6/9/2009. Section 125 Eliminates Comparable Rules for HSAs. Introduction. Why use Section 125 for HSAs?

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1 Section 125 Eliminates Comparable Rules for HSAs Can you be more flexible in your plan design and funding for HSAs? YES! Introduction Ric Joyner, MBA, CEBS, GBA, CFCI Past President of WI AHU Co-Founder of eflexgroup.com TPA for FSAs, COBRA, HRAs, HSAs We prove our service Loyal members of NAHU Different levels of people House Keeping Items Ask questions I will answers questions at the end Why use Section 125 for HSAs? Section 125 eliminates the comparable rules which are inflexible but easy to understand Allows employees to take pre-tax payroll deductions (IRS term salary reduction ) of HSA contributions versus taking deduction at end of year Ok no brainer on using section 125 plans so where do we go now? Do we get a free POP plan? Rules: Written plan document, non discrimination tests, Corp resolution. Not an ERISA plan 1

2 Agenda Discuss Comparable Rules of HSAs Discuss Section 125 Non-Discrimination Tests Compare HSA Comp Rules to Section 125 ND Tests Review Section 125 Plan Requirements Using Section 125 for Flexible Funding of HSAs Using Section 125 for Flexible Entry Dates Questions Close Story In your meeting with an employer several months ago you presented your 5 year business plan for the employer s benefits, that you learned from NAHU breakout with Ric and Tom in NY City. The employer called you back to get moving on the plan. He said no other agent had such a program. Congratulations! Now lets move ahead to implementation. Story-Implementation He decided to jump ahead on the plan and go for an HDHP with an HSA. You suggest the carrier, the bank and pick eflex for your section 125 pop plan so employees can have pre-tax health insurance premiums and pre-tax payroll deductions for HSAs contributions. Did you know that section 125 nullifies the HSA comparable rules? But agents are stuck on comparable rules because delving deeper requires more sofistication, time to learn and research. Hopefully you will find this a helpful resource. 2

3 Story-Design The employer mentions that he has a core group of 25 employees who have low turnover and are professionals. This is the management group which is salaried. There are 50 more employees who are hourly but have high turnover. The employer wants to know if you can design an HSA program that will allow the managers to get more of an employer contribution based on length of service and or a % of pay and entry dates into the plan immediately for salaried. The next request is to allow the hourly to come on with one year of service, half the contribution of the salary people? Is this possible? Answer later HSA Comparable Rules HSA Contribution Rules: Employer Contributions Are always excluded from employees income (pre-tax) Must be comparable for all employees participating in the HSA If not comparable, there will be an excise tax equal to 35% of the amount the employer contributed t to employees HSAs The self-employed, partners and S-Corporation shareholders are generally not considered employees and cannot receive an employer contribution they can make deductible contributions to the HSA on their own taxes. Page 21 All about HSAs July 22 (treas.gov) HSA Comparable Rules Comparable contributions are contributions to all HSAs of an employer: which are the same amount or which are the same percentage of the annual deductible May count only employees who are eligible individuals covered by the employer under the HDHP and who have the same category of coverage (i.e., self-only or family).no other classifications of employees are permitted Part-time employees can be tested separately. Part-time means customarily employed fewer than 30 hours per week Employers may contribute more on behalf of employees'. that are non highly compensated Comparability rules do not apply to collectively bargained employees. Source: All about HSA July Treas.gov 3

4 What are highly compensated individuals for HSAs? For purposes of the HSA comparability rules, an HCE is determined by using the 414(q) rules (the same rules used for qualified retirement plans and dependent care assistance plans). Basically, the 414(q) rules define an HCE as (1) a 5% owner in either the current or the preceding year, or (2) an employee who received compensation in excess of $110,000 (2009 indexed limit) in the preceding year, subject to a top paid group election by the employer. Sum of HSA Comparable Rules Treat everyone the same way Give everyone the same thing Part time is less than 30 hours per week Give more to non HCEs Single or family coverage is the only classification The positive to this approach is it easy to figure out if you are passing or failing. The negative of this approach is the lack of flexibility in meeting diverse needs of the employers. Question: What about amounts based on different health plans? Answer to Question With respect to your question regarding geographic divisions, you have identified one of the big problems with the comparability rules. You cannot differentiate employer HSA contributions based on geographic region, operating division, or a whole host of other reasonable business classifications that can result in different health coverage for different groups at different costs. Furthermore, all entities within a controlled group are considered a single "employer" when applying these rules. The only differentiations allowed for employer HSA contributions are with respect to coverage type (single, employee+1, employee+2 and employee+3) and the following classifications: current full-time, current part-time, former employees (except COBRA continues) and collectively bargained employees. Finally, as you are aware, an employer can provide higher contributions to non-hces as compared to HCEs. If you need additional information, please let us know. Gail M. Olsen Reinhart Boerner Van Deuren s.c. (414)

