Review of Healthcare Flexible Spending Account Options

Transcription

1 Review of Healthcare Flexible Spending Account Options Per Internal Revenue Code Section 125(i), Amended by Internal Revenue Service Notice Health Service Board December 12, 2013

2 Contents Healthcare Flexible Spending Accounts (FSA) FSA Administrative Charge FSA Forfeitures Carryover Option IRS Notice Impact of Adopting Carryover Option Health Service Board Options 2

3 Healthcare Flexible Spending Accounts A Healthcare flexible spending account (FSA) allows payment of qualified out-of-pocket medical expenses on a pre-tax basis. Qualified out-of-pocket medical expenses (eligible expenses) are submitted to a third-party administrator (TPA), which are then reviewed and reimbursed back to the participant. If participants do not fully utilize balances in their FSA accounts by the end of the year, those monies are forfeited to plan administrator (use-it-or-lose-it rule). 3

4 Healthcare Flexible Spending Accounts Qualifying medical expenses (eligible expenses) include but are not limited to: Medical Office Visit and Rx Co-payments Deductibles Over-the-Counter Drugs Hearing Aid Batteries Smoking Cessation Programs and Therapies 4

5 FSA Administrative Charge HSS contracts with WageWorks Inc., as the TPA (third party administrator) for FSA administration. WageWorks applies an administrative charge of $4.30 per member per month (pmpm) for any month within a plan year that the member s FSA account is active. HSS funds the $4.30 pmpm administrative charge using forfeitures from the prior plan year. Members are not billed for this administrative charge and therefore are not aware of the cost to administer the FSA. 5

6 FSA Forfeitures If members do not fully utilize balances in their FSA accounts by the end of the year, the monies are forfeited to the plan administrator (HSS). Forfeitures pay for the administrative charges of the TPA and cover costs for underfunded FSA obligations. Underfunding results from members claiming amounts greater than their contributions prior to the end of the plan year due to leaving active employment or a leave of absence. 6

7 FSA Forfeitures Example of Underfunding: If a member elects $2,500 in deductions for their Healthcare FSA, and then submits a claim for the entire $2500 during the first month of the plan year, the full $2,500 would be payable to the participant immediately. If the member then leaves active employment, the FSA account becomes underfunded because the member did not make the full year contributions to the FSA and the underfunded amount becomes the responsibility of the plan administrator (HSS). 7

8 HSS Healthcare FSA Forfeitures Average annual enrollment in healthcare FSAs is 2,621. Contributions annually $3,394,000 Average annual forfeiture amount $230,000 Average underfunding ($81,000) Administration ($115,000) Balance $34,000 Based on weighted averages FY FY short plan year actuals and CY 2013 estimated. 8

9 Carryover Option: IRS Notice On October 31,2013 the IRS released notice which amended the use-it-or-lose-it rule (also called forfeiture rule). This change allows employers the option to permit up to $500 in unclaimed healthcare FSA contributions to be carried over to the next plan year (effective for 2013 and beyond). This notice only applies to healthcare FSA s, not dependent care FSA s. 9

10 Carryover Option: IRS Notice The $500 carryover is not a requirement. Three options are available. Employers can have a run-out period and a carryover but not a grace period and a carryover. RUN-OUT PERIOD GRACE PERIOD $500 CARRYOVER 90-day run-out after January 1 of each year, allows for late claim submission from prior year. Unused dollars at end of the run-out are forfeited. (Current HSS choice.) Two months plus 15-day grace period allows unused FSA dollars from the prior year to apply to the first two months plus 15 days of the new year. Unused dollars at the end of the grace period are forfeited. Allows for up to $500 to be carried over to the new plan year. Unused FSA dollars in excess of $500 are forfeited. 10

11 Impact of Adopting Carryover Option Members are given more flexibility in managing their FSA benefit. Enrollment in FSAs may increase. Administrative charges will increase as members carryover funds from one year to the next increasing the number of months their FSA account is active. Forfeitures will decrease as members carryover remaining account balances up to $500. HSS may have to start billing members for the admin charges once forfeitures can no longer cover this fee. 11

12 Health Service Board Options 1. Elect to maintain the current healthcare FSA plan design with the 90-day run out period. 2. Elect to add the carryover option to the healthcare FSA plan design in addition to the 90-day run out period. IRS is allowing this change to be effective for 2013 plan years. Additional administrative costs can be covered by forfeitures. HSS will reassess the ability of the forfeitures to fund the administration charge. 12

13 Reference IRS Notice