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FSAs, HSAs, HRAs, and more…

GERARD M. HALL, CPP | PAYROLL TECHNICAL OPERATIONS MANAGER, CBIZ

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Agenda

• The IRS Lingo

• Plans

– Features

– Rules/Regulations

• Upcoming News

• Helpful Resources

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Quick Housekeeping Rules

• Active Participation is Appreciated

• Respect other people’s opinions/thoughts

• Don’t wait to ask questions; Ask Away

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The Lingo (Aunt IRiS)

• Section 125

– Internal Revenue Code (Cafeteria Plan)

– Allows for deductions to be taken on a pretax basis

– Prevents discrimination to highly compensated

employees

• Section 213(d)

– What’s eligible for reimbursement

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What’s a Flexible Spending Account?

• An FSA lets you set aside pre-tax money from your

paycheck to use for eligible out-of-pocket expenses

• There are 2 types of FSAs:

• Health Care account

• Dependent Care account

– Note: You don’t need to be enrolled in an employer’s health plan to enroll in an

FSA.

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What’s the benefit of an FSA?

• Example of cost savings

• *This is example is based on 7.65% FICA and 15% tax bracket.

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Health Care FSA

• A Health Care FSA makes it easy to save funds to use for eligible

health care expenses. Generally medical, dental, and vision

expenses

• The Internal Revenue Service (IRS) annual health care FSA pretax

contribution limit is $2,700. (2019)

• If employee and spouse each have a health care FSA, each can

contribute $2,700.

• The entire contribution is available at the beginning of

the plan year.

• Health care FSA funds can be used by employee and• Spouse

• Child (to age 26)

• Tax dependent who is permanently and totally disabled

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Medical Care Rule

• Must diagnose, cure, mitigate, treat or prevent disease

or affect any structure or function of the body

• “But for” test – would the expense be incurred in the

absence of the medical condition?

• OTC can only be allowed with a prescription

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Dependent Care FSA

• A Dependent Care FSA is a great way to save funds for eligible child and adult care expenses.

• The IRS annual dependent care FSA limit is $5,000 per household/family.

• If employee and spouse each have a dependent care FSA, one can contribute up to $5,000 between the two

• If married filing separately, the maximum allowed is $2,500, regardless if spouse doesn’t have a plan

• Eligible expenses are used for

• Eligible dependent under age 13.

• Spouse or dependent unable to take care of him/herself

• To use funds, employee must be working.

• If married, spouse must either be working, looking for work, be a full-time student or incapable of self-care

• Funds become available as they are deducted from your paycheck, and deposited into your account.

• Reported in Box 10 of W-2

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FSA Plan Operation

• Plan is owned by the employer

• Disbursements to the plan can be requested for reimbursement or paid real-

time with FSA card; require substantiation

• Contributions taken out equally over pay periods in plan year

• Changes can only be made to elections if a change of status occurs; must line

up with change

• Use-it-or-lose-it rule: Any unused funds left in these accounts are forfeited at

the end of the plan year

– Funds return to employer to use at its disposal, EXCEPT returning funds to

employee

– Employer could be liable for disbursement overages to plan

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What is an HSA?

• An HSA plan, many times referred to as a “high deductible health plan (HDHP), is health insurance that covers employee and/or family for catastrophic events.

• Individuals and employers are allowed to make contributions up to the annual IRS maximum contribution amount

• A health spending account owned and controlled by employee, no matter where employee goes or works for.

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HSA Product Characteristics

• Funds may carry over year to year

• Funds are portable• Funds may be

invested and earn interest for greater savings potential

• Must be paired with a qualified high deductible health plan (HDHP)

• May pair with Limited Purpose FSA and/or HRA

• Vision, dental expenses only

• Employer and/or consumer may contribute to account

• Contributions made by payroll deduction, check, transfer

• IRS restrictions on annual contribution amount

• No third party substantiation required –consumer responsible

• Internal Revenue Code §213(d) expenses may be reimbursed

• Funds may be withdrawn for non-qualified expenses with penalty

Consumer Owned

Contributions Distributions Account Balance

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2019/2020 Contributions and Out-of-Pocket Limits

for Health Savings Accounts

2020 2019 Change

HSA Contribution Limit (employer + employee)

Individual:$3,550

Family:$7,100

Individual:$3,500

Family:$7,000

Individual:+50

Family:+100

HSA catch-up contributions (age 55 or older)