5 Section 125 There are four or more parts to section 125 Cafeteria Plans Premium Conversion best known as POP plans: For the express purpose of allowing employees to pre-tax their premiums Health FSA: For medical expenses similar to HSAs or HRAs Dependent Care: For dependents care so families can work or go to school Premiums FSA purchased at home outside of the employer Full Cafeteria Plans that allow for a menu of choices funded at different levels by employee selections POPs are common for HSAs Who are we testing? Key Employees Highly Compensated Employees Non-Highly Compensated Employees Officers 5

6 Definitions Key Employee An Officer earning more than $150,000 in 2008 taxable year; $160,000 in 2009; or A more than a 5% owner (see above); or A more than a 1% owner receiving compensation in excess of $150,000. Note government entities do not have Key Employees. Highly Compensated An Officer; A shareholder owning more than 5% of the Employer, voting power, or value of all classes of stock; or An employee who earned in excess of $105, in 2008; $110,000 in 2009 A spouse or dependent of an individual described above that works for the same Employer. Employees who were also in top-paid group (top 20% of employer s entire workforce) for preceding plan year or current plan year if first year of employment. Officer An officer is an employee with the authority of an administrative executive. Thus, if an employee has an officer s title, but does not have the authority, (Bank VP) he is not considered an Officer. Similarly, an employee who has the authority but not the title is considered an officer. (Manager of a Credit Union) Whether an individual is considered an Officer is based on all the facts and circumstances (e.g. nature and extent of duties, authority, and continuity of service). 6

7 Disqualification of Plan If non discrimination testing is not accurately completed for as long as the plan has been in force. This is the problem with free pop plans. Who is responsible for updating the plan? Who is responsible for the test? Who is responsible for the enrollment---speaking of enrollment Enrollment of the POP eflex uses a negative election to allow employees to enroll without filling out paper work. Many voluntary companies want to fill out forms for enrollment Mechanical works this way: 1. Letter out to employees explaining the benefits of section 125 and when the enrollment will take place 2. Letter indicates enrollment is voluntary but employer will move all premiums eligible to be pre-tax: Health, HSA, Accident, Voluntary etc on a given date. 3. Employees will experience the savings without having to enroll or fill out paper work UNLESS they chose not to enroll by telling HR (see new regulations codified verbal IRS and 401k default enrollment rules) Section 125 Non Discrimination Tests Eligibility Four Tests: Contributions Benefits Concentration 7

8 Eligibility Test If your plan meets four requirements, it is not discriminatory as to eligibility. No more than a three year wait to participate and the employment requirement is the same for each employee. An eligible employee s participation in the plan begins no later than the first day of the first plan year beginning after the date employment requirement is satisfied. E-Test Continued The plan benefits a group of employees who qualify under a reasonable classification established by the employer [as defined in Treas. Reg 1.410(b)4(b)]. Examples: Salaried, hourly, full time, part time. The plan must pass the safe harbor percentage test (a certain percentage of non-highly compensated individuals (HCI) must be eligible to make an election). A plan automatically passes the safe harbor if all employees of the employer are eligible. Plan will fail the eligibility test if there is not the same availability of benefits or employer flex credits for highly compensated participants (HCP) vs. non-hcp, or if the plan requires greater salary reductions for non-hcps than for HCPs with the same benefit elections. Contributions/Benefits Test Smell or facts and circumstances test A plan must give each similarly situated (family vs. single coverage; varying geographical locations) participant the same opportunity to elect qualified benefits and the plan must give each similarly situated participant p the same election with respect to employer contributions. 8

