Latest and Greatest in HRA's and Cafeteria Plans

Copyright 2014- Not to be reproduced without express permission of Benefit Express Services, LLC

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Important Developments for Cafeteria Plans and Health

Reimbursement Arrangements for 2014 and Beyond

By Larry GrudzienAttorney at Law


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Agenda

• IRS Notice 2013-54 & Technical Release 2013-03

• DOMA

• Health FSA Carryover

• Other Developments

IRS Notice 2013-54 &

Technical Release 2013-3


• They prohibit the reimbursement of premiums for individual medical policies from health reimbursement arrangements and

premium only plans.

• Allow premiums for other types of individual coverages to be reimbursed.

• Provide requirements for integrated HRAs.

• Rules are effective for plan years beginning in 2014.

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Reimbursing Premiums for Individual Policies


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• Arrangements that help employees to pay for individual health insurance

policies on a tax-free basis fail to satisfy the ACA’s annual dollar limit and

preventive health services “market reform” provisions.

• There are exemptions for certain plans.

Reimbursing Premiums for Individual Policies


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• A employer payment plan will not meet these mandates unless it meets the

rules pertaining to participation in a group health plan.

• It is defined as any arrangement that facilitates the direct or indirect payment

of individual market coverage.

• It does not include any arrangement whereby employees may choose between

cash or an after-tax amount to be applied toward health coverage, including

forwarding post-tax payroll deduction to the insurer, as long as the

arrangement satisfies the voluntary plan safe harbor under the DOL

regulations.

Employer Payment Plans


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• According to the IRS and DOL, any arrangement that provides for the

purchase of individual market coverage on a pre-tax basis will fail these market

mandates.

Bottom-line


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• Retiree plans

• Reimbursement of exempted benefits

• Voluntary benefits safe harbor

Exemptions


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• Guidance requires that HRAs be integrated with group health plans for plan

years beginning in 2014.

• Rules vary depending on whether the group health plan is of minimum value.

• Free standing HRAs can still reimburse premiums and expenses for “excepted

benefits.”

Free Standing HRAs


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• Must be integrated with group health plan of the employer of another

employer.

• Two integration methods provided.

• First method is with a group health plan that does not provide minimum value.

• Second method is with group health plan that provides minimum value.

Integrated HRAs


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• A Group plan that does not provide minimum value:

Employee must be enrolled in group health plan.

Reimbursements limited to copays, coinsurance deductibles premiums for

group health plan and non-essential health benefits.

Must allow permanent opt out and waiver of future reimbursements

annually.

Upon termination, must require remaining amounts to be forfeited or

permanently opt out and waiver of future reimbursements.

Integrated HRAs


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• Group plan that does provide minimum value:

Employee must be enrolled in group health plan.

No restrictions on reimbursements.

Must allow permanent opt out and waiver of future reimbursements

annually.

Upon termination, must require remaining amounts to be forfeited or

permanently opt out and waiver of future reimbursement.

Integrated HRAs


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• Unused amounts that were credited to an HRA while the HRA was integrated

with other group health plan coverage may be used to reimburse medical

expenses in accordance with the terms of the HRA even after the employee

ceases to be covered by other integrated group health plan coverage without

causing the HRA to fail to comply with the market reforms.

• The HRA coverage will be considered minimum essential coverage, which will

prevent an employee from obtaining a premium assistance tax credit for

coverage purchased through the Exchange.

Other Rules


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• For health FSAs to avoid the requirements of Health Care Reform, they must

meet the requirements of an “excepted benefit.”

• Free standing health FSAs are still possible if reimbursing excepted benefits.

• What requirements apply if a Health FSA is not an excepted benefit?

Health FSAs


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• A health FSA is considered an excepted benefit” if it satisfies two

conditions:

Maximum Benefit Condition: The maximum benefit payable under the

health FSA to any participant in the class for a year cannot exceed two

times the employee's salary reduction election under the health FSA for

the year (or, if greater, the amount of the employee's salary reduction

election for the health FSA for the year, plus $500), and

Availability Condition: Other nonexcepted group health plan coverage

(e.g., major medical coverage) must be made available for the year to the

class of participants by reason of their employment.

Health FSAs


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• On May 13, 2014, the IRS issued Q&A guidance restating the conclusion in

Notice 2013-54, that an employer is considered to establish a type of group

health plan-called an "employer payment plan"-if it reimburses employees'

premiums for individual health insurance policies.

