Janet LeTourneau

A consumer-directed health plan (CDHP) doesn’t necessarily mean a high-deductible health plan (HDHP), but frequently that’s where a CDHP starts. Once the employer is sold, it’s time to start employee education. Unfortunately, employees have misunderstandings about HDHPs, and it’s time to clear them up.

Agents and brokers work with employers to help them provide the best products for their employees. My August 2011 column discussed goal setting with employers. With an objective of keeping health care costs reasonable, an HDHP can help both the employer and the employee afford health care benefits.

Once the employer has made the decision to move to a higher-deductible insurance product, the employee education process begins.

Make sure employee have all the facts they need to make an informed decision. They need details about each health care plan being offered, detailed medical expense history for each family member and a worksheet for comparing their out-of-pocket costs for the various plans. I’ll go through the considerations for an employee worksheet a little later in this article.

Your goal is to break through the myths and get rid of common objections like, “I don’t think I can afford that deductible,” or “I feel like this will be more expensive if I get sick.” You have to help employees make an educated, rather than emotional, decision—one based on real numbers.

Summary of Employee Benefits Plans
A summary of benefits is an outline provided to employees prior to open enrollment. It explains each benefit being offered and discusses things like deductibles, co-payments, coinsurance, wellness benefits and prescription drug coverage for each insurance product. Once employees read their open enrollment summary of benefit descriptions and make a side-by-side comparison, their answer for health care coverage is typically clear.

Medical Expense History
Start with the facts. Have participants write down the expenses they incurred in the last 12 months. If they can’t remember every prescription and doctor’s office visit, participants can get this information from their insurance carrier’s website. Have them download the previous year’s costs for each family member, because personal history is important when factoring in individual and family deductibles. Table 1 is an example of what they might see.

Special note should be made of the “agreed pricing” column in a client’s personal health care reimbursement history. First, this column may have different names depending on the carrier. Second, this is the price a participant pays for services and prescriptions in an HDHP with no co-payments. To compare insurance plans, an employee should ordinarily use the “agreed pricing” in lieu of co-payment amounts in calculations for the HDHP.

Be sure employees compare apples to apples. For instance, some non-grand­fathered plans provide wellness benefits. The deductible is waived and the plan pays 100 percent for routine physical exams, immunizations, hearing and eye exams, and preventive health care services. A doctor’s office visit last year that required a co-payment may be free this year due to mandated coverage under the Affordable Care Act.

Comparison Worksheet
Providing an employee with a tool to organize the information that needs to be collected in order to compare plans will be crucial. It should have headings similar to the following bullet points in order to include all the pertinent items for comparison.

• Premiums. Just the employee portion. This is where you might see a huge difference in out-of-pocket expenses. Let’s say that family coverage is $450 for the low deductible and $170 for the HDHP per month. By switching to the high deductible, a participant would start out with a $3,360 savings ($450 minus $170 equals $280 per month times 12 months).

• Prescriptions. To find out the full price of current prescriptions, employees need to check out the “agreed pricing” amount on their explanation of benefits (EOB) or carrier website.

• Mail order prescriptions. Mail orders for prescriptions that require a co-payment may be less expensive than buying them from a local pharmacy or drug store. Check out some retailers that offer special four-dollar prescription co-pays, regardless of insurance plan. It could be that certain common medications could be even less expensive.

• Over-the-counter medications. Recur­ring over-the-counter medications should be noted. Although not paid through insurance, participants need this information to determine their contributions to either a flexible spending account (FSA) or a health savings account (HSA). Remember, as of January 1, 2011, a prescription is required for OTC drugs and medicines in order to pay for these items through an FSA or an HSA.

• Doctor’s office visits. Separate wellness from illness-related visits. Wellness visits may be provided at no cost to participants from an HDHP or under other plans due to mandated coverage under the Affordable Care Act.

• Network pricing. Even with a higher-deductible plan, the claims still go through the carrier for pricing. Be sure to point out the “agreed pricing” column in the download from their current health care provider. This is each participant’s responsibility.

• Deductible. Note that if family members are covered, the rules for HSA-compatible HDHPs require that the entire family deductible be satisfied before coverage kicks in. That may not be the case for a high-deductible plan that is not paired with a health savings account.

