Employee Health Benefits

Employee Health Benefits

Table of Contents 1. Overview... 1 2. Training Objectives... 2 3. Resources... 3 4. Health Savings Accounts... 4 a. Benefits of an HSA account... 4 b. Who Qualifies for an HSA?... 4 c. What is a High-deductible Health Plan?... 5 d. Limits on Contributions... 5 e. Maximum annual contributions... 6 f. Qualified HSA Distributions... 6 g. Qualified Deductions... 6 h. Recordkeeping... 7 i. Using Form 8889... 7 5. Medical Savings Accounts (MSAs)... 8 a. Benefits of an Archer MSA... 8 b. Qualified Individuals... 8 c. Contributions... 9 d. Limitations on Contributions to an Archer MSA... 9 e. Using Form 8853... 9 f. Recordkeeping... 10 g. Qualified Deductions... 10 h. Distributions from an Archer MSA... 10 6. Health Flexible Spending Arrangements (FSAs)... 11 a. Benefits of an FSA... 11 b. Qualified Individuals... 11 c. Contributions... 11 d. Unused amounts... 11 e. Qualified Medical Expenses... 11 f. Non-qualifying Expenses... 11 7. Health Care FSA... 12 a. Health Reimbursement Arrangements (HRAs)... 13 b. Medicare Advantage MSAs... 13 8. Archer MSA Limitations... 14 9. HSA Limitations... 15 10. What is New in 2013?... 16 a. Same-sex couples marrying... 16 b. Salary reduction contributions... 16 c. FSAs... 16 i

11. What s New in 2012?... 17 a. For HSA Contributions... 17 b. For FSA Contributions... 17 12. Glossary... 18 13. Test Questions... 19 ii

Employee Health Benefits 1. Overview An employee health benefit is usually a group health plan established or maintained by an employer or by an employee organization (such as a union), or both, that provides medical care for participants or their dependents directly or through insurance, reimbursement, or otherwise (US Department of Labor website). Health benefits may include health savings accounts (HSAs), flexible spending arrangements (FSAs), or medical savings accounts (MSAs). 1

2. Training Objectives When you have completed this training, you will: Be familiar with the general terms associated with employee health benefits. Understand the differences between the various types of health benefits. Know the limitations for each type of health benefit. Understand the benefits of each health benefit. Be familiar with the resources at your disposal. 2

3. Resources Form 8889 Publication 502, Medical and Dental Expenses Form 8853, Archer MSAs and Long-Term Care Insurance Contracts 1-800-MEDICARE (1-800-633-4227) Notice 2002-45, Part V, IRB 2002-28, page 93, www.irs.gov/pub/ires-irbs/irb02-28.pdf IRS Publication 969 (2011), Health Savings Accounts and Other Tax-Favored Health Plans 3

4. Health Savings Accounts A health savings account (HSA) is a tax-exempt account or trust set up with a qualified trustee, such as a bank, insurance company, or anyone else approved by the IRS to act as a trustee, to reimburse certain medical expenses. a. The benefits of an HSA account include: i. Tax deductions for contributions made to the HSA ii. Employer contributions made to employee HSA accounts can be deducted from the employees gross income. iii. Employer contributions are deducted from the employer s business income tax return under Employee benefit programs. iv. HSA contributions do not expire if they are not used in the same year they are deposited. HSA contributions can remain in a qualified HSA account year after year until used. v. Interest and other earnings on HSA contributions are tax-free. vi. Distributions made from the HSA account may be tax free if they are used for qualified medical expenses. vii. HSAs remain with the individual rather than the employer in the event of employment change. b. Who qualifies for an HSA? Individuals must meet the following requirements to be eligible for participation in an HSA. Individuals must: i. Participate in a high-deductible health plan (HDHP) as of the first day of the month Note: The last-month rule states that individuals are eligible for the entire year if they are an eligible individual on the first day of the last month of the tax year (December 1, for most taxpayers) j. Have no other health coverage, with the exception of other health 4

