cdhp 101: behind the wheel of consumer-driven plans

CDHP 101: Behind the Wheel of Consumer-Driven Plans

Larry Grudzien

Attorney at Law

Lawrence (Larry) Grudzien, JD, LLM is an attorney practicing exclusively in the field of employee benefits. He has experience in dealing with qualified plans, health and welfare, fringe benefits and executive compensation areas. He has more than 35 years’ experience in employee benefit law.

Mr. Grudzien was also an adjunct faculty member of John Marshall Law School’s LL.M. program in Employee Benefits and at the Valparaiso University’s School of Law. Mr. Grudzien has a B.A. degree in history and political science from Indiana University, J.D. degree from Valparaiso University School of Law and LL.M. degree in tax from Boston University School of Law. He is a member of Indiana and Illinois Bars.

About Larry

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Larry GrudzienERISA Attorney

Copyright 2017 – Not to be reproduced without express permission of Benefit Express Services, LLC

Cafeteria Plans

4Copyright 2017 – Not to be reproduced without express permission of Benefit Express Services, LLC

• A written plan for employees who may choose between cash and qualified benefits

• Essential Features:

Cash Requirement

Salary Reduction

Election Requirement

• Types of Plans:

Premium Only Plans (POP)

Health Flexible Spending Accounts

Dependent Care Assistance Plans

Source: Code §125(a) &(d)

Statutory Definition


• Employee completes election form for salary reduction

• A designated portion of the employee’s salary is reduced every pay period to pay for his or her portion of premium and/or expenses

• Employer collects amounts and pays premium for employee coverage

• Employer reimburses employee’s medical and dependent care expenses

• Both employer and participant saves FICA and FUTA taxes on contributions

How Cafeteria Plans Work


Employee Advantages

• Tax Savings on Income Tax and FICA

• Flexibility in Choosing Benefits

• More Benefit Choices May Be Available

• Uniform Coverage Rule

Employee Disadvantages

• Elections Irrevocable Except for “Change in Status”

• “Use or Lose it Rule”

Advantages & Disadvantages


Employer Advantages

• Tax Savings on FICA and FUTA Taxes, State Unemployment Insurance and Workers’ Compensation Taxes

• Improved Recruitment and Retention

• Cost Savings in Providing Flexible Benefit Structure

• Impact of Employee Premium Increases Softened

• Increase in Employee Awareness of Benefit Costs

Employer Disadvantages

• Initial Setup Costs

• Ongoing Administration Expenses

• Expense Relating to Communication of Benefit Program to Employees

• Uniform Coverage Rule

Advantages & Disadvantages


Written Plan Required

Contents

• Description of Benefits

• Eligibility Rules

• Procedures Governing Elections

• Manner in Which Contributions Are Made

• Maximum Employer Contributions

• Plan Year

Source: IRS Reg. §§ 1.125-1, Q&A-3, 1.125-2, Q&A-3.

Legal Requirements of Cafeteria Plans


• Reporting & Disclosure Requirements

• ERISA Coverage

• Nondiscrimination Requirements Eligibility to Participate

Contribution and Benefits

Key Employee Concentration

Source: Code §125(b)&(c), IRS Reg. §1.125-1, Q & A-19

Legal Requirements of Cafeteria Plans


Any employer can sponsor a cafeteria plan

• No minimum size requirement

• No required form of ownership

Eligible Individuals

• Only employees of plan sponsor or controlled group member may participate

• Former employees may participate if active employees predominate

• Some workers may be excluded under plan terms if discrimination rules are not violated

Sponsorship & Participation


A “qualified benefit”: does not defer compensation and is excludable from gross income under Code

Qualified Benefits include:

• Health Plan premiums

• Dental Plan premiums

• Vision Plan premiums

• AD&D premiums

• Disability Premiums

• DCAPs

Source: Code §125(f), IRS Reg.§1.125-1, Q&A-5, IRS Reg §1.125-2, Q&A-4.

