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THE EXAM ?
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Health and Accident
Benefits
Section 4
Health Insurance Plans
• Traditional health insurance
– Fee for service arrangement
•
•
•
•
HMO – Health Management Organizations
POS – Point of Service
PPO – Preferred Provider Organizations
Tax Treatment of Contributions
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
Overview
Who is eligible to
set up an
account?
(Archer) MSA
An MSA is a taxexempt trust or
custodial account
established for the
purpose of paying
medical expenses in
conjunction with a
high-deductible
health plan.
Self-employed
persons and
businesses with 50
or fewer employees.
Health Savings
Accounts (HSA)
A tax-exempt trust or
custodial account
created to pay for
the qualified medical
expenses of the
account holder and
his or her spouse or
dependents.
Health
Reimbursement
Arrangements
(HRAs)
An employer funded
account that
reimburses
employees for
qualified medical
care expenses.
Individuals and
An employee whose
families covered only employer offers an
under a qualified
HRA.
high-deductible
health insurance
plan. Certain
“excepted” plans are
permissible (e.g.
dental, vision).
Health Care
Flexible Spending
Accounts (FSAs)
An employersponsored benefit
program under
which employees
received
reimbursement for
qualified medical
expenses.
An employee whose
employer offers a
health care FSA
option.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Medical Savings
Provision
Account
MSA
Qualified highWhat are the
deductible health
requirements for
the corresponding plan insurance:
health plan?
For 2011 self only
deductible of $2,050$3,050 with an outof-pocket maximum
of not more than
$4,100;
Family deductible
must be between
$4,100-$6,150 with
an out-of-pocket
maximum of not
more than $7,500.
1Amounts
to increase by CPI-U.
Health Savings
Accounts (HSA)
Qualified highdeductible health
insurance:
For 2011 self-only
deductible must be
at least $1,200 with
an out-of-pocket
maximum of not
more than $5,950;
family deductible
must be at least
$2,400 with an out4of-pocket maximum
of not more than
$11,900.1
Plan can provide
first-dollar coverage
of preventive care.
Health
Reimbursement
Arrangements
(HRAs)
No health plan
requirements.
Health Care
Flexible Spending
Accounts (FSAs)
No health plan
requirements.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
Do the uniform
coverage and 12month election
rules apply to the
account?
MSA
Employee and
employer, but both
cannot contribute in
the same year.
Who may
contribute to the
Account?
Individual: 65% of
Deductible
Family: 75% of
Deductible
Contributions to an
MSA can be made in
cash in a lump sum
at the beginning of
the year.
Health Savings
Accounts (HSA)
No.
Employer or
employee or both.
Generally will be the
account holder
(including salary
reduction) or the
employer or both.
Health
Reimbursement
Health Care
Arrangements
Flexible Spending
(HRAs)
Accounts (FSAs)
Not for the HRA.
Yes.
Applies to high
deductible health
coverage funded by
salary reduction by
the employee.
Solely the employer. The account holder,
employer or both.
Usually funded by
employees, who
choose to salary
reduce a certain
amount of their pay
in an FSA account.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
What are the
limits on
contributions?
MSA
Individual = 65% of
deductibles
Family = 75% of
deductible
Health
Reimbursement
Health Savings
Arrangements
Accounts (HSA)
(HRAs)
Up to 100 percent of No federal income
the deductible
tax law limits.
amount of the
Employers typically
accompanying high- set limits, usually
deductible health
equal to or less than
insurance policy. The the amount of the
max for 2011 is
deductible of
$3,050 for self only
employees’ health
coverage and
plan.
$6,150 for family
coverage.
.
Health Care
Flexible Spending
Accounts (FSAs)
No limits under
federal income tax
law. Employers
typically set limits.
Salary Reductions
capped at $2,500
starting in 2013.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
What are qualified
medical
expenses?
MSA
Qualified medical
care described
under Section 213 of
the tax code.