$1,000 $1,000 No change

HDHP minimum deductibles Individual:$1,400

Family:$2,800

Individual:$1,350

Family:$2,700

Individual:+50

Family:+100

HDHP Maximum out-of-pocket amounts Individual:$6,900

Family:$13,800

Individual:$6,750

Family:$13,500

Individual:+150

Family:+300

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HSA Plan Operation

• Plan is owned by the employee

• Account must be funded prior to distribution

• Per-pay amounts can change at any time without proof of status change

• CANNOT Have HSA and Medical FSA plan; may have limited purpose FSA

• Any (federally) pretax employee deductions and all employer contributions are

reported in Box 12W of W-2

• Any distributions from HSA account will be reported on 1099-SA; must fill out

Form 8889

– Must declare that distributions were all for qualified health expenses to

remain tax-free

• HSA dollars can be moved to an investment account and receive gains from

mutual funds

– NH and TN requires to report threshold of interest made as capital gains

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• HRA- Health Reimbursement Arrangement

– Is a pre-tax reimbursement benefit that will reimburse

you for certain out of pocket medical expenses. The

HRA is funded by your employer 100%

– Company controlled plan; determines maximum

amounts (minus QSEHRA)

What is an HRA?

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• Qualified small employer HRA (QSEHRA)

– Available to employers < 50 employees

– Allowance amount max of $5,150/yr self and

$10,450/yr family

– Can rollover months and years; reimbursement

cannot exceed maximum

• Group Coverage HRA

– Must offer group health insurance

– No allowance caps nor distribution maximums

Available HRAs (as of 2019)

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• One-person stand-alone HRA

– Business of any size that wishes to offer HRA to one

employee

– No allowance caps

• Retiree HRA

– Business of any size; only available to retired

employees

– No allowance caps

Available HRAs (as of 2019) continued…

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In Comparison…

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Other FSA Plans

• Adoption Assistance

– Covers expenses in the process of legally adopting

an eligible child

– 2019: Maximum reimbursement per child ($14,080)

– Tax free as long as AGI is <= $211,160

• Parking/Transit Reimbursement

– Monthly election; unused amounts roll over

– Monthly reimbursement max of $265

– If employer pays for parking/transit amounts >$265

must be imputed

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Discrimination Testing• Performed on FSA plans; cannot discriminate to highly

compensated employees (HCEs)

• Must be done at least once by the last day of the plan (most times done the end of the first quarter of the plan)

• Medical FSA Tests

– Eligibility Test: Must benefit >= 70% eligible employees

– Benefits Test: FSA benefits must be the same

• Additional Dependent Care FSA Test

– 5% Owners Test: No more than 25% of DC contributions can come from the 5% owners

– 55% Average Benefits Test: Average DC benefits must be >=55% to those not highly compensated

• Plan must be altered if failed (elections can be lowered/stopped for HCEs/owners)

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HSA Health Care FSA HRA

What does it

stand for?

Health Savings Account Health Care Flexible

Spending Account

Health

Reimbursement

Account

Who owns it? Employee Employer Employer

Who funds the

account?

Employee, employer

and others

Typically by

employee, but

employer can

contribute

Employer only

What type of

corresponding

health plan is

allowed?

Eligibility to contribute

requires opening and

maintaining a

qualifying high-

deductible health plan.

A full-purpose

health care FSA is

compatible with any

type of health plan

coverage. A limited-

purpose health care

FSA is typically

used in conjunction

with participation in

an HSA and its

qualifying high-

deductible health

plan.

An HRA is allowed

with any type of

health plan.

Can unused

amounts carry

over?

Yes. The individual

owns the account and

any contributions made

to it, regardless of the

source or timing of the

contribution.

Yes, by plan design,

a plan may allow up

to $500 to carry

forward to future

plan years. This is

an optional plan

feature. If the plan

does not have a

carryover, any

remaining balance at

the end of the plan

year is forfeited.

Yes. The employer

can choose to have

unused funds roll

over from year to

year. However,

rollover is not

required.

Is the account

portable

between

employers?

Yes. The individual

owns the account.

No. FSAs cannot be

rolled over to a new

employer.

No. An HRA may

be designed to allow

former employees to

use their funds, but

it cannot be rolled

over to a new

employer.

Does interest

accrue?

Interest may accrue in

an HSA, depending

upon the custodian and

the type of deposit

account.

Interest does not

accrue.

Interest does not

accrue.

Is the account

subject to

COBRA

continuation?

No. An HSA is not a

health benefit plan

subject to continuation.

COBRA rights

apply.

COBRA rights

apply.

How is it

funded?

Money is deposited

directly into the

account. Contributions

can be made by

employee or other

person on an “after tax”

basis, by employer or

through pre-tax salary

deduction.

Based on the

employee’s annual

election, the

employer designates

a specific amount of

wages to

be deducted from

the employee’s

payroll check pre-

tax.

The employer

contributes a set

amount on a

notional basis.

What is the

contribution

amount?