Qualified Benefits


• Health FSAs

• Group Term Life Insurance premiums

• Paid Vacation Days

• 401(k) Salary Deferrals

• Adoption Assistance Benefits

• Retiree Group Term Life premiums

The following benefits are not “qualified benefits” that may be offered through a cafeteria plan:

• Educational Assistance

• Qualified Scholarships and Fellowships

• Qualified Tuition Reductions

• No Additional Cost Services

• Qualified Employee Discounts

• Working Condition Fringe Benefits

• Transportation Fringe Benefits

Qualified Benefits


• Qualified Moving Expense Reimbursements

• On Premises Gyms/Athletic Facilities

• Meals and Lodging Furnished by Employer

• Dependent Group Term Life Insurance

• Medical Savings Accounts

• Long Term Care Insurance

• Benefits that Defer Compensation

Some benefits may or may not be includable in cafeteria plans:

• Individual Health Insurance Policies,

• Hospital Indemnity and Cancer Insurance Policies,

• Health Insurance Coverage for Domestic Partners

Qualified Benefits


• Employee Contributions

• Post & Pre-Tax

• Non-Elective Employer Contributions

• Opt-Out and Cash-Out Provisions

Cafeteria Plan Contributions


• Employee agrees to reduce salary on a pre-tax basis to pay for benefits under the plan

• Such contributions are considered employer contributions for tax purposes (from the IRS view)

• The employee gives up the right to the amount of salary reduced before becoming entitled to it thus avoiding constructive receipt

• This arrangement allows an employee to pay for coverage in a tax-advantaged manner

Source Code §125(a), IRS Reg. §1.125-1, Q&A-1, IRS Reg. §1.125-2, Q&A-2

Employee Contributions


• Contingent Contributions

• Matching Contributions

• Flex Credits

• Variations

Non-Elective Employer Contributions


Plan document must contain procedures describing the election period:

• Period during which elections can be made

• Period for which elections are effective

Note: Plan does not have to allow election changes

In general, elections must be:

• Made in advance before the beginning of the period of coverage

• Irrevocable

• Made on a prospective basis

Source: Code §125(d)(2), IRS Reg. §1.125-1, Q&A-7, IRS Reg.§1.125-2, Q&A-5.

When must elections be made?


• Annual open enrollment-needs to be occur before the first day of the subsequent plan year

• Enrollment periods for new hires

• Special mid year elections

When must elections be made?


• General Irrevocability Rule

• 14 Events that are Recognized by the IRS as Permitting Mid-Year Election Changes

• Other Events That Might Permit Mid-Year Election Changes

• Administrative Requirements To Implement A Mid-Year Election Change

Source: Code §125(d)(2), IRS Reg. §1.125-1, Q&A-6, 8, and 15, IRS §1.125-2, Q&A-6

Mid-Year Election Changes


• Change in status

• Cost changes with automatic increases or decreases

• Significant cost changes

• Significant coverage curtailment (with or without loss of coverage)

• Addition or significant improvement of benefit package options

• Change in coverage under another employer’s plan

• Loss of coverage under group health plan of governmental or

educational institution

• HIPAA special events

Events that Permit Mid-Year Election Changes


• COBRA qualifying events

• Judgments, decrees or orders

• Entitlement to Medicare or Medicaid

• FMLA leaves of absence

• Enrollment in the Marketplace

• Reduction of hours

Flexible Spending Accounts


• A program that provides coverage under which eligible health care, dependent care and adoption expenses may be reimbursed

• Subject to maximums and reasonable conditions set by IRS regulations and plan provisions

• Employees pay pre-tax salary reductions into a flexible spending account

• Employees receive reimbursement for certain qualified eligible expenses from their flexible spending account

• Remember the “Use it or Lose It Rule”

What is a Flexible Spending Account?


• Health Care FSA – Reimburses eligible medical, dental and/or vision care expenses not reimbursable elsewhere

• Dependent Care FSA – Reimburses eligible child care or elder care expenses

• Adoption Assistance FSA – Reimburses eligible adoption expenses (less common, reimbursements subject to Social Security and Medicare taxes)

Types of Flexible Spending Accounts


• Considered a self-insured medical reimbursement plan - Code Sections 105 and 106 apply

• Considered a group health plan subject to COBRA and HIPAA

• Considered an employee welfare benefit plan - ERISA applies

• Subject to nondiscrimination rules - IRC Section 105(h)

