We get a great deal of questions from our clients and their employees regarding how Flex Accounts and Health Savings Accounts function in the Reform Era. Some of the rules are quite difficult to apply to a particular clients’ benefit plan, even for an experienced firm like ours. It talkes careful analysis and keen insight into current and evolving regulations.
On March 28, 2014, the Internal Revenue Service (IRS) released an Office of Chief Counsel Memorandum to provide information on how health flexible spending account (FSA) carryovers affect eligibility for health savings accounts (HSAs). Although the IRS memorandum is not official guidance, it helps clarify the IRS’ position on health FSA carryovers and HSA eligibility.
In the memorandum, the IRS provides that an individual who carries over unused funds from a prior year to a current year under a general purpose health FSA will not be eligible for HSA contributions for the entire current plan year (even for months after the health FSA no longer has any amounts available to pay or reimburse medical expenses).
However, the memorandum offers some alternative approaches that allow health FSA carryovers while preserving HSA eligibility. These approaches include carrying over unused amounts to an HSA-compatible health FSA and allowing individuals participating in a general purpose FSA to decline or waive the carryover.
Health FSA Carryovers
In general, health FSAs are subject to a “use-or-lose” rule that requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.
On Oct. 31, 2013, the IRS released Notice 2013-71, which relaxed the use-or-lose rule. Under the relaxed rule, employers with health FSAs may allow participants to carry over up to $500 in unused funds into the next plan year. The carryover of up to $500 may be used to pay or reimburse medical expenses incurred during the entire plan year to which the health FSA is carried over.
This carryover provision is different than a health FSA’s run-out period, which is a period immediately after the end of the plan year when a participant may submit claims for expenses incurred during the plan year.
A health FSA may be amended to include the carryover feature only if the plan does not also incorporate the grace period rule. Also, a health FSA may specify a lower carryover amount than the $500 maximum, and has the option of not permitting carryovers at all. Any unused amount in excess of $500 (or a lower amount specified in the plan) remaining at the end of the run-out period for the plan year will be forfeited.
For ease of administration, a health FSA is permitted to treat reimbursements of all claims for expenses that are incurred in the current plan year as reimbursed first from unused amounts credited for the current plan year and, only after exhausting these current plan year amounts, as then reimbursed from unused amounts carried over from the prior plan year.
Only an eligible individual may establish an HSA and have HSA contributions made on his or her behalf. To be HSA-eligible, an individual must be covered under a high deductible health plan (HDHP) and generally may not be covered under a health plan that is not an HDHP.
An individual who is covered by a health FSA is eligible for HSA contributions only if the health FSA is HSA-compatible (that is, a limited purpose health FSA or a post-deductible health FSA). Thus, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses (that is, a general purpose health FSA) is not an eligible individual for purposes of HSA contributions. This disqualification extends to the entire plan year, even if the health FSA has paid or reimbursed all amounts prior to the end of the plan year.
FSA Carryovers and HSA Eligibility
The IRS memorandum addresses how the carryover of unused amounts under a health FSA from a prior plan year affects an individual’s HSA eligibility during the current plan year.
Carryovers to General Purpose Health FSAs
The IRS memorandum provides that an individual who has coverage under a general purpose health FSA solely as a result of a carryover of unused amounts from the prior year is not eligible for HSA contributions.
This rule applies regardless of the amount available from the health FSA for any month during the plan year. Thus, the individual’s ineligibility for HSA contributions continues for the entire health FSA plan year, even for months in the plan year after the health FSA no longer has any amounts available to pay or reimburse medical expenses.
A cafeteria plan may provide that if an individual participates in a general purpose health FSA that provides for a carryover of unused amounts, the individual may elect prior to the beginning of the following year to decline or waive the carryover for the following year. In that case, the individual who declines or waives the carryover under the terms of the cafeteria plan may contribute to an HSA during the following year (assuming he or she meets the other tax rules for HSA eligibility).
Carryovers to HSA-compatible Health FSAs
An individual who participates in a general purpose health FSA and elects for the following year to participate in an HSA-compatible health FSA may elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA. This individual is eligible for HSA contributions during the following year (assuming he or she meets the other tax rules for HSA eligibility).
There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.
A cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in an HDHP for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.
Administration During Run-out Period
If an individual elects to carry over unused amounts from a general purpose health FSA to an HSA-compatible health FSA, the uniform coverage rules may be applied during the run-out period of the general purpose health FSA as follows:
- The unused health FSA amounts may be used to reimburse any allowed medical expenses incurred prior to the end of the general purpose health FSA plan year.