coverage that provides for: Workers compensation liabilities Specific diseases or illnesses Fixed amounts for hospitalizations Accidents Disability Dental care Vision care Long-term care ii. Not be enrolled in Medicare iii. Not be claimed by another person as a dependent Note: Even if the other person does not claim the individual as a dependent, the individual may still not claim a deduction for HSA contribution. c. What is a high-deductible health plan? HDHPs are generally considered those with higher than typical deductibles, though with the growth in popularity of HDHPs, typical is becoming a very high deductible. Guidelines for what is considered HDHP are as follows: i. A minimum annual deductible for individuals of $1250 and for families of $2500 ii. Maximum annual deductible and other out-of-pocket expenses for individuals of $6250 and for families of $12500. iii. Out-of-pocket costs are limited to $6250 for self-only coverage or $12,500 for family coverage. iv. HDHP must deny payments to all family members until the family HSA annual covered expenses in excess of the minimum annual deductible of $2500 for 2013. v. The minimum annual HDHP deductible does not apply to preventive care benefits even though it pays for preventive care without a deductible or after a small deductible. Following are preventive care benefits Annual physicals Routine prenatal and well-child care Immunizations Help to stop smoking Obesity programs Screenings for cancer and cardiovascular disease. Prescription drugs for asymptomatic patients with risk factors for a disease or for recovering patients to prevent a recurrence of a disease 5

d. Limits on contributions depend on the type of HDHP coverage, the individual s age, the date the individual became eligible, and the date the individual ceased to be eligible. e. Employer contributions made to an employee s HSA are not reported as part of the employee s income. If employer s contribution is less than the limit, taxpayer may contribute up to the applicable limit. Form 8889 is used to report all contributions and filed with Form 1040 or Form 1040NR. Form 5498-SA should be sent to the individual by the trustee, detailing the contributions made to the HSA during the year. f. Contributions considered in excess are those greater than the allowable limits. Excess contributions made by an employer are recorded as gross income on the individual s tax return. A 6% excise tax is applied to excess contributions, and applies to each year the excess remains in the HSA account. g. If contributions exceed allowable amount, taxpayer can fill out Excess Contribution and Deposit Correction Request Form to have excess funds returned and will not incur a penalty or have to pay taxes on extra contribution. h. Maximum annual contribution for employees Individuals cannot make contributions to an HSA when they are covered by an HDHP and a health FSA or HRA that reimburses for medical expenses, except: Limit must be reduced by contributions to an Archer FSA Maximum contribution with self-only coverage is $3250 and $6450 for family Catch-up contributions for $1000 for taxpayers over age 55 A one-time tax-free transfer from an IRA or Roth IRA may be made. May be done a second time during the year if the first time was for self-only and the second time is for family coverage i. Qualified HSA distributions include those that are from a health FSA or HRA and are transferred to the HSA. j. Qualified deductions are those that the trustee will reimburse an individual when: i. The deductible HSA been met ii. The medical expense is not reimbursed by the HDHP. iii. When an individual becomes ineligible, distributions from his or her HSA are still tax-free when used to pay or reimburse qualified medical expenses. iv. For a list of qualified medical expenses, refer to Publication 502, Medical and Dental Expenses. The following are not considered qualified medical expenses: 6

Medicines other than insulin that are not prescribed (known as non-prescription or over-the-counter) purchases after December 31, 2010 are not qualified medical expenses. Insurance premiums, unless they are for Long-term health care insurance COBRA or other health care continuation coverage Medicare, if the individual is over 65 years old Health coverage while taxpayer is receiving unemployment v. HDHP deductible does not apply to preventive care. Plan can qualify as HDHP even if it pays for preventive care. Preventive care includes Annual physicals Routine prenatal and well-child care Immunizations Tobacco cessation Obesity programs Screening services for a broad range of conditions such as cancer and cardiovascular disease Note: Deductions made for reasons other than qualified medical expenses will be subject to income tax and may incur an additional 20% tax unless account owner becomes disabled, reaches age 65, or dies.. Deductions do not have to be made from the HSA each year. k. Recordkeeping: Records of the following must be kept not filed to prove that: i. The distributions were used to pay or reimburse qualified medical expenses ii. The qualified medical expenses were not previously paid by another source iii. The medical expenses were not itemized deductions in any year l. Using Form 8889: Distributions are reported using Form 8889. 7

5. Medical Savings Accounts (MSAs) are intended for the self-employed and employees of small business employers to meet the medical care costs of the employee, their spouse, and their dependents. An Archer MSA is a tax-exempt account or trust set up with a bank, insurance company, or other U.S. financial institution for the purpose of saving money for future medical expenses. a. The benefits of an Archer MSA include i. The ability to claim deductions for contributions whether using Form 1040, Form 1040NR, or not. ii. Interest earned on the account is tax-free. iii. Distributions are tax-free if they are used for qualified medical expenses. iv. The contributions roll over year to year if they are not used. v. The Archer MSA stays with the individual, regardless of a change in an employer vi. Can be rolled over to an HSA. b. Qualified individuals are those who i. Are an employee, or spouse of an employee, of a small employer (defined as 50 or fewer employees). ii. Maintain a self-only or family HDHP iii. A self-employed person iv. Participate in a high-deductible health plan (HDHP) as of the first day of the month Note: The last-month rule states that individuals are eligible for the entire year if they are an eligible individual on the first day of the last month of the tax year (December 1, for most). v. Have no other health coverage, with the exception of other health coverage that provides for: Workers compensation liabilities 8