Legal Framework for Health Care FSAs


• There is a coverage period usually 12 months (often calendar year to coincide with income taxes)

• During coverage period, pre-tax salary reductions are taken from the employees pay check and are credited to the FSA

• Participant submits claims for reimbursement of incurred eligible health care expenses

How Healthcare FSAs Work


• Must be elected prior to effective date of coverage period

• Elections are generally irrevocable

• Cafeteria plan mid-year election rules apply so generally a change in status is required to change an election

• Plan documents can be more restrictive that than the regulations

Healthcare FSA Elections


• General irrevocability rule - no change required for the plan year

• 5 events are recognized by the IRS as permitting mid-year election changes for health FSAs

• Other events are recognized permitting mid-year election changes

• Administrative requirements that must be met to implement a mid-year election change

• 5 Events for Mid-Year Election Changes:

Change in status

COBRA qualifying events

Judgments, decrees or orders

Entitlement to Medicare or Medicaid

FMLA leaves of absence

Mid-Year Election Changes


• Must be an eligible expense under a written accident or health plan

• Must be for health care (medical, dental or vision)

• Must be incurred during the coverage period

• Must be incurred by covered employee, spouse or eligible dependent

• May not include any expense for which employee actually claims a federal income tax deduction

• Expenses can not be reimbursable from another source

• Reimbursement of insurance premiums is prohibited

• There must be adequate claims substantiation

Legal Requirements for Eligible Expenses


• Office visit to doctor to treat illness or injury

• Prescription drugs (OTC drugs cannot)

• Hospital room and board

• Surgery

• Covered dental treatment

• Eye exams, eye glasses, contact lenses, if medically necessary and prescribed by doctor

• There are many others - IRS Publication 502 lists medical services and equipment that are generally eligible. There are exceptions

• Must not be reimbursable elsewhere

Examples of Eligible Expenses


• Cosmetic treatments

• Illegal operations or treatments

• Qualified long term care services

• Insurance premiums

Examples of Services that Are Not Eligible


Unused salary reductions can not be carried over to the next plan year

• An employee will lose salary reduction contributions that are not submitted for reimbursement

• IRS does not impose any taxes on forfeited employee contributions

• Plan document determines how employer may use forfeited contributions

• Most plans allow a short “run-out” period for submitting expenses from the previous year

Forfeitures from participants’ health and/or dependent care FSAs may be:

• retained by the employer

• used to defray administrative expenses

• used to reduce salary reduction contributions for the next year on a “reasonable and uniform basis”

• returned to employees on a “reasonable and uniform basis,” consistent with detailed requirements included in the proposed rules

“Use It or Lose It” Rule


Carryover and Grace Period Rule

• It modifies the “use-it-or-lose-it" rule for “qualified benefits” under a cafeteria plan

• An employer may amend its cafeteria plan document to provide for a grace period of up to 2-1/2 months immediately following the end of each plan year to use amounts deferred in the previous plan year but remain unspent or allow the carryover of up to $500 to the next plan year

Uniform Coverage Rule

• At any time during the coverage period, the participant must be allowed withdraw the entire amount

• If the participant does not have sufficient amount to cover the withdraw, the employer must still reimbursement the amounts

Additional Rules


Health FSA claims must be substantiated with two items:

• a written statement from an independent third party providing that the medical expense has been incurred and the amount of the expense

• a written statement from the participant providing that the medical expense has not been reimbursed and that the participant will not seek reimbursement from any other health plan coverage

Third party statement

• Requirement:

Verifies that the expense has incurred

Ensures that advance reimbursements of future or projected expenses is not made

• Originals or copies, faxes or scanned copies or originals should satisfy requirement.