- Any claims covered by the HSA-compatible health FSA must be reimbursed in a timely fashion up to the amount elected for the HSA-compatible health FSA plan year.
- Any claims in excess of the elected amount may be reimbursed after the run-out period when the amount of any carryover is determined.
Example: Employer offers a calendar-year general purpose health FSA and a calendar-year HSA-compatible health FSA. Both FSAs provide for a carryover of up to $500 of unused amounts and do not have a grace period. Employee has an unused amount of $600 in the general purpose health FSA on Dec. 31 of Year 1. Prior to Dec. 31 of Year 1, Employee elects $2,500 in the HSA-compatible health FSA for Year 2 and elects to have any carryover go to the HSA-compatible health FSA. Employee also elects coverage by an HDHP for Year 2.
In January of Year 2, Employee incurs and submits a claim for $2,700 in dental care covered by the HSA-compatible health FSA. The plan reimburses $2,500, the amount elected, in a timely fashion. In February of Year 2, Employee submits and is reimbursed from the general purpose health FSA for $300 in medical expenses incurred prior to Dec. 31 of Year 1. At the end of the run-out period, $300 in the general purpose health FSA is unused and carried over to the HSA-compatible health FSA. Employee is then reimbursed $200 for the excess of the January claim over the amount elected for the HSA-compatible health FSA. Employee has $100 remaining in the HSA-compatible health FSA to be used for expenses incurred in the year or carried over to the next year. Employee is allowed to contribute to an HSA as of Jan. 1 of Year 2.
Contact us and we will perform an analysis customized to your specific circumstances.
On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 (Act) into law. The Act’s main provisions preserve the pay rate for physicians treating Medicare patients and delay the compliance deadline for converting to the updated International Classification of Diseases codes for at least one year.
The Act also eliminates the Affordable Care Act’s (ACA) annual deductible limit that applied to health plans in the small group market. This change is retroactively effective to when the ACA was enacted in March 2010.
The Act does NOT eliminate the ACA’s out-of-pocket maximum, which applies to all non-grandfathered health plans for plan years beginning on or after Jan. 1, 2014.
Effective for 2014 plan years, the ACA requires non-grandfathered health plans to comply with cost-sharing limits with respect to their coverage of essential health benefits.
Annual Deductible Limit
As originally enacted, the ACA included an annual deductible limit that applied to health plans offered in the small group market. This limit became effective for plan years beginning on or after Jan. 1, 2014. Effective for 2014 plan years, the ACA provided that the annual deductible may not exceed:
- $2,000 for self-only coverage; and
- $4,000 for family coverage.
The ACA required the deductible limit to be adjusted annually. For 2015, the Department of Health and Human Services (HHS) announced that the annual deductible limit would increase to $2,050 for self-only coverage and $4,100 for family coverage.
HHS created an exception that allowed a small health plan’s deductible to exceed the ACA limit if a plan could not reasonably reach the actuarial value of a given level of coverage (that is, a metal tier—bronze, silver, gold or platinum) without exceeding the limit. This exception was available to all metal-level plans, but it was particularly useful for bronze-level plans.
The ACA places an annual limit on total enrollee cost-sharing for essential health benefits, effective for plan years beginning on or after Jan. 1, 2014. This annual limit, or out-of-pocket maximum, applies to all non-grandfathered health plans. This includes, for example, self-insured health plans and insured health plans of any size.
Effective for 2014 plan years, a non-grandfathered health plan’s out-of-pocket maximum may not exceed:
- $6,350 for self-only coverage; and
- $12,700 for family coverage.
The ACA requires the out-of-pocket maximum to be adjusted annually. For 2015, HHS announced that the out-of-pocket maximum will increase to $6,600 for self-only coverage and $13,200 for family coverage.
In addition, HHS provided transition relief for 2014 plan years for plans that utilize more than one service provider to administer benefits.
Repeal of Annual Deductible Limit
The Act eliminates the ACA’s annual deductible limit for health plans in the small group market. This change is effective as of the date of the ACA’s enactment in March 2010.
The repeal of the annual deductible limit will provide small employers with more flexibility to control premium costs by selecting a health plan with a higher deductible. However, the out-of-pocket maximum, which includes the deductible amount, and the ACA’s actuarial requirements for small health plans will continue to limit enrollee cost-sharing in small employer plans.
Small employer health plans that have started their 2014 plan years (for example, calendar year plans) were already required to incorporate the ACA’s annual deductible limit, unless a higher limit applied due to the actuarial value exception. It is not likely that these plans will be affected by the repeal of the ACA’s deductible limit until their 2015 plan years.