• Q/A-1 provides that the employer's exposure to excise taxes of $36,500 per

year (i.e., $100 per day) for each employee affected by the failures.

• This excise tax liability requires self-reporting on IRS Form 8928.

• Adverse consequences are also possible under ERISA and the PHSA.

• Q/A-2 indicates that the DOL issued substantially identical guidance in

Technical Release 2013-03, and HHS is expected to announce soon that it

concurs.

Recent Guidance

Repeal of Defense of Marriage Act (“DOMA”)


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• May recognize same sex spouses, but not required.

• If do not, may be in violation of other federal laws.

• May require proof, but have to require of all married couples.

Repeal of DOMA


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• Cafeteria plans:

May allow employees who are married as of June 26, 2013 to change

existing elections.

Change can be made at any time during the cafeteria plan year that

includes June 26, 2013 or cafeteria plan year that include December 16,

2013.

May wait until 2014 to make change.

Repeal of DOMA


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• If an employer decides to offer same-sex coverage:

make any necessary amendments to the definition of “spouse” in the cafeteria and

wrap plan documents (and possibly amend the definition of “children” and

“dependents” as well).

confirm with that the third-party administrators/providers are updating policies and

providing required notices to same-sex spouses (e.g., initial COBRA notices and

notices to those already in the COBRA election period).

make sure the insurance policies are consistent with the decisions.

determine how same-sex spouses will be identified.

ensure the payroll systems are updated to reflect proper tax treatment of group

coverage for same-sex spouses (and their children).

Repeal of DOMA


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• Same-Sex Spouses: Taxes on Health Insurance Coverage: For employees

who purchased same-sex spousal health insurance coverage from their

employer on an after-tax basis, such amounts paid for that coverage may be

treated as pre-tax and excludable from income, the IRS said.

• FSA Deduction Limits and Reimbursements: Regarding FSA

reimbursements, in Notice 2014–1, the IRS said cafeteria plans are allowed to

permit a participant's FSA to reimburse covered expenses incurred by a

participant's same-sex spouse starting either at the beginning of the cafeteria

plan year that includes the date of the Windsor decision (6/26/13), or the date

of marriage, whichever is later.

Same-Sex Marriage: Federal Tax Guidance


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• Dependent Care FSA

Same-sex married couples also are subject to the $5,000 contribution limit

for contributions to a dependent care FSA, the IRS said.

If, prior to the Windsor decision, the couple contributed to separate

dependent care FSAs and the combined accounts now exceed the limit

for married couples, employers can reduce the contributions of the

spouses for the remainder of the year to avoid exceeding the limit, the IRS

said.



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• HSA Deduction Limits: In Notice 2014–1, for HSA contribution limits, same-

sex married couples are subject to the joint deduction limit for contributions to

an HSA, the IRS said.

• For calendar year 2014, the maximum yearly contribution to an HSA is $6,550

($6,650 for calendar year 2015) for an individual with family coverage under a

high-deductible plan.

• “This deduction limit applies to same-sex married couples who are treated as

married for federal tax purposes with respect to a taxable year,” the IRS said,

“including the 2013 taxable year.”



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• COBRA:

Same sex spouses treated as qualified beneficiaries

COBRA notice must now be provided

• HIPAA:

Special enrollment rights

• FMLA: An employee can take leave for a serious medical condition,” including

military-family leave, of the same-sex spouse if the employee lives in a state

that allows same-sex marriage.

Other Areas

Health FSA Carryover

IRS Notice 2013-71


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• On October 31, IRS and Treasury issued new guidance (Notice 2013-71) that

modifies the “use or lose” rule that applies to health flexible spending

arrangements (“FSAs”).

• Under the guidance, employers may now allow employees to carry over up to

$500 of unused FSA balances to the next plan year.

• The Notice permits employers to adopt the carryover provision as early as the

current 2013 plan year.

• The Notice also clarifies the transition relief provided in earlier proposed

regulations so that employers of all sizes can permit certain changes in salary

reduction elections for their non-calendar year cafeteria plan.

Introduction


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• Under the IRS’ proposed regulations under Code § 125, unused FSA balances

at the end of a plan year cannot be used to reimburse expenses in the next

plan year and must be forfeited.

• This “use or lose” rule was intended as a means of meeting the requirement

under Code § 125 that a cafeteria plan not provide for deferred compensation.

• An employer may, however, adopt a run-out period immediately following the

end of the plan year in which the employee may submit claims for

reimbursements incurred during the plan year.