• Credit card receipts or canceled checks do not satisfy requirement

Claim Substantiation


Participant Statement

• It must provide: the expense has not been reimbursed

the employee will not seek reimbursement under any other plan covering health benefits

the expense was incurred for the participant or an eligible dependent

• Language should be added to new and annual enrollment forms

• Must obtained contemporaneously with or after the expense has been incurred



• For 2017 annual contributions limit for salary reduction contributions is $2,600 per plan year per employer and $2,650 for 2018

• Maximum contribution limits should be carefully observed to ensure that participants are treated on a uniform and consistent basis

• The minimum amount a participant can submit for reimbursement - $50

• Reimbursement minimum should be specified in the plan document

Plan Limits on Annual Contributions and Reimbursement Amounts


Dependent Care Plans


• Salary reduction plan permitted under Code §129

• Not considered an ERISA welfare plan

• Also considered a flexible spending account under Code §129

• Needs to comply with Code §125 requirements

• Basic Requirements:

Plan terms must be in writing

Must be for the exclusive benefit of employees

Purpose must be to provide employees with dependent care assistance

Reimbursement must be for employment related expenses

Does not need to be funded

Must meet applicable non-discrimination rules

DCAP Plans


• Subject to “Use it or Lose it Rule” Remember “grace Period changes

• Unlike a health FSA, a DCAP is not subject to the “uniform coverage” rule

• COBRA does not apply, but employer may allow employee to continue to the end of the year

• Expenses must be “employment related”

• Expense must be for one or more qualified individuals

• Care provided must be for the “well being and protection” of the qualified individual

• All rules applicable to health FSAs apply to DCAP reimbursement except the “uniform coverage” requirement and COBRA

• Some of the reimbursable expenses under a DCAP:

Babysitter inside or outside your home

Day camp for school age children during vacation

Day care center that meets state and local regulations

What Expenses are Reimbursed Under a DCAP?


Eldercare for a dependent provided they spend at least 8 hours inside your home

Sick child care facility

Some of the expenses that cannot be reimbursed under a DCAP:

• Expenses due to unpaid or volunteer work

• Payments made to an employee’s child under age 19

• Day care center that does not comply with local and state requirements

• Educational expenses for kindergarten or above

• Expenses for overnight camp

• Incidental expense billed separately from dependent care expenses

What Expenses Are Not Reimbursed Under a DCAP?


Employers are allowed to reimburse for what they believe are “reasonable expenses”

DCAP reimbursement claims require the following:

• Written statement from independent third party

• Statement must indicate the amount of the expenses

• Written certification by the participant that the expense has not reimbursed by another plan

• The name, address, and tax id of the provider should be included on the statement



• Under Code §129 the maximum amount is the lesser of $5000 if married and filing jointly and $2,500 if married and filing separately or a single parent

• If annual earned income is less than the above the earned income becomes the maximum

• Employers should make employees aware of the annual maximum in all employee communication material

• Employers are not responsible if a married couple violates by the annual maximum by “double dipping” in their respective plans

What Are the Annual Plan Maximums?


• In general, elections are irrevocable

• Mid-year election rules apply

• Election changes, especially the “significant cost rule”, are less stringent than health FSA rules

• Some Election Changes do not apply

• Some mid-year changes are not allowed to avoid “double dipping”

What Election Changes Are Allowed During the Plan Year?


Health Reimbursement Arrangements


• Provided in Rev. Ruling 2002-41 and IRS Notice 2002-45

• Considered an employee welfare benefit plan under ERISA

• Considered an employer sponsored self-funded health plan subject to IRC 105(h)

• Are financed by the employers (no pre-tax salary reduction contributions)

• Reimburse participants for medical expenses up to a maximum dollar amount for any plan year

• Allow unused amounts to be carried forward to the next plan year

• Reimburse participants for medical expenses

• Can be used with high-deductible group health plans

What is an HRA?


• Employer controls what medical expenses are reimbursed

• Employer controls the amount of the reimbursement each year

• HRAs can be used to provide retiree medical benefits

• Employer can reimburse premiums or just expenses

• Employees can lose right to receive reimburse once leave employment unless elect COBRA

Why would an employer consider establishing an HRA?


• Plan Document

• Enrollment form

• Summary Plan Description (SPD)

• Expense Reimbursement Form

• Form 5500, if required

• Summary of Benefits and Coverage

• Summary Annual Report (if required to file Form 5500)

What documents are needed to establish them?


• Yes, To reimburse medial expenses or premiums, the HRA must be integrated with a group health plan an insured health plan

• An employer can designate which expenses it will reimburse under the HRA

• No group health plans is needed for reimbursing dental, vision and retiree expenses or premiums

• Two integration methods are provided

• First method is with a group health plan that does not provide minimum value

• Second method is with group health plan that provides minimum value

• For expenses or premiums to be reimbursed, dependents must be covered by group health plan of the employer or spouse’s employer.

