Alphabet Soup:
Review and What’s
New with HRAs,
FSAs & HSAs
October 6, 2011
Government Payroll Review Seminar
(GPRS)
Presented by:
Darcy L. Hitesman, Esq.
12900 – 63rd Avenue North
Maple Grove, MN 55369
Phone: 763-503-6620
Website: www.HitesmanLaw.com
Introduction
• Lots has happened
• Lots is happening
• Focus on the defined contribution
methods
2
Legal Box
• Outer limits
• Lots of room inside
– Flexibility
– Responsibility
3
How the Code Works
• General rule:
– Anything provided by an employer to
an employee in return for services is
taxable income to the employee.
• Exception:
– Unless there is a specific Code section
the exempts it from being taxable
income.
• The Catch:
– When a Code provision exempts
something from income, it usually
requires compliance with a number of
requirements in return.
4
HIPAA Portability
• Unlike privacy and security, not all
group health plans are subject to
HIPAA Portability requirements.
Excepted status is important because dictates
application of other requirements, including many
requirements under Health Care Reform.
• Analysis
• Is it a group health plan?
– Broadly defined
– Employer sponsored plan that
provides medical benefits
– HSA is not group health plan
5
HIPAA Portability
• Does a listed exception apply?
– Retiree only plan
• Fewer than 2 current employees
– Health FSA
• Maximum benefit does not exceed two
times salary reduction or if greater salary
reductions plus $500; and employer offers
another plan that is subject to HIPAA
Portability (e.g., major medical)
• Most are excepted
– HRAs
• To be excepted, must meet Health FSA
requirements above
• Most are not excepted and must comply
with HIPAA Portability
– Stand alone dental; stand alone vision
• Separate policy if insured
• Not integral if self-insured (e.g., separate
election, separate premium)
6
HIPAA Portability
– Long Term Care Coverage
• Excepted if under separate policy or
not integral
• Most falls within exception
– Wellness and EAP
• Not unless another exception applies
• Most are not excepted and must
comply with HIPAA Portability
– Blanket exceptions:
• Independent
• Non coordinated
• Supplemental (special rules)
– Examples: accident coverage, auto
insurance, work comp., specified disease;
fixed indemnity
7
Goal
• Refresh regarding methods
– Similarities
– Differences
• Update
– “New” ways they are being used
– Health Care Reform
8
Today’s Agenda
Code §
Health Reimbursement
Arrangement
HRA
Review
What’s New
105
Health Flexible Spending
Account
Health FSA
105
Health Savings Account
HSA
223
9
HEALTH REIMBURSEMENT
ARRANGEMENT
MSRS-HCSP
All versions of the same
thing…HRA
10
Health Reimbursement
Arrangement
• Self-insured medical plan under
Code §§ 105, 106
– First recognized by IRS in 2002
– Written plan document
– 213(d) medical expenses (including
medical premiums)
• Limited scope
• Post deductible
• Tied to major medical
11
Health Reimbursement
Arrangement
– Expenses of employees (including
former); spouse (DOMA);
dependents
– Claims substantiation and
adjudication
•
•
•
•
•
Independent third party substantiation
Claimant representations
Third party adjudication
Ordering rules
Mutual exclusivity
12
Health Reimbursement
Arrangement
• Nondiscrimination testing
– Bargained
– Non-bargained
• Highly compensated individual
• Eligibility
• Benefits
If you treat people differently…nondiscrimination
issue.
13
Health Reimbursement
Arrangement
• Entirely employer funded
– No choice to participate
• Nothing in return if waive
• Exception
– No salary reduction
• Not related to cafeteria plan
• Exception
– No employee after-tax contribution
– Conversion
• Mandated; set
• NO CHOICE!
– Carryover from one year to the next
year permitted
– Spend down permitted
• Consider COBRA
14
Health Reimbursement
Arrangement
• Other Federal Laws
– HIPAA Privacy/Security
• Covered entity
• Business Associate
• Policies and procedures
– HIPAA Portability
• Most HRAs are subject
– COBRA
– Bunch of others…
•
•
•
•
•
•
USERRA
FMLA
GINA
WHCRA
NMHPA
Health Care Reform
15
Moving on…
Code §
Health Reimbursement
Arrangement
HRA
Review
What’s New
105
Health Flexible Spending
Account
Health FSA
105
Health Savings Account
HSA
223
16
HRAs: What’s New?
• New ways to use
• New laws that impact –
Health Care Reform
17
HRAs to Pay Premiums
• Group medical premiums
• Individual medical premiums
• Ordering issues with cafeteria
plan ability to pay premiums pretax
• Actives; post employment
(including retirees)
• Nondiscrimination testing
– Just premiums
– Premiums “plus”
18
HRAs for Wellness Credits
• Stand alone or enhancement to
existing
• Additional contribution –
employer contribution
• Nondiscrimination testing
– Just premiums
– Premiums “plus”
Note: Wellness maximum for standard based program
increases to 30% for 2014.
