Tag Archives: FSA

Better Late Than Never

November 16, 2018

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

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

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

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

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

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

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

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

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FSA Discrimination Testing

February 12, 2016

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Discrimination testing of an FSA plan is required on an annual basis to assure the plan has been implemented to the benefit of all employees and not just a select few. To meet the qualifications for tax-favored status, an FSA plan cannot discriminate in favor of Key or Highly Compensated employees.

Before reviewing the discrimination testing requirements let’s learn more about these two types of employees:

Key employees include:

  • An officer receiving annual pay greater than $170,000*; or
  • An employee with either
    • Greater than 5% ownership in the business; or
    • Greater than 1% ownership in the business with annual pay of more than $150,000*.

Highly compensated employees include:

  • Officers of the company;
  • An owner of at least 5% of the company for the applicable plan year being tested or in the 12 months preceding the tests;
  • Any employee with gross annual compensation before deduction of more than $120,000* during the 12 months prior to the testing year;
  • The spouse and dependent children of an employee meeting the highly compensated definition are considered to meet the definition of highly compensated as well.

*Salary amounts given are for years 2015 (subject to index adjustment for future plan years).

FSA discrimination testing includes review of Eligibility along with Contribution and Benefit which demonstrates compliance as follows:

Eligibility Test

Eligibility to participate in an FSA plan must not discriminate in favor of highly compensated employees. Meeting the eligibility testing requirement generally includes the following:

  • 70% or greater of all non-excludable employees must benefit (regardless of their status as a highly compensated or non-highly compensated employee);
  • 80% or more of these employees who are eligible to benefit; and
  • Employees qualifying under a classification that does not discriminate in favor of highly compensated employees.

Contribution and Benefit Test

The test for contribution and benefit (which is also known as the Utilization Test) determines the plan is not discriminating to the benefit of highly compensated employees thereby assuring all eligible plan participants have the same opportunity to elect the non-taxable benefit. All participants and their dependents must have the same treatment in regard to required employee contributions, maximum benefits and waiting periods.

The following tests are required to demonstrate compliance in this regard:

  • Key Employee Concentration Test must show key employees are not receiving greater than 25% of the non-taxable benefits in total.
  • Dependent Care Spending Account Test must show the average benefits received by non-highly compensated employees are at least 55% of the average benefit received by highly compensated employees. Also, testing must show shareholders and owners of at least 5% of the company are not receiving more than 25% of the total dependent care benefit.

IRS Reporting Requirements

Form 5500 must be filed for all FSA plans no later than 7 months after the end of the plan year. Compliance and testing results are subject to audit by the IRS.

In closing, as with all Employee Benefit plan discrimination testing, it is imperative that proper oversight be conducted by the plan administrator to assure continued regulatory compliance. Such oversight includes appropriate review prior to commencement of the benefit plan year as well as periodic review during the year to assure continued compliance by events such as employees entering or leaving the plan or by employee election changes due to a qualifying event.

The contribution limitation which went into effect on January 1, 2015 of $2,550 on Health FSAs and $5,000 on Dependent Care FSAs will reduce the likelihood of non-compliance, but appropriate oversight is still vital.

Additional information on other discrimination testing requirements can be found on the J.W. Terrill News and Compliance Blog.

Revised February 12, 2016

 

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Nondiscrimination: Section 125

November 13, 2015

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Section 125 Cafeteria Plans: Pre-Tax Premiums, Healthcare, Dental, Vision Expenses and Dependent Daycare Section 125 Cafeteria Plans are subject to nondiscrimination tests required by the IRS. These tests are performed annually to ensure the Plan is not discriminating in favor of highly compensated and key employees.

Your Administrator should perform these tests at the beginning of the Plan Year and again before the last day of the Plan Year as participation can change throughout the year. If any changes are needed, these can only been done prior to the end of the Plan Year.

Eligibility Test: To determine if a reasonable number of non-highly compensated employees are eligible to participate in the cafeteria plan.

Contributions and Benefits Test: To determine that contributions and benefits are available to all participants, and that highly compensated employees do not have access to select more benefits than non-highly compensated participants.

Concentration Test: To determine that key employee participants do not exceed 25% of the benefits provided to all employees under the Plan, based on elections.

Plan design allows for eligibility and availability of benefits to be provided in a nondiscriminatory manner, testing is required after the elections have been made in order to determine highly compensated and key employees do not have access to nontaxable benefits exceeding 25% provided to all employees under the Plan.

