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Tax Consequences of Gym Membership Reimbursement

July 10, 2019

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All Good Deeds Get Taxed…
In order to encourage employees to exercise, some employers and insurance carriers reimburse or subsidize employees for the cost of a gym membership. Cash or cash equivalent rewards (i.e., gift cards) are always taxable income to the employee. Employers frequently offer non-cash rewards to employees in the belief that such things as t-shirts, water bottles, Fitbits, and gym memberships are not taxable to the employee, but each type of reward needs to be evaluated to determine whether or not it can be provided on a tax free basis.

Unless, it’s of Little Value
Under the Internal Revenue Code (the “Code”), certain fringe benefits may qualify for tax free treatment if they are of little value and provided infrequently, making it hard to reasonably account for their cost. These are known as de minimis fringe benefits and can include company-branded water bottles, towels, T-shirts, and gym bags. By contrast, a gym membership reimbursement for multiple months will rarely qualify as a de minimis fringe benefit due to the dollar value, and the amounts are both known and easily accounted for. The reimbursement will also be viewed as a cash or cash equivalent, which is always taxable income to the recipient.

Off-Site Versus On-Site Gyms
While exercise has obvious health benefits, the value for an “off-site” (or third party gym open to the public) gym membership generally cannot be provided as a tax-free medical benefit because it does not meet the Code’s exception for “medical care.” Medical care is defined as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. Expenses for items or services that provide only general health benefits are considered taxable, and the IRS feels that gym memberships rarely qualify as tax-free medical care.[1]

The IRS makes a limited exception to the broad “general health” exclusion. If an individual can prove that he or she was diagnosed with a specific illness, is using the gym as treatment, and has only incurred the gym membership fees because of the illness under the direction of his or her health care provider, the membership fees may be excluded from the individual’s taxable income.[2] This will almost certainly require a supporting physician’s statement.

Note: This limited exception will only apply to the employee who can demonstrate this and will not broadly apply to all employees receiving a reimbursement or subsidy.

Also, the IRS does make exceptions for “on-site” gyms and employer-owned athletic facilities.
To qualify, the gym or facility needs to be:

  1. Located on property owned or leased by the employer;
  2. Staffed by employees or a third-party hired by the employer for its operation; and
  3. Closed to the public.

The most common example would be an employer who has an on-site gym as an employee perk, along with a cafeteria, and other amenities.

Does it Matter Who Pays?
No, it doesn’t matter. Sometimes, insurance carriers contribute to the cost of participant gym memberships. While the employer is not the one paying for the gym memberships, the employer most likely should be the one addressing the tax issues. This is because, but for the employer sponsored medical plan in which the employee participates, the carrier wouldn’t be paying the incentive. Since the reward is a cash or cash equivalent incentive, it’s taxable income. It’s becoming more common for insurance carriers to address the tax consequences of this approach with employers.

How Do We Account for the Value of the Off-Site Gym Benefit?
Since the off-site gym membership reimbursement is considered a fringe benefit and is unlikely to fit within the medical care exception, the value of the reimbursement will be added as income to employee’s IRS Form W-2. The employer will add the amount to Box 1, under Wages, Tips and Other Compensation, and might detail the amount in Box 15 or on a separate statement.[3]

Summing it up
Employers need to evaluate each incentive and benefit offered to employees and determine its tax status. The reimbursement of off-site gym membership fees is generally taxable to employees and must be reported in Box 1 of Form W-2.

[1] The IRS has addressed this on several occasions, most recently in IRS Memorandum 201622031 (April 14, 2016).

[2] IRS Memorandum 201622031 (April 14, 2016).

[3] The U.S. Department of Labor recently proposed rules that would exclude the value of gym memberships (even if offsite) from being considered as regular compensation for the purposes of determining overtime under the Fair Labor Standards Act.

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Agencies Release 2020 Adjusted Limits

July 9, 2019

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Now that the U.S. Department of Health & Human Services (HHS) has released its final rules, and the IRS has released Rev. Proc. 2019-25, we know the 2020 cost-of-living adjustments for non-grandfathered plans subject to the Affordable Care Act (ACA), high-deductible health plans (HDHPs), and health savings accounts (HSAs). For comparison purposes, the limits for 2019 and 2020 are below:

ACA Limit 2019 2020
Out-of-Pocket Maximum Limit[1] Self-only: $7,900

 

Family: $15,800

Self-only: $8,150

 

Family: $16,300

 

 

HDHP/HSA Limits 2019 2020
HDHP Minimum Deductible Self-only: $1,350

 

Family: $2,700

Self-only: $1,400

 

Family: $2,800

 

HDHP Maximum Out-of-Pocket Self-only: $6,750

 

Family: $13,500

Self-only: $6,900

 

Family: $13,800

HSA Annual Contribution Maximum Self-only: $3,500

 

Family: $7,000

 

Self-only: $3,550

 

Family: $7,100

HSA Catch-up Contribution Limit (age 55 and older) $1,000 $1,000

Also in HHS’ Final Rules – New Prescription Drug Guidance

Consumers and group health plans alike have struggled with the rising cost of prescription drugs, and there have been numerous high-profile cases involving dramatic price increases for prescription medication. It may seem impossible to effectively reign it in, even with existing manufacturer coupons, discount cards, and other drug-rebating programs. HHS has debated several prescription drug policy changes directed at lowering prices and has adopted a new approach. Beginning in 2020, fully insured and self-insured plans will be able to exclude the value of drug manufacturer coupons used to buy brand-name medications if a medically-appropriate generic-equivalent is available. This change is intended to shift costs from employers to consumers encouraging them to choose equally effective, lower-cost FDA-approved generic medication. This approach is purely optional. Plans do not have to disregard manufacturer coupons and may be able to include those amounts when calculating the participant’s annual out-of-pocket maximum. Keep in mind that some states may prohibit fully insured plans from doing this.

[1] This limit does not apply to plans that remain grandfathered under the ACA.

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The Affordable Care Act’s Employer Mandate: Part 1

July 9, 2019

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Determining Applicable Large Employer Status

This article is Part 1 in a series intended to provide an overview of the Employer Shared Responsibility provisions (also known as the “employer mandate”) under the Affordable Care Act (ACA). The employer mandate generally requires certain employers – known as applicable large employers – to offer medical coverage to full-time employees in order to avoid certain potential penalties.