9 Concentration Test THE KEY EMPLOYEE CONCENTRATION TEST This test compares the nontaxable benefits provided to Key Employees to the nontaxable benefit provided to all employees. Nontaxable benefits include the value of the group medical premium, contributions to a Flexible Spending Arrangement, contributions to an HRA or HSA, and contributions to any other benefit provided under the Section 125 Plan. The value of nontaxable benefits provided to Key Employees cannot exceed 25% of the total nontaxable benefits provided under the plan. Comparison of HSA/125 HSA Description Section 125 Description Comparable Same amount similarly situated Edibility Same eligibility for everyone Same % Contributions/benefits Same for everyone Contribute more to Concentration 25% max for key nhce only Officer Key HCE Hey wait a second!!! It sounds like they are similar so where s the beef? 9

10 How can we be flexible? You can do anything you want with in reason as long as it is does not favor the highly compensated Classes Hourly Salary Menu of products Different entry dates Out shine your competition with plan designs that meet more needs 125 and Flexible Funding Ideas Case study #1 Employer has 25 management people who are salaried and 50 hourly. Step 1. Determine plan design employer wishes-budget and current benefits, a. Full cafeteria plan with choices? b. High turnover in the hourly and pension document has one year wait for hourly and 30 days for management or salaried. Can we duplicate? c. Yes Flexible Entry Dates Step 2 Get a census that will help you define section 125 officers, Key, HCEs and hourly Eyeball the ratios within each group- 25 salaried, 50 hourly Composition: 1 is an owner and key employee with salary and ownership 2 are HCEs based on income 1 is an officer based on management criteria Pay is fairly similar except the owner who meets the 160, test What about last year? Lets look back This eyeball says the other 21 within bounds. Eyeball looks good This is a go for eligibility, contributions and benefits 10

11 Flexible Entry Dates The 50 are hourly and do not have significant authority Do not belong to a union Have high turnover Employer doesn t want to fund the HSA for anyone with less than one year to match retirement plan. Ok with section 125 (3 year max) Classes work as well. Hourly vs. Salary This is a go for eligibility, contributions and benefits Let s take all participating employees and test them on the concentration. We are 26% for HCE and Key so we ask them to back down contribution for HSA or health by 1% Our plan is ready to go and the employer is pleased. Note actual test under new regs must be done at year end. Flexible Funding for HSAs Case #2 Employer is struggling with offering employees benefits. His goal is to become creative but cap his annual offerings to a fixed expense that is controllable. Your idea? A full cafeteria plan with a menu of choices. Flexible Funding (same 50/25 employer) Employer will offer two health options. One will be a traditional plan with low deductibles and co-pays. The other will be an HSA qualified plan. Plan design Employer decides to require employees to pay more for their fully insured plan as part of their choices and section 125 pop is needed Employer will fund 50% of the HSA deductible if the employee takes the HDHP/HAS. Employee can elect to fund the other 50% of the HSA. Employer will pay 75% of all premiums Single/ family coverage is funded accordingly We use the same census from the other group Employer will pay $1000 per year for HSA contribution if employee opts out of benefits altogether and can prove health coverage elsewhere. 11

12 Flexible Funding Designs Step 2: Lets do the enrollment because we don t know who is choosing which plan or an opt-out and thus a preliminary eyeball doesn t work Step 3. Once enrollment is known we can now play with our formulas to determine if our non discrimination test applied Now we follow all the steps outlined prior and come to determine that we pass all tests. Results of enrollment 5 employees of mixture enrolled in the opt-out 20 Employees were families and half elected the full coverage and the other half elected HDHP 50 Singles did the same thing Employer is amazed at the amount of people we met needs for and the flexibility of plan design. But the additional education is by HR is needed but employees are happier NONDISCRIMINATION TEST RED FLAGS Zero non-hces eligible for the plan; The plan excludes a high percentage of non-hces; Not all employees receive the same employer contributions; KEYs or HCEs receive more employer contributions toward their group medical premium or the Flexible Spending Arrangement; Disparate waiting periods or disparate eligibility requirements; Different benefits provided to employees; A high percentage (>25%) of KEYS contributing to the Flexible Spending Arrangement; Only one participant in the Dependent Care FSA and that participant is an HCE. Plans frequently fail the Dependent Care Test the plan cannot have only HCEs participating in this portion of the plan or it will fail. 12

13 Summary Learn section 125 non discrimination rules to assit you in designing plans that meet employer needs Don t trust just one person as a guru find more than one answer Don t expect vendors to give you free advice if you don t use their products Go to B2B on NAHU.org and sign up Use There are many vendors in NAHU for POPs We hope you will patronize these vendors and eflex Questions Ric Joyner rj@eflexgroup.com ext 125 (get it?) 13