© 2012 employee benefits corporation. 2 hsas – interaction with cafeteria plans, hras and cobra...

2© 2012 Employee Benefits Corporation

HSAs – Interaction with Cafeteria Plans, HRAs and COBRA

Peter AntonieCompliance Communications

SpecialistEmployee Benefits

CorporationThe material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.


HSAs – Interaction with Cafeteria Plans, HRAs and COBRA Webinar• HSAs can be included in a

Cafeteria Plan• HSAs need to be documented

in the Cafeteria Plan• Transition issues need to be

addressed prior to implementing an HDHP with HSAs

• Interaction of HSAs at the participant level can lead to compliance issues

• We can answer your questions about how HSAs interact with Cafeteria Plans, HRAs or COBRA


Today’s Agenda• Quick Review of HSAs• HSAs in a Cafeteria Plan

Documenting employer and employee contributions

Limited or Post Deductible Health Care FSA

Transition issues when HSAs are added to an existing cafeteria plan

Cafeteria plan participant issues• Designing an HRA to accommodate

HSAsHRA participant issues

• Transition issues affected by COBRA• Common compliance issues


Quick Review• HSAs authorized under IRS Code §

223 • Account established in the individual’s

name – not the employer’s

• Owned by the account holder• Portable with the individual – not tied to

employer• Not a group health plan – not subject to

COBRA, FMLA, HIPAA, ERISA, etc.• Eligible to make or receive HSA

contributionsNot another individual’s tax

dependentNot entitled to (enrolled in)

MedicareCovered by a qualified High

Deductible Health Plan (HDHP)

Not covered by any disqualifying coverage


Quick Review

HSA Contributions• By individual or family member as

tax deduction at year-end (post-tax) Is a $ for $ adjustment to gross

income• By individual as pre-tax deduction

in cafeteria plan Is a $ for $ adjustment to gross pay

• By employer (employer’s contribution reduces the maximum the individual can contribute)


HDHP & HSA Limits** minimum = deductible, maximum =

out-of-pocket • 2012 min/max

– Single $1,200/$6,050

– Family $2,400/$12,100

• 2012 contribution limit– Single $3,100– Family $6,250

• 2013 min/max– Single

$1,250/$6,250– Family

$2,500/$12,500• 2013

contribution limit– Single $3,250– Family $6,450


• IRS Code § 223 prompted amendment of § 125 to allow HSAs in Cafeteria Plans

• Must adopt or amend the Cafeteria Plan for pre-tax HSA contributions through the premium only componentsame as documenting pre-tax

medical or dental • Pre-tax contributions are an election

Are considered “premiums” for medical care

Regulation allows for prospective changes (no event needed – Final Proposed Treasury Regulation 1.125-2)

• Any employer contributions to HSAs are noted in the employer contribution section

HSAs in a Cafeteria Plan


Adoption Agreement or Amendment


HSAs Documented as Premiums


HSA Contributions Through a Cafeteria Plan• Employee contributions are a

pre-tax election• Employee’s elected amount can

be changed any pay period, prospectively (no permitted election change event necessary)

• Annual maximum contribution amounts include employee and employer contributions $3,100/single; $6,250/family

(2012) $3,250/single; $6,450/family

(2013)


• Any employer HSA contributions are through the cafeteria plan if employees can make pre-tax contributions (Treasury Regulation §54.4980G-5)

• Employer contributions reduce the amount an individual can contribute

• HSA contributions (employer and employee) are taken into account when §125 Contributions & Benefits and Key Employee 25% Concentration nondiscrimination tests are performed

HSA Contributions Through a Cafeteria Plan


HSA Contributions through a Cafeteria Plan§125 Nondiscrimination Testing• HSA contributions (employer &

employee) treated as premiums• HSAs are taken into account when

performing the §125 Contributions & Benefits test* and Key Employee 25% Concentration test

• Failing either or both tests means the HCEs or Key employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs)

*The C&B Availability test fails if HCEs receive contributions and some eligible employees get no contribution


HSA Contributions through a Cafeteria Plan• Employer reports employee pre-

tax and any employer HSA contributions on W-2, in box 12 with code W

• Employer responsible to monitor that*:Employee is enrolled in HDHP coverage

offered by employerEmployee has no disqualifying coverage

offered by employerEmployee is eligible for $1,000 catch-up

contribution

* Not responsible to monitor another employer’s plan or spousal coverage


HSA Contributions Through a Cafeteria PlanEmployee is responsible to

monitor that*:• Employee is an eligible

individual• Employee is not covered by any

disqualifying coverage• Employee does not over-

contribute• Employee only seeks HSA

distributions for qualified medical care expenses

* Reported through IRS Forms 8889 and 5329


Flexible Spending Arrangements with HSAs• Can adopt a Limited Health

Care FSA or Post Deductible Health Care FSA for employees who want to make HSA contributions and also have an FSA