• Maximum out-of-pocket. Par­tici­pants do not want surprises here. Make sure they know the maximum out-of-pocket amount for each plan and point out that some policies do not count the deductible toward the maximum out-of-pocket limits.

• Total it up and compare. With all the numbers in place, employees will have concrete facts to help them in their decision on a health care product.

• Encourage participation in an HSA or FSA, as applicable. Provide a benefit comparison (see Table) for easy distinctions between HSAs and FSAs.

Making the CDHP Complete
When helping employers build a plan that is best for them and their employees, the CDHP is not complete without a choice of “side account” benefits. An FSA or HSA will enable employees to pay for out-of-pocket medical expenses with pre-tax dollars.

Employees may have questions about the differences between an HSA and an FSA. They both pay for out-of-pocket medical expenses on a pre-tax basis. Some concerns employees have are the differences each benefit provides as to the availability of funds or access to their account at a later date. This table may help them make an educated assessment.

Decision Time
Regardless of what the numbers support, employees have personal reasons for their choices. Some employees prefer to enroll in an FSA rather than an HSA, even if they enroll in a qualified HDHP. They know that by participating in an FSA their expenses will be reimbursed in full by their employer at the beginning of the plan year, regardless of their account balance. They also may not want the hassle of keeping track of another account or the extra form on their 1040 filing required by HSAs.

Also, families with young children may be more comfortable with a lower deductible health plan. It’s harder for them to predict future health care expenses, and they are happier with a set co-payment amount for doctor visits and prescriptions.

That’s what makes a CDHP “consumer-directed.” There are solutions for each employee and his or her personal needs. Your job is to give them the best tools available so they can make decisions that are right for them and their families. Ë›

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

For some companies the 2012 open enrollment decisions have already been made. Other employers may be on the fence about benefit offerings, don’t have a January start date, and/or have not even started to think about next year’s benefit changes.

In other words,  there are still plenty of opportunities to consult with employers about their benefits. Again this year, the clever, snappy response is a consumer-directed health plan (CDHP). But just what is a CDHP?

The fact is, a CDHP is a broad category for many different plans—both health insurance and so-called side accounts. See my April 2011 column (“The Latest On Coordinating HSAs With FSAs And HRAs”), where I talk about the different side accounts that allow employees to save 25 to 40 percent on qualified expenses when they elect to pay those expenses with voluntary payroll deductions on a pretax basis or get additional health care benefits through an employer-funded account.

Side accounts generally consist of (1) a health flexible spending account (health FSA); (2) a health reimbursement arrangement (HRA); (3) a health savings account (HSA); and (4) additional voluntary products.

A CDHP does not start with a benefits program; it starts with preparation and philosophy. Yet, with all the available choices, how are employers supposed to decide what is best for their employees? As a consultant, conversations with your employer clients can bounce around so fast you think you’re inside a pinball machine.

Many times both good and bad ideas get tossed in the trash as an employer tries to decide where to spend his benefit dollars and just how to get the most bang for the buck. And, a savvy employer will realize that unless he actually does something to improve health status, he will be needing to retrench and revisit all available options each year in order to manage benefit costs.

Sometimes a decision is simply by default. Employers might understand only one type of plan, they might guess at what might work, or they may even stick with what they did last year. What employers need are clear-cut decision-making tools that bring clarity to their benefits package and keep them on point and focused on the task at hand.

The option that is right for your employer clients and their employees depends on several factors. Ask the following questions to determine which CDHP side account is appropriate for their company’s goals and objectives:

1. Do you want to allocate a portion of the premiums you save by offering a high-deductible health plan into an account for each employee?

Yes means it’s time to talk about an HSA, HRA or health FSA. Employers may contribute employer dollars to any of these accounts.

No indicates a preference toward instituting an HSA or health FSA. The HRA utilizes only employer dollars, whereas the HSA and FSA plans can be funded with employee pretax salary redirection.

2. If you are contributing to a plan, do you want the money you contribute to the side account to be used only for qualified medical expenses?

Yes puts the HSA out of play. Contribu­tions to an HSA can be withdrawn by a participant for any purpose, but there would also be taxes and a 10 percent penalty on funds withdrawn for non-medical reasons. Some employers simply do not want their employer dollars to be used for anything other than eligible medical expenses.

