Author Archives | Andie Schieler

About Andie Schieler

Andie is an attorney and works in J.W.Terrill's Compliance division specializing in interpreting the Affordable Care Act and various insurance laws. She advises clients on legal and regulatory issues affecting their employee benefit plans. She obtained her law degree from Saint Louis University and undergraduate from Indiana University Bloomington.

Mistaken HSA Contributions

March 7, 2019

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Health Savings Accounts (HSAs) have become increasingly popular over the past decade. When combined with a qualified high deductible health plan (HDHP), an HSA allows an individual to save money to be used on qualifying medical expenses at a later date. Employees may elect to contribute money to their HSA account on a pre-tax basis through their employer’s cafeteria plan. Employers aren’t required to contribute to employees’ HSA accounts, but many choose to do so as part of their health insurance program.

Unfortunately, mistakes can and do occur when administering HSA contributions. Employers may think mistakes are easy to fix, but the HSA regulations are very particular about when (or even if) a mistaken HSA contribution can be recovered. Employers frequently can’t recover the funds even if the HSA holder/employee agrees to the recoupment. However, the IRS does allow an employer is allowed to recover the mistaken contributions in certain situations.

Employee Was Never HSA Eligible

If HSA contributions are made to an employee who was never an HSA-eligible individual, the employer can recover the amounts. The employer may request the bank administering the HSA to return the funds. This option is not available if the employee was eligible for even one month during the year.

Administrative or Process Error

The IRS recently released General Information Letter 2018-0033 clarifying when and how to fix certain HSA contribution mistakes. If there is clear documentary evidence of an administrative or procedural error, the employer may request the HSA bank return the money to the employer so all parties are in the same position before the mistake was made. Examples of the types of mistakes that may be corrected include:

  • Withholding and contribution of amount in excess of the employee’s HSA salary reduction election;
  • Incorrect entries by payroll administrators;
  • Excess amount due to duplicate payroll files being accessed;
  • Employee payroll election change is not timely processed resulting in wrong amount being withheld;
  • Incorrect HSA contribution amount calculation;
  • Wrong decimal entry;
  • Incorrect spreadsheet being accessed; and
  • Employee name confusion.

The above list is not exhaustive and only contains examples of administrative and procedural errors that can be fixed. Employers should maintain documentation to support their decision to correct a mistaken contribution. Documentation should include details on the type of mistake, how it occurred, the impact and the steps the employer took to correct the mistake.

Employee Is No Longer HSA Eligible

Another common mistake is for an HSA holder to continue contributing to their HSA when they are no longer eligible. Individuals must be enrolled in a HDHP and have no disqualifying coverage (such as enrollment in Medicare/Medicaid or coverage under a general purpose FSA or HRA) to be able to contribute to an HSA account.

The 2019 annual HSA contribution limit for those with self-only HDHP coverage is $3,500 and $7,000 for those with family HDHP coverage. HSA holders who lose HSA eligibility during the year will
have their annual contribution maximum pro-rated for the months in which they were HSA eligible. HSA holders who are eligible as of December 1st may contribute up to the annual maximum, regardless of only being HSA eligible for part of the year, as long as they retain HSA eligibility through the end of the following calendar year.[1]

Corrective Distributions

If an individual makes or receives contributions in excess of their annual HSA contribution limit, including contributions received from an employer that the employer is unable to recoup as described earlier, they may be subject to a cumulative 6% excise tax for each year the impermissible contributions remain in the HSA.

To avoid this penalty, the excess contributions must be distributed to the account holder before the account holder’s federal income tax return filing deadline for that taxable year (typically April 15th). HSA holders must also be careful also include the net income attributable to such excess contributions in their gross income for the taxable year in which the distribution was received. This is done by notifying the HSA bank of a need for a corrective distribution. The HSA bank will provide the account holder with the necessary forms and information to make the corrective distribution. We recommend HSA holders work with a tax advisor to correct any HSA errors.