This article will explain if and when the employer mandate applies. Future articles will address how to determine who is a full-time employee, offers of coverage, and how to report this information to the IRS.

What’s in a Name?

In 2015, the employer mandate changed the landscape of employer-provided group health plans for insurance carriers and employers alike. The employer mandate is filled with many defined terms, including:

  • Full-time employee (FTE) – An employee who is expected to work at least 30 hours per week on average and/or who does average at least 30 hours of service per week over the course of a measurement period.
  • Applicable large employer (ALE) – An ALE is an employer who employs 50 or more FTEs (including full-time employee equivalents) on average during the prior calendar year. ALE status is also determined in the aggregate for certain groups of related legal entities identified under the Internal Revenue Code, and each member employer of an aggregated ALE group is known as an applicable large employer member (ALEM).
  • Dependent – An FTE’s natural or adopted child (or a child placed for adoption) who has not reached age 26. For employer mandate purposes, “dependent” does not include a spouse or any other child including a stepchild or foster child.[1]
  • Minimum essential coverage – This is broadly defined to include most traditional job-based health plans (including retiree and COBRA coverage).
  • Minimum value – Minimum value means the plan covers at least 60% of the total allowed cost of covered services expected to be incurred by a standard population and must include coverage for hospital and physician services. In layman’s terms, it’s a bronze-level plan.
  • Affordable – Affordable coverage means the employee’s share of self-only coverage in the lowest-cost available plan providing minimum value doesn’t exceed an indexed percentage (9.86% in 2019) under any of three employer safe harbors: (1) Federal Poverty Limit, (2) Rate of Pay, and (3) Form W-2. These safe harbors will be addressed in a later article in this series.
  • Section 4980H(a) Penalty – This penalty is triggered when an ALE/ALEM fails to offer minimum essential coverage to at least 95% of its FTEs and at least one FTE qualifies for a subsidy in the public health insurance exchange. This penalty amount is indexed and pro-rated monthly ($208.33/month or $2,500/year in 2019) and is multiplied by all of the ALE/ALEM’s FTEs. An ALE may exclude 30 FTEs from this penalty calculation. This 30 FTE exclusion limit applies at the aggregated ALE group level, and an ALEM is limited to excluding its proportional share of the 30 FTEs. We will also refer to this as the “no offer” penalty in this article.
  • Section 4980H(b) Penalty – This penalty is triggered when an ALE/ALEM offers minimum essential coverage to at least 95% of its FTEs but fails to offer affordable, minimum value coverage to an FTE who qualifies for a subsidy in the public health insurance exchange. This penalty is also indexed and pro-rated monthly ($312.50/month or $3,750/year in 2019) but is limited to those FTEs who actually qualify for subsidies. We will also refer to this as the “inadequate offer” penalty in this article.

This article focuses on how to determine ALE/ALEM status. The other terms and their employer mandate definitions will be covered in greater detail in later articles in this series.

Defining an ALE (or ALEM)

As indicated earlier, an ALE is an employer who employs 50 or more FTEs (including full-time employee equivalents) on average during the prior calendar year. With this definition fresh in mind, it’s clear that the first step is to determine if the employer has 50 or more FTEs in “Year 1” making it an ALE for “Year 2.” Sounds simple, right?

How to Determine ALE Status

 

 

 

 

Step 5 in Action

 

 

 

 

What about First-Timers? Transitional Relief is Available.

Both ALE status determinations and the employer mandate apply on a calendar year basis without regard to an employer’s actual plan year. Employers who are on the brink of becoming ALEs need to continuously monitor their employee count. If an employer grows during the year or has employees logging extra hours, it may cross the 50 FTE threshold in that year (Year 1) and face the employer mandate the following year (Year 2). This can pose a particular problem for an employer with a non-calendar year plan that could be left scrambling to comply with the employer mandate in the middle of its plan year. Remember, the employer mandate imposes monthly penalties for non-compliance beginning January 1st of Year 2.

Luckily the final regulations contain some relief for first-time ALEs. The regulations give “first-timers” three months (January through March of Year 2) to:

  1. Do the math for Year 1 to determine if it is an ALE for Year 2;
  2. Find a broker;
  3. Negotiate a plan;
  4. Put together open enrollment materials;
  5. Have open enrollment; and
  6. Make coverage effective by April 1st of Year 2.

If the new ALE does not offer coverage to its FTEs (and dependents) by April 1st, the employer may be subject to the subsection (a) “no offer” penalty for those months (January-March) in addition to any subsequent calendar month for which coverage is not offered.

The first-time ALE also gets a break from the subsection (b) penalty if the coverage offered by April 1st provides minimum value and is affordable. If the employer does offer coverage by April 1st but the coverage is “inadequate,” the employer may be subject to the subsection (b) penalty for January, February and March in addition to any subsequent calendar month for which the penalty may apply.

So, Should You Care?

If you’re an employer who reaches the magic number of 50 or is over 50 FTEs, then you should care a lot – and prepare. The transitional relief is only available for the first year in which an employer is an ALE, even if the employer goes back and forth between ALE and non-ALE status. Neglecting or not being prepared for the employer mandate and the responsibilities it entails could be very costly. We will cover how to determine FTE status and the offer of coverage in Part 2 of this series.

Authors:

Andie Schieler – Andie is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for J.W. Terrill a Marsh & McLennan Agency

Jennifer Stanley – Jennifer is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan Agency.

Chris Beinecke – Chris is the Employee Health & Benefits National Compliance Leader for Marsh & McLennan Agency.

 

[1] By contrast, stepchildren and foster children do count as dependents for other ACA provisions such as the ACA’s dependent coverage to age 26 mandate.

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President Signs Executive Order to Improve Healthcare Price and Quality Transparency

July 2, 2019

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The President signed an Executive Order (or “Order”) on June 24, 2019, directing the U.S. Departments of Health and Human Services (HHS), Treasury, and Labor (collectively, the “Tri-Agencies”) and other federal departments (together, the “Various Agencies”) to develop rules designed to assist patients in making informed decisions about their healthcare.

