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Covering Dependents Can Raise Questions

March 14, 2012 – 7:01 pm | By John Iekel | No comments yet

Many employers provide some sort of benefits for employees’ dependents. These can take many forms. Some are benefits that do not require expenditure of much, or any, money and which are not taxed. Other benefits for dependents, however, may entail more significant expenditures and have to be provided under specific rules in order to not constitute income on which an employee will be taxed. Dependent care flexible spending accounts (FSAs) and coverage of dependents through health FSAs are among the most common kinds of coverage employers provide employees’ dependents. These kinds of coverage may seem straightforward. For instance, an employer simply makes it possible for employees to participate in these kinds of FSAs and makes sure employees follow the rules. But as any employer and plan administrator knows, situations easily can arise that create complications. Questions often concern whether a particular expense is covered, whether a situation is among those for which the IRS allows a participant to make a change of election during the plan year before open enrollment, who exactly can be covered and more. Following are two examples of questions that can arise and how an employer can address them. Q. Suppose a dependent care FSA participant has a child who will not behave and the facility that provides the dependent care will no longer allow the child to attend. Can the participant change their election? Does this qualify as a change in status that would allow them to do that? A. Every time a participant changes dependent care providers he or she can change the dependent care FSA election. A participant in such a situation can make a mid-year change in their dependent care FSA election. It probably can be considered a significant curtailment of coverage with a loss of coverage (as cited in Treasury Regulation (Treas. Reg.) §1.125-4(f)(3)). The Treas. Reg. §1.125-4(f) election changes do apply to dependent care FSAs (but not health FSAs). In this situation, coverage has been curtailed and lost. It does not matter who was at fault for causing the change. This situation is akin to Example 5 in the Treasury regulations, which reads as follows:

(i) Employee A is married to Employee B and they have one child, C. Employee A’s employer, M, maintains a calendar year cafeteria plan that allows employees to elect coverage under a dependent care FSA. Child C attends X’s on site child care center at an annual cost of $3,000. Before the beginning of the year, A elects salary reduction contributions of $3,000 during the year to fund coverage under the dependent care FSA for up to $3,000 of reimbursements for the year. Employee A now wants to revoke A’s election of coverage under the dependent care FSA, because A has found a new child care provider. (ii) The availability of dependent care services from the new child care provider (whether the new provider is a household employee or family member of A or B or a person who is independent of A and B) is a significant change in coverage similar to a benefit package option becoming available. Because the FSA is a dependent care FSA rather than a health FSA, the coverage rules of this section apply and M’s cafeteria plan may permit A to elect to revoke A’s previous election of coverage under the dependent care FSA, and make a corresponding new election to reflect the cost of the new child care provider.

Q. Is a dependent who is married also eligible for coverage under the parents’ FSA? Has this changed since the enactment of the health care reform law? A. The expansion of coverage for dependent children under the Patient Protection and Affordable Care Act applies regardless of the child's marital status. A married adult child of an employee whose employer-provided plan covers that child through age 26 can still be covered even though that child is married. The marital status of the adult child has no relevance regarding whether that adult child still can be covered under the employer's plan. In addition, under IRS Notice 2010-38, the spouse of an employee's adult child can also be covered under the employee's employer-provided health coverage. However, the tax treatment of the coverage for the employee's child and the spouse of the employee's child is different. The employer-provided coverage for the employer's child is excludable from the employee's gross income, but the coverage for the adult child's spouse is includible in the income of the employee. Therefore, the employee will not be taxed on the coverage provided to the employee's adult child who is age 26 or under — but the employee will be taxed on the coverage provided to the spouse of the employee's child.

Example. G is married to H, and neither is a dependent of E. G and H have decided not to participate in the health coverage offered by G's employer, and Employer Y provides health coverage to G and H. G is a child of E within the meaning of dependent (26 U.S.C. §152). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health coverage and reimbursements for G under Employer Y's plan are excludible from E's gross income under tax Code Sections 106 and 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year. The fair market value of the coverage for H is includible in E's gross income for the 2010 taxable year.

