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HRAs, HSAs, and FSAsA Comparison, Interactions, and Updated

Guidance

Presented by:Lisa M. deFilippis (Cleveland)

January 14, 2014

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About the Firm

Represents management exclusively in every aspect of employment, benefits, labor, and immigration law and related litigation

Over 750 attorneys in 53 locations nationwide

Current caseload of over 5,000 litigations and approximately 300 class actions

Founding member of L&E Global

DisclaimerThis presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances.  Indeed, health care reform law is highly complicated and it supplements and amends an existing expansive and interconnected body of statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.).  The solutions to any given business’s health care reform compliance and design issues depend on too many varied factors to list, including but not limited to, the size of the employer (which depends on complex business ownership and employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether its employees work full time or part time, the importance of group health coverage to the employer’s recruitment and retention goals,  whether the employer has a collectively-bargained workforce, whether the employer has leased employees, the cost of the current group health coverage and extent to which employees must pay that cost, where the employer/employees are located, whether the employer is a religious organization, what the current plan covers and whether that coverage meets minimum requirements, and many other factors. 

IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

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Topics for Discussion

HRA, FSA, HSA Account Basics – Similarities and Differences

How These Different Accounts Work Together

HRA, FSA and HSA and the Affordable Care Act Accounts

FSAs: the New Carryover Rule and Excepted Benefit Criteria

Required and Optional Amendments to Your Plan(s)

Definition to Know “Qualified Medical Care Expenses

Generally, out-of-pocket payments for medical careo Defined in the Internal Revenue Codeo Payments on behalf of account beneficiaryo Prescribed medication o NOT amounts covered by insurance or otherwiseo Generally includes health insurance premiums

(except HSAs and FSA’s)

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Health Reimbursement Arrangements

The BasicsWhat is an HRA?o Paid for by the employer only, no salary reduction

contributionso Not provided under a cafeteria plano Reimburses employee for Qualified Medical Care

Expenses up to maximum dollar amounto Generally considered to be group health plan

Who can have an HRA?o Employees and retirees, and their spouses and

dependents

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Health Reimbursement Arrangements The Basics

What if a participant doesn’t use maximum amount?o May be able to carry-over to next year o Carry-over cannot be paid out in cash or other benefits

What expenses are eligible for reimbursement?o Qualified medical care expenses of employee, spouse, or

dependentso Includes IRC §213(d) medical expenses (including group health

plan premiums)o Expenses must be substantiated

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Health Reimbursement Accounts Pros and Cons

Proso Carry-over from one year to next may be permittedo Maximum reimbursement amount does not need to be immediately

available to employeeso Coverage period can be less than 12 monthso Not subject to IRC §125 regulations governing health FSAs

Conso Medical expenses must be incurred during the coverage periodo Substantiating expenses can be costly and time consumingo Subject to regulation as group health plan

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Health Savings Accounts The Basics

What is an HSA?o A trust or custodial account maintained exclusively for purpose of

reimbursing the account holder for the payment of qualified medical expenses

Who can have an HSA?o Eligible individuals covered by a high deductible health plan

Who is an eligible individual?o Individual who is covered by a HDHP and not covered by any other

health plan (with certain exceptions)

How do you establish an HSA?o Eligible individuals or Employer may open an HSA in the individual’s

name

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Health Savings Accounts The Basics

What is an HDHP?o Annual deductible for 2014 must be at least $1,250 for self-only

coverage or $2,500 for family coverageo Out-of-pocket expenses (including the deductible) for 2014

cannot be more than $6,350 for self-only coverage or $12,700 for family coverage

What other types of health coverage are permitted?o Cannot have other insurance that covers the same benefits as

the HDHPo Permitted coverages: AD&D, dental, vision, and long-term care

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Health Savings Accounts The Basics

Who can contribute to an HSA?o Any eligible individualo If HSA established by Employer, then employer and/or the employeeso If established by self-employed/unemployed individual, then that

individual and possibly other family members

How are HSA contributions treated for tax purposes?o Employer contributions are not included in employee’s gross incomeo Employer contributions are tax-deductible to Employero Individual’s contributions are tax deductible

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Health Savings Accounts Pros and Cons

Proso Employer’s contributions are excluded from employees’ taxes

o Individual’s contributions are tax-deductible up to $3,300 each year for individual coverage or $6,550 for family coverage for 2014

o Contributions may be made until April 15 of the following year

o Accounts owned by individual

o Health care expense distributions are not subject to tax

Conso Employer cannot recover any portion of its contribution to an employee’s HSA

o Employee and Employer reporting requirements

o Employer must offer HDHP

o May not be “group health plan”13

Flexible Spending AccountsThe Basics

What is an FSA?o Employer plan permitting employees to pay for certain health care expenses on

pretax basis

How are FSAs funded?o Employee salary deferral election prior to beginning of plan year

o Irrevocable election

o Employer contributions optional

How do employees get reimbursed for eligible expenses?o Employee is reimbursed up to the deferral election amount for qualifying

expenses during that year

o Qualified expenses must be incurred during the FSA’s defined “period of coverage”

o Expenses must be substantiated14

Flexible Spending AccountsThe Basics

What are contribution limits?o $2,500

When can salary deferral elections be changed?o Life change events

What about expenses incurred outside Coverage Period?o Grace periodo $500 carry-over rule

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Flexible Spending ArrangementsPros and Cons

Proso Generally, cannot reimburse for expenses incurred outside of the coverage

periodo $2,500 plan limito For Employers: use it or lose it rule

Conso For Employees:

• Use it or lose it ruleo For Employers:

• The maximum reimbursement amount must be immediately available to employees each coverage period

• Coverage period must be 12 months• Subject to regulation as “group health plan”