What and When…
This Order continues the President’s agenda to reform the healthcare industry. The Order requires a number of federal agencies to issue guidance, rules and tools designed to increase transparency in the healthcare market and certain other changes. These include (all timing is measured from the date of the Order):

Within 60 days

  • HHS must propose regulations that require hospitals to publically post charge information, including negotiated rates, on common or shoppable services[1] in a consumer-friendly way. While price transparency is the primary goal, the Order contained other directives that will potentially impact how patients interact with healthcare.

Within 90 days

  • The Tri-Agencies must issue a notice of proposed rulemaking seeking comment on how healthcare providers, insurance carriers, and self-insured group health plans can support transparency.

Within 120 days

  • Treasury will issue guidance permitting qualified high deductible health plans (HDHPs) to pay for medical care for chronic conditions without cost sharing. This means the HDHP will be able to provide these benefits before the individual has met the annual deductible without affecting the ability to make or receive health savings account (HSA) contributions.

Within 180 days

  • HHS – with support from the Attorney General and Federal Trade Commission – will issue a report addressing how the federal government and private sector negatively affect transparency and recommendations to improve this. HHS will develop ideas to address surprise medical billing, including the creation of a federal benchmark of exorbitant out-of-network fees owed to providers by insurance companies and plans.
  • The Various Agencies will work together to improve data collection for research by consolidating data from federally sponsored health systems (such as Veterans Affairs and the Marketplace) and improving access to de-identified claims data.
  • Treasury will propose regulations to treat expenses related to certain types of arrangements, which may include direct primary care and healthcare sharing ministries, as eligible medical expenses. This would enable the expenses to be reimbursable from an HSA, health reimbursement arrangement, or health flexible spending account (hFSA).

Please note: The Order did not indicate that expenses related to direct primary care and healthcare sharing ministries must be included as eligible medical expenses in the proposed regulations. The Order also did not address these arrangements as potential disqualifying other coverage for HSA compatibility purposes.

Treasury will also issue guidance increasing the maximum amount of hFSA funds that can be carried over to the following plan year.

  • The Tri-Agencies will work together to propose rules on expanding patient access to expected out-of-pocket costs to cut down on surprise or balance billing.

But Relax for Now…
No immediate action by employers is necessary as a result of this Executive Order. The initial guidance and proposed regulations are months away, and it will be much longer before final regulations appear. In the meantime, there should be no immediate impact on the healthcare market.

[1] Shoppable services are common services that are offered in the market by multiple providers, such as imaging services.

We are providing this information to you in our capacity as consultants with knowledge and experience in the insurance industry and not as legal or tax advice.  The issues addressed may have legal or tax implications to you, and we recommend you speak with your legal counsel and/or tax advisor before choosing a course of action based on any of the information contained herein.  Changes to factual circumstances or to any rules or other guidance relied upon may affect the accuracy of the information provided. Marsh & McLennan Agency LLC is not obligated to provide updates on the information presented herein. © 2019 Marsh & McLennan Agency LLC. All Rights Reserved.

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New Health Reimbursement Arrangements Allowed Under Final Rules

June 19, 2019

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The President signed an Executive Order on October 12, 2017, directing the U.S. Departments of Labor, Treasury, and Health and Human Services (collectively, the “Agencies”) to consider rules expanding the availability and permitted uses for Health Reimbursement Arrangements (HRAs). The clear intent was to ultimately enable employers to offer HRAs to employees that can be used to purchase individual insurance policies. The Agencies issued a set of final regulations addressing this and related issues on June 13, 2019.

The Bottom Line

We’ll address the final rules in more depth under Details about Individual Coverage HRAs below, but the main takeaways are:

  • Premiums – Employers will be able to offer HRAs to employees that can be used to pay for individual health insurance coverage and Medicare premiums. These will be referred to as “Individual Coverage HRAs” or “ICHRAs” in this article.
  • Employer mandate – Individual Coverage HRAs can be used to avoid the Employer Shared Responsibility provisions (also known as the “employer mandate”) penalties under the Affordable Care Act (ACA).

However

  • It’s one or the other – An employer can offer traditional group health coverage to a class of employees or an Individual Coverage HRA, but not both (with a very limited exception).

So, when exactly?

The effective date is for plan years beginning on or after January 1, 2020, which is unchanged from the earlier proposed rules. There is every indication that both the federal and state-run public insurance exchanges will not be ready to handle the anticipated increase in enrollment, adjust product offerings, or make accurate eligibility determinations until much later, so 2020 may prove chaotic for individuals covered by ICHRAs and the employers offering them.

Details about Individual Coverage HRAs

ITEM GUIDANCE
Eligibility

 

Employees (including former employees) and dependents enrolled in major medical coverage purchased in the public insurance exchange, individual insurance market, or Medicare[1] are eligible to participate.

Coverage for any part of a month for which a premium is due qualifies.

Employees who are enrolled in coverage consisting solely of excepted benefits,[2] short-term limited duration insurance, TRICARE, or health care sharing ministry coverage are ineligible.

Reimbursements The ICHRA may be designed to limit reimbursements solely for individual insurance premiums, or it can be designed to also allow reimbursements for qualified medical expenses (so long as the expenses are not limited to medical expenses not covered by Medicare).
Classes of Employees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employers may divide their workforces into the following classes of employees:

  1. Full-time employees
  2. Part-time employees
  3. Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region)
  4. Salaried workers
  5. Non-salaried workers (such as hourly employees)
  6. Seasonal employees
  7. Employees covered by a collective bargaining agreement
  8. Employees eligible for the employer’s traditional group health coverage who are in a waiting period
  9. Non-resident aliens with no U.S.-based income
  10. Temporary employees of staffing firms
  11. Any group formed by combining two or more of the above classes (Example: Full-time, salaried employees).

If an Individual Coverage HRA is offered to a class, it must be offered on the same terms to all employees within the class.[3] Benefit levels can vary only based on age[4] and family size within a class.

If an employer offers an Individual Coverage HRA to a class, it cannot offer its traditional group health coverage to that class, except that an employer may offer traditional coverage to grandfathered members of a class and limit new hires of that class to Individual Coverage HRAs after a date chosen by the employer.

Employee Class Size If an employer offers traditional group health coverage to some of its employees, a minimum employee class size applies to Individual Coverage HRAs offered to classes (1) – (5) described above or any combination that includes one of those classes.