• Employees (and former employees) must be offered the opportunity to permanently opt-out of and waive future reimbursements from the HRA at least annually.

• And on termination of employment, the HRA must either be forfeited or it must allow the employee to permanently opt out and waive future reimbursements.

Does an HRA have to be used with a group health plan?


• The employer determines which employees will participate in the plan

• An employer may exclude any employee as long as the plan passes the nondiscrimination tests of Code §105(h)

• Self-employed individuals, partners and more than 2% shareholders of a S Corporation may not participate

Who is Eligible to Make or Receive Contributions?


Yes, HRAs are considered a self-funded welfare plan and must meet all of the ERISA requirements:

• Written plan requirement

• Trust requirement, if HRA is funded

• Claims procedures

• Reporting and Disclosure

• Fiduciary requirements

Must the ERISA requirements be met?


Can an employee participate in an Health FSA in the same month?

• Yes, it is possible

• FSA and HRA cannot reimburse the same medical expense

• If expense can be covered by both, plan must specify that FSA must be exhausted first

• If plan does not specify, HRA must be exhausted first

• Employer may designate only certain expenses can be reimbursed by HRA

Do the Health FSA rules apply to HRAs?

• No, because HRAs contain only employer contributions

• Use-it- or-lose rule does not apply

• Uniform coverage rules does not apply

Other Questions


What contributions are permitted and how are they treated for tax purposes?

• Reimburse participants for medical premiums or expenses up to a maximum dollar amount specified by the employer for any plan year.

• Reimburse participants for all eligible medical expenses or only those specified by the employer.

• Any contributions to HRA are deductible by the employer and any reimbursements for expenses are not taxable to the employees.

What expenses can be reimbursed?

• The Plan can reimburse medical expenses and/or premiums.

• Employer can reimburse any medical expense under Code § 213(d) or just those expenses it specifies in the plan.

• Can include dental, vision, prescription drug and preventive care expenses.

Other Questions


Can HRAs reimburse premiums for individual coverage?

• No. HRAs are prohibited after 2013.

• HRAs of small employers given relief until the end of 2016.

• Certain small employers will be allowed under a qualified small employer HRA.

Can unused amounts be carried to future years?

• Yes, an employer may allow carryover, but is not required to do so.

• Employer may specify the carryover amount and period.

• Any amount allowed to be carried over will be considered an expense on the employer’s balance sheet.

Other Questions


Once contributions are made, can they be forfeited?

• Yes, an employer may specify events in which the employee loses the right to continue to use any amounts set aside in an HRA.

• An employer can provide that amounts will be available after termination of employment or death.

• Employee can continue to use HRA if he or she elects COBRA.

Must benefits be funded?

• No. The DOL has not required employers to fund contributions that are promised.

• They can be paid from the employer’s general assets.

Other Questions


• Under Code §105(h), a plan is discriminatory for eligibility unless it benefits:

70 percent or more of all employees

80 percent of employees eligible to benefit, as long as 70 percent or more employees are eligible to benefit under the plan

a nondiscriminatory classification of employees

• An HRA is discriminatory for benefits if the type and amount of benefits available to highly compensated participants are not also available on the same basis to other participants.

• The comparison is based on benefits subject to reimbursement, rather than actual benefit payments or reimbursements under the plan, and on dollar amounts, rather than percentages of pay.

• These nondiscrimination rules do not apply to retiree benefits if certain conditions are met.

Are there any nondiscrimination rules?


When can distributions be made?

• An employer decides when establishing the plan:

What medical expenses or premiums may be reimbursed under the plan

When reimbursements will be made

Whether any contributions will be made available for reimbursements in future years

Under what circumstance employees will lose the right to receive reimbursement

Who substantiates if paid for medical expenses?

• The employee submits claims to the employer or to a TPA selected by the employer.

• Procedures for submitting claims similar to procedures under a Health FSAs.

Other Questions


• What happens to an individual’s HRA upon his or her death?