Background


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• In 2005, the IRS relaxed the use-or-lose rule and permitted employers to

provide a grace period of up to 2 months and 15 days following the end of the

plan year in which participants could continue to incur expenses and received

reimbursements for those expenses from the unused amounts in the FSA at

the end of the plan year.

• An employer adopting a grace period was also permitted to provide a run-out

period after the end of the grace period.

Background


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• Prior to the Affordable Care Act (“ACA”), there was no statutory limit on the

amount of FSA salary reduction contributions that an employee could elect,

although many employers imposed limits in the plan.

• The ACA limited the amount of salary reduction elections to an FSA to $2,500

per taxable year.

• In Notice 2012-40, the IRS recognized that the potential for using FSAs to

defer compensation was restricted with the application of the limits on FSA

salary reduction elections and requested comments on whether it should

modify the use-or-lose rule.

Background


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• Permitted Carryover – The Notice permits an employer to allow an employee

to carryover up to $500 of any unused amount remaining in the FSA after the

end of the run-out period to the next plan year.

• The carryover does not reduce the permitted $2,500 salary reduction election

limit in the next plan year, and an employee with a carryover may still choose

salary reduction elections for the next plan year of up to $2,500 (or other

lower limit provided for in the plan).

• If the employer decides to allow a carryover, the same carryover limit must

apply to all participants.

Carryover of Unused FSA Balances


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• Permitted Reimbursements – Consistent with the general cafeteria plan rules, the amount carried

over may only be used to pay or reimburse permitted medical expenses.

• The carryover amounts may be used to reimburse expenses during the run-out period that were

incurred during the previous plan year or may be used to reimburse expenses incurred in the current

plan year.

• The salary reduction election in the current plan year, however, may only be used to reimburse

expenses in the current plan year (unless carried over to the next plan year) and may not be used to

reimburse expenses for the prior plan year during the run-out period.

• The Notice provides that for ease of administration, a plan is permitted (but not required) to treat

reimbursements of all claims for expenses incurred in the current plan year as reimbursed first from

the amounts credited from the current plan year and then as reimbursed from carried over amounts.



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• The maximum amount of reimbursement must be available at all times during

the period of coverage is still required for FSAs.



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• Removal of the Grace Period – The Notice provides that a plan that adopts the

carryover provision may not also provide a grace period for the FSA.

• An FSA may either provide for the carryover or provide for a grace period, but

cannot provide for both.

• Informing Participants – The employer must inform participants of the

carryover provision.

• Employers that adopt the carryover provision for the 2013 plan year should

inform participants of both the new carryover feature and the removal of the

grace period as soon as possible.



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• Timing of Amendment – An employer has until the last day of the plan year

from which amounts may be carried over to amend its cafeteria plan to adopt

the new carryover option, and the amendment may be retroactive to the first

day of that plan year.

Cafeteria Plan Amendment


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• Special Rule for 2013 Plan Years –Recognizing that for many plans,

employers would only have a few months to amend their cafeteria plans for the

2013 plan year, the Notice contains a special rule for the 2013 plan year that

permits an employer to amend its cafeteria plan to adopt the carryover

provision for a plan year that begins in 2013 at any time on or before the last

day of the plan year that begins in 2014.

• For a calendar year plan, this means that an employer could amend its

cafeteria plan as late as December 31, 2014 to adopt a carryover from the

2013 plan year to the 2014 plan year.



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• Grace Period Amendment – An employer adopting the carryover must also

amend its cafeteria plan to remove the grace period no later than the end of

the plan year from which amounts may be carried over.

• An employer with a calendar year cafeteria plan that provides a grace period

that wishes to adopt the carryover for the 2013 plan year should amend its

cafeteria plan to eliminate the grace period and provide for the carryover

before the end of the 2013 plan year.



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• The ability for an employer to provide for a carryover and also permit

employees newly eligible for a health saving account (“HSA”) to contribute to

the HSA is uncertain.

• Generally, an individual who is covered by a general purpose FSA may not

make contributions to an HSA.

• However, an individual may be covered under certain types of FSAs, such as

a limited purpose FSA that pays or reimburses expenses only for preventive

care and certain “permitted coverage” or a post-deductible FSA that pays or

reimburses preventive care and other permitted medical expenses only if

incurred after the minimum annual deductible for the high deductible health

plan is satisfied.