• Regular Health Care FSA is disqualifying coverage – makes individual ineligible to make or receive HSA contributions


Limited Health Care FSA• Recognized in IRS Notices

2004-8 & 2008-59Is not disqualifying coverageHealth Care FSA will disqualify an

individual from being able to contribute to an HSA• Includes the spouse’s Health Care FSA

• What can it cover?Dental expensesVision expenses Preventive Care expenses*

* Many cafeteria plans, including the BESTflex Plan, do not provide for this – too hard to administer


Limited Health Care FSA• If Limited Health Care FSA is to

be offered, must adopt or amend Cafeteria Plan to include it

• Follows all the same rules as a regular Health Care FSAUniform Coverage ruleUse-It-or-Lose-It (forfeiture)

ruleThird party substantiation of

expensesPermitted election change

events


Limited Health Care FSA Documentd


Post Deductible Health Care FSA• Recognized in IRS Notices 2004-8 &

2008-59• Only dental or vision expenses

eligible until minimum HDHP deductible is satisfied

• All medical care expenses incurred after satisfying the minimum HDHP deductible are eligible expenses

• Follows all the Health Care FSA rules• Often not offered to employers

– No process in place to track deductibles

– Participant must provide proof of satisfying HDHP deductible


Cafeteria Plan Transition Issues• Adoption of HDHP with

HSAs creates transition issues for Health Care FSA participantsYear-end transitionMid-year transition


Cafeteria Plan Transition IssuesYear-end adoption of HDHP

with HSAs• If employer does not offer the

Grace Period, all Health Care FSA participants can begin contributing to the HSAs at start of new plan year IRS Notice 2005-86

• Any employer HSA contributions can only be made into HSA eligible employee accounts


Year-End Transition to HDHP with HSAs (cont.)If employer does offer the Grace

Period*• Participants that have a $0 Health

Care FSA balance on last day of plan year can begin contributing to the HSA on first day of new plan year

• Participants with a Health Care FSA balance at year end must wait until end of run-out period to begin making contributions to the HSA (1st of the month following end of Grace Period)

• Employer can amend the current plan to remove Grace Period prior to year end and all participants can make HSA contributions starting with new year

* IRS Notice 2005-86


Year-End Transition to HDHP with HSAs (cont.)Additional option*

– Convert all Health Care FSAs to Limited or Post Deductible Health Care FSAs during the grace period• Cannot be a choice to

participants• Challenges for those who do not

have dental or vision expenses – could result in forfeitures

– Requires amendment to delete the Health Care FSA and convert to Limited or Post Deductible Health Care FSA

* IRS Notice 2005-86


Cafeteria Plan Transition IssuesMid-Year adoption of HDHP with

HSAs• Example: Employer offers a calendar

year Cafeteria Plan but the health insurance renews on August 1.Employer currently offers an HMO

but will offer an HDHP on August 1 with an HSA

Employer has many employees enrolled in the Health Care FSA

Adoption of HDHP is a Coverage Change – does not permit Health Care FSA participants to revoke or amend their elections (Treasury Regulation 1.125-4(f))

• What are the employer’s options?


Mid-Year Adoption of HDHP with HSAsInformal IRS guidance March

2005Option 1:• Convert all participants to a

Limited or Post Deductible Health Care FSA on August 1

• Unilateral employer action, not participant choice

• Expenses incurred after August 1 can only be reimbursed for dental or vision care

• Participants may forfeit money if they do not have enough dental or vision care needs

• All employees can start making HSA contributions August 1


Mid-Year Adoption of HDHP with HSAs (cont.)Option 2:• Do not convert Health Care FSA• Participants who are enrolled in the

Health Care FSA cannot immediately contribute to the HSA

Cannot revoke Health Care FSA since change to HDHP is a Coverage Change

May begin contributing on January 1 if their account balance is $0 or the Grace Period is not present

If the Grace Period is present and there is an account balance, the participant can begin contributing to an HSA on April 1 of the next plan year (1st of the month following Run Out period)


Mid-Year Adoption of HDHP with HSAs (cont.)Option 3Plan ahead• Run a short plan year in the

Cafeteria Plan to make it match the health insurance plan year (e.g., 1/1 – 7/31)

• Requires that employer anticipates change to HDHP with HSAs prior to cafeteria plan renewal on January 1 so amendment can be made for short plan year

• Then, year end transition issues apply


Participant Scenarios

Scenarios assume participant has HDHP coverage with HSA contributions

• Spouse’s employer implements new health plan

• Spouse acquires new job and benefits

• Participant marries individual who has existing health coverage

• Participant’s spouse loses job and health benefits


Participant scenarios (cont.)