[1] This is described in more detail in “Frequently Misunderstood Health Savings Account Issues” appearing earlier in this newsletter.

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Slowly Filling in the Blanks

January 2, 2019

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IRS Releases Guidance on Qualified Transportation Fringe Benefits for Tax-Exempt Organizations

The Tax Cuts and Jobs Act (the “Act”), enacted in December 2017, eliminated the business deduction employers received for providing qualified transportation fringe benefits (“fringe benefits”) to their employees beginning January 1, 2018. The Act did not affect the employee exclusion, which enables the amount of qualified transportation fringe benefits provided by employers to be excluded from employee gross income up to specified monthly limits ($260 in 2018; $265 in 2019). Since the loss of the business tax deduction would not affect a tax-exempt organization, Congress included a provision in the Act that requires tax-exempt organizations to add the amount of these fringe benefits provided to their employees to its unrelated business taxable income (UBTI). However, the Act didn’t specify exactly how to calculate the disallowed deduction or UBTI amount, particularly for qualified parking expenses.

The Internal Revenue Service released Notice 2018-99 that fills in this gap by describing how to calculate the disallowed deduction amount for taxable organizations or UBTI for tax-exempt organizations. The Department of the Treasury and the IRS will eventually publish proposed regulations but, in the meantime, IRS Notice 2018-99 may be relied upon for fringe benefit amounts paid or incurred after December 31, 2017. Essentially, the calculation will depend upon whether the employer pays a third party for parking, or if the employer owns or leases a parking facility.

We believe the ultimate result is that employers will move away from or limit providing reserved parking spaces to employees for reasons that will become clear later in this article.

Employer Pays a Third Party for Parking Space 

If an employer pays a third party so their employees may park in the third party’s garage or lot, the disallowed deduction or UBTI amount is generally the total annual cost paid to the third party. Keep in mind that if the amount exceeds the monthly exclusion limit ($260 in 2018; $265 in 2019), the excess amount must also be treated as taxable compensation to the employee. Fortunately, this excess amount will not be included in the UBTI calculation.

Employer Owns or Leases All or Part of a Parking Facility

Until further guidance is released, employers may use any reasonable method to calculate the disallowed deduction or UBTI amount if the employer owns or leases a portion of a parking facility. The IRS specifically noted that “using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method.”

If the employer owns or leases more than one parking facility in a single geographic location, the employer may aggregate the number of spaces in those parking facilities using this process. If the parking facilities are in multiple geographic areas, the employer cannot aggregate the spaces. For those who prefer firmer guidance, Notice 2018-99 provided steps an employer may follow to calculate that amount. Yes, this is really what the guidance says.

Step 1: Reserved Employee Spaces

The employer must first calculate the amount attributable for reserved employee spaces. This is done by determining the percentage of reserved employee spaces in relation to total parking spaces and multiplying that by the employer’s total parking expenses for the parking facility. “Total parking expenses” is defined in the Notice and does not include a deduction for depreciation or expenses paid for items near the parking facility, such as landscaping or lighting. The resulting amount is the disallowed deduction or the amount that will be added to a tax-exempt organization’s UBTI. The IRS will allow employers that have reserved employee spots until March 31, 2019 to change their parking arrangements to decrease or eliminate the number of reserved employee spots retroactive to January 1, 2018.

Step 2: Primary Use Test

The employer must next identify the remaining spaces and determine whether they are primarily used for the general public or for its employees. The IRS defines “primary use” as greater than 50% of actual or estimated usage during normal hours on a typical work day. If parking space usage significantly varies, the employer can use any reasonable method to determine the average usage. The portion of expenses not attributable to the general public’s use is the disallowed deduction or amount included in a tax-exempt organization’s UBTI.