Claims paid from an HRA or a health FSA are adjudicated. That means that someone is looking at every claim to ensure that reimbursements from the plan are for qualified medical expenses. This gives an employer the satisfaction of knowing that the dollars are actually being used for the intended purpose.

No keeps the door open for a discussion of setting up HSAs for participants, in addition to an HRA and an FSA.

3. Do you want your employees to be able to roll over unused dollars from year to year?

Yes signifies a willingness to allow participants to build wealth in an account that may be used in the future. And, to different extents, all three accounts can have a rollover feature.

The HSA, of course, belongs to each participant and accumulated funds roll forward from year to year.

The HRA may allow participants to roll funds forward from one plan year to the next, and the employer may cap the amount that can accumulate in any participant’s account. Or, the employer does not have to allow for rollover of unused funds.

The health FSA may permit participants a 2.5 month grace period in which to spend leftover funds from the previous plan year.

No illustrates that this employer would prefer an HRA plan that can be designed so that it does not accumulate funds for participants or an FSA where leftover funds are forfeited at the end of the plan year or grace period.

4. Do you want the annual limit of this account to be available to participants on the first day of the plan year?

Yes denotes a preferences toward a health FSA or an HRA that is designed to make funds immediately available. The HSA will pay out only what has been contributed to date. For participants who live on a tight budget, the HSA just isn’t the plan for them.

The HRA may be designed to make the annual election available to participants on the first day of the plan year or at different intervals (monthly or quarterly).

FSAs pay the entire amount of a medical claim up to the annual election amount, regardless of the amount of contributions to date. For the budget-minded participants, this plan allows them to pay medical expenses while contributing a set amount per pay period.

No implies a preference for employees to have an HSA or an employer-funded HRA that would make the annual election available on a periodic basis.

If an employer answers yes to most of these questions, then an HRA with a health FSA would fit seamlessly beside a high-deductible health plan. This type of consumer-directed health plan agenda combines the most sought after CDHP attributions for employers and their employees.

The HRA Edge
Why do many employers favor an HRA?
• Both an employee and employer can share in the financial responsibility of the high-deductible health plan.

• Health care awareness and ownership is promoted.

• A portion of the funds can be made available on the first day of the plan year by an employer who still retains control of employer dollars.

• The possibility of funds being used for non-medical expenses is eliminated.

• Employee education is less daunting because HRAs are less complicated than HSAs.

• No extra IRS forms need to be filled out by participants when filing their tax returns.

HRA Design Choices
How much should an employer allocate to an HRA for each employee during the plan year? The level of contributions can differ for those selecting single or family coverage. The health insurance plan deductible needs to be considered as well as how much responsibility will be placed on employees in determining the HRA plan limits.

Move on to assigning different levels of coverage to various health care costs. Health care expenses can be easily divided into four different areas: prescriptions; medical expenses subject to the deductible of the health plan; over-the-counter medicines (when prescribed) and supplies; and other Internal Revenue Service (IRS) medical, dental and vision fees, and health care products.

Each category of costs must be considered in order to decide whether to allow the expenses to be paid with employer dollars from the HRA or from an employee-funded health FSA. An employer can even decide which account pays first and which one kicks in second. For instance, the HRA could pay first for deductible charges, with the health FSA branded for more discretionary items such as LASIK eye surgery or orthodontia.

Unused employer HRA contributions expire at the end of the plan year unless a plan is designed to allow funds to roll forward. To encourage employees to plan ahead and budget wisely, an employer might designate a portion of the unused accumulated employer allocation (say 50 percent) to roll forward to the next year. However, there is no IRS requirement to roll forward any portion of the employer contribution that is not used. This is another decision for the employer.

How It All Stacks Up
Because each employee has unique needs and the employer and employees want to maximize savings, offering multiple or stacked health care accounts is a win-win for everyone.

For a practical CDHP design worksheet and an FSA HSA, HRA comparison chart, go to: www.takecarewageworks.com/ab/ab_hra.html.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

Here’s a top ten list of reasons why employers and employees should establish health savings accounts (HSAs).

