There are two new laws governing employee benefits that will affect employers with California employees beginning Jan. 1, 2020: a new individual health coverage mandate and a new notice requirement related to flexible spending accounts.

Health Coverage Mandate for Individuals

The first new law imposes a mandate on all California residents to obtain health coverage for themselves, their spouse (or domestic partner), and their dependents beginning on Jan. 1, 2020. The coverage must meet minimum essential coverage (MEC) requirements as defined by California law. Individuals who do not comply will face California state tax penalties unless they qualify for an exemption from the law. The law also increases premium subsidies to individuals for coverage through Covered California.

The law does not require the employer to give employees any immediate notice of the new individual mandate. Instead, the state of California will notify all individuals who did not indicate on their individual income tax returns they and their dependents were enrolled in and maintained minimum essential coverage for the preceding year.

Nor does the law require that employers provide health coverage (although such coverage may be otherwise mandated by the Affordable Care Act (ACA)). Employees may obtain coverage via Covered California if their employers do not provide health coverage.

However, the law does impose reporting and disclosure obligations on employers who do provide coverage.

Employers, other sponsors of employment-based health plans, and insurers that provide coverage meeting the MEC requirements to California residents must report coverage to the California Franchise Tax Board (FTB) by March 31 of the year after close of each calendar year. The FTB will develop reporting forms for employers, which will include, but is not necessarily limited to, each covered individual's (and covered dependents') name, address, taxpayer identification number and dates of coverage during the calendar year. The first reports to the FTB will be due March 31, 2021.

In addition, employers that sponsor health plans that provide coverage that meets the individual mandate's MEC requirements must provide a written statement to each employee or former employee including the name, address and telephone number of the employer contact and the same information that is provided to the FTB as described above. These notices must be provided to covered employees and former employees by the Jan. 31 following the calendar year in which the coverage was provided (i.e., the first report to the FTB will be due Jan. 31, 2021). Failure to report this coverage can trigger penalties of $50 per covered individual per calendar year. Employers subject to the ACA may instead provide completed IRS Form 1095-Cs to their employees. Employers may contract with service providers or insurers to provide the returns and disclosures required by this law.

Flexible Spending Account Notices

The other new law effective Jan. 1, 2020, applies to FSAs, which are expense reimbursement plans (also known as flexible spending accounts) that are part of an employer's cafeteria plan under Section 125 of the Internal Revenue Code. They permit employee pre-tax salary contributions to go into an account from which the employee may be reimbursed during a plan year for expenses incurred for medical care, dependent care and adoption assistance.

The imprecisely worded three-sentence law requires employers with California employees that are maintaining FSA accounts to notify the employee participants of any "deadline to withdraw funds before the end of the plan year;" in other words, notice must be given of any run-out period (the period to submit claims) that ends prior to the end of the year. This law applies where FSA participants will lose FSA coverage of reimbursement of claims upon a mid-year termination of employment. It also applies to a mid-year termination of the FSA plan, which could occur because of a mid-year sale or acquisition of the employer sponsor. The statute requires giving the notice to FSA participants in two different forms, only one of which can be electronic.  In addition to an email or text message notification, the employer should also notify employees by mail, telephone or in-person notice. The statute gives no mandatory notice language or model form, nor any specific required notice timing or specific penalty for violation.

ERISA Preemption

As with many other such state statutes attempting to regulate issues relating to benefit plans, the validity of the new laws may be challenged in court. Most healthcare FSAs are subject to ERISA. State laws regulating ERISA plans often are preempted. However, the California Department of Labor Standards (DLSE) will attempt to enforce these laws, even if challenged. Any challenge will take years to be resolved, and the DLSE will treat the laws as enforceable until a court finds otherwise.

The new health coverage individual mandate may not be struck down as preempted by ERISA because it imposes a tax rather than requiring any action to be taken by employees, or change to be made by employers to their benefit plans.

The new flexible spending account rules are more likely to be invalidated with respect to healthcare FSAs. Most dependent care and adoption assistance FSAs are not subject to ERISA and therefore ERISA will not preempt California law with regard to that type of FSAs. However, employers are advised to comply with the new requirement by giving notice of the run-out period to prevent any DLSE enforcement action or claims by employees.

Action Items

We expect that any employer who currently does not offer health coverage because it is not subject to the ACA mandate will be under pressure from potential California employees to adopt a health plan.

With respect to FSAs, providing several notices to employees of upcoming run-out period deadlines for mid-year terminations is a good practice, and we recommend that employees adopt the practice of providing such notices for all employees throughout the United States. Also, employers may consider changing plan design to extend the runout period to the end of the year for all employees who terminate employment mid-year.

Yana S. Johnson is a principal in the San Francisco, California, office of Jackson Lewis. She has nearly 20 years of experience helping clients with employee benefits and executive compensation issues.

Raymond P. Turner is of counsel in the Dallas, Texas, office of Jackson Lewis. He has nearly 30 years of experience in all aspects of employee benefits law and is board certified in tax law by the Texas Board of Legal Specialization.