Specific diseases or illnesses Fixed amounts for hospitalizations Accidents Disability Dental care Vision care Long-term care vi. Not be enrolled in Medicare vii. Not be claimed by another person as a dependent Note: Even if the other person does not claim the individual as a dependent, the individual may still not claim a deduction for MSA contribution. c. Contributions: An individual can contribute to his or her own MSA. The individual s employer can contribute to the employee s MSA. However, both an individual and his or her employer cannot make contributions during the same year. Contributions to an Archer MSA must be made in cash. Note: Contributions to an Archer MSA do not need to be made every year. d. Limitations on contributions to an individual s Archer MSA are i. Up to 75% of the annual deductible of the HDHP for family coverage, or 65% for self-only plans, if the HDHP HSA been in place all year. If not, use line 5 of the worksheet in the Instruction for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. ii. Not more than the individual s annual income from the employer through which the HDHP is provided. iii. If an individual s spouse is covered by the individual s HDHP, and the spouse s employer contributes to the Archer MSA belonging to the spouse, the individual cannot make contributions to his or her own Archer MSA during that year. e. Using Form 8853: Contributions are reported using Form 8853, and filed with the tax return. Contributions considered in excess are those greater than the allowable limits. Excess contributions made by an employer are recorded as gross income on the individual s tax return. A 6% excise tax is applied to excess contributions, and applies to each year the excess remains in the MSA: account. 9

Note: The excise tax can be avoided if the excess contribution is withdrawn from the MSA account by the due date, including extensions, of the tax return, and the excess amount reported as other income on the tax return for the year of the withdrawal. f. Recordkeeping: Records of the following must be kept not filed to prove that: i. The distributions were used to pay or reimburse qualified medical expenses ii. The qualified medical expenses were not previously paid by another source iii. The medical expenses were not itemized deductions in any year g. Qualified deductions are those that the trustee will reimburse an individual when i. The deductible HSA been met ii. The medical expense is not reimbursed by the HDPH. iii. For a list of qualified medical expenses, refer to Publication 502, Medical and Dental Expenses. The following are not considered qualified medical expenses: Medicines other than insulin that are not prescribed (known as non-prescription or over-the-counter) purchases after December 31, 2010 are not qualified medical expenses. Insurance premiums, unless they are for Long-term health care insurance COBRA or other health care continuation coverage Medicare, if the individual is over 65 years old Note: Deductions made for reasons other than qualified medical expenses will be subject to income tax and may incur an additional 20% tax. Deductions do not have to be made from the MSA each year. h. Distributions from an Archer MSA can be rolled over into another Archer MSA or an HSA and are not taxable, if the rollover is completed within 60 days, and only one rollover contribution HSA been made into the account during any one-year period. Distributions are reported using Form 8853. 10

6. Health Flexible Spending Arrangements (FSAs) are funded through voluntary salary reduction with an individual s employer. Employers may contribute to the FSA. a. Benefits of an FSA include i. There are no reporting requirements for an FSA ii. Employer contributions can be excluded from the individual s gross income iii. Contributions are tax-free. No income tax (federal or employment) are deducted from contributions. iv. If withdrawals are used for qualified medical expenses, they are tax-free. v. Funds can be withdrawn from the FSA account to pay for qualified medical expenses even if the funds have not yet been deposited into the FSA account. b. Qualified Individuals: Individuals do not have to be covered under any health plan to participate in an FSA. FSA participation is at the discretion of the employer. Self-employed individuals are not eligible for participation in an FSA. c. Contributions made and not used by the end of the year are forfeited d. Unused amounts incurred may be used to reimburse expenses incurred within a 2 ½ month grace period following the end of each plan year. e. Qualified medical expenses include those listed in Publication 502, Medical and Dental Expenses. Proof of the qualified medical expense is required to be submitted to the health FSA. f. Non-qualifying expenses include those paid for: vi. Health insurance premiums vii. Long-term care coverage or related expenses viii. Amounts covered under other health plans 11

g. Health-Care FSA ix. Maximum salary reduction contribution is $2500. Plans that do not require $2500 limit do not qualify. x. Employer may set a lower limit xi. May not be used to reimburse taxpayer for other health plan coverage including coverage under plan for spouse or dependent, long-term care services or elected cosmetic surgery xii. May receive reimbursements up to designated limit even though payments are less xiii. Employers on FMLA (Family Medical Leave Act) may either continue or revoke coverage during FMLA leave Note: For coverage under both a health FSA and HRA, refer to Notice 2002-45, Part V, found in IRB 2002-28 on page 93 at www.irs.gov/pub/ires-irbs/irb02-28.pdf 12

