieved of liability for the management of the QDIA or for the prudent selection and monitoring of the QDIA
• If the notice and all other requirements under the regulation are satisfied, the fiduciary will be relieved of liability with respect to all assets invested in the QDIA, regardless of whether the assets were contributed prior to the effective date of the regulation (except to the extent otherwise limited by the regulation)
• The QDIA notice can be, but is not required to be, combined with the notices required under the Internal Revenue Code Sections 401(k)(13) and 414(w)
• Defaulted participants should be furnished neither less nor more materials than would be provided to participants who direct their own investments in an ERISA 404(c) plan

Additionally, the description of stable value products or funds was amended in order to broaden the “Grandfather” type relief available for assets invested in certain of these products or funds.

It is important for plan sponsors to understand the new guidance and comply if they wish to receive the benefit of the protections offered.  If a plan’s provisions do not comply with these regulations, the plan’s fiduciaries run the risk of breaching their fiduciary duties, exposing themselves to liability to “automatic enrollment” plan participants for investment losses.

Employers and/or plan sponsors of individual account plans that currently provide or want to provide an “automatic enrollment” feature should review their plans to ensure compliance with the new guidance.  Their benefits counsel can assist them to ensure that their plan provisions are in compliance.

• Benefits , ERISA , Pension
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