The minimum class size is:

  • 10 employees for an employer with < 100 employees,
  • 10% of the total number of employees, for an employer with 100 to 200 employees, and
  • 20 employees for an employer with > 200 employees.
Special Enrollment Period Individuals who gain access to an Individual Coverage HRA qualify for a 60-day special enrollment period in the public insurance exchange and individual market.
ACA and the Employer Mandate

 

An Individual Coverage HRA automatically qualifies as “minimum essential coverage” and is an “offer of coverage” for the purposes of satisfying the ACA’s employer mandate.[5]

An Individual Coverage HRA is deemed “affordable coverage” if the difference between the monthly premium for the lowest-cost available silver plan and 1/12th of the annual Individual Coverage HRA contribution is equal to or less than the applicable affordability safe harbor percentage.[6]

Affordable Coverage Example

In 2020, an employer makes an annual contribution of $3,600 to an employee’s Individual Coverage HRA.   The monthly premium for the lowest cost available silver plan in the area is $400.

$400 – ($3,600/12) = $100/month

The Individual Coverage HRA is an affordable offer of coverage for the employee if $100/month is within an affordability safe harbor for that employee in 2020.

An Individual Coverage HRA (with its individual major medical insurance policy) deemed affordable coverage is automatically deemed to satisfy the ACA’s minimum value requirement.

Waiver

 

Employees must be permitted to waive participation annually at the beginning of the plan year or effective date of coverage.
Exchange Subsidies An individual who enrolls in an Individual Coverage HRA is ineligible for subsidies through the public insurance exchange.

An individual who waives coverage may be eligible for subsidies if the HRA is not considered an offer of affordable, minimum value coverage by the employer.

Substantiation

 

Employers are required to adopt reasonable substantiation procedures to confirm participants are enrolled in eligible medical coverage and communicate these to eligible employees no later than the first day of the plan year or effective date of coverage.

The rules indicate an employer may rely on the employee’s attestation of coverage or require reasonable proof of enrollment (such as an ID card).[7]

Employees are required to substantiate enrollment in eligible medical coverage (including for any dependents) each time a request for reimbursement is submitted.

A model attestation is available.

ERISA Status, etc.

 

The Individual Coverage HRA is itself an employer-sponsored group health plan.

The individual insurance coverage reimbursed by the ICHRA will not be considered an ERISA plan offered by the employer so long as the employer does not sponsor it or play a role in its selection.

HSA Eligibility An individual who uses the ICHRA to purchase qualified high deductible health plan coverage is eligible to contribute to a health savings account unless the ICHRA can also be used to pay for general medical expenses.
Cafeteria Plan Option  An employer may allow employees within a class to pay for any remaining premium for eligible medical coverage through the employer’s cafeteria plan, but this is not available for coverage purchased through the public insurance exchange.[8]
Notice Requirements

 

Employers must provide eligible employees with a notice describing:

  1. The terms of the Individual Coverage HRA,
  2. Contact information for assistance,
  3. The availability of a special enrollment right for individual coverage, and
  4. The effect the ICHRA may have on the employee’s eligibility for a subsidy in the public insurance exchange.

The notice must be provided at least 90 days before the beginning of the plan year.

A model notice is available.

The employee class and class size limitations should make it difficult for an employer to simply shift its highest cost claimants to the individual market. That said, some classes of employees may incur higher medical expenses than others, and an employer could still shift a more expensive class to the individual market. The ICHRA may also provide employers with a lower, fixed cost coverage alternative to provide to certain classes of employees that present less significant attraction and retention challenges than others.

And for Good Measure…

The Agencies also created another category of HRA known as an “Excepted Benefit HRA” that may be offered on a standalone basis exempt from the ACA’s mandates if all of the following are true:

  • The employer offers traditional group health coverage to the employee whether or not the employee elects it (this means the employee cannot also be offered an Individual Coverage HRA);
  • The maximum annual contribution is $1,800 (indexed);
  • Reimbursements are limited to general medical expenses and premiums for COBRA, short-term limited duration insurance, and other excepted benefits coverage (this can include many types of non-major medical health coverage); and
  • The Excepted Benefit HRA is available on a uniform basis to all similarly situated employees.[9]

An Excepted Benefit HRA does not interfere with an individual’s eligibility for subsidies in the public insurance exchange. This form of HRA may be an interesting alternative to a traditional opt-out credit. It does not require the employee to actually enroll in other group health coverage to avoid impacting affordability calculations for the employer’s traditional group health coverage, and the HRA contributions aren’t subject to payroll taxes.


[1] Oddly, fully insured student health insurance also qualifies.

[2] This is based on HIPAA’s “excepted benefits” rule.

[3] An employer can offer an Individual Coverage HRA to some former employees within a class and not others so long as the terms are uniform for those offered coverage.

[4] Individual Coverage HRA contributions for older employees are limited to a maximum of three times the contributions provided to younger employees.

[5] The final rules do not require a minimum ICHRA contribution amount for this, but the IRS intends to release additional guidance that may address this issue.

[6] Yes, accuracy will be largely dependent upon the timely availability of exchange premium information. This may make it more attractive to offer non-calendar year Individual Coverage HRAs with plan years beginning in February or March.

[7] This may make the ICHRAs vulnerable to being used to pay for premiums for ineligible coverage.

[8] Employers are not required to permit this, and it might prove complex to administer.

[9] This is based on HIPAA’s “similarly situated groups” rule and is not tied to the permitted classes of employees under the Individual Insurance HRA.

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National Health Observance for April – World Immunization Week (April 22-28)

April 17, 2019

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Each year, the last week of April is marked by the World Health Organization (WHO) as World Immunization Week.  The purpose of this week is to promote the use of immunizations to protect people of all ages against disease. The standard definition of “immunization” is the action of making a person or animal immune to infection, and to stimulate the body’s own immune system to protect the person against subsequent disease.  According to WHO, immunizations currently prevent between 2-3 million deaths every year in all age groups, and are recognized as one of the most successful and cost-effective health interventions in the world.  They are an important piece of the puzzle when it comes to overall health and wellness.  However, the WHO also found that only 85% of the world’s children receive their recommended immunizations.