When a Section 125 Plan fails any of the tests, the entire Plan does not fail, however your Administrator will provide notification to allow reductions in elections (if performed at the beginning of the Plan Year), and notice of the highly compensated and key employees as applicable, are now subject to include their elections as taxable income. End of Plan Year results are available to the employer as documentation of result status. The IRS does not allow for corrections once the Plan Year is over.

A Section 125 Plan is a great benefit to provide to your employees, allowing them income tax and FICA savings and FICA savings for the employer. Your Administrator should perform these tests to ensure your Plan is compliant and does not discriminate in favor of highly compensated or key employees. Plan Design will establish Eligibility, Contributions and Benefits and the Concentration test will provide directions for maintaining compliance for the Plan Year.

Highly Compensated Employee is an Officer of a company, a more than 2% shareholder, an employee with compensation of $120,000 for 2015. This would include a spouse or dependent.

Key Employees are an officer having annual pay of more than $170,000 for 2015, a 5% owner, a 1% owner with annual compensation more than $150,000.

Source: J.W. Terrill Benefit Administrators

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Advantages of a Health Reimbursement Arrangement

September 11, 2015

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Section 105 of the Internal Revenue Service (IRS) regulations allow for reimbursement of medical expenses under an employer sponsored health plan. This is also known as a Health Reimbursement Arrangement or HRA. Under the HRA, the employer will provide the funds to reimburse members for those eligible expenses that have been incurred. Some examples of eligible expenses include deductible, co-pays and coinsurance along with dental and vision claims as well. What will be covered is determined by the employer and their goals regarding employee benefits.

piggybankAdvantages for the employer by offering an HRA include qualified claims being tax deductible, the flexibility to design plans that will enhance the overall employee benefit package and having more choices with the potential of greater control over costs. Advantages for the employee include rolling over unused funds into the next plan year, contributions made by the employer are excluded from the gross income of the employee and reimbursements for qualified expenses may be tax free.

From time to time there is the misconception that an HRA and FSA (Flexible Spending Account) are truly one in the same. While they are similar, there are some distinct differences. The HRA is funded only by the employer, no employee contributions are allowed. The HRA can only reimburse what is available in the account at that particular time. While the amount elected in the FSA is available from day one of the plan year. HRA regulations do not require an eligible expense be incurred in the current plan year; only that the member be an active participant in the HRA at the time of the expense. The employer does have the option to allow this expense to occur or not. A member can elect both an HRA and FSA if the employer offers the two and the member meets all eligibility requirements.

A common question for members participating in an HRA is “what happens to the account balance if they leave the company”? There are two different options that are available when this occurs and one is unique to HRA’s. First, an employer can allow the employee to continue the HRA through COBRA. The employee would fund 100% of the premiums for the HRA and any health plan it might be tied to. The second and unique feature is referred to as the spend-down provision. This would allow an employee no longer with the company to use the existing HRA balance for expenses incurred after employment has ended. The employer does control if this will be an option for members along with which qualifying events are eligible, how much of the available funds can be used and how long the ex-employee has to use the funds.

With the majority of the regulations for ACA now in place, the deductible reimbursement plan option may no longer be available for certain segments of the market. However, the HRA is still to be considered a viable alternative for those looking to replace or enhance certain aspects of a benefit package for employees.

 

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2015 Benefit Limits

January 13, 2015

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The start of 2015 brings numerous changes to the benefits world, both large and small.  While the Individual Mandate has received the majority of publicity, there are many smaller changes that deserve attention.  Here are a few of those new limits:

ACA Individual Mandate Tax

The Individual Mandate is the national requirement that individuals have health care coverage or they face a tax that increases each year.  This is one of the two parts to the Affordable Care Act aiming to increase healthcare coverage.  The two parts are the Individual Mandate and the Employer Mandate.  Employers deal with the Employer Mandate, or Pay-or-Play Mandate, and not the Individual Mandate.

Penalty for noncompliance for 2015:

  • Greater of $325 per uninsured person OR 2% of household income

*The final penalty will not exceed the national average cost of bronze coverage for the household.

401(k) Plan Limits and Thresholds

The maximum elective deferral dollar limit:

  • 401(k) plan: $18,000
  • SIMPLE 401(k) plan: $12,500

The maximum catch-up contribution dollar limit:

  • 401(k) plan: $6,000
  • SIMPLE 401(k) plan: $3,000

FSA Contribution Limit

FSAs, Flexible Spending Accounts, allow for individuals to use pre-tax dollars to pay for health care costs.  It can be set up through a cafeteria plan of an employer and allows the employee to use specified money to pay for qualified medical expenses.