Step 3: Reserved Non-Employee Spots

If the primary use of the employer’s remaining parking spaces is not for the general public, the employer must identify the number of spaces exclusively reserved for non-employees (such as “Customer Only” parking). Spaces reserved for partners, sole proprietors and 2% shareholders are also included in this category. If the employer has reserved non-employee spaces, it needs to determine the percentage of reserved non-employee spaces in relation to the remaining total spaces. That amount is multiplied by the employer’s remaining total parking expenses. This is the amount of the disallowed deduction or amount included in a tax-exempt organization’s UBTI.

Step 4: Determine Remaining Use and Allocable Expenses

If there are any leftover parking expenses left over, the employer must reasonably determine employee use (either actual or estimated usage) of the remaining spaces during normal work hours and the related expenses for those spaces. The amount of expenses attributable to employee use is the disallowed deduction or amount included in in a tax-exempt organization’s UBTI.

IRS Notice 2018-99 does provide some helpful examples of this four step process illustrating how the calculation works in different situations. If tax-exempt organizations have $1,000 or more of UBTI they will need to report using Form 990-T.  Those tax-exempt organizations with less than $1,000 in UBTI are not required to file and are not subject to the tax.

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Better Late Than Never

November 16, 2018

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The Internal Revenue Service released Revenue Procedure 2018-57 today, which contains the 2019 cost-of-living adjustments for various employee benefit plans including employer sponsored health care flexible spending accounts, qualified transportation fringe benefits, and adoption assistance programs. The following provides a summary of the annual limits for these specific benefit programs along with a summary of the 2019 high deductible health plan and health savings accounts limits announced earlier this year.

Each of the limits described below are applicable for taxable years beginning in 2019. If you have any questions or need further details about the tax limits and how they will impact your employee benefit programs, please contact your account team.

Health Care Flexible Spending Accounts
Employees will be allowed to contribute up to $2,700 per plan year.

Qualified Transportation Fringe Benefit
The monthly dollar limit on employee contributions has increased to $265 per month for the value of transportation benefits provided to an employee for qualified parking. The combined transit pass and vanpooling expense limit will also increase to $265 per month.

Adoption Credit/Adoption Assistance Programs
In the case of an adoption of a child with special needs, the maximum credit allowed under Code Section 23 is increased to $14,080. The income threshold at which the credit begins to phase out is increased to $211,160. Similarly, the maximum amount that an employer can exclude under Code Section 137 from an employee’s income for adoption assistance benefits is increased to $14,080.

HDHP and Health Savings Account (HSA) Amounts
Earlier this year, the IRS released Revenue Procedure 2018-30 which included the 2019 minimum deductible and maximum out-of-pocket limits for high deductible health plans (HDHPs) and the maximum contribution levels for HSAs.

  • The minimum annual deductible for a plan to qualify as a HDHP will remain at $1,350 for self-only coverage and $2,700 for family coverage;
  • The maximum annual out-of-pocket limits allowable under an HDHP will increase to $6,750 for self-only coverage and $13,500 for family coverage; and
  • The 2018 maximum allowable annual contribution employees may make to their HSAs will increase to $3,500 for an individual with self-only coverage and increase to $7,000 for an individual with family coverage.

The HSA catch-up contribution limit for participants who are 55 or older on December 31, 2019, remains an additional $1,000 per year.

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Annual Creditable Coverage Notice Deadline Approaches

September 21, 2018

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The annual deadline for the Creditable Coverage notice is arriving once again. The Centers for Medicare and Medicaid Services (CMS) requires employers offering prescription drug coverage to disclose to all Medicare Part D eligible individuals the creditable status of their plan by October 15th each year. Employers may use the model notices available here on CMS’s website.

It can be very difficult for employers to know exactly who should receive the notice as there are ways to become Part D eligible beyond attaining age 65. Many employers resolve this issue by including the notice in enrollment materials or providing separate mailings to all employees who participate in the employer-sponsored plan. We’ve previously discussed distributing the notice here.