The employer may design a plan to allow a deceased employee’s spouse and other dependents to continue participation in the plan without electing COBRA.

If not, COBRA will be available to spouse and other dependents.

• May the employer place any restrictions on the withdrawals?

Yes. An employer may place restrictions on what expenses will be reimbursed, the amount of the reimbursement and when the reimbursement will be made.

• Does COBRA apply?

Yes HRAs are subject to COBRA requirements.

Qualified beneficiaries will have access to unspent HRA balance and will be entitled to additional HRA accruals that active employees receive.

Each qualified beneficiary will have an independent right under COBRA to continue coverage that was available immediately preceding the qualifying event.

Other Questions


• How is the COBRA premium determined?

The premium must be actuarially determined or, alternatively, the applicable premium may be determined by using a “past-cost” method.

A plan is permitted to charge a qualified beneficiary up to 102% of the applicable premium.

• When electing COBRA, must the employee be given a separate election?

It will depend on whether an employee has to participate in the HRA to participate in the group health plan.

An employer can provide a separate election.

• What reporting is required?

They are subject to the ERISA reporting requirements.

Subject Form 5500 requirements- exempt if unfunded and have under 100 participants.

Must provide and Form 1095-C if plan is not integrated with a group health plan of the employer.

Section 111 Reporting -$5,000 or more

Other Questions


What disclosures are required to participants?

• Separate SPD

• Separate SBC

• Employees (and former employees) must be offered the opportunity to permanently opt-out of and waive future reimbursements from the HRA at least annually.

Why would an employer participate in an HRA?

• An employer has complete control in:

what medical expenses will be reimbursed

what unused amounts will be carried over

for what period of time unused amounts will be carried over

• An employer can decide from year to year what amounts they will contribute.

• HRAs can work with Health FSAs.

Why would an employer participate in an HRA?


• ERISA requirements will still apply

• Nondiscrimination requirements apply

• Claim substantiation is still required

• Possible funding issues

• May reduce savings in going to higher deductible health plan

• COBRA application

Why would an employer not participate in an HRA?


Qualified Small Employer HRA


Effective Date

• Employers may adopt this HRA plan design starting with plan years that begin on or after January 1, 2017

Eligible Employers

• For an employer to qualify to offer this plan design, an employer must: Employ less than 50 full time employees and full time equivalent employees This

determined in the previous calendar year

Not offer a group health plan

Offer the HRA on the same terms to all eligible employees



• Excludible Employees

Employers may design this plan to exclude certain employees from participating:

• Part-time and seasonal employees

• Employees under age 25

• Union employees

• Certain non resident aliens

• Reimbursement Limit

$4,950 for 2017, $5,050 for 2017 for single

$10,000 for 2017 is $10,250 for 2018 for family per plan year

• Proration of Limit

It is prorated for those employees who work part of the year or short plan year.



Reimbursable expenses

• The plan may be designed to reimburse for all Section 213(d) medical expenses and/or individual health insurance premiums.

Condition to receive tax-free reimbursements

• An employee must show proof that they are covered under a minimum essential health plan when enrolling.

• After enrollment, the employee must provide the following as proof of continued coverage in order to receive tax-free reimbursement:

Explanation of Benefits (EOB) for S213(d) medical expenses

Monthly Premium bill for Individual health insurance premium expenses

• Participants may be taxed on their reimbursements if the participant is not covered by their minimum essential coverage for any month during the plan year.



• An employer must provide an annual written notice 90 days in advance of the plan year or the employee’s initial eligibility date.

• This notice must be provided to all eligible employees.

• The notice must contain:

The amount of HRA benefit available

Instruct employees to provide the amount of HRA benefit available to the public exchange if the employee is applying for a premium tax credit

Benefits for plan year could be prorated if participate in plan less than 12 months

Warn employees that their reimbursements may be taxable if the employee does not have minimum essential coverage for any month

• Failure to provide this notice can trigger a penalty of $50 per employee, up to $2500 per year.

Notice Requirement


The HRA’s benefit amount must be reported on the employee’s W-2.

This HRA is not subject to COBRA.

Other matters


Health Savings Accounts (HSAs)


What is an HSA?