Health
Reimbursement
Health Savings
Arrangements
Accounts (HSA)
(HRAs)
Qualified medical
Qualified medical
expenses as defined expenses as
in Section 213(d) of defined in Section
the Internal Revenue 213(d) of the
Code, e.g., amounts Internal Revenue
paid for doctors’
Code, including
fees, prescription
health insurance
medicines, and
premiums.
necessary medical
services not paid for
by insurance.
HSA funds generally
cannot be used to
pay health insurance
premiums; however,
there are certain
exceptions. See
below (“When can
funds be used to pay
health insurance
premiums?”).
Health Care
Flexible Spending
Accounts (FSAs)
Unreimbursed
qualified medical
expenses as
defined in Section
213(d) of the
Internal Revenue
Code, except (in
general) for health
insurance
premiums: e.g.,
amounts paid for
doctors’ fees,
prescription
medicines, and
necessary medical
services not paid for
by insurance.
Health FSA funds
generally cannot be
used to pay health
insurance
premiums.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
What are the
claim
substantiation
and adjudication
requirements?
MSA
Claim substantiation
is required.
Health
Reimbursement
Health Care
Health Savings
Arrangements
Flexible Spending
Accounts (HSA)
(HRAs)
Accounts (FSAs)
Claim substantiation Claim substantiation Claim substantiation
by a third party is not is required.
is required.
required: however
the individual HSA
owner must maintain
the records
substantiating their
claims.
Plan is selfadjudicated by
account owner
submitting only
eligible claims or
reporting the taxable
distribution.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
When can funds
be used to pay
health insurance
premiums?
Health Savings
Accounts (HSA)
Health
Reimbursement
Arrangements
(HRAs)
1. While receiving
unemployment
benefits
1. While receiving
unemployment
benefits
Funds can be used
to pay for premium
under:
2. While receiving
COBRA benefits.
2. While receiving
COBRA
continuation
benefits
1. The employee’s
health plan
MSA
2. A spouse’s
health plan
3. The employer’s
retiree health
plan
4. COBRA
continuation
coverage.
Health Care
Flexible Spending
Accounts (FSAs)
Health care FSAs
can not be used to
pay insurance
premiums of any
kind.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
Can funds be
used to pay for
long-term care
coverage?
MSA
Yes, premiums for
qualified long-term
care insurance are
reimbursable up to
the dollar limits
specified in IRC
213(d).
Health Savings
Accounts (HSA)
Yes, premiums for
qualified long-term
care insurance are
reimbursable up to
the dollar limits
specified in IRC
213(d).
Health
Reimbursement
Arrangements
(HRAs)
Yes, premiums for
long-term care
insurance are
reimbursable.
Health Care
Flexible Spending
Accounts (FSAs)
No, the Internal
Revenue Service
code specifically
excludes long term
care insurance as a
qualified benefit
under a cafeteria
plan; so long term
care insurance
premiums are not
reimbursable under
an FSA.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
Are withdrawals
for non-medical
expenses
allowed?
Health Savings
MSA
Accounts (HSA)
Yes, but doing so will Yes, but distributions
trigger a 15% tax
not used exclusively
penalty.
to pay “qualified
medical expenses”
are included as
income and are
subject to a 10%
additional tax. At the
death of the
individual the
ownership of the
account can be
transferred to the
spouse – otherwise
the HSA ceases to
be an HSA and is
included in the gross
income of the
beneficiary or the
individual’s estate.
Health
Reimbursement
Arrangements
(HRAs)
No.
Health Care
Flexible Spending
Accounts (FSAs)
No.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
Can an employer
or trustee limit
reimbursements?
What is the tax
treatment of
contributions?
MSA
No. Employee owns
the account.
Employee
contributions are
deductible in
computing adjusted
gross income and
are deductible
whether or not the
individual itemizes
deductions.
Employer
Contributions are
excludable from
gross income, are
not subject to
withholding for
income tax, and are
not subject to other
employment taxes.
Earnings: Earnings
on amounts in an
MSA are not taxable
prior to distribution
from the MSA.
Health Savings
Accounts (HSA)
No.
Employee
contributions are tax
deductible.
Employer
contributions are
excludable from
gross income and
not subject to
employment taxes
(e.g., FICA).