If mailing the notice, first-class mail is generally preferred. A single notice may be sent to Part D eligible employees and their Part D eligible spouse or dependents. If the employer is aware a spouse or dependent resides at a different address, a separate notice must be sent to their address. When including with enrollment materials, the notice must be:

  • Prominently referenced; and
  • In a (minimum) 14-point font in a separate box, bolded or offset on the first page.
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PCORI Fee Deadline Approaches

June 20, 2018

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The annual Patient Centered Outcomes Research Institute (PCORI) fee is due by July 31, 2018. The fee was created by the Affordable Care Act to help fund the nonprofit Patient-Centered Outcomes Research Institute which supports clinical effectiveness research. Typically only employers with self-funded health plans, including health reimbursement arrangements (HRAs), must calculate and pay the fee. Health insurance companies will pay the fee on behalf of employers with fully-insured health plans.

Plan sponsors will use IRS Form 720 (Quarterly Federal Excise Tax Return) to report the fee. The fee amount changes annually and is tied to the plan year. The amount due each year is calculated by multiplying the applicable fee by the average number of covered lives in the plan. Employers have several methods available to calculate the average number of covered lives including the actual count method, snapshot method and Form 5500 method. For plan years ending in January 2017 through September 2017, the fee will be $2.26. For plans ending in October 2017 through December 2017, the fee will be $2.39.

For more information on how to calculate and pay the PCORI fee, please contact your service team.

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2019 HSA Contribution Limits

May 14, 2018

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The IRS announced inflation-adjusted Health Savings Account limits for 2019 in Revenue Procedure 2018-30. They also announced minimum annual deductible and maximum annual out-of-pocket thresholds for 2019.

* The IRS announced they would continue to allow the original limit to stand for the remainder of 2018 despite the mid year reduction to $6,850.

 

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IRS Extends Relief for Those Affected by 2018 Family HSA Contribution Maximum Change

April 26, 2018

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In early March the IRS announced a change in the family HSA contribution maximum for 2018. As previously discussed, the Tax Cuts and Jobs Bill changed the way the IRS calculates benefit contribution maximums resulting in the 2018 family HSA contribution maximum changing from $6,900 to $6,850.

The IRS announced today that taxpayers with family coverage under a High Deductible Health Plan (HDHP) may continue to use the $6,900 limit for the rest of 2018. The IRS recognized the $50 reduction would “impose numerous unanticipated administrative and financial burdens” including the cost of adjusting cafeteria plan contributions for employers allow pre-tax HSA contributions.

This announcement is a little late for many who have taken steps to adjust their contributions. The new guidance provides ways for HSA holders to recoup those “mistaken distributions” (the $50 difference) without penalty. However, HSA custodians are not required to allow individuals to repay mistaken distributions. If an individual has received a distribution from an HSA of an excess contribution based on the $6,850 limit, they may repay the funds to the HSA. Those funds will not be includable in the individual’s gross income, will not be subject to the 20% excise tax on excess contributions and will not need to be reported on Form 1099-SA or Form 8889.

Those individuals who received a distribution from an HSA of an excess contribution based on the $6,850 limit but choose not to repay the distribution to the HSA will not be required to include the amount in gross income or pay the 20% excise tax if the distribution is received on or before the individual’s tax filing deadline (including extensions of time).

The tax treatment described above will not apply to distributions from an HSA that are attributable to employer contributions if the employer relies upon the $6,900 limit. Then, the distribution must either be used to pay qualified medical expense or it must be includible in the employee’s gross income and subject to the 20% excise tax. Employers should consult tax advisors with any concerns regarding this IRS’s guidance.

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IRS Lowers 2018 Family HSA Contribution Maximum

March 6, 2018

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Late last year Congress passed the Tax Cuts and Jobs Bill into law. It contained a number of tax reforms including a change to the way the Internal Revenue Service (IRS) calculates cost of living increases. The IRS now has to calculate the increases using “Chained CPI.” The new method takes into account consumers switching to cheaper products which reduce the effect of inflation. As a result, Chained CPI results in lower cost of living increases than what we’ve previously seen.