However, small employer health plans that have not started their 2014 plan years (for example, health plans with a Nov. 1 to Oct. 31 plan year) may be able to avoid the ACA’s deductible limit altogether.
Delay for ICD-10 Codes
The Act delays the deadline for HIPAA-covered entities to comply with the updated set of diagnosis and procedure codes known as the International Classification of Diseases, 10th Edition (ICD-10). The deadline is delayed from Oct. 1, 2014, until at least Oct. 1, 2015. This delay will give covered entities and their business associates more time to fully transition to the ICD-10 codes for their HIPAA standard transactions.
Defined Contribution Health Plans: A Transition from Defined Benefits to Defined Contribution in the Healthcare Reform Era
By Andrew Wheeler,
Director of eCommerce
CIBC of Illinois, Inc.
For many years, businesses have operated under the Defined Benefit (DB) model of health plans for their employees. Employers would pick a plan or set of plans and tell employees “here are your benefits, so go pick the level of coverage you and your family needs. We will pay X amount/percentage for your contribution to our group plan(s).” It was for good reason; there is no viable health care market for who have a prior medical history. Pre-existing conditions and underwriting requirements excluded a large part of the employer workforce potential so there were no other options, to be honest.
Now, as a result of the implementation of the Affordable Care Act 2014 and the rules that eliminate medical underwriting and pre-ex exclusions, we are at the point where a new paradigm can enter the employee benefits arena; Defined Employer Contributions (DC).
This Sounds Vaguely Familiar?
The whole thought of DC is not new as we have been using this methodology with retirement benefits for years. In the mid-2000’s as retiree costs skyrocketed, companies faced a choice of raising the cap associated with retiree contributions, or pass along the increases to the retirees. Most companies chose the latter of these two and DC was off and running. The same applies to employee retirement contributions.
Skin in the Game
We have already seen the recognition of the need to get employees involved in the structure and operation of their health plan, even before ACA became law. The use of an HRA/HSA within the health plan is a hybrid of DC and DB, and most employees are at least aware of these types of hybrids. Many employees and employers have experienced the benefits of becoming participants in Consumer Driven Health Plans (CDHP). When implemented correctly, with robust employee education and careful plan design, these types of CDHP’s have done the trick. They have provided stability, however tedious and fleeting, as opposed to the DB model.
Now, as we look at full implementation of the ACA in 2014, employers are looking at a similar situation with their health plans. Because there is the “Affordability” factor associated with ACA, employers cannot require employees to pay more than 9.5% of their W2 wages for employee-only contributions without incurring a $3000 tax (fine). Costs are being shifted to the employer contribution in most cases, and employees are left with picking up more of the spouse/family costs as a result. Employers are looking for some stability in a market that, by all indications, will continue to be volatile for the foreseeable future. Costs are rising in the face of ‘Affordable Care” legislation and carriers are signaling that they will continue to rise well into 2014 and beyond. Just like The Rolling Stones, employers are also crying “Gimme Shelter,” and maybe a migration to DC is that path to peace of mind for employers so they don’t “fade away.”
Defined Contribution: The Model
In the DC model, employers contribute a fixed amount to employees for health insurance purchases. The employer selects products to offer to employees and sets a defined contribution. The employees go to the exchange and use the employer contribution to select and insurance plan that meets their needs. Now, the risk of premium increases moves to the employees.
Employers usually establish HRA’s to make contributions in their DC plans because unlike FSA’s and HSA’s, HRA’s can be used to reimburse premiums. This also allows employers to utilize health plans other than High Deductible (HDHP) plans in their offering. Because ACA prohibits annual limits on essential benefits after 2013, employers need to know if their HRA is Integrated or Stand-Alone.
Integrated HRA’s are not required to be compliant with the ACA annual limit restriction if the coverage by itself satisfies the annual limit restriction. Integration also occurs when the HRA is available only to employees who are covered by employer coverage that meets annual limit regulations. As of right now, the agencies implementing ACA state that an employer HRA cannot be integrated with the individual market coverage or with an employer plan that provides coverage through individual policies. In addition, an employer HRA may be treated as integrated only if the employee receiving the HRA is enrolled in that coverage.
Stand-alone HRA’s that do not fall under an exemption (retiree, vision only, dental only, certain FSA’s) will not be subject to annual limit restrictions. This means that employers will not be able to offer a stand-alone HRA for employees to purchase coverage in or outside of the exchanges.