Health
Reimbursement
Arrangements
(HRAs)
Yes. The plan may
define covered
expenses.
Employer
contributions are
generally
excludable from
employee’s gross
income.
Health Care
Flexible Spending
Accounts (FSAs)
Yes. The plan may
define covered
expenses.
Employees pay no
federal, Social
Security or (in most
states) state taxes
on FSA
contributions.
Employers pay no
FICA tax on FSA
contributions.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Health
Reimbursement
Arrangements
(HRAs)
Yes. Unused
amounts in an HRA
may be carried
over, subject to any
limits set by the
employer).
Provision
Can funds be
carried over from
one year to the
next?
MSA
Yes. Funds may be
carried over
indefinitely during a
participant’s lifetime.
Health Savings
Accounts (HSA)
Yes. Funds may be
carried over
indefinitely during a
participant’s lifetime.
Are accounts
portable?
Upon a participant’s
death, an HSA may
be passed on to a
surviving spouse
without federal tax
liability.
Yes. The account is
owned by the
employees.
Employee continues
to have access to
the account when
they leave or change
jobs.
Upon a participant’s
death, an HSA may
be passed on to a
surviving spouse
without federal tax
liability.
Yes. The account is Yes, but only at
owned by the
discretion of the
employees.
employer.
Employee continues
to have access to
the account when
they leave or change
jobs.
*New Ruling
Health Care
Flexible Spending
Accounts (FSAs)
*Yes for an
additional 3 months
following the end of
the plan year.
No. Unused FSA
balances are
forfeited to the
employer if the
employee leaves or
changes jobs.
Summary Comparison of
HSAs – FSAs – HRAs - MSAs
Provision
Does interest
accrue on funds
deposited in the
account?
Do 105(h)
nondiscrimination
rules apply?
MSA
Yes.
No.
Health Savings
Accounts (HSA)
Yes. Interest
accrues tax free.
“Comparable”
contributions
required. Employer
contributions must
be the same for all
employees who are
“eligible individuals.”
However, if
employee
contributions to an
HSA are made
through a Section
125 cafeteria plan,
employer
contributions are
subject to the
Section 125
nondiscrimination
rules, not the
comparability rules
Health
Reimbursement
Arrangements
(HRAs)
There is no
requirement that
interest accrue but
employers have
discretion to credit
interest to the HRA
accounts.
Yes, if self-funded.
Health Care
Flexible Spending
Accounts (FSAs)
No. Interest is not
accrued.
Yes.
Long Term Care Insurance
• Generally treated as accident and health
insurance contracts
– Amounts received are excluded from income
– Per Diem Payments
• Capped at $300 per day(2011).
COBRA Health Insurance Continuation
(Consolidated Omnibus Reconciliation Act of 1985)
• Employers: 20 or more employees
• Purpose:
To allow qualified beneficiaries the opportunity to
elect continued group health for specified periods
of time under specified qualifying events
• Qualifying Event
– Death of the covered employee;
– The covered employee’s termination of employment (for
reasons other than gross misconduct) or reduction in hours
worked;
– Divorce or separation of the covered employee;
– Entitlement of the covered employee to Medicare benefits
(upon enrolling in the program);
– A dependent child losing that status; and
– Bankruptcy proceedings that cause a retired covered
employee or the employee’s dependents to lose coverage.
COBRA Health Insurance Continuation (Continued)
• Duration of Continuation
– Termination or reduction of work hours – 18 months
– Absence due to military service – 24 months
– Beneficiary is disabled – 29 months
– Death, divorce, separation, loss of dependent child
status or two or more qualifying events – 36 months
• Premium Requirement:
– 102% of health care premium rate. The 2% is allowance for
additional administrative costs.
– Up to 150% of premium cost for qualified disabled dependents
from the 18th up to the 36th month of coverage
• Coverage Election
– The election period begins the day the previous coverage
terminates
– The election period lasts 60 days from that time (no longer)
Family and Medical Leave Act
• Employers: 50 or more employees
• Guarantees employees:
– 12 weeks of unpaid leave in a year.
