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Tax Consequences of Gym Membership Reimbursement

July 10, 2019


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


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


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.


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


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


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).


  • 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



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.



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.



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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Association Health Plans (AHPs) – Update

April 2, 2019


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;
  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;
  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
  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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Mistaken HSA Contributions

March 7, 2019


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


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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Automatic Enrollment Given a Boost

February 5, 2019


U.S. Department of Labor (DOL) Issues Letter Indicating ERISA Preemption Applies to State Payroll Withholding Laws

On December 4, 2018, the DOL issued a letter in response to an inquiry from the American Council of Life Insurers (ACLI) about the interaction of ERISA and state wage withholding laws that require an affirmative written election before payroll deductions may be taken as contributions toward coverage in an employer-sponsored benefit plan.

ACLI’s inquiry related to employer-provided disability coverage, but the DOL responded more broadly and indicated that ERISA preempts (overrides) such a state law. This generally means that, unless an employee has waived coverage, an employer with an ERISA-covered benefit plan may automatically enroll employees in coverage and deduct the required contributions from employee paychecks. This letter does not actually represent a change in the DOL’s position or introduce any new guidance, but it is a welcome clarification that allows employers flexibility to increase group plan participation, spreading risk, and expanding protection for their workers.

ERISA Preemption Primer

Basically, the legal doctrine of ERISA preemption provides that a benefit plan subject to ERISA may generally ignore any conflicting state law that may relate to the benefit plan with certain limited exceptions. The most significant exception allows states to regulate insurance within their borders, and state laws regulating insurance are “saved” from ERISA preemption. This is why state insurance mandates apply to fully-insured ERISA plans while self-insured ERISA plans may choose to ignore them.

In support of its position for the preemption of state wage withholding laws in connection with enrollment in an ERISA plan, the DOL cited various court cases and previous Advisory Opinions addressing circumstances in which state laws have been found to relate to an ERISA benefit plan. To the extent an applicable state law is interpreted to regulate or limit an employer’s ability to enroll employees or to make plan-related payroll deductions, it is the DOL’s position that such state law will be preempted and will not apply to the employer’s ERISA plan.

Note: The DOL’s letter did not address any of the exceptions to ERISA preemption such as the exception saving state insurance laws. As a result, the letter shouldn’t be viewed as sanctioning other actions an employer might want to take with respect to a fully-insured benefit plan.

Notes and Practical Issues

If an employer wants to implement an automatic enrollment policy, there are a few additional considerations that should be taken into account. For example, ERISA imposes certain fiduciary obligations on an employer in its role as plan administrator. Among other things, this requires comprehensive communications pieces about any plan terms and conditions as well as a clear explanation of the employee’s right to decline coverage and the exact procedures and timeframes for doing so.

We realize that the inquiry dealt specifically with disability coverage and that many employers provide ancillary coverage such as basic life, AD&D, and disability at no cost to employees. It’s also worth noting that disability was a tricky example to use, as many self-insured short term disability programs may not actually be eligible for ERISA preemption.1 The DOL letter did not address whether the required contributions for benefits subject to automatic enrollment could be taken pre-tax or post-tax, which is really an IRS matter, but either should be permissible.2 This contribution approach should be included in the communication material described earlier.

The DOL’s response does support the use of an automatic enrollment approach with respect to medical/Rx coverage, although an employer may not wish to do so for various reasons including the higher required employee contributions for these benefits compared to ancillary coverage like life and disability coverage. Also, the Affordable Care Act’s employer shared responsibility requirement can be met merely by offering coverage without regard to whether an employee actually enrolls.  In any event, the employee must be given the opportunity to waive coverage.

1 Many employer-provided self-insured short term disability programs will fall within ERISA’s payroll practice exception, and ERISA’s preemption rules will not apply to them.
2 An employer may prefer disability contributions to be taken post-tax so that the disability benefits will be tax free when paid to participants.

