Cadillac Tax (Part 1)

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High-cost health plan taxes, often referred to as Cadillac plan taxes, are expected to impact plans provided by healthcare organizations for their own employees as much as 39% by 2020. Beginning in 2018, the Patient Protection and Affordable Care Act (ACA) requires employer to pay 40% on the value of high cost health plans. This tax on Cadillac plans is calculated as 40% of the portion of the plan that exceeds standards set by the ACA, therefore the implications are significant. Also to be considered by the employer, the tax is measured as a direct function of plan cost and a number of factors can drive excise-tax exposure. Truven Health Analytics estimates the cost of tax per members to be $452 per employee in 2018, $589 in 2019 and $660 in 2020 for active plans. For plans projected to pay the tax, average tax amount range from 4.9% to 5.2% of projected plan costs from 2018 to 2020. Overall, it is projected the PEPY tax cost across all health system plans will be 1.6%-2.0% of plan costs from 2018 to 2020. Employers still have time to plan and position their programs to alleviate the impact of the Cadillac tax in 2018 and afterwards. For more information visit www.hhs.gov/healthcare/rights/law/title/ix-revenue-provisions.pdf and look out for Cadillac Tax Part 2 on Thursday!

Update on HRA Plans

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With many recent changes in health insurance plan design and compliance requirements under the ACA, HRAs continue to be a valuable plan design tool for employers.  We have seen a growth in HRAs in 2014 for groups of all sizes, including options designed to reimburse deductible expenses, coinsurance expenses, retiree expenses, and out-of-pocket medical, dental, or vision expenses.  A priority this year has been to examine all new and existing plans to ensure that HRAs meet the qualifications for integrated (linked) plans under IRS guidance issued during 2013.  If you have any questions about how new rules affect your current or proposed plan, feel free to contact us.

Flexible Spending Accounts (Part 2)

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How Do Health FSAs Work?

At the beginning of the year, you elect the total amount you want to have withdrawn from your paychecks to put into your FSA, and your employer will deposit the money into the account in equal allotments throughout the year. The IRS has outlined rules guiding eligibility, contributions and reimbursements.

FSA Eligibility

FSAs are employer-sponsored benefit plans, and the employer can choose what other type of group health plan coverage to offer with the FSA.  FSAs can be offered with any type of health plan—FSAs are not tied to a high deductible health plan (HDHP) like health savings accounts (HSAs) are. Self-employed individuals are not eligible for an FSA, and restrictions may apply for highly compensated individuals or key employees.

Opening Your FSA

The FSA is sponsored by your employer as one of your employee benefits. You will need to choose how much you want to contribute to your FSA. The amount you elect will be for the entire plan year, and your employer will then deduct the corresponding amount from your paycheck with each pay cycle. This is sometimes referred to as a salary reduction arrangement.

Contributions

After your initial contribution election, you ordinarily cannot change your election for a plan year during the year. Your elected contribution amount can only be changed if you experience a permitted election change event, such as a change in family status and your FSA permits you to change your election.

The amount you choose to transfer into your FSA should be based on the amount of qualifying medical expenses you anticipate your family incurring during the plan year. Start by looking at your family’s medical expenses for the past year and then determine whether your family will likely have those same expenses again and whether there will likely be any new expenses. Use this estimate to help you choose what amount you would like to contribute to your FSA, remembering that it is typically best to underestimate by a little than to overestimate and lose that money at the end of the year.

Limits – Effective Jan. 1, 2013, the maximum amount you can contribute each year to your FSA is $2,500, which will be indexed for inflation and therefore may change year to year. The employer may implement a lower annual limit than the federal maximum.

Who can contribute – Both you and your employer may contribute to your FSA. However, your employer is not obligated to contribute to the account.

Grace Periods and Carry-overs

The FSA operates with a use-or-lose rule, meaning if you don’t use the money in your FSA by the end of the plan year, you will lose it. However, the use-or-lose rule was relaxed with two options that employers may choose to offer: a grace period or a carry-over. The grace period can last up to 2 ½ months into the next year, typically March 15 for a calendar year plan. Generally, only expenses you incur during the plan year can be reimbursed from the funds in your FSA, but if your FSA has a grace period, you can use those unused funds in your FSA for expenses incurred during the grace period.

Under the carry-over option, an FSA may allow participants to carry over up to $500 in unused money at the end of the plan year to be used to reimburse expenses incurred in the next year. The carry-over does not count toward the annual maximum allowable contribution.  Employers are not required to offer either of these options, and they may only offer one of the two options, not both.

If you have funds in your FSA at the end of the year, you might consider scheduling a checkup, dental cleaning or similar appointment before the end of the year in order to use up the leftover funds before they are lost.

Using Your Health FSA

FSAs must comply with a uniform coverage rule. The uniform coverage rule provides that an employee’s entire annual FSA election amount, less any amount already used, must be available at any time of the plan year—even if that full amount has yet to be contributed to the account. This means that the entire amount of your election is available for your use at any time of the year. For example, if you elect $1,000 for your annual contribution, and you incur qualified medical expenses of $800 in January, your FSA will reimburse you for the $800 even though that amount has not yet been deducted from your salary.

When you are paying for a qualified medical expense that you would like to use your FSA funds for, you typically have two choices: using a health payment card or requesting reimbursement.

Health Payment Card
Some employers may provide you with a health care payment card, which is very similar to a debit or credit card, and you can pay for eligible medical services or products by swiping the card as you would a debit or credit card. The money will then be deducted from your FSA account.