7. Other Benefits a. Health Reimbursement Arrangements (HRAs) can be funded by the employer alone, rather than by a voluntary deduction paid by the employee. HRAs allow employees to be reimbursed tax free for qualified medical expenses up to a maximum dollar amount and can be offered with other health plans. HRAs are not reported as income for the individual. i. Contributions made by an employer are not included as income for the employee. ii. Balances can be retained in the account year after year when not used. iii. Qualified medical expenses include: Health insurance premiums Long-term care coverage expenses Amounts not covered by other health insurance Note: Self-employed are not eligible for HRAs. Note: For coverage under both a health FSA and HRA, refer to Notice 2002-45, Part V, found in IRB 2002-28 on page 93 at www.irs.gov/pub/iresirbs/irb02-28.pdf b. Medicare advantage MSAs are Archer MSAs that Medicare designates to be used to pay for qualified medical expenses. Medicare must approve the HDHP as a qualified health plan. More information is available by calling 1-800-MEDICARE. 13

8. Archer MSA Limitations 2013 annual deductible Self-only coverage $2150 to $3200 Family coverage $2300 to $6450 2013 annual out of pocket limits: Self-only $4300 Family coverage $7850 2012 annual deductibles: Self-only coverage Family Coverage 2012 annual out-of-pocket limits: Self-only coverage Family coverage 2011 annual deductibles: Self-only coverage Family coverage 2011 annual out-of-pocket expense limits: Self-only coverage Family coverage 2010 annual deductibles: Self-only coverage Family coverage 2010 annual out-of-pocket expense limits: Self-only coverage Family coverage $2,100 to $3,150 $4,200 to $6,300 $4,200 $7,650 $2,050 to $3,050 $4,100 to $6,150 $4,100 $7,500 $2,000 to $3,000 $4,050 to $6,050 $4,050 $7,400 14

9. HSA Limitations Annual contribution is limited to: Self-only coverage, under age 55 Self-only coverage, age 55 or older Family coverage, under age 55 Family coverage, age 55 or older* Minimum annual deductibles: Self-only coverage Family coverage Maximum annual deductible and out-of-pocket expense limits: Self-only coverage Family coverage 2013 $3250 $4250 $6450 $7450 $1250 $2500 2012 $3,100 $4,100 $6,250 $7,250 $1,200 $2,400 $6,050 $12,100 2011 $3,050 $4,050 $6,150 $7,150 $1,200 $2,400 $5,950 $11,900 2010 $3,050 $4,050 $6,150 $7,150 $1,200 $2,400 $5,950 $11,900 $6250 $12500 *Assumes only one spouse HSA an HSA. See IRS Publication 969 if both spouses have an HSA. 15

10. What is New in 2013? a. For federal tax purposes, individuals of the same sex are considered married if they were lawfully married in a state or foreign country whose laws allow the marriage of two individuals of the same sex, even if the state or foreign country where they live now does not recognize same-sex marriage. b. Salary reduction contributions to the health FSA cannot be for more than $2500 a year. c. FSAs - plans may have a grace period which allows up to $500 of unused amounts remaining at the end of the year be used in the first 2 ½ months of the following year. 16

11. Glossary Health benefits: usually a group health plan established or maintained by an employer or by an employee organization (a union), or both, that provides medical care for participants or their dependents directly or through insurance, reimbursement, or otherwise (US Department of Labor website). Health Savings Account (HSA): A tax-exempt account or trust set up with a qualified trustee, such as a bank, insurance company, or anyone else approved by the IRS to act as a trustee, to reimburse certain medical expenses. High-deductible Health Plan (HDHP): HDHPs are generally considered those health plans with higher than typical deductibles. Medical Savings Accounts (MSAs): An MSA is a tax-exempt account or trust set up with a bank, insurance company, or other U.S. financial institution for the purpose of saving money for future medical expenses. 17