• Tax-exempt trust or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder and his or her spouse and/or dependents

Source: Code §223

Can an HSA be outside employment relationship?

• Yes. Individuals can set up a HSA on their own or through an employer

• Must still meet statutory requirements:

Trust or custodial account

Participate in a high deductible health plan

Meet contribution limits

Health Savings Accounts


• Eligible individuals are those employees who are covered only by a high-deductible health plan

• Individuals enrolled in Medicare are not eligible to make contributions to an HSA

• Eligibility is determined on a month by month basis

• An individual who is covered under:

a spouse’s or dependent’s employer’s health plan

a comprehensive major medical individual insurance policy

a health FSA or HRA unless coverage under such HRA or FSA is limited to “permitted benefits” or specific benefits not provided by the high-deductible health plan

Can an individual covered under “other coverage” still be eligible?

• Yes. If individual is eligible for other “permitted coverage” or “permitted insurance” in addition to a high deductible health plan, they can still be eligible to make or receive a contribution to an HSA

Who is not eligible to make or receive contributions?


• Worker’s Compensation

• Automobile Insurance

• Insurance for a specified disease or illness.

• Insurance that pays a fixed amount per day of hospitalization

• Coverage for accident, disability, dental, vision and long-term care

What is permitted coverage or insurance?


Can first dollar preventative care be included in a high-deductible plan?

• Yes. This is permissible under a HDHP

• Preventative care is defined as including the following:

Periodic health evaluations

Routine prenatal and well-child care

Child and adult immunizations

Tobacco cessation programs

Obesity weight-loss programs

Certain screenings

Can first dollar prescription drug coverage be provided?

• No - Notice 2004-28 - No coverage below deductible limits provided under a HDHP

First Dollar Coverage


• No, unless expenses under FSA and/or HRA are limited to dental, vision and/or preventive care benefits (“Limited Purpose Health FSA or HRA”)

• If an employee suspends participation in a HRA for the year (Suspended HRA”)

• FSA or HRA pays expenses above the deductible of the HDHP (“Post-Deductible Health FSA or HRA”)

• HRA pays or reimburses expenses incurred after retirement (“Retirement HRA”)

• Provided in Revenue Ruling 2004-45

Can an employee participate in a FSA/HRA and HSA in the same year?


A health plan that in the case of individual coverage has an annual deductible is at least $1,300 for 2017 and $1350 for 2018 and in the case of family coverage has an annual deductible of $2,600 for 2017 and $2,700 for 2018

Maximum out-of-pocket expense limit on covered expenses can not exceed $6,550 for 2017 and $6,650 for 2018 in the case of individual coverage and $13,100 for 2017 and $13,300 for 2018 in the case of family coverage. Out-of-pocket expenses include deductibles, co-payments, and other amounts (other than premiums) that the individual must pay for covered benefits under the plan.

What is a “High Deductible Health Plan”?


• Employee Contributions: Contributions are deductible (within limits) in determining adjusted gross income.

• Employer Contributions: These contributions (including salary reduction contributions made through a cafeteria plan) are excludable from gross income and wages for employment tax purposes to the extent the contribution would be deductible if made by the employee.

• Other Contributions: Contributions may be made by family members and other third parties. These contributions are deductible by the eligible individual to the extent the contributions would be deductible if made by the individual.

What contributions are permitted and how are they treated for tax purposes?


• Yes They are treated as employer contributions and are excluded from the employee’s income

• Code Section 125 has been amended to allow HSAs to be offered under cafeteria plans

• These contributions are not subject to: the "use or lose it rule"

the "uniform coverage rule”

the mandatory 12 month period of coverage requirement

Note, a health FSA may allow a participant who makes HSA contributions to start or stop his or her election and to increase or decrease his or her election at any time. All of the other cafeteria plan rules would apply.

Can salary deferral contributions be made?


• The maximum aggregate annual contribution that an individual can make to a HSA is $3,400 for 2017 and $3,450 for 2018 in the case of individual coverage and $6,750 for 2017 and $6,900 for 2018 in the case of family coverage.

• Annual contribution limits for individuals who have attained age 55 by the end of the taxable year is $1,000 in 2009 and thereafter.

• Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.

What are the limits for contributions?


• Any contributions exceeding the limits are not deductible.

