CDH Traps. William Stuart Spring 2013

Transcription

1 CDH Traps William Stuart Spring 2013

2 Objectives of This Course Many, perhaps millions, of individuals are inadvertently not in compliance with IRS reimbursement plan rules The purpose of this course is to help you guide your clients to avoid these issues identify these situations if they re present already Counsel clients about approaches to come back into compliance help you guide clients to structure benefit offerings to minimize potential issues 2

3 This Presentation Is Not Legal Advice Your presenter is not a lawyer This presentation is not intended as legal advice Rather, the purpose is to present information to help you identify potential compliance issues The presentation does not purport to discuss all potential compliance issues Given the complexity and fluidity of federal tax law and labor regulations, clients and advisors should discuss particular benefit offerings with their own legal counsel 3

4 Situations That We ll Cover I can reimburse my same sex spouse s expenses from my reimbursement account, right? My client offers both a traditional Health FSA and an HSA. Which account pays my employees expenses first? My client has a calendar-year traditional FSA and wants to introduce an HSA mid-year. No problem, right? Can my client pro-rate an HSA contribution if a new hire comes on mid-year? 4

5 Situations That We ll Cover My client has several employees who are 65+. They won t benefit from an HSA program, will they? My client doesn t have to offer the HRA to COBRA participants, correct? Right? My client s non-dependent adult child remains on her health plan. Can she reimburse his expenses tax-free? 5

6 I can reimburse my same sex spouse s expenses from my reimbursement account, right? 6

7 Trap No. 1: Recognition of Marriage The IRS doesn t recognize same-sex marriages The same rules apply to domestic partners and ex-spouses Implications These family members and their dependents who aren t the subscriber s dependents are not eligible for reimbursements under a Health FSA or an HRA Since the Health FSA or HRA is an employer-based plan, these individuals cannot have their own reimbursement plans through that employer unless they work for the same employer Exception: The same-sex spouse or domestic partner is the employee/subscriber s tax dependent If the Health FSA or HRA reimburses expenses automatically, the employee must reimburse the employer s account The implication for HSAs is different... 7

8 Trap No. 1: Recognition of Marriage Implications (cont.) These same-sex spouses and domestic partners (and their dependents) also are not eligible to receive tax-free reimbursements from the employee s HSA, but... HSAs are individual, not employer-based, accounts Thus, the spouse/partner, if HSA-eligible, can establish his/her own HSA to reimburse his/her (and tax-dependents ) eligible expenses tax-free Establish the account with any trustee No pre-tax payroll contributions by either spouse Tax-deductible personal (after-tax) contributions Tax-free distributions for accountholder and dependents 8

9 Broker Guidance Educate employees at open enrollment If the HRA program is integrated, consider a design that reimburses employee rather than provider Employee can return the payment without involving a provider Some TPAs give individual employees the option to opt out of a Pay the Provider model, which achieves the same result Counsel employees with same sex-spouses, domestic partners or ex-spouses to look at HSA plans 9

10 My client offers both a traditional Health FSA and an HSA. Which account pays employees expenses first? My client has a calendar-year traditional FSA and wants to introduce an HSA mid-year. No problem, right? 10

11 Trap No. 2: Health FSA and HSA A Health FSA meets the IRS definition of a health plan HSA rules don t allow individuals to be HSA-eligible if they re covered by more than one health plan unless all their plans are HSA-qualified Thus an individual covered by an HSA-qualified health plan and a traditional Health FSA is not HSA-eligible It doesn t matter whether the employee or the spouse is the Health FSA participant If the spouse is a same-sex spouse, domestic partner or exspouse, the plan doesn t impact the employee s HSA-eligibility 11

12 Trap No. 2: Health FSA and HSA Implications If the Health FSA and new HSA plan years overlap, the employer has limited options Terminate the Health FSA all participants, whether or not they want to be HSA-eligible, forfeit elections Turn the Health FSA into a Limited-Purpose Health FSA (reimburses dental and vision only) change applies to all participating employees (no bifurcation), and many will forfeit funds with a limited number of eligible items Start the HSA-qualified plan, while employees in the Health FSA experience a delay in HSA eligibility they can reimburse eligible expenses from the Health FSA until they re HSA-eligible Delay the HSA plan for a year and run a short-year Health FSA renewal to line up anniversary dates Note: Health FSA with a grace period rules 12

13 Trap No. 2: Health FSA and HSA The only times an individual can choose to reimburse out of one account or the other: Individual has an HSA and Limited-Purpose Health FSA Individual has an HSA, is no longer HSA-eligible and participates in a traditional Health FSA program In either case, the IRS does not establish payment order rules the individual can reimburse out of whichever account he chooses It always makes sense to spend from use-it-or-lose-it accounts (traditional or Limited-Purpose Health FSA) to reimburse all expenses eligible under that Health FSA plan design 13

14 Broker Guidance Anticipate line up the Health FSA with the benefit plan year now to protect employees when your client introduces an HSA in the future Run a short year Health FSA next year to line up the plans anniversaries Educate employees at open enrollment even if your client s plans line up, a spouse s employer s Health FSA may not 14