  • The FSA contribution limit for 2015: $2,550

Maximum DCAP Amount

DCAP, or the Dependent Care Assistance Program, allows employees to pay for certain dependent care expenses with pre-tax dollars.

  • If you are married and filing separately: $2,500
  • If you are not married and filing alone: $5,000

HSA

An HSA, or Health Savings Account, combines a high deductible health plan (HDHP) with a tax-favored savings account.  Money in this savings account can help pay the deductible and once the deductible is met, the insurance starts paying.  Whatever money left in the savings account will earn interest and is the employee’s to keep.

The HDHP Minimum Annual Deductible:

  • Self-only: $1,300
  • Family: $2,600

The HDHP Out-Of-Pocket Maximum:

  • Self-only: $6,450
  • Family: $12,900

HSA Maximum Contribution Limit:

  • Self-only: $3,350
  • Family: $6,650
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2015 FSA Limit Increases

November 11, 2014

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The IRS has announced new limits for FSA plans in 2015. The Affordable Care Act imposed a $2,500 limit (as index for inflation) on salary reduction contributions to health FSAs and the IRS has adjusted for inflation in 2015. For taxable years beginning in 2015, the dollar limitation is increased to $2,550.

As previously mentioned, the IRS has announced it will allow health FSA plans to offer a carryover feature of up to $500 in unused health FSA funds to the following year. The plan may continue to use a grace period giving employees a two and a half month extension to spend remaining FSA funds. However, FSA plans cannot have both the carryover and the grace period options, nor are they required to offer either of them.

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More Flex in Your FSA

October 9, 2014

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Health flexible spending accounts are now more flexible.  In Notice 2013-71 issued by the Department of Treasury, announced a change in the “use it-or-lose it” rule pertaining to Flexible Spending Arrangements (FSA).  The ruling permits employers to allow participants to carry over unused amounts of up to $500 for expenses in the next plan year for health flexible spending accounts.

For nearly 30 years, health FSAs has been subject to the “use-or-lose” rule, meaning that any account balances at the end of the year were forfeited.  An estimated 14 million American families participant in the health FSAs, the “use-or-lose” rule has often been identified as the biggest deterrent for those considering  whether to sign up for an FSA.

Notice 2013-71 outlines the following:

  • The Health FSA must be amended to utilize this rollover provision.  The amendment must be adopted on or before the last day of the plan year from which amounts may be rolled over.
  • The maximum election of $2500 is not impacted by the rollover amount of $500.  (e.g. A participant could have access to up to $3000 for the next plan year, if the participant elects the maximum of $2500 and the maximum rollover amount of $500.)
  • If a plan chooses to adopt the rollover, that same rollover limit must apply to all plan participants.
  • Plan Sponsors may allow FSA participants to make use of either the grace period or the rollover provision, but the plan may not allow both.

If you are an existing client, please contact your assigned Account Manager to discuss the Rollover option.  If you are interested in learning more or to discuss plan options with J.W. Terrill Benefit Administrators, please contact Terrillflex@jwterrill.com

Source: Treasury.gov

Resource: Employer FSA Rollover FAQ

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Flexible Spending Accounts

May 6, 2014

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Flexible Spending Accounts (FSAs) are tax-advantage accounts that are set up by an employer through a cafeteria plan and allow participants to pay for medical and dependent care expenses with pre-tax income.  Pre-tax means before federal, state and Social Security taxes are deducted.  There are two types of spending accounts included in an FSA plan.

Health Care Spending

A health care FSA allows participants to set aside pre-tax income to pay for specific health spending needs.  Each participant is allowed to determine the amount of pre-tax income they want to set aside based on the amount their specific employer determines is the maximum per plan year, not to exceed the IRS limitation of $2,500.

The FSA is set up by the employer and the entire annual election made by each participant is available on the first day of the plan.  This means if a participant has a large expense early in the plan year, they are allowed to use the entire balance and, in essence, pay back the plan via payroll deductions for the remainder of the plan year.  This does put the employer at risk because the participant could leave the plan prior to “repaying” the entire amount back.  Employers are only allowed to take the normal payroll deduction on a terminating employee’s last pay check.  Though this does not happen very often, is a risk to consider.  The forfeitures of participants not using the entire elected amount, because of the “Use it or Lose it” clause in FSAs, go back to the plan.

Typically, employers make the eligibility for the FSA plan match that of the medical, dental and/or vision plans to make it easier administratively.  However, if there is a lot of turnover, an employer may want to consider having a longer waiting period for the FSA plan so only stable workforce is eligible.