1. HSAs’ indexed figures are released earlier than any other benefits.’ The chart below displays the 2012 HSA limits.

2. Anyone can contribute to an individual’s HSA during the year—the employer and the employee.

3. HSAs roll over from year to year. There is no use-it-or-lose-it requirement like cafeteria plans have.

4. The maximum annual contribution may be deposited into an HSA even if it is established mid-year.

5. There is no dollar limit to the amount that may accumulate in an HSA.

6. Disbursements for qualified medical expenses are not taxable.

7. HSA growth through interest and dividends is not taxable.

8. HSA contributions are not taxable.

9. HSAs belong to the account holder and are retained by the participant when changing jobs.

10. HSA-eligible high-deductible health plans can save premiums for both employers and employees.

Health Savings Account (HSA)                                      2011                              2012

Minimum Deductible Amounts for Qualifying High-Deductible Health Plans (HDHP)
Individual Coverage                                                      $1,200                           $1,200
Family Coverage                                                              2,400                             2,400

Maximum Contribution Levels
Individual Coverage                                                         3,050                             3,100
Family Coverage                                                              6,150                             6,250
Catch Up Contribution for Those 55 and Over           1,000                             1,000

Maximum for HDHP Out-of-Pocket Expenses
Individual Coverage                                                        5,950                              6,050
Family Coverage                                                           11,900                            12,100

Congress mandates that cost-of-living adjustments for HSAs must be released by June 1 of every year. The early release of HSA minimums and maximums each calendar year ensures that plan sponsors and their employees have ample time to review plan design options and prepare brochures and educational materials ahead of open enrollment.

The addition of an HSA to your clients’ benefits programs drives savings in two important ways: First, because HSA-empowered consumers lower total health care costs, insurance carriers can pass along lower premiums. And secondly, like FSAs, employer contributions to HSAs help reduce payroll tax expense.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

Employers are looking for relief from skyrocketing health costs. Some employers have turned to consumer-directed health plans (CDHPs) in hopes of lowering costs, opening their employees’ eyes to true health care expenses, or making their employees better health care consumers. By combining different types of flex plans, employers can offer their work force the best value while maintaining health care coverage.
Although combination plans can offer a solution, they can also cause some confusion. Employers and employees grapple with ever-changing benefit plans, while flex plan service providers struggle with the growing issues of compliance and CDHP administration. Adding to the confusion, government agencies have issued a plethora of rulings and notices that add complexity to benefits administration.

In my April 2011 column I talked about coordinating health savings accounts (HSAs) with health flexible spending accounts (HFSAs) and health reimbursement arrangements (HRAs). The mix and match approach of combining all these types of plans may look great on paper but can result in administrative nightmares if you’re not careful. The more complicated designs can even result in a CDHP’s failure. This article is a follow-up to make sense of the administrative issues that come along with administering CDHPs—providing sweet dreams instead of nightmares for your consumer-directed health plans.

Educate Employers and
Employees Carefully
When adding benefits to an employers’ benefit packages, review all the benefits involved—both old and new. Since the IRS doesn’t limit the amount of medical expenses for which a participant may be reimbursed from a CDHP, employers sometimes try to include too many different types of plans into their benefits package.

Determine the employer’s goals and objectives. If the only goal is to save money, you might ask them to rethink their plan. CDHP designs will not always save the employer money, especially during the plan’s first year. Stay away from dollars and cents and focus instead on employee awareness of benefits, health care costs and health care alternatives—all benefits of CDHPs.

Employee education starts with a plan design that can be easily explained in a graph, chart or list. Choices must be clearly explained. Nothing will sour a plan more than employee dissatisfaction—even if it’s based on misunderstanding or failure to read the fine print. Setting the ground rules and fully educating employees is the first step toward a successful plan.

Anticipate and answer participant questions before they’re asked. Why would I want to elect the limited HFSA or HRA if I have an HSA? The answer: (1) to save HSA account funds for a catastrophic event; (2) because an employee may not be able to fully fund an HSA to the maximum deductible of his health insurance plan; (3) HSA plans grow tax free; (4) there is a 25 to 40 percent savings if vision and dental fees go through a limited HFSA or HRA.