Annual contribution

limits are established by

the IRS and indexed for

inflation. Please refer to

the IRS

Contribution/Deductible

Guidelines sheet for

specifics.

The annual

maximum amount of

employee

contribution is

established by the

IRS. This is subject

to change annually

with IRS Cost Of

Living Adjustments

(COLA).

No restrictions. For

HRAs, the employer

determines the

minimum and

maximum amounts.

Is there a

“catch-up”

contribution

provision for

older

workers?

Employees ages 55 and

older may contribute

more to the account per

year until they are

enrolled in Medicare.

Please refer to the IRS

Contribution/Deductible

Guidelines sheet for

specifics.

Not available. Not available.

Can the

account be

funded with

pre-tax salary

deduction?

Yes. Yes. No, employer-

funded only.

Is vesting

allowed?

An HSA is a bank

account owned by the

employee. The funds

are available as they

accrue in the account.

Funds are available

for use with eligible

health care expenses

on the first day of

the plan year.

The plan design may

or may not impose a

vesting schedule.

What are the

tax benefits

for

employees?

Contributions are tax

deductible, interest and

capital gains on

investments are tax-

free. Withdrawals for

qualified medical

expenses are tax-free,

although state taxes

may apply.

Employee

contributions are

exempt from federal

and FICA tax as

well as most state

and local tax.

Reimbursements are

tax-free.

Reimbursements are

federal income tax-

free.

What health

care expenses

can be paid

from the

account?

Funds can be used for

any qualified medical

expense as defined

under Section 213(d) of

the Internal Revenue

Code (IRC), except for

health insurance

premiums, with specific

exceptions.

Funds can be used

for eligible health

care expenses as

defined under

Section 213(d) of

the IRC except for

health insurance

premiums.

Funds can be used

for any eligible

health care expense

as defined under

Section 213(d) of

the IRC, including

health insurance and

long-term care

insurance premiums.

Premiums under

employer pre-tax

plans are not Section

213(d) of the IRC,

though they are tax

deductible.

Can funds be

used for non-

health care

expenses for

those under

age 65?

Non-health care

distributions must be

included in gross

income and are

subjected to a 20%

penalty tax. An

exception to the 20%

penalty applies to

distributions for non-

qualified expenses for

those individuals who

are disabled or

deceased.*

No. A health care

FSA can only be

used for eligible

health care

expenses.

No. Funds may only

be used for eligible

health care

expenses.

Can funds be

used for non-

health care

expenses for

those over age

65?

Yes. Non-health care

distributions must be

included in gross

income but are not

subject to the additional

20% tax penalty.*

No. The health care

portion of an FSA

can only be used for

eligible health care

expenses.

No. Funds may only

be used for eligible

health care

expenses.

Can COBRA

premiums be

reimbursed

from the

account?

Yes. Distributions to

pay premiums for

COBRA are tax-free.

No. A health care

FSA may not

reimburse

participants for

premiums paid for

health insurance.

This includes

premiums paid for

health coverage

under a plan

maintained by the

employer or the

employee’s spouse

or dependent.

Yes. COBRA

premiums may be

reimbursed from the

account.

Must a health

care expense

be incurred

during the

plan year the

contribution is

made?

No. Expenses are

eligible for

reimbursement once an

HSA is established.

Yes, if the plan does

not have a grace

period or carryover

feature.

No. However,

reimbursements

cannot be made for

expenses incurred

prior to the account

being established.

Is the annual

amount of the

contribution

available on

the first day of

coverage?

Only the amount

currently available in

the HSA may be used to

pay or reimburse

qualified expenses.

Yes. The total

amount elected by

the employee for the

plan year must be

available on the first

day, regardless of

the amount

contributed.

The employer-

designated HRA

funds may be

available on the first

day of the plan year.

However, funds can

be prorated during

the year if the

employer elects to

do so.

Is third-party

substantiation

of expenses

required?

No. If audited by the

IRS, the employee

shows that HSA funds

were used only for

qualified medical

expenses.

Yes. Each request

for reimbursement

must be

substantiated before

it can be reimbursed.

Yes. Each request

for reimbursement

must be

substantiated before

it can be reimbursed.

Can the

account be

integrated

with other

accounts?

Yes. An HSA can be

combined with a limited

purpose health care

FSA for use with

eligible dental and

vision expenses.

A health care FSA is

compatible with an

HRA, but only a

limited purpose

health care FSA can

be integrated with

an HSA.

An HRA is

compatible with an

FSA, but only a

limited purpose

HRA can be

integrated with an

HSA.

*HSA funds used for non-qualified medical expenses are taxed and subject to a 20% penalty if the HSA holder is less than 65 years of age. After age 65, HSA funds for non-qualified medical expenses are taxed (but not penalized).

Source: OptumBank