FSA and HSA

Office of Chief CounselMemorandum 201413005


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• The IRS Office of Chief Counsel recently released a memo that provide

employers with helpful rules regarding medical flexible spending accounts

(FSAs), including the impact of the new medical FSA carryover rule on HSA

eligibility.

Introduction


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• It relates to the new medical FSA carryover rule and its effect on HSA

eligibility.

• In late 2013, the IRS modified the "use-it-or-lose-it" forfeiture rule for medical

FSAs by allowing employers to amend their medical FSAs to permit a $500

annual carryover of an employee's unused account balance.

• However, the IRS did not address the impact of the new $500 carryover option

on an employee's HSA eligibility.

CCA 201413005


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• To be eligible to contribute to an HSA, an individual must be covered under a

high-deductible health plan (HDHP) and have no other health coverage,

among other requirements.

• The IRS memo clarifies unanswered questions related to the carryover rule .

CCA 201413005


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• An individual who is covered by a general purpose medical FSA is ineligible to

contribute to an HSA, even if the individual's medical FSA balance consists

solely of unused amounts carried over from the prior plan year.

• Further, the individual is ineligible to contribute to an HSA for the entire plan

year, even if the amounts carried over are exhausted prior to the end of the

plan year.

CCA 201413005


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• An individual with an unused balance in a general purpose medical FSA will

remain eligible to contribute to an HSA for the following plan year in any of the

following alternative situations:

CCA 201413005


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• The individual waives or declines a carryover of unused amounts from a

general purpose medical FSA to the subsequent plan year;

• The cafeteria plan offers an HSA-compatible FSA (such as a limited purpose

FSA, a post-deductible FSA or a combination of both) and the individual elects

to carry over unused amounts to the HSA-compatible FSA for the subsequent

plan year; or

• The cafeteria plan is designed to automatically enroll those who elect HDHP

coverage for the following plan year in an HSA-compatible FSA (including

carryover amounts).

CCA 201413005


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• The memo also provides detailed guidance on the ordering and

reimbursement of claims during the run-out period where an individual elects

to carry over unused amounts from a general purpose medical FSA to a HSA-

compatible FSA.

CCA 201413005


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• Overall, the new guidance provides a number of options to employers who are

interested in offering the medical FSA carryover option while still preserving

employees' HSA eligibility in subsequent plan years.

• Further, by allowing participant-by-participant choices regarding the carryover

of any unused amounts, the new guidance on carryovers provides more

flexibility to employers than current IRS rules on grace periods.

CCA 201413005

FAQ’s About Affordable Care Act

Implementation (Part XIX)


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• The IRS has confirmed that unused carry over amounts remaining at the end

of a plan year that satisfy the modified "use or lose" rule should not be taken

into account when determining if the health FSA satisfies the maximum benefit

payable limit prong under the excepted benefits regulations.

FAQs

Other Developments


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• Cafeteria plan elections must be made before the start of the plan year and are

irrevocable during the plan year unless the employee or his/her spouse or dependents

experience certain qualifying events.

• The availability of health coverage through a Marketplace is not a permitted change in

status, and thus, employees generally cannot change their salary reduction elections for

health coverage to cease salary reductions and purchase coverage through an

Marketplace.

• Similarly, employees generally cannot elect to begin salary reduction elections mid-year

to purchase the employer’s health coverage and avoid the individual mandate penalty.

• This is a concern for non-calendar year cafeteria plans because individuals can begin

purchasing Marketplace coverage effective January 1, 2014 and the individual mandate

penalty applies beginning in January 2014.

Cafeteria Plan Salary Reduction Election Transition Rule


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• The IRS provided transition relief from the cafeteria plan election rules for an employer-

provided accident and health plan with a non-calendar year plan year that begins in

2013.

• Under this transition relief, an employer can amend its cafeteria plan to permit

employees to make the following changes in salary reduction elections, even if the

employee did not experience a change in status event:

if the employee elected to salary reduce for accident and health plan coverage,

prospectively revoke or change his/her election with respect to the accident and

health plan once during that plan year; and

if the employee failed to make a salary reduction election, make a prospective

salary reduction election for accident and health coverage on or after the first day of

the 2013 plan year.



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• The Notice clarifies that this transition relief is available to all employers and is not

limited to applicable large employers.

• The Notice also clarifies that employers may adopt amendments that are more

restrictive than the two options in the transition relief, but the amendment may not be

less restrictive.