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HRAs, HSAs, and FSAsA Comparison

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HRAs HSAs Health FSAsPart of Cafeteria Plan? No, but can offer both Yes, but not required Yes

Eligibility Employees and retirees, but NOT self-employed

Employees, retirees, and self-employed if only covered by HDHP

Employees

Funding Only employer Employer, employee, and other eligible individuals

Employer and Employee

Eligible Expenses IRC §213(d) expenses, health insurance premiums, long-term care expenses

IRC §213(d) expenses, long-term care expenses, but generally not health premiums

IRC §213(d) expenses, but not health insurance premiums or long-term care expenses

HRAs, HSAs, and FSAsA Comparison

HRAs HSAs Health FSAsExpenses Covered under another plan

No No No

Contribution Limits No. Set by employer For 2014:Individual $3,300Family $6,550Catch-up contributions allowed

$2,500

Carry-over to next year?

Yes, by plan design Yes No, except grace period and $500 carry-over

Tax Treatment of Employee Contributions

No employee contributions are allowed

Pre-tax salary reductions allowed or deduction permitted if individual/post-tax

Pre-tax salary

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HRAs, HSAs, and FSAsA Comparison

HRAs HSAs Health FSAsTax Treatment (Employee) of Employer contributions and reimbursements

Excluded from tax Excluded from tax Pre-tax; excluded from tax

Tax Treatment (Employer) of Employer Contributions

Deductible upon reimbursement of expense

Deductible in year contribution made

Deductible upon reimbursement of expense

Subject to ERISA? Yes Yes, but only if employer is involved

Yes

Subject to HIPAA privacy rules?

Yes Yes, if considered health plan under definition of HIPAA regulations

Yes

Subject to COBRA? Yes Yes, if subject to ERISA

Maybe

Portability No Yes No

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Interactions BetweenArrangements – Ordering Rules

If coverage provided for the same medical care expense under both an HRA and a health FSA:o Default Rule: HRA funds must be exhausted prior to FSA

reimbursemento HRA and FSAs can be designed to avoid over-lapping

coverage

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Other Interactions Between These Arrangements

HSA participants may also be covered by a HRA if the HRA is a “post-deductible” HRA

HSA participants may also be covered by a “limited use” FSA

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Other Interactions Between These Arrangements

Under limited circumstances, an HRA can be provided along with another health plan funded by employee salary reductions

If individual’s spouse has FSA or HRA individual cannot have HSA if spouse’s FSA or HRA can pay medical expenses before HDHP is met

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Affordable Care Act The Market Reforms

Generally, imposes certain requirements (the “market reforms”) for group health plans

Market reforms impacting HRAs, HSAs, and FSAs are:o The annual dollar limit prohibitiono The preventive services requirements

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HRAs and the Market Reforms

How are HRAs integrated for purposes of satisfying these market reforms?

Two integration methods:1. Minimum Value Not Required, or

2. Minimum Value Required.

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HRA IntegrationMinimum Value Not Required Method

For purposes of satisfying the annual dollar limit prohibition and the preventive services requirements, an HRA is integrated with another group health plan if:

1. The employer offers another group health plan;

2. Employees covered by the HRA enrolled in the other group health plan;

3. Only employees enrolled in the other group health plan are eligible to enroll in the HRA;

4. HRA reimbursements are limited to certain expenses;

5. HRA provides an opt-out feature.25

HRA IntegrationMinimum Value Required Method

For HRAs that do not limit reimbursements to certain expenses, the HRA is integrated:

1. Employer must offer group health plan that provides minimum value;

2. Employees covered by the HRA are enrolled in the MV group health plan;

3. Only employees enrolled in MV group health plan may enroll in the HRA;

4. HRA provides opt-out.

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More on HRA Integration

HRAs designed to reimburse employees for individual policy premiumso An HRA cannot be integrated with individual market coverage or

individual policies provided under an employer payment plan

Retiree-only HRAs generally not subject to the market reformso But retirees covered by a standalone HRA are not eligible for the

ACA premium tax credit for any month they are covered by the HRA

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An Explanation of Excepted Benefits

ACA Market Reforms apply to “group health plans”

ACA Market Reforms do not apply to Excepted Benefits, including:o AD&D, disability income, workers’ compensation, and

liabilityo Limited scope benefits, including health FSAs

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Health FSAs and the Excepted Benefit Criteria

Benefits provided under a health FSA will be considered “excepted benefits,” if:o Employer offers other group health plan coverageo Maximum benefit payable does not exceed specific limitso Health FSA is offered through a cafeteria plan

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Affordability and Minimum Value

Individuals are eligible for ACA premium tax credit for exchange coverage only if:o The individual is not eligible for employer-sponsored

coverage that is affordable and provides minimum value

Employers offering a primary health plan with an integrated HRA, reimbursement amounts made available in the current year under the HRA may be considered for either the affordability or minimum value requirements, not both

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FSA Carryover Rules

On November 18, 2013, the IRS modified the use-or-lose rule for health care FSAs

Employers may permit carry-over of up to $500 to the next plan year

Plan amendment is required

Cannot adopt carry-over rule if plan provides for a grace period

Cafeteria plans offering health FSAs must be amended to limit participant salary reduction elections to $2,500 by the end of 2014 Plan Year

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Optional Amendments – Health FSA Carry-Over

To adopt the new $500 carryover provision, the cafeteria plan must be amended

• By the last day of plan year from which amounts will be carried over

• To eliminate grace periods if the Plan provided

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Required FSA Amendments

Cafeteria plans offering health FSAs must be amended to limit participant salary reduction elections to $2,500 by the end of 2014 Plan Year

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ANY QUESTIONS?

Lisa M. deFilippisdefilipl@jacksonlewis.com

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