Most participants use the FSA plan wisely and are very educated and understand the rules and keep a close eye on the balance in their accounts.  Most FSA administrators offer online access as well as a personal contact to call to get account balances.

Most FSAs include the convenience of a debit card pre-loaded with the plan year election, which makes it very easy for a participant to use and pay for expenses.  The debit card can be used at any participating provider/vendor that accepts electronic payments and can also be used to pay the balance of a bill just like any other credit/debit card.  Participants like the convenience of this feature and the use of this service has increased the FSA participation.

Eligible Expenses – An FSA can be used for either the employee’s expenses or those of their covered dependents.  Eligible expenses include, but are not limited to:  Office Visit Copayments, Pharmacy Copayments, Health Plan Deductible, Coinsurance, etc.  Over-the-Counter (OTC) medications are not eligible expenses under and FSA unless the participant has a prescription from their physician.  A good example of this would be for seasonal allergies.  An OTC medication may be prescribed in lieu of a prescription and serve the purpose.  In these cases, a participant is likely to pay for the medication and file for reimbursement along with the prescription from his/her physician.

Other eligible expenses include:  dental expenses, laser eye surgery, orthopedic shoes, eye exam, eye glasses, contact lenses, fertility treatment, childbirth classes, acupuncture, crutches, smoking cessation prescriptions, etc.  See a more detailed list at:  www.irs.gov/publications/502/.

Ineligible Expenses – Some examples of ineligible expenses are:  over-the-counter drugs, cosmetic surgery, athletic club membership, vitamins or supplements, insurance premiums, etc.  See a more detailed list at:  www.irs.gov/publications/502/.

Dependent Care Spending

Another part of an FSA is a Dependent Care Spending Account.  This plan allows participants to use pre-tax income for dependent care for children up to age 13 who are being cared for while the participant, or their spouse, are working or seeking employment.   Other eligible dependents could include a spouse or other IRS dependent who is mentally or physically disabled.

Expenses must be incurred within the plan year in order to be eligible.  Participants can choose a specified amount up to the IRS maximum of $5,000 annually.  Unlike the health spending account that is available on the first day of the plan, the dependent care account funds are available only after they are deposited.  There are no advance reimbursements.  Participants simply submit a claim with the appropriate documentation and they are reimbursed according to the plan provisions.  These provisions could include date reimbursements are sent, minimum check amounts and account balances at the time the claim is processed.

Eligible Expenses – include day care facility and at home care either at participants home or at the caregivers home.  The tax identification number or Social Security number of the provider must be reported in order to receive reimbursement.

Ineligible Expenses – Tuition for kindergarten and higher education, sports camps, overnight camps, etc. See a more detailed list at:  www.irs.gov/publication/502.

More Facts

FSAs are available to all eligible employees even if they do not participate in the employer sponsored health, dental or vision plans.

For an employer, offering an FSA plan could help them realize FICA and FUTA savings due to the salary reductions.  These savings typically offset the administration cost of the FSA charged by the Third Party Administrator (TPA).

FSAs could be the perfect complement to an employer’s benefit package and can help cushion the blow of health plan changes that cause higher out of pocket to participants.

If employees understand the tax advantage (lowers taxable income) and the convenience of how to use these plans, it can make a huge difference in the participation.  Most consultants and/or TPAs include communication and education materials for open enrollment meetings.

J.W. Terrill offers FSA plan administration with a convenient debit card option.  Call your Consultant or Account Manager for more information.

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What is an HRA or Health Reimbursement Arrangement?

March 11, 2014

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Section 105 of the Internal Revenue Service (IRS) regulations allow for reimbursement of medical expenses under an employer sponsored health plan. This is also known as a Health Reimbursement Arrangement or HRA. Under the HRA, the employer will provide the funds to reimburse members for those eligible expenses that have been incurred. Some examples of eligible expenses include deductible, co-pays and coinsurance along with dental and vision claims as well. What will be covered is determined by the employer and their goals regarding employee benefits.

Advantages for the employer by offering an HRA include qualified claims being tax deductible, the flexibility to design plans that will enhance the overall employee benefit package and having more choices with the potential of greater control over costs. Advantages for the employee include rolling over unused funds into the next plan year, contributions made by the employer are excluded from the gross income of the employee and reimbursements for qualified expenses may be tax free.