These cost of living increases are used to calculate the HSA contribution maximums for the year. Due to the new calculation method, the IRS announced today the family HSA contribution maximum is reduced from $6,900 to $6,850. Health FSAs and other benefit limits are not impacted. The 2018 limits are as follows:

HSA/HDHP Limits 2018 2017 2016
HSA Contribution Limit (Self-Only) $3,450 $3,400 $3,350
HSA Contribution Limit (Family) $6,850 $6,750 $6,750
HSA Catch-up Contribution Limit (55+years) $1,000 $1,000 $1,000
HDHP Minimum Deductible (Self-Only) $1,350 $1,300 $1,300
HDHP Minimum Deductible (Family) $2,700 $2,600 $2,600
HDHP Maximum Out-of-Pocket (Self-Only) $6,650 $6,550 $6,550
HDHP Maximum Out-of-Pocket (Family) $13,300 $13,100 $13,100

Ultimately it is HSA holders’ responsibility to abide by the contribution maximums as they are individually owned accounts. Because it is so early in the year, most HSA holders likely haven’t contributed the maximum yet. If they have, they will need to speak to their tax advisors about a curative distribution, which can help avoid the 6% excise tax on excess contributions.

Employers should communicate the family HSA maximum contribution change to their employees, especially if they previously provided the old limit. HR departments will also need to check their payroll accounts and adjust any employee HSA contributions that would exceed the maximum.

In addition, limits for employer adoption assistance programs have changed. The maximum amount that can be excluded from an employee’s gross income for qualified adoption expenses dropped from $13,840 to $13,810 and the adjusted gross income threshold after which the adoption exclusion begins to phase out is lowered from $207,580 to $270,140.

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Upcoming 1094/1095 Deadline

February 22, 2018

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Two 1094/1095 deadlines are quickly approaching for applicable employers. Employers filing paper copies of Forms 1094/1095 have until February 28, 2018 to mail them in to the IRS. Only those employers filing less than 250 informational returns are allowed to file paper copies and it must be sent via First-Class mail. The forms must be sent in a flat mailing (not folded) with no paperclips or staples. If sending the forms in multiple packages, write the employer’s name on each package, number them consecutively and place Form 1094-C in the first package. Where to send the forms depend on where the employer’s principal business office or agency is located.

The second deadline is on March 2, 2018. Employers have until then to distribute copies of Forms 1095-B or 1095-C to individuals. This deadline was originally January 31st but the IRS extended it in December 2017. Employers can provide these forms electronically (email or posting on employer’s website) but employees must specifically consent to the electronic distribution. Consent may be given on paper or electronically. If consent is given on paper, the individual must confirm the consent electronically.

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What the 2017 Tax Reform Actually Means for Employers

January 5, 2018

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On December 22nd President Trump signed the 2017 Tax Cuts and Jobs Act, marking his administration’s first successful modification to the Affordable Care Act (ACA). Two core aspects of the ACA are the employer mandate and in the individual mandate. The individual mandate requires U.S. citizens have minimum essential coverage for each month, qualify for an exemption, or face a tax penalty. Contrary to popular news, the tax act did not repeal the individual mandate. Rather, it took the teeth out of the law by making the individual mandate penalties $0 as of 2019. Individuals will still need to either have qualifying coverage or pay a penalty for the 2017 and 2018 filing seasons.

The employer mandate was left untouched by the bill. Applicable Large Employers (ALEs) will still need to offer affordable, minimum essential coverage providing minimum value to their full-time employees and their dependents. This means employers likely won’t be affected until 2019 when healthy individuals may decide to forgo coverage absent a penalty. Some speculate employers may have adverse enrollment effects as a result of losing healthier employees.