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Slowly Filling in the Blanks

January 2, 2019


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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Texas Federal Court Rules ACA Unconstitutional

December 18, 2018


Given the heavy media attention, you are probably aware that a Texas federal district court issued a decision on December 14, 2018, declaring the entire Affordable Care Act (ACA) unconstitutional. The final outcome will take a while, and the ACA remains in effect as this case moves through the appeals process. Employers (and their group health plans) should continue to comply with the ACA in the meantime.

2018 FORM 1094/1095 REPORTING.

Texas v. Azar

In its 2012 National Federation of Independent Businesses (NFIB) v. Sebelius decision that preserved most of the ACA as originally written,[1] the U.S. Supreme Court held that Congress had the authority to implement the individual mandate and its penalty under the taxing power given to it by the U.S. Constitution. The individual mandate penalty was reduced to zero effective January 1, 2019, by the Tax Cut and Jobs Act of 2017 triggering the Texas v. Azar lawsuit over the continuing constitutionality of the ACA. This case was ultimately joined by thirty-six states and the District of Columbia giving it a distinctive red versus blue feel.

In his decision, Judge O’Connor determined that the elimination of the individual mandate penalty meant the individual mandate itself could no longer be viewed as a valid exercise of Congress’ taxing power. Judge O’Connor also determined that the individual mandate was so essential to and inseparable from the ACA that this renders the entire ACA unconstitutional.

Predicting the Future

Judge O’Connor’s ruling did not include an injunction, meaning the ACA is still in effect pending the appeals process. This fact was verbally repeated by the Trump administration. It is probably foolish to attempt to predict the future of Texas v. Azar, but if we had to:

    1. The 5th Circuit – This is a coin flip, but the U.S. Court of Appeals for the 5th Circuit overrules the district court opinion. While the court agrees that the individual mandate is unconstitutional, the 5th Circuit is unable to conclude that the individual mandate cannot be severed from the rest of the ACA. Whatever the outcome, the side that comes up short appeals to the U.S. Supreme Court.
    2. Congress – If the 5th Circuit finds the ACA unconstitutional, lawmakers work in earnest to draft legislation preserving ACA protections that are popular with voters and to avoid massive disruption in the insurance industry. One of these bills will have enough bipartisan support to be enacted by Congress and signed into law by the President should the Supreme Court declare the ACA unconstitutional.
    3. The Supreme Court The U.S. Supreme Court agrees to hear the case and preserves the ACA again by holding that the individual mandate is severable from the remainder of the ACA and/or for other reasons. Remember, the appointments of Justices Gorsuch and Kavanaugh notwithstanding, the five justices who ruled in favor of the ACA in NFIB v. Sebelius in that 5-4 opinion are still present.

We’ll keep you updated as this progresses.

[1] If you’ll recall, the mandate for all states to participate in the Medicaid expansion was struck down.

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Do the HIPAA Privacy and Security Rules Apply to My Organization?

November 27, 2018


This article is the second in a two-part series addressing whether and how the Privacy and Security Rules (the “Rules”) under the Health Insurance Portability and Accountability Act (HIPAA) apply to various legal entities. Part One addressed Covered Entities and appeared in our October 2018 newsletter. This article addresses Business Associates of Covered Entities that are self-insured group health plans.[1]

Quick Recap

Covered Entities are the key stakeholders in the delivery and payment of health care, but they frequently partner with other organizations for assistance. Many of these organizations will need to come into contact with Protected Health Information (PHI) to assist the Covered Entity. Remember, PHI is:

  • Information about a past, present, or future health condition, treatment for a health condition, or payment for the treatment of a health condition;
  • Identifiable to a specific individual;
  • Created and/or received by a Covered Entity or Business Associate acting on behalf of a Covered Entity; and
  • Maintained or transmitted in any form.

What’s a Business Associate?

In the group health plan context, HIPAA defines a Business Associate as a third party that requires PHI to perform some function or service on behalf of a group health plan. In other words, a third party that helps make your health plan go but needs PHI to do it. The third party might create, receive, store, or transmit[2] the PHI in this role, but it must be “PHI sticky” in at least one of those ways to be considered a Business Associate. Many of HIPAA’s Privacy and Security requirements apply directly to Business Associates.