From time to time there is the misconception that an HRA and FSA (Flexible Spending Account) are truly one in the same. While they are similar, there are some distinct differences. The HRA is funded only by the employer, no employee contributions are allowed. The HRA can only reimburse what is available in the account at that particular time. While the amount elected in the FSA is available from day one of the plan year. HRA regulations do not require an eligible expense be incurred in the current plan year; only that the member be an active participant in the HRA at the time of the expense. The employer does have the option to allow this expense to occur or not. A member can elect both an HRA and FSA if the employer offers the two and the member meets all eligibility requirements.

A common question for members participating in an HRA is “what happens to the account balance if they leave the company”? There are two different options that are available when this occurs and one is unique to HRA’s. First, an employer can allow the employee to continue the HRA through COBRA. The employee would fund 100% of the premiums for the HRA and any health plan it might be tied to. The second and unique feature is referred to as the spend-down provision. This would allow an employee no longer with the company to use the existing HRA balance for expenses incurred after employment has ended. The employer does control if this will be an option for members along with which qualifying events are eligible, how much of the available funds can be used and how long the ex-employee has to use the funds.

With the majority of the regulations for ACA now in place, the deductible reimbursement plan option may no longer be available for certain segments of the market. However, the HRA is still to be considered a viable alternative for those looking to replace or enhance certain aspects of a benefit package for employees.

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ACA’s Impact on HRA’s & FSA’s

December 2, 2013

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In September the U.S. Department of Labor published technical release 2013-03 with the intent of providing guidance on the application of the ACA on three types of arrangements. Specifically the DOL focused on:

  1. Health reimbursement arrangements (HRAs), including HRAs integrated with a group health plan;
  2. group health plans under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy; and
  3. certain health flexible spending arrangements (health FSAs).

Health Reimbursement Arrangements (HRAs)

An HRA is an arrangement which is funded solely by an employer and reimburses an employee for medical expenses incurred, up to a maximum, by the employee or his spouse, dependents and children under the age of 27. This type of reimbursement is excludable from the employee’s income and any remaining amounts at the end of the year can be used for future expenses. Nearly all HRAs are considered group health plans and therefore are subject to those rules.

Market Reforms

The ACA contains certain market reforms that apply to group health plans. The focus of the DOL’s technical release was the annual dollar limit prohibition and the preventive service requirement. The annual dollar limit prohibition provides that a group health plan or health insurance issuer offering group health insurance coverage may not establish any annual limit on the dollar amount of benefits for essential health benefits for any individual. The preventive service requirement requires non-grandfathered group health plans or health insurance issuers offering group health insurance plans to provide certain preventive services without imposing any cost-sharing requirement for them. However, the market reforms do not apply to group health plans with fewer than two participants who are current employees on the first day of the plan year and group health plans in relation to its provision of excepted benefits such as: accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs.

Prior DOL guidance on market reforms have stated that when an HRA is integrated with other coverage as part of a group health plan and the other coverage alone would comply with the annual dollar limit prohibition, the HRA does not have to, by itself, comply with the annual dollar limit prohibition. Basically it doesn’t matter where it come from but a group health plan must have unlimited coverage for essential health benefits. The guidance went on to clarify that an HRA is only be considered integrated with primary health coverage offered by an employer if under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage that is provided by the employer and that meets the annual dollar limit prohibition. One consequence of this is that an employer-sponsored HRA cannot be integrated with individual market coverage or with individual policies under an employer payment plan and, thus, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition.

Circumstances when an HRA will be integrated with a group health plan for purposes of annual dollar limit prohibition and preventive services requirements:

Integrated Method: Minimum Value Not Required

An HRA is integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventative services requirements if:

  1. The employer offers a group health plan that does not consist solely of non-essential benefits;
  2. the employee receiving the HRA is actually enrolled in a group health plan that does not consist solely of non-essential benefits;
  3. the HRA is only available to employees who are enrolled in non-HRA group coverage;
  4. the HRA is limited to reimbursement of one or more of the following – co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits; and
  5. under the terms of the HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

Integrated Method: Minimum Value Required

An HRA that is not limited with respect to reimbursement as required under the integration method expressed above is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if:

  1. the employer offers a group health plan that provides minimum value pursuant to CODE 36B;
  2. the employee receiving the HRA is actually enrolled in a group health plan that provides minimum value pursuant to Code 36B;
  3. the HRA is available only to employees who are actually enrolled in non-HRA minimum value group coverage; and
  4. under the terms of the HRA, and employee is permitted to permanently opt out of and waive future reimbursement from the HRA at least annually, and upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

What does it all mean?