19
HRAs Replacing Retiree
Obligation
• Reduce OPEB impact
• Still have implicit subsidy
– Statutory obligation to make
available
– Combined with actives until age 65
• But, not a contribution to cost
element
20
Health Care Reform*
• Tax consequence of adult child (see
handout)
• OTC (see handout)
• W-2 reporting (later slide)
• Cadillac tax (later slide)
• PHSA benefit mandates
– Because generally not excepted from
HIPAA Portability
– Substantive
– Administrative
• Enhanced claims, appeals and external
review (later slide)
• Uniform Summary of Benefits and
Coverage
• Auto enrollment
*not exhaustive
21
W-2 Reporting
Requirement
• Effective 2012 (reported in 2013)
• Aggregate cost of applicable
employer sponsored coverage
• Excludable under Section 106 or
would be excludable if paid by the
employer
• Any coverage that meets the
definition of group health plan for
COBRA, subject to certain
exceptions
22
W-2 Reporting
Requirement
• Exceptions include
– Long term care
– Modified HIPAA Excepted Benefits Rule
• On site medical
– Stand alone vision, stand alone dental
– Specified illness, fixed indemnity
where paid by employee on after tax
basis
– HSAs
– Special rule for health FSAs
• First step: Identify your group
health plans and identify which are
excepted from HIPAA Portability
HRAs indefinitely excluded under interim guidance.
23
W-2 Reporting
Requirement
• Just reporting
• Transitional relief for employer
filing fewer than 250 Form W-2s
for preceding calendar year
24
Cadillac Tax
• Effective 2018
• 40% on amount in excess of threshold
– “Excess” – amount by which aggregate
cost of employee’s applicable employer
sponsored group health plan exceeds
threshold
– Threshold – $10,200/$27,500
– Employee by employee
– Monthly calculation
• Applicable employer sponsored group
health plan
– Made available to employee by employer
– Excludable from gross income under 106
or would be if employer paid for it
25
Cadillac Tax
• Excluded from group health plan
– Modified excepted from HIPAA
Portability rule
– Does not exclude (i.e., includes) onsite medical clinics
• Aggregate
– Determined by employer; allocated by
employer
– Reported to HHS by employer
– Insured group health plan paid by
insurance carrier
– Self-insured group health plan paid by
plan administrator (e.g., employer)
HRA contribution is included.
26
Enhanced Claims, Appeals,
and External Review
• Effective: has been a moving target
• Applies to group health plans not
excepted from HIPAA Portability
– Special grandfathered plan rule
• Same as major medical coverage
– Full and fair review
– Claims and appeals
• Special rule regarding substantial
compliance
– Time frames, notice requirements
– Culturally and linguistically appropriate
– External review for medical judgment
and rescissions; means contracting
with IROs
Most HRAs are subject; future guidance excluding
or modifying expected.
27
Next type of program…
Code §
Health Reimbursement
Arrangement
HRA
Review
What’s New
105
Health Flexible Spending
Account
Health FSA
105
Health Savings Account
HSA
223
28
HEALTH FLEXIBLE SPENDING
ACCOUNTS
All versions of the same
thing…Health FSA
29
Health Flexible Spending
Account
• Self-insured medical plan under
Code §§ 105, 106
• “Qualified benefit” for cafeteria
plan under Code § 125
Employee
Contribution
Section 125 Plan
Group Medical
Benefits
Group Dental
Benefits
Health Flexible
Spending
Account
Dependent Care
Expense
Reimbursement
Plan
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Health Flexible Spending
Account
• Self-insured medical plan under
Code §§ 105, 106
• Written plan document
– 213(d) medical expenses (no
premiums, no LTC, no HSA)
• Limited scope
• Post deductible
• Tied to major medical
– Expenses for employees (including
former); spouse (DOMA); dependents
– Claims substantiation and adjudication
•
•
•
•
Independent third party substantiation
Claimant representations
Third party adjudication
Ordering rules
31
Health Flexible Spending
Account
• “Qualified benefit” under Code §
125
– Salary reduction
– Employer contributions (including
cash-in-lieu)
– Irrevocable elections; limited
exceptions
– Uniform coverage
– Use it or lose it rule
– No deferral of compensation
32
Health Flexible Spending
Account
• Nondiscrimination testing
– Two levels
• Code § 105 – applies to component
• Code § 125 – applies to overall
cafeteria plan
– Bargained
– Non-bargained
– Each has eligibility and benefits
tests
• Key employee concentration test does
not apply to governmentals
– Each has own target group
definition; not the same
33
Health Flexible Spending
Account
• Other Federal Laws
– HIPAA Privacy/Security
• Covered entity
• Business Associate
• Policies and procedures
– HIPAA Portability
• Most are excepted
– COBRA
– Bunch of others…
•
•
•
•
•
•
USERRA
FMLA
GINA
WHCRA
NMHPA
Health Care Reform
34
Moving on…
Code §
Health Reimbursement
Arrangement
HRA
Review
What’s New
105
Health Flexible Spending
Account
Health FSA
105
Health Savings Account
HSA
223
35
Health FSAs: What’s
New?