Would it be better for me to take the HDHP and a regular HFSA? It might be, so don’t confuse the issues. Employees who choose HDHP coverage do not lose their right to participate in a regular HFSA, and the funds are immediately available to them. They should elect a limited HFSA or limited HRA only if they intend to contribute to an HSA.

Contributions
Contributions for HFSAs are chiefly payroll deductions and retained by an employer in its general assets. This makes for uniformity of payroll administration with each pay period being the same for the entire plan year. Changes occur when participants have a qualified change in status, new employees come onboard, or employees terminate throughout the year.

HRAs don’t necessarily have any type of account that funds are fed into. Rather, the money needs to be available as claims are turned in for reimbursement, which can be an issue. Some HRA plans allow the entire plan limit to be used at the beginning of the plan year, while others make dollars available to correspond with a schedule, based on employee payroll or monthly and quarterly credited funds.

Determine when reimbursement resources are available for any particular benefit and ensure that there are funds to pay claims at the times demanded by the various plans.

Participants can fund their HSA at the beginning of the taxable year, prior to filing their income tax return, or periodically throughout the year. Remember that the plan document needs to allow HSA contributions to flow through the cafeteria plan. In this manner, both the employer and their employees enjoy the highest tax savings afforded to HSA contributions. There are also advantages for employer contributions to an HSA made in this manner.

Claims
Claims processing is the most time-consuming and often the most onerous step in flex plan administration. Determining if an expense is eligible and coding it to properly pay from the various benefits takes plenty of education and training. Many expenses take on a different character when compared to eligible expenses allowed through each individual benefit.

For instance, one could easily determine that a doctor’s office visit would be paid out of an HSA, yet what if the office visit goes toward the deductible for a health care plan? If that is the case, this same expense may be counted toward the post-deductible HFSA or HRA limit and not paid to the participant. And if an HDHP is combined with an HRA bridge plan, the expense must be characterized as a deductible item.

Let’s say the employer has an HRA bridge plan, which pays for deductible items only, and is combined with an HDHP. Only the insurance carrier knows what expenses go toward the deductible, so only an explanation of benefits (EOB) submitted by the participant will tell the whole story on this expense, allowing it to be submitted and reimbursed properly as a claim.

A flex plan administrator can get a download from the contracted insurance carrier, but data exchange can be misleading. Make sure electronic information from the carrier contains the right information. If a data file includes all the items the insurance company denies, a file may contain items that are not eligible medical expenses or that were rejected because they were duplicates. Be very specific about the information in the file.

Reimbursing preventive care from a limited HFSA or HRA can also be problematic. Unless the plan document is very specific, the administrator may not be able to determine the broadest definition of preventive care. It can range from tests and diagnostic procedures to tobacco cessation programs, weight-loss programs, plus a glut of safe harbor preventive care screening services. The definition may even be expanded to include certain drugs or other therapies. And, once an issue is found during a preventive service (isn’t that the point?), the item becomes treatment and not a preventive expense.

No one wants their participants to become health care experts. So keep it simple. Reimburse only vision and dental expenses from a limited HFSA or HRA. Both the employee and the claims processor will be on the same page.

Disbursements—Determining
the Available Balances
Employers must keep the administrator apprised of new employees, any qualified changes in status, and terminations. Adding interest and deducting fees or cash withdrawals is sometimes handled by a custodian. Debit card swipes must be taken into account before disbursing funds for manually input claims or downloads from other health care administrators. Benefits can be paid based on either an annual limit or just on funds available to date. A software system should be making some of these decisions, but it is only as good as its initial setup and data maintenance throughout the year.

Plan Documents
Combining plans may mean updating existing plan documents. When adding an HSA option, the HFSA document should allow for at least a limited HFSA. And don’t forget about running the HSA contributions through the employer’s cafeteria plan. Making such a provision in a cafeteria plan document amounts to more savings for both the employees and employer.

Also check out the HRA plan document to determine if an additional limited, suspended or retirement HRA is in order.

Software and Technology
A software system should allow for more than one type of HFSA and more than one type of HRA per employer; identify the types of expenses allowed through each type of plan (e.g., the regular HFSA would include all eligible 213(d) expenses as outlined in the plan document, but the limited HFSA or HRA would only accept expenses incurred for vision or dental expenses or those incurred once the minimum statutory HDHP deductible is met); make reimbursements from various plans in the correct order; and issue concise reports to employers and employees fully explaining each account balance.