For 2014 HRAs will be required to meet the annual dollar limit prohibition and preventive health services requirements, unless the HRA is integrated. If an HRA is considered integrated it may impose annual limits. Whether an HRA is considered integrated will depend on how it is structured. An HRA will be considered integrated if it meets the requirements of one of the two methods mentioned above. Both integration methods require that :

  1. The employer offer the employee a group health plan that is not the HRA;
  2. the employee receiving the HRA be enrolled in a non-HRA group health plan’ even one that is not sponsored by the employer (ex. through another family member);
  3. the HRA is only available to employees enrolled in non-HRA group coverage; and
  4. the HRA’s terms allow a current or past employee to permanently opt out of and waive future reimbursements annually.

Example 1 – Employer A offers a group health plan and HRA for its employees that begins January 1, 2014. Employer A’s HRA is only available to employees who are enrolled in its group health plan or in non-HRA group coverage through a family member. Employer A’s HRA is limited to reimbursement of copayments, co-insurance, deductibles, and premiums under Employer A’s group health plan or other non-HRA group coverage. Employer A’s HRA allows employees to permanently opt out of and waive future reimbursements from the HRA group both upon termination and at least annually. Employee Z works for Employer A but chooses to enroll in non-HRA group coverage offered by Employer M, the employer of Employee Z’s spouse. Employer A knows that Employee Z is covered by Employer M’s non-HRA group coverage and Employee Z seeks reimbursement for copayments, co-insurance, deductibles, or premiums. Employer A’s HRA is integrated with Employer M’s non-HRA coverage for purposes of the annual dollar limit prohibition and the preventive services requirements.

Example 2 – Employer A offers a group health plan that provides minimum value and an HRA for its employees. Employer A’s HRA is available only to employees who are enrolled in its group health plan or in non-HRA minimum value group coverage through a family member. Employer A’s HRA allows employees to permanently opt out and waive future reimbursements from the HRA both upon termination of employment and at least annually. Employee Z works for Employer A but chooses to enroll in a non-HRA minimum value group coverage offered by Employer M, the employer of Employee Z’s spouse. Employer A knows that Employee Z is covered by Employer M’s non-HRA MV group coverage and that it provides minimum value. Employer A’s HRA is integrated with Employer M’s non-HRA group coverage for purposes of the annual dollar limit prohibition and the preventive services requirements.

Note: In both examples Employer A’s HRA would still be integrated for purposes of the annual dollar limit and the preventive services requirements if Employee Z enrolled in Employer A’s group coverage instead of Employer M’s.

Information contributed by Paul Dominick. Paul is a 3L at SLU Law and a compliance intern at J.W. Terrill where he provided legal research on health care reform issues.

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Treasury Modifies FSA Use-it-or-lose-it Rule

October 31, 2013

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The U.S. Department of the Treasury and the IRS today issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements (FSAs). To make health FSAs more consumer-friendly and provide added flexibility, the updated guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.

“Across the administration, we are always looking for ways to provide added flexibility and commonsense solutions to how people pay for their healthcare,” said Secretary Jacob J. Lew. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”

Today’s action directly responds to public comments invited by the Treasury Department and the IRS. An overwhelming majority of feedback from individuals, employers, and others requested that the use-or-lose rule for health FSAs be modified. Comments pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels, and the desire to minimize incentives for unnecessary spending at the end of the year.

For nearly 30 years, employees eligible for health FSAs have been subject to the use-or-lose rule, meaning that any account balances remaining unused at the end of the year are forfeited. An estimated 14 million families participate in health FSAs. Under current law, plan sponsors have the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two and a half months following year-end.

Today’s guidance permits employers to now allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013. In addition, the existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period: it can have one or the other or neither.

Source: Treasury.gov

Resources: Treasury Fact Sheet , IRS Notice 2013-71

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Transitional Relief for Non-Calendar-Year FSA Plans

May 31, 2012

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A provision of the Patient Protection and Affordable Care Act that is slated to take effect on January 1, 2013, limits Flexible Spending Account contributions to $2,500 per tax year. Yesterday, the IRS issued Notice 2012-40, which provides transitional relief to non-calendar-year FSA plans by establishing that the requirement does not apply for plan years that begin before 2013 and that the term “taxable year” in the law refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made.

Before this recent clarification was issued, most non-calendar-year plans were considering either the one-time option of a short FSA plan year or early compliance with the provision to protect their employees for the 2013 tax year. This is no longer an issue as plans will only have to modify their contribution caps effective their first renewal in 2013 to comply with the $2,500 plan limitation.

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