The exclusion for employer-provided coverage applies to reimbursements for expenses the employee already paid and to direct employer payments to medical care providers to discharge an obligation of the employee, spouse or dependent. Note that although a child can still be covered through age 26, the parent whose employer-provided coverage still covers those adult children cannot claim that adult child as a dependent for income tax purposes.

Know the Rules for On-call Workers

March 14, 2012 – 4:48 pm | By Guest Contributor | No comments yet

By Arthur Silbergeld, Esq. Anyone who works on a computer knows the sinking feeling that comes with hitting that nasty combination of keystrokes causing your machine to freeze. The fact that many companies now keep IT staff available around the clock just to help frantic employees get their misbehaving computers working, retrieve lost documents and resolve other technology-related problems speaks volumes about the reality of the modern workplace. Of course keeping any department fully staffed 24/7, just to handle emergencies, may not be practical. Many organizations instead keep workers on call, i.e., not physically present at the workplace but still available to answer phone calls, respond to emails or address other crises off hours. When on-call workers are hourly, their pay is governed by strict rules. Employers who fall out of compliance not only risk alienating staff. They increase their exposure to lawsuits and, in addition to owing back wages or overtime, may also face fines. The law in this area is still developing. But the courts have given employers a pretty good idea of what factors they consider key when ruling on disputes involving oncall worker pay. The first question asked by any court reviewing such claims is whether various employer restrictions keep employees from doing whatever they normally would be doing were they not on call. Courts distinguish between employees who are “waiting to be engaged” and those who are “engaged to wait,” finding only the latter time to be compensable on an hourly basis. The degree to which the on-call employee is free to engage in personal activities also is a key consideration. An employee who is free to engage in personal activities despite being available to take calls or report back to work is not entitled to be paid on an hourly basis. The degree of freedom to pursue personal activities need not be equal to the level of flexibility one has when completely off duty. In 1994, the 9th Circuit in Berry v. Sonoma, noted several factors that courts still use to gauge an employee’s degree of freedom:

whether the employee is required to stay in a particular area or workplace while on call; whether the employee must live on the employer’s premises; whether the employee kept so busy that the on-call period is virtually a full shift; whether the employee must respond immediately; whether the on-call employee can trade responsibilities with co-workers easily; whether an on-call employee is allowed to engage in personal activities while on on-call.

Geographic restrictions alone rarely are enough to sway a court to require that a worker be paid while on call. Similarly, requiring an employee to remain within range of cell phone reception, without additional limitations, generally will not make or break a case. Because courts often pay attention to the number of calls an on-call worker receives when determining whether the time is compensable, employers should, too. In Berry, the court found that coroners who received one “death report” every 3.97 hours while on-call were not entitled to hourly pay when other factors showed that they were free to use the remaining time for personal pursuits. Similarly, the 6th Circuit ruled in Rutlin v. Prime Succession, Inc. that a funeral director who received an average of 15 to 20 calls each night and had to respond to additional calls, but who was nonetheless free to watch television, make personal calls, engage in activities with his spouse, and go out to dinner also was not due hourly pay. Even requiring a worker to stay sober while on call — and to be able to return to work within 20 minutes of being paged — is not enough to require supplemental pay during the on-call period, as the 5th Circuit held in 1991 in Bright v. Houston Northwest Medical Center Survivor, Inc. Two years later, the 10th Circuit reached a similar conclusion in Gilligan v. City of Emporia, Kan. In that case, city sewer department employees who wore pagers, were barred from drinking alcohol, and who had to refrain from activity preventing them from hearing a page, but had 30 to 60 minutes to respond to a call, were found not to be entitled to hourly pay. Courts do, however, look at how busy a worker is kept during the on-call period when determining whether the time is compensable. Taking and responding to calls totaling one hour of time on a shift between 6:00 p.m. and 8:00 a.m. the following morning and not more than three hours on weekend shifts from Friday afternoon to Monday morning may not justify hourly pay. However, in Renfro v. City of Emporia, Kan., the city was tagged with hourly pay when its firefighters received an average of three to five calls while on call during 24-hour shifts. As is often the case in employment law matters, employment disputes are most likely to crop up when organizations have not explained to employees what they can expect in the way of overtime pay. Supervisors who assign employees to work on call or hire outsiders to work such shifts should, at a minimum, have a written policy explaining the on-call pay policy. In addition, they should have a handle on the workload of their oncall workers and understand the other factors that may trigger a pay requirement. Arthur Silbergeld is a partner at Dickstein Shapiro in Los Angeles. He can be contacted directly at SilbergeldA@dicksteinshapiro.com.