– Continuation of health benefits while on leave –
employee is responsible for premiums during leave
(may be required to pay entire premium, not just EE
portion
• Eligibility
– Employed for at least 12 months (can be nonconsecutive)
– Has worked at least 1250 hours within previous 12
months
– Expatriates are not covered – employees must work
within the United States or any of its territories and
possessions.
Sick Pay
• Essential purpose is to replace the wages of an
employee who cannot work because of an
illness or injury.
• Sick Pay under a Separate Plan
– Short Term Disability
– Long Term Disability
– Third party sick pay taxation requirements
• Permanent Disability Benefits
• Difference between Sick Pay and Workers
Compensation
Cafeteria Plans
• Provides a choice among taxable (cash) and nontaxable
(qualified benefits)
• Qualified benefits include:
– Coverage under accident and health insurance plans
• Medical, Dental, Vision, Etc.
– Coverage under dependent care assistance plans
– Group term Life insurance
– Qualified adoption assistance
• Funded by either Flex dollars or salary reductions
• Nondiscrimination Testing
– Eligibility Testing
– Contributions and Benefits Test
– Concentration Test
– Special Health Benefits Test
Tax treatment of Cafeteria Plans
• Employer contributions
– Excluded from employee’s income
– Not subject to federal income tax withholding
or employment taxes
• Pre-tax contributions
– Excluded from employee’s income
• Post-tax contributions
– Included in employee’s income, however,
benefits received are not
Questions ?
RETIREMENT
BENEFITS AND
DEFERRED
COMPENSATION
PLANS
Section 4
Retirement and Deferred
Compensation Plans
•
•
•
•
•
•
•
•
•
•
401(a) - Qualified Pension & Profit Sharing Plans
401(k) - Cash or Deferred Arrangements
403(a) or 403(b) - Tax-Sheltered Annuities
457 - Deferred Compensation Plans – Public Sector and
Tax-exempt groups
501(c)(18)(D) - Employee Funded Plans
IRA - Individual Retirement Accounts
408(k) – SEP - Simplified Employee Pensions
408(p) – SIMPLE Plans - Savings Incentive Match Plans
for Employees of Small Employers
ESOP - Employee Stock Ownership Plans
Nonqualified Deferred Compensation Plans
Qualified Pension and Profit Sharing Plans
(IRC 401(a))
•Defined Benefit Plan
–5 Characteristics (4-85 2011)
–Payroll Dept Responsibilities
–Annual benefit limit = $195,000
•Defined Contribution Plan
–Individual Accounts
–Contribution by Employer
–Contribution by Employee (but not always)
–Annual Compensation Limit = $245,000
–Annual Contribution Limit = $49,000
•Or 100% of Employee compensation
Amounts to remember
Plan
Type
Annual
Deferral
Limit
Annual
Catch up
Limit
Annual
Annual
W-2
Compensation Contribution Box 12
Limit
Limit
Code
401(k)
$16,500
$5,500
$245,000
$49,000
D
403(b) $16,500
$5,500
$245,000
$49,000
E
457
$16,500
$5,500
$245,000
501(c)
$16,500
$5,500
$245,000
$1,000
Married $85,000 $5,000
Single $53,000
$16,500
$5,500
$245,000
$49,000
F
408(p) $10,500
$2,500
$245,000
$49,000
S
IRA
408(k)
ESOP
G
$49,000
$49,000
H
401(a) Pension Plans vs.