In order to understand the prevalence of immunizations overall, the World Health Organization analyzes the global vaccination coverage each year, which is defined as the proportion of the world’s children who receive recommended vaccines.  The WHO is working extensively to improve the 85% statistic.  The United States may not feel the burden of limited access to vaccinations but it is felt in countries such as Afghanistan, Ethiopia, India, Indonesia, and South Africa.  The WHO wants every country to intensify their efforts to ensure that all people have access to lifesaving vaccines.

In recent national news, vaccines have become a frequent topic of conversation – good and bad.  Because of this, the theme for 2019 is Protected Together: Vaccines Work!  The primary goal of World Immunization Week is to raise awareness about the importance of full vaccinations.  For social media purposes, the WHO is using the tagline “#VaccinesWork” in order to further increase awareness and spark a global movement.

2019 Campaign Objectives:

  • Demonstrate the value of vaccines for the health of children, communities and the world.
  • Highlight the need to build on immunization progress while addressing gaps, including through increased investment.
  • Show how routine immunization is the foundation for strong, resilient health systems and universal health coverage.

Information contributed by Kelsey Kempen, a St. Louis University dietetic intern. Kelsey spent time at J.W. Terrill learning about community nutrition and corporate wellness.

Resources

https://www.who.int/en/news-room/fact-sheets/detail/immunization-coverage

https://www.who.int/news-room/events/detail/2019/04/24/default-calendar/world-immunization-week-2019

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Paying medical claims with a Health Savings Account. When can it be done tax free?

April 10, 2019

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I have run into this situation several times recently: An employee attempts to pay for their qualified medical expense claim with their health savings account (HSA) tax-free dollars, but are still taxed or face penalties. Why would this happen? Well, the ability to pay with tax-free HSA dollars is not based on when an employee enrolls in the Qualified High Deductible Plan (QHDHP), but rather when he or she establishes the HSA. Yes, the HSA is established separately from the QHDHP. An employee may decide to establish their HSA immediately, after a few months, or may not establish one at all, even when they are enrolled in a QHDHP.

It’s important to establish the HSA when first enrolled in a QHDHP, even if the employee can only contribute the minimum amount. The contribution can be increased or decreased going forward. The date the HSA is established determines eligibility to “go back” to pay a claim.

Consider this example:

An employee, Don, decides to enroll his family in the QHDHP offered by his employer as of January 1. However, Don does not establish his HSA until February 1. He incurs a $10,000 claim on January 12th with follow up doctor visits on January 16th, 23rd and 30th. On the February 15th payroll, Don adds $5,000 to his HSA to help pay the claims from January. Here’s the timeline:

  • January 1 –  Don enrolls in QHDHP
  • January 12 –  Don incurs $10,000 claim with follow up doctor visits on January 16th, 23rd, and 30th
  • February 1 – Don establishes his HSA
  • February 15 – Don adds $5,000 to his HSA to help pay for January claims

Don’s QHDHP has a $3,000/$6,000 embedded deductible. Don thought he would pay for his January claims when they came due in February or March with his HSA funds, and still have money left over after he’d met the $3,000 individual deductible portion.

However, his HSA account was not established until after the claims occurred. Though these claims would still apply to his deductible, Don cannot use his pre-tax HSA funds to pay for these claims. If he did, he would be subject to taxes and potential penalties.

Employees can fund their HSA to the applicable maximum established by the IRS each plan year, but they cannot pay for claims which occurred prior to the HSA being established.

To avoid this kind of problem, it’s important that employers educate their employees on the importance of opening their HSA at the same time as enrolling in the QHDHP being offered.

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Association Health Plans (AHPs) – Update

April 2, 2019

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Round One in the Fight over the new AHP Rules [Mostly] goes to the States
Last summer, eleven states and the District of Columbia (the “States”) sued the U.S. Department of Labor (DOL) over its final regulations intended to promote the expansion of AHPs (the “new rules”) on several grounds, including claims that the new rules conflict with both the Affordable Care Act and ERISA. On March 28, 2019, the U.S. District Court for the District of Columbia issued an opinion in favor of the States on certain key points while leaving other portions of the new rules intact.

In 30 Seconds or Less
Four key points from the Court’s ruling are:

  1. Related trades or businesses may still form AHPs across state lines under the new rules.
  2. Unrelated trades or businesses may not form AHPs at all.
  3. Associations cannot be formed for the primary purpose of offering an AHP.
  4. Self-employed individuals must remain limited in their ability to participate in an AHP, and independent contractors cannot participate.

And in More Detail…
There are two forms of permitted AHPs that we refer to as: (1) the Narrow Standard AHP created by prior guidance; and (2) the Relaxed Standard AHP created by the new rules.

The Final Regulations as Drafted
We provided an overview of the new rules and a side-by-side comparison of the two permitted forms of AHPs in an earlier article.

As Affected by the Court’s Ruling…
The Court’s ruling can be demonstrated by reproducing a portion of the side-by-side comparison from our earlier article in redlined form.

Narrow Standard AHP

Relaxed Standard AHP

Member employers must:

  1. Be within the same industry, trade, line of business or profession;
    AND
  2. Be located within the same geographic region (generally within the same state)
Member employers must:

  1. Be within the same industry, trade, line of business or profession;
    OR
  2. Their principal places of business must be located within the same state or metropolitan area (even if this crosses state lines)
The Association must already exist for a business purpose before it can provide the AHP to members The Association does not have to exist before providing the AHP to members, but it must have at least one other substantial business purpose

The requirement under the Narrow Standard AHP rule applies, meaning the Association must already exist for a business purpose before it can provide the AHP to members

Self-employed individuals are not eligible if running a business with no common law employees

 

Self-employed individuals who run a business with no common law employees may still be eligible under “Working Owner” test

“Working Owner” test:

  1. Works at least 20 hours/week or 80 hours/month for business
    OR
  2. Has earned income from the business at least equal to the cost of AHP coverage

The requirement under the Narrow Standard AHP rule applies, meaning self-employed individuals are not eligible if running a business with no common law employees

What’s next?
The Court’s opinion is missing an effective date, although this may be cleared up in the order that follows or through subsequent motions. The Court directed the DOL to consider how the new rules might operate with the overturned portions removed. The DOL could attempt to modify its new rules to better fit within the Court’s opinion instead, but this seems unlikely. This case was always headed for appeal, and the only surprise at this point might be which side is ahead after the first round.