Questions to consider when evaluating new technological approaches: Can the administrator accept downloads from the insurance carrier for payments directly to the service provider? How about smart phone apps and communications? Many emerging smart phone apps allow a participant to take a picture of the receipt and send it to the plan administrator. The use of debit cards, social networking and technology engages participants and relieves their administrative burdens.

Breakdowns in communication to employees, expectations that can never be met, and administrative snafus can wreck a plan before it’s ever had a chance to begin. To maximize performance of a combination approach, you’ll need to step through administrative issues that pop up at various stages of setting up and administering consumer-driven health plans.

Other considerations would include employee demographics and how the HIPAA, COBRA and ERISA laws affect each part of a combined plan design. Sometimes simpler is better. Choose a combination that is easy to administer and, more importantly, easy to communicate to employees.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

Interim Guidance Issued On Group Health Insurance Reporting For W-2s

Recently, interim guidance on the who, what, when and how for W-2 reporting of group health insurance was issued. And it wasn’t as bad as we feared! In fact, some of the more complicated areas to report have been delayed until further guidance is issued.

Background
The Affordable Care Act of 2010 provided for the mandatory reporting of the aggregate cost of applicable employer-sponsored health coverage to all their employees. This was initially required on each employee’s Form W-2 beginning on or after January 1, 2011. Previous guidance already made 2011 Form W-2 reporting voluntary with required reporting scheduled for the 2012 Form W-2 that will generally be issued in January of 2013.

Notice 2011-28, issued March 29, 2011, provides interim guidance to assist employers in completing the Form W-2 and relief from some of the filing requirements, and is applicable until further guidance is issued. The guidance is in a very detailed question and answer format with examples to make clear the obligation for most employers.

The amounts reported on the Form W-2 are purely informational. Neither this notice nor any additional guidance that is contemplated will cause otherwise excludable employer-provided health care coverage to become taxable to employees.

Who Must Report?
All employers that provide applicable employer-sponsored coverage must include this information on Form W-2. This includes federal, state and local government entities, churches and other religious organizations, and employers that are not subject to COBRA continuation requirements. As with most rules, there are a couple of exceptions, including plans maintained by federal, state and local government entities whose plans primarily cover members of the military and their families and federally recognized Indian tribal governments, even if those plans include civilians of such entities.

Also excluded from reporting the cost of coverage are employers who file fewer than 250 W-2s and W-2s issued to retirees or those not receiving compensation.

What Is Employer-Sponsored Coverage?
A group health plan that is considered an employer-sponsored plan (including a self-insured plan) is one that is contributed to and provided by an employer (including a self-employed person) or employee organization to provide health care to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. It also includes on-site medical clinics.

The employer may rely upon a good faith application of a reasonable interpretation of the statutory provisions and applicable guidance in determining their employer-sponsored plans.

What Must Be Reported?
The aggregate cost of applicable employer-sponsored coverage must be reported on the Form W-2. This is the total cost of coverage under any group health plan made available to an employee by an employer — excludable from the employee’s gross income or would be excludable if it were employer-sponsored coverage.

The aggregate reportable cost includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for the cost through pre-tax or after-tax contributions. For instance, coverage paid for an adult child over the age of 26 would be paid with taxed dollars. This coverage is included along with coverage paid by the employer that is not included in the employee’s income. Another example would be for excess reimbursement to highly compensated employees that is included in gross income.

However, there are exceptions for certain coverage that need not be reported:

• Amounts contributed to any Archer MSA.

• Amounts contributed to any health savings account (HSA).

• Any employee salary reduction amount to a health flexible spending arrangement (FSA). However, it does include employer flex credits or contributions made to a heath FSA in certain circumstances. See Employer Flex Credits below.

• Cost of coverage under a health reimbursement arrangement (HRA).

• Long term care coverage.

• Coverage described in IRC Section 9832(c)(1), similar to accident or disability income insurance—to name a few. The exception is for on-site medical clinics.