Issues to consider:• Does participant have HDHP

coverage after the event?• Does participant have any

disqualifying coverage after the event?

• What effect does the event have on the participant's future HSA contributions?


Designing an HRA to Accommodate HSAs• Underlying plan that HRA is

linked to must itself be an HDHP

• HRA cannot reimburse any deductible expenses until employee has had out-of-pocket expenses equal to or greater than the HDHP minimum deductible amounts

• HRA may need to be amended by January 1 to assure minimum reimbursement threshold amounts comply with any inflationary increase in the HDHP deductible minimums


Designing an HRA to Accommodate HSAsExample: employer’s HDHP deductible

is $2,500/single, $5,000 per family aggregate; 100% reimbursed thereafter

HRA design:Single plan: first $1,250* not paid,

remaining $1,250 paid 100%Family plan: first $2,500* not paid,

remaining $2,500 paid 100%*this accommodates the 2013 minimum HDHP

out-of-pocket deductible expense


HRA Participant Issues

Participant’s employer has HDHP with HSA compatible HRA

• As long as participant's spouse does not have disqualifying coverage* that includes the participant, the participant can make HSA contributions*Non-HDHP medical plan,

Health Care FSA or non-compatible HRA


Health Care FSA vs HRA vs HSA

FeatureHealth Care

FSAEBC HRA HSA

ContributionsEmployer and

employeeEmployer

Employer and employee

Maximum Contribution

Set by employer

Set by employer

Indexed annually

Tax status of ER

contributions

Excludable from EE income

Same Same

Portability None NoneIndividual account

HDHP Not required Not required Required

Non-Medical expenses

Not allowed Not allowedSubject to

20% penalty + tax


Health Care FSA vs HRA vs HSA(continued)

FeatureHealth Care

FSAEBC HRA HSA

Coverage Period

12 monthsPlan

determinesDoes not

apply

Uniform coverage rule

AppliesDoes not

applyDoes not

apply

Substantiation

requirements

Plan must substantiate

Plan must substantiate

Individual substantiatio

n

Reimbursement order

FSA pays last unless HRA document over rides

HRA pays first unless

HRA document stipulates

FSA

Cannot have FSA or HRA cover same expenses


Transition Issues Affected By COBRA• Qualified beneficiary (QB)

eligibility for HSAs• Adoption of HDHP at

renewal• Adoption of HDHP mid-year


Transition Issues Affected By COBRA

QB eligibility for HSAs• If COBRA coverage is HDHP, QB

can make HSA contributions• If QB does not elect COBRA for

HDHP coverage, cannot make HSA contributions unless covered by HDHP through another plan Spouse’s HDHP coverageIndividual health plan HDHP

coverage


Transition Issues Affected By COBRA

Adoption of HDHP at renewal• Requires new coverage

information to QBs

• Open enrollment for QBs if new insurer

• Requires new premium rate information


Transition Issues Affected By COBRAAdoption of HDHP mid-year• Change of coverage for active

employees allows change in coverage for QBs

• Change in premium for active employees allows change in applicable premium for QBsAn exception to the 12-month

Determination Period rules• Open enrollment for QBs if new

insurer• Requires new premium rate

information


Common Compliance Issues For Employers• Not documenting pre-tax HSAs in the

cafeteria plan• Not documenting employer’s

contribution to HSAs in the cafeteria plan

• Not performing due diligence on employee eligibility for HSA contributions

• Not including HSAs in census report for nondiscrimination testing

• Not adjusting (amending) the HRA reimbursement thresholds to accommodate new HDHP minimums

• Not providing advance notice of HDHP adoption for COBRA QBs


Summary

• HSAs can be included in the cafeteria plan

• HSAs need to be documented in the cafeteria plan

• Transition issues need to be addressed prior to implementing an HDHP with HSAs

• Interaction of HSAs at the participant level can lead to compliance issues


Questions?

• Any questions can be addressed by e-mail or phone at your convenience

Compliance Department800 346 [email protected]

• Thanks for Attending!!

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© 2012 employee benefits corporation. 2 hsas – interaction with cafeteria plans, hras and cobra...

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