Changing Employer Benefit Contributions Midyear
Many employers grappling with the harsh impact of the COVID-19 pandemic on their businesses are considering different, and often drastic, ways to keep their doors open and their businesses afloat. Businesses sponsoring employee benefit plan options may feel inclined to consider reducing the employer contributions made to employees’ health insurance plans midyear, in an effort to reduce spending. While this may seem like an attractive possibility at first glance, there are deep compliance ramifications to be aware of when your clients are considering this option. Changing or reducing the employer contribution midyear, outside of Open Enrollment, can open the employer up to several compliance challenges in the employee-benefit space.
ERISA Plan Documents
Before the employer considers this option, it should first turn to its self-created ERISA Summary Plan Descriptions (SPDs) and Plan Documents – which almost all employers must create under federal ERISA law. ERISA SPDs are legal documents that detail plan eligibility, plan funding, employer contributions, pre-/post-tax information, etc., to employees in a language that can be understood by most/all employees. The employer should carefully follow its own rules for the plan – if it has them in ERISA documents. If the employer does not have rules and ERISA SPDs, the employer should work to create some immediately, so it can meet federal requirements and have legal documentation for its employer contribution and general health plan administration.
Some employers opt to include employer contribution information in employee handbooks, which can be helpful to both the organization and its employees. However, ERISA SPDs are the legal documents that contain all relevant plan information – and it is imperative for employers to follow their own rules created in their plans. If employers make changes to information contained in ERISA SPDs, an ERISA Summary of Material Modification document summarizing the change(s) must be created and distributed to employees within 210 days after the conclusion of the plan year in which the change is made.
The Affordable Care Act (ACA) requires additional midyear notification requirements and considerations, on top of ERISA’s requirements. The ACA requires employers to give 60-days advanced notice of plan changes (including employer contribution changes) before implementing them, unless the change is made at Open Enrollment. This notice is called the ACA’s 60 Day Advanced Notice of Material Modification. It only applies when changes are made to a plan in the middle of a plan year.
When employee costs for plans change midyear, employees must be given the right to change their health plans – essentially creating a mini open enrollment for the employer’s affected employees. This is due to the change in cost of the plans, and related personal affordability for such plans for employees and their families.
Employers desiring to make changes to contributions midyear should consult their health insurance carrier(s) first to notify them of the change, and so carriers can approve and permit midyear changes to plans as part of the mini Open Enrollment. Carriers are not required to allow this type of change, but carriers can at their discretion. If the change is granted, additional Open Enrollment paperwork should be created – including relevant deadlines assigned by the carrier in order to implement this change.
Premium Only Plan (POP) Considerations
If employees drop their health coverage midyear as a result of this change, it could have implications on an employer’s Premium Only Plan (POP) – which allows an employer to withhold pre-tax dollars from employees’ paychecks for health premiums. POPs have annual nondiscrimination testing requirements, which ensure key employees and executives don’t take up a significant majority of pre-tax dollars. An exodus of employee participation from the health plan could trigger challenges with this nondiscrimination compliance requirement for a POP. Also, please note that a change in the cost of premium generally allows an employee to change or revoke his or her plan elections made with pre-tax dollars utilizing a POP.
Employers should also consider employees’ potential responses and perceptions regarding a midyear contribution change. Employees can generally assume the coverage and costs presented to them at annual Open Enrollment will remain in place throughout the entire plan year. As a result, they make their health choices based on the costs and benefits presented to them – and are likely utilizing their plans midyear, especially with the pandemic.
If the change in contribution causes employees to need to change plans due to cost, then their medical treatment could be disrupted due to the plan/network changes. Furthermore, if employers implement these changes without getting carrier approval to allow a mini Open Enrollment, and/or if employers do not properly notify employees of these changes in accordance with the law, it could be especially problematic. Employees could respond by bringing a civil lawsuit against the employer, which often carries some of the biggest liabilities to employers in the compliance space.
Legal Guidance Recommended
Because of the complexity of the overlapping laws and considerations here, legal counsel is highly advised to ensure full compliance with the law according to the employer’s own specific circumstances. The employer should also consider consulting a CPA who can speak to any related tax implications, which a change may have on the employer’s business.
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