• Coverage under a separate policy, certificate or contract of insurance for dental or vision care. However, the employer must report the cost of dental or vision care coverage that is integrated into a group health plan.

• Coverage described in IRC Section 9843(c)(3), in the vein of specified disease or indemnity insurance, the payment for which is not excludable from gross income and for which a deduction under regulation 1621 is not allowable.

• Coverage for a terminated employee who requests his W-2 before the end of the calendar year.

• Cost of coverage provided under a multi-employer plan.

• Cost of coverage provided under a self-insured group health plan that is not subject to any federal continuation coverage requirements (as a church plan) including COBRA, ERISA or Public Health Service Act and the temporary continuation coverage requirement under the Federal Employees Health Benefits program.

• Coverage provided by the federal government, the government of any state or political subdivision thereof, or any agency or instrumentality of any such government, under a plan maintained primarily for members of the military and their families.

Employer Flex Credits to a Cafeteria Plan
The amount of the health FSA for a cafeteria plan year equals the amount of the employee salary reduction plus any optional employer flex credits that the employee applies to the health FSA. In determining the aggregate reportable cost, the amount of the health FSA is reduced (but not below zero) by the employee’s salary reduction election.

If the amount of the salary reduction for all qualified benefits in a cafeteria plan elected by an employee equals or exceeds the amount of the health FSA for the plan year, the employer does not include the amount of the health FSA for that employee in the aggregate reportable cost. However, if the amount of the health FSA for the plan year exceeds the salary reduction elected by the employee for the plan year, then the amount of that employee’s health FSA minus the employee’s salary reduction election for the health FSA must be included in the aggregate reportable cost.

As you can imagine, this provision makes reporting a little more onerous. The employer is not looking at coverage on a global basis, but on individual elections to the cafeteria plan. Here’s an example:

Let’s say an employee makes a $2,000 salary reduction election for several benefits, including $1,500 to the health FSA, for a cafeteria plan calendar year. In this example, the employer offers a flex credit of $1,000. Therefore, the cost of qualified benefits for the employee is $3,000 (salary reduction of $2,000 plus $1,000 provided by the employer). In this scenario, none of the health FSA amount is taken into account for purposes of determining the aggregate reportable cost because the employee’s salary reduction exceeds the amount of the health FSA election.

Here’s another example. An employee makes a $700 salary reduction election for the health FSA and the employer matches the employee’s salary redirection with an additional $700 for the health FSA. The amount of the employee’s health FSA is $1,400 and exceeds the salary reduction election of $700 for the plan year. In this scenario, the employer must include the $700 flex credit in determining the aggregate reportable cost.

Who Reports Which Costs?
There are many instances in which an employee works for more than one employer during the year or terminates with an employer. The question then arises concerning which costs should be reported.

In general, those receiving employer-sponsored coverage will have information reported on their W-2. An employee of multiple employers during the year will have his cost of coverage reported on each W-2 received and a terminated employee’s coverage can be prorated for just the cost of coverage received while employed or can include COBRA payments after termination.

Related employers with a common paymaster will detail the aggregate reportable cost of the coverage provided to that employee by all the employers for whom it serves as the common paymaster.

Basically the same rules apply to both predecessor and successor employers unless the successor employer follows the optional procedure and issues one Form W-2. The successor can report wages paid to the employee during the calendar year by both the predecessor employer and the successor employer. Under this circumstance, the successor employer should report the aggregate reportable cost of coverage provided by both employers and the predecessor employer must not report the cost of coverage it provides.

Costs are determined on a month-by-month basis for employees beginning or terminating coverage during the year or for employees who change coverage during the year. Even when costs change during the year, such as when rates are not calculated on a calendar-year basis, the reportable amounts are the aggregate of the monthly or partial-month costs. It is also reasonable for the employer to prorate the reportable costs for the calendar year.

Methods of Calculating the Cost of Coverage
An employer may apply any reasonable method of reporting the cost of coverage provided under a group health plan using one of the following methods:

1. The COBRA applicable premium method that satisfies the requirements under IRC Section 4908B(f)(4) can be utilized for reporting the cost of coverage for a fully-insured plan.