The traditional appeal route would next move this case to the Circuit Court of Appeals for D.C. Whatever that outcome, it seems reasonable to believe the Circuit Court’s decision will also be appealed, meaning final resolution may need to come from the Supreme Court, which won’t occur in 2019. Although the Court’s opinion leaves open a path for related trades or business to form Relaxed Standard AHPs across state lines, we would not be surprised if interest cools in the interim.

All parties interested in or pursuing Relaxed Standard AHPs will need to evaluate whether to proceed or make modifications necessary to fit within the Court’s decision. This is a trickier proposition for an already operating Relaxed Standard AHP that is now in conflict with that decision. It may be reasonable for these AHPs to continue operating “as is” while the case is being appealed, but these AHPs should definitely consult with legal counsel first and may wish to suspend enrolling new member employers for the time being.

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U.S. Department of Labor Releases Proposed Overtime Rule

March 27, 2019

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On March 7, 2019, the U.S. Department of Labor (DOL) released a Notice of Proposed Rulemaking (“NPRM”) proposing to revise the overtime salary thresholds under the Fair Labor Standards Act (FLSA). The proposed rule would increase the weekly salary threshold for exempt employees from $455 ($23,660 annually) to $679 ($35,308 annually).

The DOL made earlier efforts to revise the overtime salary threshold, which stalled due to heavy legal opposition.  This NPRM is a new effort by the DOL to address the current salary threshold that dates back to 2004.

Determining Exempt Status

In order to be exempt from FLSA overtime requirements, an employee must meet both the “salary test” and “duties test.”

Salary Test

An employee must meet two prongs of the salary test:

  1. The salary basis test – With limited exception, the employee be paid a predetermined amount, regardless of quality or quantity of work, and the amount must at least equal the required minimum wage.
  2. The salary level test – The minimum salary for an employee to qualify as exempt would be $679 per week or $35,308 annually.  This is the primary focus of the NPRM.

Duties Test

The duties test exempts those that primarily perform executive, professional and administrative duties. For additional information on the duties test, please refer to the DOL wage and Hour Division (WHD) Fact Sheet #17A.

Overtime Eligibility

Non-exempt employees, as defined under FLSA, must be compensated at 1 ½ times their normal rate of pay for any hours worked over 40 hours in a work week. Pay for time not worked such as vacation, sick leave, or holiday pay is not counted toward the overtime requirement. Non-exempt employees can be paid on an hourly, salary, piece rate, or commission basis so long as:  (i) they are compensated at or above the required minimum wage rate for all hours worked;  and (ii) are paid overtime for any hours worked in excess of 40 hours in a single work week.

In addition to FLSA requirements, an employer is still required to comply with any applicable state or local wage and hour laws.

Other Proposed Changes

The NPRM also includes the following:

  • An increase in the total annual compensation requirement for  “highly compensated employees” subject to the “minimal duties” test from $100,000 to $147,414 annually;
  • Employers may use non-discretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level; and
  • A statement of commitment by the DOL to periodically review the salary threshold.

The NPRM does not change the “duties test” for determining exempt status or change the current overtime protections for police officers, firefighters, paramedics, nurses, laborers or non-management employees working in maintenance, construction, or other similar occupations.

Additional information about the proposed rule is available at here.  Once the proposed rule is published in the Federal Register, interested members of the public will have 60 days to submit comments by visiting www.regulations.gov.

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Social Determinants of Health

March 8, 2019

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Population Health Managers have long known that the health of an individual is dependent on a complex variety of factors, not just genetics and lifestyle. Health can also be determined by the places and conditions where employees work and live. Poor social and environmental conditions can negatively affect the health outcomes of those employees. For example, unsafe neighborhoods, low income, poor access to healthcare, poor quality education and low literacy can affect the health and wellbeing of the employee population. These conditions are referred to as the Social Determinants of Health (SDoH). Healthy People 2020 defines SDoH as: conditions in the environment in which people are born, live, learn, work, play, worship and age that affect a wide range of health, functioning, and quality-of-life outcomes and risks. The Kaiser Family Foundation has organized the SDoH around five key categories and their sub categories:

  1. Economic Stability: Employment, income, expenses, debt, medical bills, support
  1. Education: Literacy, language, early childhood education, vocational training, higher education
  1. Health and Health Care: Health coverage, provider availability, provider linguistic and cultural competency, quality of care
  1. Neighborhood and Built Environment: Housing, transportation, safety, parks, playgrounds, walkability, zip code
  1. Social and Community context: Social integration, support systems, community engagement, discrimination, stress

Understanding and addressing how these social determinants can affect the health outcomes of an employee population is imperative for an employer. Although employers may feel that they have no influence on the conditions and environments where their employees were born, live, learn or play, they have a substantial influence on the conditions and environments at the workplace. For example:

  • Employers can offer financial wellbeing resources to assist employees with economic instability and make sure that all employees earn a living wage. http://livingwage.mit.edu/
  • Employers can offer tuition reimbursement and allow employees travel time to attend evening classes.
  • Employers can provide affordable healthcare benefits to employees.
  • Employers can offer bus tickets and train vouchers for employees who use public transportation.
  • Employers can assist employees with food insecurity by directing them to appropriate resources or by providing meals or snacks at the workplace.
  • Employers can offer resources on stress management and access to appropriate care through an Employee Assistance Program (EAP).

Many initiatives have been launched at the federal and state levels, but many challenges remain. Employers should proactively seek ways to decrease the burden of poor conditions in which their employees may work by assessing their current environment and needs of their employee population and commit to find ways to improve.

Resources:

https://www.healthypeople.gov/2020/topics-objectives/topic/social-determinants-of-health

https://www.cdc.gov/socialdeterminants/index.htm

 

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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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Frequently Misunderstood Health Savings Account Issues

March 7, 2019

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Authors:
Christopher Beinecke is the Employee Health & Benefits National Compliance Leader for Marsh & McLennan Agency. 
Jennifer Stanley is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan Agency.


The health savings account (HSA) eligibility and contribution rules are often misunderstood, which can result in potential adverse consequences for participating employees.[1] This article focuses on certain employer-provided benefits that may unexpectedly affect an employee’s ability to make or receive HSA contributions as well as certain rules that affect the contribution amounts a participant can make and/or receive during the year.