Fueling Disputes: Health Reform May Spur New Types of Employee Lawsuits

March 14, 2012 – 3:54 pm | By Todd Leeuwenburgh | No comments yet

Recent legal challenges have focused on constitutional issues, but health care reform is expected to create new reasons for benefits and employment-law litigation, according to a reform expert. Reform rules fraught with legal risk include: (1) pay-or-play requirements, (2) claims appeals and external review, (3) essential benefits; and (4) retiree medical rules. Another area of concern is that scenarios will arise under reform that will generate discrimination complaints. Attorney James R. Napoli of Proskauer Rose in Washington, D.C., has shared with the SmartHR Manager blog some forward-looking thoughts about impending compliance challenges and litigation targets brought on by health reform. Napoli, who heads his firm’s Health Care Reform Task Force, will speak at greater length and unveil more of his predictions at his firm-sponsored ERISAFest in New York City on March 15. Realignment From Full- to Part-time Employees? How employers tally full-time workers will affect the degree of their involvement and expense in meeting health reform requirements. Under health reform, employers with 50 or more full-time employees that do not offer affordable health coverage with essential health benefits will pay an assessment starting in 2014. Napoli predicts the following scenarios:

• This requirement may trigger some workforce realignment from full-time workers to part-time status in an effort to reduce obligations under the law.
• Reeling back coverage and sending folks to the exchanges may be risky, and it’s important to do so in a way that does not contribute to employment disputes.
• Workers who object to losing full-time benefits in the move to part-time status may be able to build a case they were discriminated against ---- if employers are not careful.

Independent Review Organizations Employers will have to contract with independent review organizations (IROs) under health reform’s July 2010 claims appeals & external review rules. IROs will have authority to review claim disputes de novo and to overturn a plan determinations. IRO rulings are binding under reform. Some argue that this gives them control over plan funds, and they can be considered plan fiduciaries. IROs will decide potentially large-dollar items, like patterns of benefits denials (uncovered services) and eligibility rescissions (for example, in cases of fraud or misrepresentation.) Lawsuits likely will center on whether IROs should be considered plan fiduciaries or non-fiduciary service providers, Napoli says. Retiree-only Plans While health reform outlawed lifetime limits (and annual limits after Jan. 1, 2014) on coverage, retiree-only plans are exempt from this requirement. Therefore, retiree-only plans can retain caps on coverage. Napoli notes that:

• Employers may try to move eligible folks into the retiree-only option. Workers who are steered out of coverage without limits into coverage with strict limits may think they have an arguable legal claim.
• Reform might contribute to employer flight from providing retiree medical benefits, as a result of the increasing costs and obligations of providing coverage in general.

Other Litigation Areas

• Caps on non-essential benefits (for example, a given rehabilitative device might be subject to a $500 limit because it is not defined as essential). Napoli notes that such limits might be challenged if one can successfully argue that the “non-essential” benefit should have in fact been defined as essential.
• Allegations of employment-law violations or discriminatory intent may stem from employers steering workers to the health insurance exchanges, he says.

Napoli is the managing author of The New Health Care Reform Law — What Employers Need to Know (A Q&A Guide), published by Thompson Publishing Group.