There’s been some uncertainty if Congress will launch another repeal effort in 2018. Senate Majority Leader Mitch McConnell suggested in late December that the Senate will give up ACA repeal efforts in 2018 due to the difficult odds of repealing and replacing with a 51-49 Senate party division. But other Republicans, including Senator Lindsey Graham (R-S.C.) and House Speaker Paul Ryan (R-Wis.) expressed support for another attempt at reform. Ultimately employers will need to wait to see if Congress will pass other changes to the ACA.

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IRS Gives an Early Present to 1094/1095 Filers

December 22, 2017

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Today the IRS announced in Notice 2018-06 they will be extending due dates and good faith filing relief to 2017’s 1094/1095 reporting requirement. Under the Affordable Care Act, Applicable Large Employers (ALEs) are required to complete Form 1095-C for each of their full-time employees. In addition, issuers of coverage must report on all those enrolled in their plans with Form 1095-B. The original deadline to provide a copy of these forms to individuals was January 31, 2018. The IRS extended the deadline to provide the 1095-C and 1095-B forms to March 2, 2018. However, employers will still need to send copies with the IRS by February 28, 2018 or by March 31, 2018 if filing electronically. In addition, the 30 day extension will not be available to the new March 2, 2018 deadline but it will still be available for the IRS filing deadlines by using Form 8809.

As we’ve previously mentioned, the IRS will not require tax filers to submit copies of their Form 1095-B or 1095-C with their tax returns. Instead, filers will certify health insurance coverage by checking certain boxes on their returns.

The notice also extended the good faith filing relief that was available last year. This means the IRS will not impose penalties on reporting entities if they can show they made a good-faith effort to comply with the information-reporting requirements. This relief applies to incorrect and incomplete information reported on the forms. No relief is available to employers who do not timely file the forms.

 

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New ALEs Subject to Employer Mandate on Calendar Year Basis

November 14, 2017

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The Affordable Care Act’s employer shared responsibility provisions require Applicable Large Employers (ALEs) to offer affordable, minimum value coverage to their full-time employees or face a penalty. In previous years, the IRS extended transitional relief to ease the burden of the employer mandate. For example, non-calendar year plans with part of their 2015 renewal falling in 2016 wouldn’t be subject to the employer mandate for those months in 2016 despite their ALE status. Unfortunately, the government has declined to extend any more transitional relief.

ALE status is determined by calculating the average number of Full Time Equivalent (FTE) employees during the prior calendar year. Because ALE status and the employer mandate apply on a calendar year basis, employers who are on the brink of becoming ALEs due to employee growth will need to monitor their full time equivalent count. If an employer grows substantially during the second half of a year, it may cross the 50 FTE threshold for that year and need  to comply as of January 1st of the following year. This can pose a problem for non-calendar year plans that may be left scrambling to comply with the law in the middle of their plan year.

Luckily the final regulations still contain some relief for those first-time ALEs. The employer mandate imposes two potential penalties for non-compliance. However, first-time ALEs will not be subject to a subsection (a) penalty for failing to offer full-time employees coverage as long as they offer coverage by April 1st of the first year following ALE status. If the employer does not offer coverage to the full-time employee by April 1st, the employer may be subject to the subsection (a) penalty for those months (January-March) in addition to any subsequent calendar months for which coverage is not offered. The first-time ALE will also not be subject to a subsection (b) penalty if the coverage offered on April 1st provides minimum value. If the employer does offer coverage by April 1st but the coverage does not provided minimum value, the employer may be subject to the subsection (b) penalty for those initial calendar months (January-March) in addition to any subsequent calendar months for which the penalty may apply. This transitional relief is only available for the first year in which an employer is an ALE. ALEs will not be able to rely on it for subsequent years if their employee counts fluctuate over and under the 50 FTE threshold.

In sum, employers with non-calendar year plans on the verge of being ALEs should be prepared to offer “full-time” employees coverage on January 1st the first year they are an ALE.

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