• Contributions made by an employer over the limits are included in the employee’s income.

• Excise tax applies to contributions in excess of the maximum contribution amount. The excise tax is generally equal to 6% of the cumulative amount of excess contributions that are not distributed from the HSA to the contributor.

• If the excess contributions for a taxable year and the net income are paid to the individual before the due date of tax return (including extensions) for filing, then the net income is included in the individual’s gross income for the taxable year in which the distribution is received but the excise tax is not imposed on the excess contribution and the distribution of the excess contributions is not taxed.

What happens if the limits are exceeded for any year?


• When must contributions be made for any year?

By the due date of the individual’s tax return (excluding extensions)

• Are there any nondiscrimination rules?

Yes. If an employer makes contributions to employees’ HSAs, the employer must make available comparable contributions (e.g. same amount or the same percentage of deductible) on behalf of all employees with comparable coverage during the same period (e.g. single/family).

The comparability rule may apply separately to part-time employees (i.e., employees who are customarily employed for fewer than 30 hours per week). The comparability rule does not apply to amounts transferred from an employee’s HSA, health FSA, or MSA or to HSA contributions made through a cafeteria plan.

• What happens if an employer does not comply with the above comparability rule?

The employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs of the employer for that period.

Health Savings Accounts


• Distributions for qualified medical expenses of the individual and his or her spouse or dependents generally are excludable from gross income.

• Amounts in a HSA can be used for qualified medical expenses even if the individual is not currently eligible for contributions to the HSA.

• Qualified medical expenses generally are defined as under Code § 213(d) and include expenses for diagnosis, cure, mitigation, treatment, or prevention of disease, including prescription drugs, transportation primarily for and essential to such care, and qualified long term care expenses.

• General rule is health insurance premiums cannot be paid from HSA. Exceptions are long-term care, COBRA, Medicare Part A and B, Medicare HMOs, and employer-sponsored health insurance.

• Distributions from a HSA that are not for qualified medical expenses are includible in gross income.

• These taxable distributions are also subject to an additional 10% tax unless made after death, disability, or the individual attains the age of Medicare eligibility (i.e., age 65).

When can distributions be made?


Who substantiates that if paid for medical expenses?

• It is the individual participant because he or she claims treatment on Form 1040

• Trustee or custodian is not permitted to substantiate claims

• The employer is not permitted to substantiate

What happens to an individuals HSA upon his or her death?

• Any balance remaining in the decedent’s HSA is includible in his or her gross estate.

• If the HSA holder’s surviving spouse is the named beneficiary of the HSA, then, after the death of the HSA holder, the HSA becomes the HSA of the surviving spouse and the amount of the HSA balance may be deducted in computing the decedent's taxable estate, pursuant to the estate tax marital deduction.

• If, upon death, the HSA passes to a named beneficiary other than the decedent’s surviving spouse, the HSA ceases to be a HSA as of the date of the decedent's death, and the beneficiary is required to include the fair market value of HSA assets as of the date of death in gross income for the taxable year that includes the date of death.

Other Questions


Company Background - Services

81

EligibilityEnrollmentIntegration

Self ServiceCommunicationsEE Call Center

Decision SupportRetiree H&W Admin.

COBRADirect Billing

Total RewardsReimbursements (HSA / FSA)

Commuter BenefitsDependent Verifications

ACA & Other Compliance Svc.

We help participants understand and usetheir benefits wisely so that they can be accountable for their healthcare.

We enable you, as the plan sponsor, to enable and deliver your benefits strategy.

benefit wise. relationship driven.


Company Background – Book of Business

82

Clients & Services Supported

226

Administration Participants 1,500,000+

3,952Technology Clients

Reimbursement / COBRA clients 187

Average client size - participants 4,100

Mid/Large Administration clients

ACA 1095 Forms Generated 250,000

250 employees serving our clients from two services center; Schaumburg, IL and Rancho Cordova, CA.


Some of Our Partners


Questions?


Contact Information

85

Larry GrudzienAttorney at Law

(708) [email protected]


mailto:[email protected]

http://www.larrygrudzien.com/

cdhp 101: behind the wheel of consumer-driven plans

Recruiting & HR