15 Can my client pro-rate an HSA contribution if a new hire enrolls mid-year? 15

16 Trap No. 3: HSA Contributions A Section 125 (or Cafeteria) Plan allows employers to offer employees the option to receive part of their compensation as non-taxable benefits The Section 125 plan (original or through amendments) must spell out the terms of each program, including POP, Health FSA and HSA Absent the terms of the specific program in the Section 125 plan, contributions are not tax-free 16

17 Trap No. 3: HSA Contributions The document should address at least Minimum and maximum employee payroll contributions Frequency of prospective contribution changes at least monthly Employer contribution by contract type Timing of employer contributions Special rules for participants who become eligible during the year New hires Newly-eligible 17

18 Broker Guidance Make sure your client has an updated Section 125 document that outlines the HSA program Have your client periodically subject its Section 125 plan to legal review to ensure continued compliance Explain the policy clearly to new hires 18

19 My client has several employees who are 65+. They won t benefit from an HSA program, will they? 19

20 Trap No. 4: HSAs & Age 65+ Employees A 65 th birthday does not impact HSA eligibility Enrolling in a non-hsa-qualified plan does impact it Enrollment in Part A is not automatic An individual is enrolled in Part A when she receives Social Security benefits and is age 65+ OR actively enrolls to receive benefits Enrollment in other Parts is by application only 20

21 Trap No. 4: HSAs & Age 65+ Employees Notes An individual cannot receive Social Security benefits and choose not to enroll in (or disenroll from) Medicare Part A An individual enrolled may be able to disenroll from both programs by returning all benefits received through Medicare and Social Security An individual enrolled in Medicare may still benefit from enrolling in an HSA-qualified plan He ll pay lower premiums than the other plan Medicare may pay some expenses subject to deductible If his wife is HSA-eligible, she can open an HSA, contribute up to the family maximum and reimburse his expenses She can t reimburse his Medicare premiums until she turns 65 21

22 Broker Guidance Discuss options with your clients employees who are enrolled in Medicare to determine whether they can benefit from an HSA program (HSA-eligible spouse, desire to reduce taxable income, benefit from lower family premiums vs. individual coverage for spouse, etc.) who are age 60+ and not enrolled in Medicare to help them create a plan before they turn age 65 22

23 My client doesn t have to offer the HRA to COBRA participants, correct? Right? 23

24 Trap No. 5: HRAs and COBRA The IRS considers HRAs (like Health FSAs) to be health plans COBRA-eligible individuals must be offered the same health plan choices as active employees Therefore, employers have no choice but to offer HRA continuation to COBRA-eligible individuals Period No exceptions End of discussion... almost... 24

25 Trap No. 5: HRAs and COBRA While employers must offer continuation, they have two choices (which they must decide in advance and incorporate into their governing documents): Whether to charge a premium to COBRA participants How to package the HRA election Charging a premium Employers do not have to charge a premium to COBRA participants, but the IRS allows them to do so The monthly premium is not annual face value of the HRA divided by 12 months remaining balance divided by remaining months 25

26 Trap No. 5: HRAs and COBRA Charging a premium (cont.) The monthly premium is calculated by determining the actuarial value of the HRA Simple illustration of actuarial value Annual face value of the HRA is $1,200 Average reimbursement is rate is 40% Actuarial value is $480 ($1,200 * 0.4) Monthly premium is $40 ($480/12), plus 2% load ($40.80) Packaging the election Bundled (health plan+hra OR neither) Separate (health plan OR health plan+hra OR neither) 26

27 Broker Guidance Make sure your client understands the COBRA implications of an HRA (including COBRA proliferation) Check the plan documents drafted by the TPA to make sure your client s preferences are reflected Make sure your COBRA notification process incorporates the HRA 27

28 My client s non-dependent adult children remain on her health plan. Can she reimburse their expenses tax-free? 28

29 Trap No. 6: Adult Children The rules vary by reimbursement plan A Health FSA is a health plan therefore children can continue to receive reimbursement to age 26, even if they re not enrolled on the parent s major medical plan An HRA is a health plan therefore children can continue to receive reimbursement to age 26 An HSA is not a health plan therefore these children s eligible expenses cannot be reimbursed tax-free from a parent s HSA, but... The child, if HSA-eligible, can establish her own HSA She (or her parents) can make personal tax contributions to her HSA, and she deducts them on her income tax return She can reimburse her eligible expenses tax-free 29

30 Key Takeaways from This Program The federal tax code s definition of marriage, which is stricter than some states, governs reimbursement accounts Only one account has the flexibility to benefit same-sex spouses (and domestic partners and ex-spouses, too) Individuals cannot be HSA-eligible and have access to reimbursements through a traditional Health FSA Their own or their spouses Brokers/employers must be proactive to minimize this conflict 30

31 Key Takeaways from This Program Employers need to update their Section 125 plan documents when they introduce an HSA Allow employees to make pre-tax payroll contributions Define rules for employer contributions Medicare enrollment but not eligibility impacts HSA eligibility Age 65 is not the automatic end of HSA eligibility Some Medicare enrollees can still benefit from enrolling in an HSA-qualified health plan 31

32 Key Takeaways from This Program Employers must offer an HRA to COBRA participants Employers have some flexibility in designing the COBRA offering How to package the option Whether to charge a premium for the HRA Parents may or may not be able to reimburse adult children s expenses from a tax-advantaged account, depending on the account 32