SHOP and Private Exchanges
With the recent proposed rule allowing States to delay SHOP exchanges until 2015, small group employers will have their traditional broker or direct relationship with carriers. Employers can also utilize private exchanges that are starting to pop up. Unlike the Federal or State-based exchanges, these private hubs will contain other lines of employee benefits like health, vision, and dental insurances. Employers will be able to use the DC model in private exchanges, within the rules laid out in the above paragraphs, but it is quite unclear how employees will adjust to a DC model without the traditional broker-advocate-employee personalized connections. As with much of the ACA, it is unclear how compliance with the ACA will be monitored by HHS and the IRS with regard to private exchanges. However nebulous, it is still something that small group employers should at least be aware of and seek counsel on.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at http://www.CIBCINC.Com or call toll free 877-936-3580.
- How Your Health Insurance Will Be Turned On Its Head (forbes.com)
By William Johnson,
President and CEO CIBC of Illinois, Inc.
All employers get frustrated with rising health insurance costs. Just like the employers, employees also feel the pinch of diminished benefits and rising contribution levels. And believe me; they let you know about it. For both, it seems fait accompli that the sun will rise, the Cubs will not be in the World Series, and insurance costs will go up each and every year.
Even if an employer tries to do the right things to control costs on their own, it is almost like eating a shoe with a spoon; it’s cumbersome, hard to cut into small manageable bites, and you would rather be eating something else, anyway. That is where a Benefit Consultant is of value. Instead of ordering off the menu, we take the “shoe” off your plate and let you get back to the core of your business operations.
HRA and HSA Implementation
Two methods of controlling costs we can deploy are a Health Savings Account (HSA) and/or Health Reimbursement Arrangement (HRA). Businesses can use either of these or both in concert to gain control of their benefit costs. An HSA is a bank account that is linked to a high deductible health plan. When an employer or employee contributes to the HSA, those dollars immediately become pre-tax contributions. An HRA is simply a funding arrangement between the employer and employee that covers qualified eligible benefits.
So let’s tackle the HSA first. HSA eligible plans are typically lower in premium due to the fact that they are higher in deductible than regular fully insured plans, and there are no copays before you meet your deductible. If the deductible is $2500, the insured must meet that deductible and then all eligible expenses are covered at 100%. There are some states where there is a copay on prescriptions after deductible is met, with certain carriers. These plans are great for those who are healthy and rarely got to the doctor for anything outside of their yearly checkup (which should be free due to Healthcare Reform, by the way), as well as those who have medical conditions that would cause them to max out their Out of Pocket expenses in the first few months of the year. The employee still gets the discounted rates via negotiated carrier discounts, but they are on the hook for the deductible, first. Keep in mind that payroll deducted contributions to premium and HSA bank accounts are a tax savings for the employee AND the employer.
If an employer utilizes an HRA, they can reimburse the employee for eligible expenses associated with the benefit plan. If the plan has a $1500 deductible, the employer could reimburse the second $750 of deductible (or the first, but that is not optimal in cost-control methodology). Using an HRA is optimal when there are significant savings to be gained by raising the plan deductible. Another benefit is that if there is no expense, there is no reimbursement…thus, no wasted premium dollars. We run the numbers based on actuarial norms and can accurately assess your cost-benefit strategy in this arena.
It is beneficial for some employers to deploy an HSA eligible plan, and then have the HRA in place to cover portions of the larger HSA deductible. If an employer has a $1000 deductible plan, and their renewal increase is such that it has become unaffordable for all concerned to continue with that deductible, the employer could typically save enough in premium to go with an HSA qualified plan that has a $2500 (or more) deductible. Then, the employer could potentially reimburse the first $500 of deductible and the last $1000 of deductible to the employee. In this manner, the cost increases have been mitigated, and the employee still has the same $1000 deductible in essence.
Consumerism and Cost
This also places the idea of consumerism into the employee’s view of healthcare. Employees tend to embrace going to Urgent Care facilities that cost $60 rather than the ER that costs thousands because THEY are a partner in the cost sharing. And this type of employee-based cost/benefit analysis is a very good thing for your business.
Once employees become used to thinking about their healthcare in this manner, you can begin to utilize other methods to drill down to other levels of savings. Since we meet with all of our clients’ employees during these types of transitions, I can tell you that employee fear of a high deductible is real. When presented with the savings opportunity, it is our experience that employees understand the big-picture and start making cost-conscious decisions for themselves…which are indirectly good decisions for your business.
Let us know if you are tired of the “shoes” your broker delivers at each renewal. We find Solutions for your business. Solutions, that work.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.