• New ways to use
• New laws that impactHealth Care Reform
36
Working With Other
Programs
• Coordinate with HRA that only
pays premiums
– Premiums paid through HRA
– “Plus” paid through health FSA
• Allowing “employee only” option
– Does not impact spouse or
dependents HSA contribution
eligibility
• Wellness credits but watch HIPAA
Portability
37
Health Care Reform
•
•
•
•
•
•
Tax consequence of adult child
OTC
$2,500 maximum salary reduction (later slide)
W-2 reporting
Cadillac tax
PHSA benefits mandates
Note: Most cases do not apply because generally excepted from
HIPAA Portability.
– Substantive
– Administrative
•
•
•
•
•
•
•
Enhanced claims regulations
External review
Uniform Summary of Benefits and Coverage
Auto enrollment
Cadillac tax
Preventive care
Annual and lifetime maximums
38
$2,500 Salary Reduction
Maximum
•
•
•
•
Effective 2013
Just health FSAs
Previously no statutory maximum
True employer contributions should
be outside
– No cash out available
– Watch out for HIPAA Portability
• Flat dollar amount
– Not like dependent care FSA limit
• Per participant; family status irrelevant
• No combination with spouse
• No coordination or offset with available
tax credit
– Not indexed for inflation
– Aggregate for employer
39
Next type of program…
Code §
Health Reimbursement
Arrangement
HRA
Review
What’s New
105
Health Flexible Spending
Account
Health FSA
105
Health Savings Account
HSA
223
40
HEALTH SAVINGS ACCOUNTS
It is what it is!!!
41
Health Savings Account
• First recognized by IRS in 2003
• Not group health plan
– Not COBRA
• Exists under § 223 of the Code
• Often part of cafeteria plan under
§ 125 of the Code
– Employee contributions
– Employer contributions (including
wellness credits)
42
Health Savings Account
• Tax favored “IRA-type” accounts
–
–
–
–
Designed to accumulate
No forfeitures
Self-adjudicated
To beneficiary upon death
• Separate trustee
• Invested; tax-free earnings
• Limited employer involvement
– Can’t limit access
– Can’t limit distributions
• Strategically implement
– No mid year
– Coordinate with other programs
• Two part analysis
– Contributions in
– Distributions out
43
HSA Contributions In
• Must be “eligible” for HSA
contribution
• Monthly determination
• Subject to statutory maximums
per year
– Special rules if become eligible
during a year
• Catch up contributions for those
over 55
• Employer reports on W-2, Box 12,
Code W
44
HSA Contributions In
• Must be covered by “qualified
high deductible health plan”
– Comprehensive health plan meeting
specific statutory requirements
• Deductible
• Out of pocket maximum
– First dollar preventive
– Prescription drugs subject to deductible
• Monthly determination
45
HSA Contributions In
• Must not be covered by “other
coverage” unless “permitted”
• Other coverage is coverage that
pays an expense prior to the
satisfaction of the high deductible
under the qualified high
deductible health plan
– Includes (i.e., bad other coverage)
•
•
•
•
•
Regular health FSA
Regular HRA
Coverage through spouse
Coverage through employer
Outside comprehensive individual
coverage
46
HSA Contributions In
– Permitted (i.e., not bad other
coverage)
•
•
•
•
•
•
•
•
•
Disease specific
Indemnity
Dental, vision
Prescription discount cards
Supplemental
Most EAPs and wellness programs
Limited scope health FSA
Limited scope HRA
Post deductible HRA
• Cannot be covered under
Medicare
47
HSA Distributions Out
• Distribution for anything
• Not required to be covered under
qualified high deductible health plan
• Taxable unless a medical expense for
accountholder, spouse (DOMA),
dependent
–
–
–
–
Distribution amount as taxable income
Excise tax too
No exceptions for inadvertent
“Medical expense”
• Section 213(d) but
• Limited insurance premiums
–
–
–
–
Long term care insurance
COBRA
While receiving unemployment compensation
Certain premiums for retirees (must be age 65 or
over)
48
Moving on…
Code §
Health Reimbursement
Arrangement
HRA
Review
What’s New
105
Health Flexible Spending
Account
Health FSA
105
Health Savings Account
HSA
223
49
HSAs: What’s New?
Health Care Reform
• OTC
• Non-medical penalty to 20%
50
Questions
51
Thank you
• Darcy L. Hitesman
Hitesman & Wold, P.A.
12900 – 63rd Avenue North
Maple Grove, MN 55369
763-503-6620
• Visit our website to register to
receive our informational Client
Alerts! www.HitesmanLaw.com
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