Health care payment cards may be used only on eligible medical expenses that are not reimbursed or covered by another source. Over-the-counter (OTC) medications are only eligible for reimbursement if they are prescribed to you, and you present the prescription at the time of purchase. The only OTC medication that can be reimbursed without a prescription is insulin. Health care payment cards may not be used to cover more than the maximum dollar amount of coverage available in your FSA.

As a general rule, every claim paid with a health care payment card must be reviewed and substantiated. The IRS guidance allows automatic adjudication for certain card transactions, meaning that receipts do not need to be submitted for verification of expenses for which a health care payment card is used. This applies in three situations at medical providers and 90-percent pharmacies (which are drug stores and pharmacies where at least 90 percent of the store’s gross receipts during the prior taxable year consisted of medical expenses):

  • When the total cost of the transaction is equal to the standard copayment for the service(s) received
  • When the transaction is for recurring expenses that have previously been approved
  • When the merchant provides expense verification to the employer when the transaction takes place

Reimbursement
Another way to pay for eligible medical expenses with your FSA funds is to pay out-of-pocket and then submit receipts for reimbursement. Your account will have specific instructions for how to do this. When submitting for reimbursement, you will need your receipts and proof that what you paid for was an eligible medical expense; this is one of the reasons it is important to keep all receipts and related paperwork from your health care provider.

 

Qualified Expenses

Employees may use their health FSAs to pay for or reimburse themselves for their own eligible medical expenses, as well as their spouses’ and dependents’ eligible medical expenses.  Eligible medical expenses are unreimbursed medical care expenses, as defined under Section 213(d) of the Internal Revenue Code. An employer can more narrowly define the expenses that can be reimbursed from an FSA. Health FSAs cannot be used to pay for non-medical expenses. Your FSA cannot be used to pay for health insurance premiums, long-term care coverage or expenses, or amounts already covered under another health plan. See Appendix for a list of qualified medical expenses.

Flexible Spending Accounts (Part 1)

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What Are Health FSAs?

An FSA is an employer-sponsored savings account for health care expenses. You are not taxed on the money put into the FSA, and you can then use the account to pay for qualified out-of-pocket health care costs, such as your deductible and copays, but not your premium. However, you cannot stockpile money in the account from year to year, and you will lose leftover money in the account at the end of the plan year unless your employer offers an option that allows for either a short extension or a small carry-over into the next year.

FSAs were created in the 1970s to enable employees to use pre-tax dollars for health care expenses that were not otherwise covered by employer-sponsored health coverage. These accounts gained more popularity in the 2000s, and they underwent a few changes with the Affordable Care Act (ACA), including the addition of an annual contribution limit.

Health FSAs can save you money on taxes while helping you regularly put aside money for health care expenses. If carefully planned, using an FSA for health care costs can be an asset to your family’s budget.

 

Why Have a Health FSA?

Health FSAs offer an option for setting aside money to use for qualified medical expenses. These accounts offer a convenient way to prepare for out-of-pocket medical expenses while saving on taxes. In addition, you can use your health FSA to pay not only for your medical expenses, but also for the medical expenses of your spouse and dependents.

 

Health FSA Advantages

Here are some of the advantages an FSA can provide:

Tax reductions: The amount you contribute to a health FSA is not subject to federal income tax or social security (FICA) tax—effectively adjusting your annual taxable salary. The taxes you pay each paycheck and collectively each plan year can be reduced significantly.

  • Your employer can also contribute to your FSA, and this amount is also not considered taxable income to you.
  • You can withdraw money from your FSA to pay for qualified medical expenses (see Appendix) and your withdrawals are not taxed.
  • You do not have to report FSA amounts on your income tax return.

Convenience: After the initial election at the beginning of the year, your employer will take care of transferring the allotted amount into your FSA through salary deferral.

Flexibility: You can withdraw health FSA funds at any time (for qualified medical expenses), even if the amount has not yet been deposited into the account, as long as the amount is no more than your elected annual deferral amount less any amount already used.

 

Is a Health FSA Right for You?

FSAs can save you money because you don’t have to pay taxes on the amount deferred to the account. However, using an FSA does require careful planning in order to reap the financial benefits.

When you participate in an FSA, you have to decide at the beginning of the plan year how much to contribute for the year. Because you will generally lose what you don’t use by the end of the year, determining how much to defer into an FSA can be challenging. While correctly estimating your health care expenses and using an FSA to pay for those expenses will save you money, incorrectly gauging your health costs could cause you to lose money.

How your employer manages the FSA may also affect how much you will benefit from using an FSA. If the employer provides a grace period or carry-over option (see “Grace periods and carry-overs” section), you will have a little more flexibility when using your FSA funds. The largest downside to using an FSA is that if you over fund your FSA and don’t use the amount in there, you will lose what you’ve saved.

Health Plan Identifier (HPID) Requirement & Impact on HRA/FSA Plans

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New rules require health plans to obtain a unique Health Plan Identifier (HPID), which eventually must be used by plans, providers, insurers, and others in all standard transactions.  The HPID requirement is an effort to standardize health care transactions in order to reduce the cost and increase the quality of heath care.  The requirements for full compliance differ depending on the size and structure of the plan.  Although the deadline for large health plans to obtain the HPID is fast approaching, further guidance from HHS would be welcome to clarify the rules.  As of today, it is our view that all HRAs and FSAs administered by ProBenefits do not need to register this year due to a small plan exception.  A summary of the topic, including a discussion of plans subject to the requirement and the deadline for compliance, can be found here.


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