Typical Business Associates for a Self-Insured Group Health Plan



Maybe So

  • Third party administrator (TPA) including pharmacy benefit manager
  • COBRA administrator (more about this below)
  • Broker/consulting firm
  • Actuaries
  • Record keepers (e.g. Iron Mountain or other third parties storing physical electronic records with PHI)
  • Other cloud service providers such as Google if Gmail is used as the email system
  • Plan sponsor/employer
  • Stop-loss carrier (more about this below)


  • External legal counsel
  • Accountants if will see PHI in connection with an audit or review





COBRA Administrators
If a COBRA administrator merely receives enrollment and disenrollment information from the employer (as plan sponsor), the information it receives is not PHI and the COBRA administrator is not technically a Business Associate of the group health plan. The nature and source of the information provided is easily blurred between the employer and group health plan, and it’s common for COBRA administrators to agree to be treated as Business Associates.

The Curious Case of Stop-Loss
The Rules indicate that stop-loss carriers are not Business Associates of a group health plan when the stop-loss policy insures the plan itself. The Rules are less clear about the more likely scenario where the stop-loss policy insures the employer/plan sponsor directly.  In practice, stop-loss carriers are often reluctant to be treated as Business Associates and are frequently excluded.  We recommend employers enter into robust non-disclosure agreements with stop-loss carriers not treated as Business Associates.

Business Associate Contracts

Your organization’s group health plan is required to enter into a contractual agreement with all of your Business Associates outlining how the Business Associate may use and disclose PHI, how it will secure PHI, and other rights and obligations the parties have under the Rules.[3] The Department of Health and Human Services (DHHS) has provided sample  business associate contract language. Among other items, the contract must include language addressing the parties’ responsibilities when unsecured PHI is improperly used or disclosed (a “breach”). Your organization has a limited amount of time to investigate and respond to a breach.

As a practical matter, it is the employer (as plan sponsor) who must secure the contract for all of the plan’s Business Associates, but Business Associates will often supply their version of this contract to the employer without being prompted. It is in each party’s best business interest to use a standardized contract for administrative ease rather than having to honor the commitments of contracts from different sources, so there is a natural tension between the parties who each favor their own contracts. The requirements for a Business Associate contract are pretty standard, but it is not unusual for the contract to be more favorable toward the drafting party or to include additional contractual terms beyond what the Rules require, so it is important to have this reviewed by your legal counsel.

Sometimes Business Associates contract with other organizations to perform one or more functions the Business Associate was hired to perform for the group health plan (“subcontractors” who are also PHI sticky), and there is no direct relationship between the health plan and the subcontractor. Your Business Associate must represent in the Business Associate contract that they have with your organization that it has a contract in place with its subcontractor that provides for all of the same protections under the Rules with respect to any PHI related to your health plan.

Example – A self-insured medical plan engages a TPA for claims administration and other services. One of these services is claims monitoring to reduce fraud, waste, and abuse.  The claims monitoring services are actually provided by a subsidiary of the TPA, and the medical plan does not have a direct contract with the claims monitoring subsidiary. The TPA is a Business Associate of the medical plan. The claims monitoring entity is a Business Associate of the TPA and should be addressed as a subcontractor within the Business Associate contract between the medical plan and the TPA.

Next Steps

You should always know who your Business Associates are and should make sure you have a list of all the current vendors who provide services related to your health plans. Of these vendors, which ones use PHI to perform a function on behalf of a group health plan?

These are your Business Associates, and you should maintain current Business Associate contracts with all of them. Don’t forget to make this an implementation step when adding a new vendor who will be a Business Associate to your health plan(s).

[1] In Part One, we addressed that insurance carriers are the Covered Entities for fully-insured group health plans and that employers/plan sponsors generally have few obligations under the Rules for those plans.

[2] A third party that only transmits PHI without accessing or storing it may qualify for an exception as a mere conduit of the information.

[3] A failure to enter into the contract does not mean the third party is not your Business Associate and just subjects you to potential penalties for non-compliance.

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