Profit Sharing Plans
• Pension Plans
– Benefit determined
when employee retires
– Payable over
employee’s life span
– Employers
contributions are not
based on profit
– Defined benefit plan or
defined contribution
plan
• Profit Sharing Plans
– Allows employees to
participate in company
profits
– Discretionary
contribution based on
a selected formula by
employer
– Defined contribution
plan only
Cash or Deferred Arrangements
(IRC 401(k))
•Pre-Tax contributions that decrease Employee’s taxable
income Employer can make deferrals without employee
consent up to 3%
–Employee can then stop deferrals and receive cash or continue
•Non Discrimination testing
•Contributions to all plans are included in determining limit
•Early distribution penalty equal to 10% excise tax
•Employee contributions not subject to Federal Income Tax
•Contribution amounts are subject to Social Security and
Medicare Tax
Tax Sheltered Annuities (IRC 403(B))
•Public Schools, Tax Exempt Charities, Religious,
Educational Organizations
•Requirements
•Contribution limits EGTRRA
•Employee contributions not subject to Federal Income Tax
•Special provision for employees over 15 years of service
•Additional information available – IRS Publication 571
Deferred Comp Plans for the Public Sector and
Tax-Exempt Groups (IRC 457)
•Eligibility
•No discrimination testing
•EGTRRA Limits
•Contributions placed in tax exempt trust for employees and
beneficiaries
•Distributions cannot be made before employee reaches 70
1/2 years old, separation of employment (retirement) or
employee has unforeseeable emergency.
•Employee contributions not subject to Federal Income Tax
Employee-Funded Plans (IRC 501(c)(18)(D))
•EGTRRA Limits
•Employee contributions not subject to Federal Income Tax
•Defined contribution plan
•Solely funded by employee contributions
•Maximum deferral limit is reduced by other CODAs
maintained by the employer
Individual Retirement Accounts
•EGTRRA Limits
•After tax amount deductible based on participation in other
plans
•Deductibility based on Adjusted Gross Income
•Employer contributions included in income, but not subject to
FIT
•Defined Benefit or Defined Contribution Plan
•Usually direct deposit contributions – not payroll deductions
•Can be SIMPLE plan
•ROTH IRA
–Contributions not deductible
–Not included in income if meet criteria
–May contribute double amount of traditional IRA deductible amount
Simplified Employee Pensions (IRC 408(k)) (SEP)
•Employer’s who cannot provide traditional plans
•Is an IRA
•Employer must make contribution to plan on behalf of
employee based on guidelines
–21 years of age
–Worked for employer 3 out of last 5 years
–Earned at least $500 in 2008
•Salary reduction agreements limited to EGTRRA
•Employees can elect a salary reduction agreement if plan
was setup before 1997.
Savings Incentive Match Plans for Employees
of Small Employers (SIMPLE)
IRC 408(p)
•Small Business Job Protection Act of 1996
•Must allow eligible employees to participate
–Employer with no qualified retirement plan and less than 100
employees
–Received at least $5,000 in compensation during any 2 prior
years
–And expect to receive $5,000 in current year
–EGTRRA Limits
•Fully vested at time of contribution
•Non-Discrimination testing
•EE’s must have 60 days before year begins to make changes to
contribution
•Not subject to Federal Income Tax
Stock Ownership Plans (ESOP)
•Must meet 401(a) requirements
–Participation
–Vesting
–Non discrimination
•ESOP buys stock with employer contributions or borrowed /
leveraged funds
–Stock bonus plan
–Combined stock bonus and money purchase plan
–Designed to invest primarily in employer’s stock
•Value changes based on stock
•Not considered wages
Nonqualified Deferred
Compensation Plans
• Compensation will be deferred until a later date
• Funded vs. Unfunded
– Funded
• Subject to taxation
– Unfunded
• Not subject to taxation
• Cannot be any other type of deferral plan
• American Jobs Creation Act of 2004
W -2 Reporting Requirements
•
•
•
•
•
•
•
•
•
•
•
•
MSA – Box 12 – Code R
HSA – Box 12 – Code W
Non-taxable Sick Pay – Box 12 – Code J
Dependent Child Care – $5000 - Box 10
Adoption Assist - $10,630 – Box 12 – Code T
401(k) – Box 12 – Code D
403(a) or 403(b) – Box 12 – Code E
457 – Box 11 or Box 12 – Code G
501(c) – Box 12 – Code H
408(k) – Box 12 – Code F
408(p) – Box 12 – 401(k) = Code D, IRA = Code S
409(a) – Box 12 – Code Y or Z
Questions ?
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Topics: Section 5
Paying the Employee
and Section 6
Withholding Taxes