• For example, the employer may limit the period that the employee can make the salary

reduction election change to a certain time period, such as the first month in 2014,

instead of during the entire 2013 – 2014 plan year.



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• HRAs and nonexcepted health FSAs subject to the fee.

• Based on average number of employees.

• Fee is $1 per employees for plan years ending before October 1, 2013 and $2 after.

• Report and report fee on Form 720, due July 31 of the calendar year after the plan year

ends.

PCORI Fee


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• HRA is not subject if “integrated” with self-insured or insured coverage.

• Health FSA is not subject if an exempted benefit.

Reinsurance Fee


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• To meet federal requirements, large health plans must obtain a national health plan

identifier number (HPID) by November 5, 2014.

• For this requirement, a large health plan is one with more than $5 million in annual

receipts.

• Self-funded plans should look at claims paid for the prior plan year.

• Small health plans have until November 5, 2015, to obtain an HPID.

HPID


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• A HPID is an all-numeric, 10-digit identifier that will be used as the plan's unique

identification number for all HIPAA-covered transactions.

• One of the goals of the Health Insurance Portability and Accountability Act (HIPAA) is to

pay claims more efficiently.

• Efficient electronic processing requires standardization, and the HPID requirement is

part of that standardization and automation effort.

• Plans will be required to use HPIDs in specified HIPAA standard transactions by

November 7, 2016.

HPID


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• Controlling Health Plans" (CHPs) are required to obtain an HPID.

• "Subhealth Plans" (SHPs) may obtain an HPID.

• A CHP is defined as a health plan that either:

• Controls its own business activities, actions, or policies; or

• Is not controlled by an entity that is not a health plan, and if it has one or more subhealth

plans, exercises sufficient control over the subhealth plan to direct its business activities,

actions, or policies.

• An SHP is defined as a health plan whose business activities, actions, or policies are

directed by a controlling health plan.

HPID


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• In general, for self-funded plans, the self-funded major medical plan will be the CHP.

• If the employer uses a master "wrap" plan document that includes several different

benefits, the employer will need to decide whether it wishes to use a single CHP number

for all of the health benefits included under the wrap plan, or if some of those benefits

should be treated as SHPs.

HPID


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• An employer will apply for its HIPD through the Centers for Medicare and Medicaid

Services (CMS) website. Most employers will need to register and set up a health

insurance oversight system (HIOS) account at

https://portal.cms.gov/wps/portal/unauthportal/home/.

• Once the account is in place, the employer can apply for the plan identification

number(s).

• Detailed information on this process is available at: http://www.cms.gov/Regulations-

and-Guidance/HIPAA-Administrative-Simplification/Affordable-Care-Act/Health-

Plan-Identifier.html and at http://www.cms.gov/Regulations-and-Guidance/HIPAA-

Administrative-Simplification/Affordable-Care-Act/Downloads/

HPOESTrainingSlidesMarchSlideDeck.pdf

HPID


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• HIPAA-covered entities (health plans, health care clearinghouses, and health care

providers) that electronically transmit health information relating to a covered transaction

will be required to use the plan's HPID beginning in November 2016.

• Covered transactions include the payment of health care claims, health care claim

status, health plan eligibility, and the payment of health plan premiums.

• If the covered entity does not engage in standard transactions (which is usually the case

with self-funded plans), the covered entity must require that its business associates use

an HPID whenever they are involved in a standard transaction on its behalf.

HPID


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• Form W-2

Health FSA: only employer contributions used are reported.

HRAs: no reporting in the past.

Reporting


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• Information Reporting (Code §6055 ):

Reporting is not required for coverage that supplements minimum essential

coverage, the preamble to the final regulations states that reporting generally is not

required for HRAs, on-site medical clinics, wellness programs that provide reduced

premiums or cost-sharing under a group health plan, or coverage that supplements

the primary plan of the same plan sponsor.

Reporting


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• Information Reporting (Code §6056 ):

It may apply for reporting for large employers. For large employers.

A link to the forms is provided below:

• Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and

Coverage Information Return: http://www.irs.gov/pub/irs-dft/f1094c--dft.pdf

• Form 1095-C, Employer Provided Health Insurance Offer and Coverage:

http://www.irs.gov/pub/irs-dft/f1095c--dft.pdf

Reporting

Questions?


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Larry Grudzien

• Phone: 708-717-9638

• Email: [email protected]

• Website: www.larrygrudzien.com

Contact Information

Latest and Greatest in HRA's and Cafeteria Plans

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