Unexpected Disqualifying Other Coverage and Potential Solutions

In order to be eligible to make or receive HSA contributions, an individual must participate in a qualified high deductible health plan (HDHP) and have no other disqualifying coverage. Some common employer-provided benefits may unexpectedly be disqualifying other coverage, and we’ll address three of the most common “gotcha’s” below.

1. Account-Based Plans (FSAs and HRAs)
General purpose health FSAs and HRAs that may be used to reimburse for a broad range of qualifying medical expenses are generally disqualifying other coverage and disqualify an individual from making or receiving HSA contributions for the entire plan year. This is also true if the FSA or HRA is your spouse’s and can be used to reimburse for your medical expenses (whether or not this actually happens).

HSA Eligibility Solutions for Account-Based Plans –
Employers should consider the following HSA compatible FSA plan design options when offering an account-based plan and an HDHP (these are often referred to as “HSA compatible FSAs”):

  • Offer a limited-purpose FSA or HRA that may only be used to reimburse for dental and vision expenses;
  • Offer a post-deductible FSA or HRA that may only be used to reimburse for general medical expenses after the individual has met their annual HDHP deductible; or
  • An employer can actually offer an FSA or HRA that combines both features by being limited to dental and vision expenses until the annual HDHP deductible is met and can then be used to reimburse for general medical expenses afterwards.

Run-Out Periods, Grace Periods, and Carryover Provisions – FSAs usually operate with a run-out period allowing participants to submit claims after a plan year ends and may also include either a grace period or carryover provision (but not both). We’ll describe how these can affect HSA eligibility when used in a general purpose FSA:

  1. Run-Out Period When we say run-out period, we mean a participant has some period of time after the end of the plan year to submit claims that were incurred during the plan year. For
    example, a calendar year FSA may allow participants until March 31st to submit claims incurred by or before December 31, 2018. If I enroll in an HDHP during annual enrollment, an FSA with a run-out period does not interfere with my ability to make or receive HSA contributions at the start of the next plan year. In this example, I am eligible to make or receive HSA contributions on January 1, 2019.
  2. Grace Period When we say grace period, we mean a participant has some period of time after the end of the plan year to submit claims that were incurred during the plan year OR during the grace period. For example, a calendar year FSA may allow participants until March 31st to submit claims incurred by or before March 15, 2019. If I enroll in an HDHP during annual enrollment, an FSA with a grace period can interfere with my ability to make or receive HSA contributions until the first of the month after the grace period is over. In this example, if I have an FSA balance as of December 31, 2018, I would not be eligible to make or receive HSA contributions until April 1, 2019.The issue is whether I have an FSA balance at plan year end. If I have a zero FSA balance at plan year end (December 31, 2018 in our example), I am HSA eligible at the start of the next plan year without regard to the FSA’s grace period.
  3. Carryover Provision An FSA might include a carryover provision permitting participants to carry over the lesser of: (i) their unspent FSA account balance as of the end of the plan year; or (ii) $500 as a contribution toward their FSA balance for the next plan year. Amounts carried over do not count toward an individual’s annual FSA contribution limit ($2,700 for 2019). If funds are carried over into the following year and can be used to reimburse for general medical expenses, an individual will be ineligible to make or receive HSA contributions for the entire year.An employer can provide employees with options to avoid losing HSA eligibility for the following year:
  • The rules allow FSA funds to carry over from a general purpose FSA into an HSA compatible FSA plan. An employer could design the carryover feature to automatically carry over a balance from a general purpose FSA into an HSA compatible FSA when an individual elects HDHP coverage. This option obviously requires the employer also maintain an HSA compatible FSA.
  • An employer could allow affected employees to decline or waive a carryover at the end of the FSA plan year. An employer that doesn’t provide an HSA compatible FSA might choose this option.

2. Clinics (both onsite and offsite clinics)

In terms of HSA compatibility, clinics can be divided into two categories:

HSA Conflict

A clinic will cause an HSA conflict if all of the following is true:

  • The clinic provides medical services other than first aid, dental or vision care, preventive services, or certain disease management or wellness services;
  • The clinic provides the general medical services before an individual has met their annual HDHP deductible; and
  • The individual does not pay for the fair market value (FMV) of the general medical services before meeting their annual HDHP deductible.

No HSA Conflict

A clinic does not cause an HSA conflict if any of the following is true:

  • The clinic’s services are limited to first aid, dental or vision care, preventive services, or certain disease management or wellness services;
  • The clinic does not provide other medical services before an individual has met their annual HDHP deductible; or
  • The individual pays for the FMV of other medical services before meeting their annual HDHP deductible.

3. Telemedicine

There is much debate over whether telemedicine is a group health plan that is disqualifying other coverage for the purposes of HSA eligibility. We believe most telemedicine programs are disqualifying other coverage despite claims by some that telemedicine benefits should qualify for an exception available to employee assistance programs (EAPs).

The Myth of the EAP Exception for Telemedicine – IRS Notice 2004-50, Q/A #10 indicates that coverage under an EAP, disease management program, or wellness program isn’t other disqualifying coverage if the benefits do not provide significant medical care and provides an example of short-term counseling available through an EAP as meeting this standard. We’ll ignore for now whether a telemedicine benefit can be considered an EAP and agree there may be some wiggle room to do so.

The EAP exception is not a blanket exception for all EAPs without regard to their plan designs, and the real issue is whether the telemedicine benefit offers significant medical care. Some believe the medical care or treatment provided by a telemedicine benefit should not be considered significant because of the narrow range of available services that might be performed within a single telemedicine visit. We disagree. We can infer that a determination of significant medical care or treatment shouldn’t be limited to a single episode of care or the example of the permissible EAP in IRS Notice 2004-50, Q/A #10 wouldn’t bother describing the available counseling as “short-term.” Instead, the language used by the IRS strongly suggests that an EAP providing many or an unlimited number of visits would be considered other disqualifying coverage.

EAPs generally provide for a limited number of visits per year. By contrast, telemedicine programs tend to provide for an unlimited number of participant visits. In addition, telemedicine programs can usually write prescriptions which are not available through most traditional EAPs.

