Alphabet Soup: Review and

What’s New with HRAs, FSAs &

HSAs

Presented by:Darcy L. Hitesman, Esq.

12900 – 63rd Avenue NorthMaple Grove, MN 55369

Phone: 763-503-6620Website: www.HitesmanLaw.com

October 6, 2011Government Payroll Review Seminar

(GPRS)

2

Introduction

• Lots has happened• Lots is happening• Focus on the defined contribution

methods

3

Legal Box

• Outer limits• Lots of room inside– Flexibility– Responsibility

4

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.

5

HIPAA Portability

• Unlike privacy and security, not all group health plans are subject to HIPAA Portability requirements.

• Analysis• Is it a group health plan?– Broadly defined– Employer sponsored plan that

provides medical benefits– HSA is not group health plan

Excepted status is important because dictates application of other requirements, including many requirements under Health Care Reform.

6

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)

7

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

8

Goal

• Refresh regarding methods– Similarities– Differences

• Update– “New” ways they are being used– Health Care Reform

9

Today’s Agenda

Code § Review What’s New

Health Reimbursement Arrangement

HRA 105

Health Flexible Spending Account

Health FSA 105

Health Savings AccountHSA

223

10

HEALTH REIMBURSEMENT ARRANGEMENT

PEHP PMA

VEBAHRA

ICMA

America’s VEBA

MSA

PRAMSRS-HCSP

REBA

PSA

VEMA

PEBSCO

All versions of the same thing…HRA

RHSA

11

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

12

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

13

Health Reimbursement Arrangement• Nondiscrimination testing– Bargained– Non-bargained• Highly compensated individual• Eligibility• Benefits

If you treat people differently…nondiscrimination issue.

14

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

15

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

16

Moving on…

Code § Review What’s New

Health Reimbursement Arrangement

HRA 105

Health Flexible Spending Account

Health FSA 105

Health Savings AccountHSA

223

17

HRAs: What’s New?

• New ways to use• New laws that impact –

Health Care Reform

18

HRAs to Pay Premiums

• Group medical premiums• Individual medical premiums• Ordering issues with cafeteria

plan ability to pay premiums pre-tax

• Actives; post employment (including retirees)

• Nondiscrimination testing– Just premiums– Premiums “plus”

19

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.

20

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

21

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

22

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

23

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.

24

W-2 Reporting Requirement• Just reporting• Transitional relief for employer

filing fewer than 250 Form W-2s for preceding calendar year

25

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

26

Cadillac Tax

• Excluded from group health plan– Modified excepted from HIPAA

Portability rule– Does not exclude (i.e., includes) on-

site 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.

27

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.

28

Next type of program…

Code § Review What’s New

Health Reimbursement Arrangement

HRA 105

Health Flexible Spending Account

Health FSA 105

Health Savings AccountHSA

223

29

HEALTH FLEXIBLE SPENDING ACCOUNTS

Flex Spending Account

Health FSAMedical

reimbursement plan

FSA

Reimbursement

account

Health expense

account

All versions of the same thing…Health FSA

Unreimbursed Medical Account

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Health Flexible Spending Account• Self-insured medical plan under

Code §§ 105, 106• “Qualified benefit” for cafeteria

plan under Code § 125

Section 125 Plan

EmployeeContribution

Health Flexible Spending Account

Group Medical Benefits

Dependent Care Expense

Reimbursement Plan

Group Dental Benefits

31

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

32

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

33

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

34

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

35

Moving on…

Code § Review What’s New

Health Reimbursement Arrangement

HRA 105

Health Flexible Spending Account

Health FSA 105

Health Savings AccountHSA

223

36

Health FSAs: What’s New?• New ways to use• New laws that impact-

Health Care Reform

37

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

38

Health Care Reform

• Tax consequence of adult child• OTC• $2,500 maximum salary reduction (later slide) • W-2 reporting• Cadillac tax• PHSA benefits mandates

– Substantive– Administrative

• Enhanced claims regulations• External review• Uniform Summary of Benefits and Coverage• Auto enrollment• Cadillac tax• Preventive care• Annual and lifetime maximums

Note: Most cases do not apply because generally excepted from HIPAA Portability.

39

$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

40

Next type of program…

Code § Review What’s New

Health Reimbursement Arrangement

HRA 105

Health Flexible Spending Account

Health FSA 105

Health Savings AccountHSA

223

41

HEALTH SAVINGS ACCOUNTS

It is what it is!!!

42

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)

43

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

44

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

45

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

46

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

47

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

48

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)

49

Moving on…

Code § Review What’s New

Health Reimbursement Arrangement

HRA 105

Health Flexible Spending Account

Health FSA 105

Health Savings AccountHSA

223

50

HSAs: What’s New?

Health Care Reform• OTC• Non-medical penalty to 20%

51

Questions

52

Thank you

• Darcy L. HitesmanHitesman & Wold, P.A.12900 – 63rd Avenue NorthMaple Grove, MN 55369763-503-6620

• Visit our website to register to receive our informational Client Alerts! www.HitesmanLaw.com