This view is also consistent with statements made by the Departments of Labor, Treasury, and Health & Human Services during the rulemaking process creating the EAP exception under the Affordable Care Act in which the agencies suggested an EAP providing for many or an unlimited number of visits would not qualify.

Potential HSA Eligibility Solutions for Clinics and Telemedicine

It is reasonable to assume that many telemedicine and clinic benefits will be considered other disqualifying coverage and cause an HSA eligibility issue without some sort of solution to resolve the conflict:

  1. Limit the scope – The benefits could be limited in scope to services that do not interfere with HSA eligibility, such as preventive services, dental or vision care, first aid (in the case of the clinic), or other services deemed insignificant care by the IRS such as immunizations and providing non-prescription pain relievers.This solution falls into the category of legally correct but not particularly useful, as limiting the scope of telemedicine and/or onsite health clinic benefits in this manner can defeat the purpose of meaningfully lowering the cost of the employer’s medical plan.
  2. Provide only post-deductible benefits – If the benefits are restricted to an HDHP participant until after he or she has met their HDHP deductible, there is no HSA conflict. This solution also falls into the category of legally correct but not particularly useful and can be both difficult and impractical to administer.
  3. Charge fair market value for the services – If the HDHP participants pay the FMV for the services received, there is no HSA conflict. While unpleasant, this is often the most practical solution to implement. There is no guidance explicitly directing how to calculate FMV for these benefits, which should make several approaches reasonable:(a) Use the Medicare reimbursement rate for the given service;
    (b) Use the in-network usual, customary, and reasonable charge for the given service; and
    (c) Develop standard rates for services/bundles of services based on the expected cost of providing them through the telemedicine or clinic benefit.

Flat rates are very common for telemedicine and clinic visits with additional charges for labs, tests, or prescriptions. An employer (particularly a healthcare system) may determine a discount is appropriate when determining the appropriate rates to take into account the lower cost of providing the services through a clinic or via telemedicine compared to general medical facilities. It is also not unusual for third-party administrators to have developed standard rates for services using the methods described above that employers can implement. If there is a monthly cost for access to the telemedicine or clinic benefit, that could be factored into the FMV fee calculation.

HSA contributions can be used to offset the cost of services for the telemedicine and clinic benefits, and employers can provide HSA contributions to assist. No fee needs to be charged for limited scope services (e.g., preventive, dental, vision, etc.). Although it adds a layer of administrative complexity, it is also true that the clinic does not need to charge anything once the individual has met the HDHP deductible for the year.

If point-of-service charges are limited to HDHP participants, it does raise a potential nondiscrimination issue under the Tax Code. However, if there is a reasonable mix of both highly and non-highly compensated participants in the HDHP and other medical plan options, this should not present an issue.

Certain Rules Affecting Annual HSA Contribution Limits

In general, an individual’s annual HSA contribution limit is pro-rated based on the number of months an individual is eligible to make or receive HSA contributions with HSA eligibility determined as of the first of each given month. This general rule has a lot of moving parts and is subject to several modifications.

  1. Aggregation Under the health FSA rules, the annual contribution limit ($2,700 for 2019) is based solely on the employee’s own contributions, excluding carryovers. By contrast, all contributions made or received to an individual’s HSA count toward the individual’s annual HSA contribution limit ($3,500 self-only; $7,000 family for 2019), with the exception of rollovers.
  2. The Last Month Rule – While eligibility and contribution limits are generally pro-rated monthly, an individual who is HSA eligible on December 1st can make or receive HSA contributions up to their full annual limit provided he or she remains HSA eligible through the end of the following calendar year. If the individual does not remain eligible throughout this period, the individual’s annual HSA contribution limit for the year is retroactively determined using the pro-rata method and will usually lead to adverse tax consequences. An employer is not required to administer the last month rule for payroll deduction purposes. If an employer does not administer this, the employee is still free to take advantage by contributing the additional amounts to the HSA bank on an after-tax basis (usually by writing a check) and taking a deduction on their personal income tax return using IRS Form 8889.
  3. A Special Rule for Spouses A husband and wife cannot establish a joint HSA, but each spouse can set up their own HSA if eligible. If either spouse has family coverage in an HDHP, both spouses are treated as having family coverage and are limited to the annual HSA family contribution limit split between them. This limit is divided equally unless they agree on a different division. Spouses can demonstrate they’ve agreed to a different division by electing unequal contributions toward their HSAs.A break for domestic partners – This special rule for spouses does not apply to domestic partners. Each domestic partner could contribute up to the annual HSA family contribution limit in this instance, because the contribution limit is not tied to tax dependent status. That said, an individual cannot use their HSA to pay for the medical expenses of a domestic partner on a tax free basis (or without penalty) unless the domestic partner is also the individual’s tax dependent. The individual could avoid the penalty if the individual was already age 65 or older.
  4. Catch-up Contributions HSA eligible individuals who are age 55 or older by the end of the calendar year may contribute an additional $1,000 for that year and every year thereafter so long as they remain HSA eligible.[2] If both spouses are over age 55 or older and HSA eligible, both are able to make catch-up contributions to their separate HSAs.

Putting it all together Chris (56 years old) is married to Jennifer (50 years old). Jennifer has enrolled in employee + children HDHP coverage through her employer and Chris has enrolled in employee-only HDHP coverage through his employer. Jennifer’s employer makes an HSA contribution of $1,000 to her HSA on January 1, 2019. Chris’ employer does not make a contribution to his HSA.

  • For 2019, Jennifer could normally contribute up to $7,000 to her HSA and Chris could normally contribute up to $3,500 to his HSA. Due to the special rule for spouses, Jennifer and Chris begin with a combined annual HSA contribution limit of $7,000.
  • Chris can contribute up to $3,500 plus an additional $1,000 catch-up contribution.
  • Assuming Chris does contribute $4,500, Jennifer’s annual contribution limit is $3,500. Her employer has already contributed $1,000, meaning Jennifer can only contribute an additional $2,500 herself.
  • Alternatively, Chris could limit his HSA contribution to his $1,000 catch-up contribution and Jennifer would be free to contribute $6,000 to her HSA in addition to the $1,000 received from her employer.

[1] We address the consequences of ineligible contributions in the “Mistaken HSA Contributions” article appearing later in this newsletter.

[2] Remember that an individual enrolled in Medicare is not HSA eligible.

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