2. Alternatively, a premium charged or modified COBRA premium calculation can be used.

• “Premium charged” method may be used only for an employer’s fully insured plan and would be the actual premium charged by the insurer.

• “Modified COBRA premium” method involves a plan where the employer subsidizes the cost of COBRA. If the actual premium charged by the employer to COBRA qualified beneficiaries is equal to the COBRA premium in a prior year, the employer may use the COBRA premium in the prior year as the reportable cost for the current year. In other words, both the employer and the employee costs toward the COBRA premium would be reported.

3. A “composite rate” refers to premiums that are the same dollar amount regardless if the employee elects single or family coverage or if there are different types of coverage such as self only, family or self plus one and family coverage. The employer may calculate the same reportable coverage for the single class or all the different types under the plan for which the same premium is charged to the employees, provided this method is applied to all types of coverage provided under the plan.

An employer is not required to use the same method for every plan, but must use the same method with respect to a plan for every employee receiving coverage under the plan. These are methods—not to be construed as reporting COBRA premiums actually being paid or provided by the employee or employer.

And remember, the employer need not report COBRA premiums paid after termination of employment—this is optional.

How Is the Cost of Coverage Reported?
The cost of coverage is reported on each employee’s W-2 in box 12 using code DD. And when transmitting the W-2 figures to the Internal Revenue Service (IRS), the combined total is not included on the Form W-3, “Transmittal of Wage and Tax Statements.”

See the 2011 Form W-2 and instructions at: www.irs.gov under “Forms and Publications.”

When Is Reporting Required?
Original guidance slated employers to begin this reporting requirement on the 2011 Form W-2. However, previous relief afforded employers an extra year to comply. Employers must include the aggregate cost of their group health insurance for calendar years starting after December 31, 2011 (this is the 2012 W-2 that is generally issued in January of 2013). Of course, employers may begin to comply with the 2011 W-2 if their procedures are already in place.

Still More to Come
The Form W-2 reporting guidance is both technical and lengthy. In addition, certain provisions of this interim guidance only provide transition relief. In other words, new rules are yet to come. In fact, further guidance may limit the availability of some or all of this transition relief. So let’s take a look at what’s to come in the way of exclusions:

• HRA reporting coverage.

• Forms W-2 provided to terminated employees before the end of the year.

• Multiple employer plans.

• Dental and vision plans.

• Self-insured plans not subject to COBRA.

• Employers who annually file fewer than 250 Forms W-2.

These items are waiting for further guidance and have not yet received a blanket exception for all times but will continue until further guidance is issued.

We can look forward to more directives on W-2 reporting to plug some of the holes in this guidance. If you would like to read the entire notice or send comments to the IRS about this interim guidance, go to www.irs.gov/pub/irs-drop/n-11-28.pdf.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

In the race between all types of consumer-directed health plans, health savings accounts (HSAs) are becoming a real contender.

Upon making their appearance in 2004, HSAs were at first impossible to set up because the qualified high-deductible health plans (HDHPs) described by the Internal Revenue Service (IRS) did not exist. Employers did not know they could offer health flexible spending accounts (HFSAs) and health reimbursement arrangements (HRAs) along with HSAs.

How can an employer offer an HSA, a health FSA, and an HRA program and still comply with every law surrounding these benefits?

First, a little background. HSAs are individually owned health care payment accounts that allow participants to contribute untaxed dollars. Interest or dividends accumulate tax-free; and when participants pay for qualified medical expenses, there will be no additional tax consequences.

In order to be eligible for an HSA, individuals must be covered by a qualified HDHP that satisfies minimum deductible amounts with certain out-of-pocket maximums. Account holders may not be covered by any other insurance plans that are not an HDHP or that include benefits provided by an HDHP. However, participants may obtain narrowly defined “permitted insurance” or “permitted coverage” products, such as policies that provide dental, vision, accident, disability and long term care benefits. For non-grandfathered plans, HDHPs also provide “preventive care” reimbursements that are below the minimum deductible amounts or without deductibles.

Other Insurance Coverage
Now let’s discuss health coverage provided through Section 125 HFSAs or HRAs and limited purpose HFSAs and HRAs, suspended HRAs, post-deductible HFSAs and HRAs, and retirement HRAs.

Limited-Purpose HFSAs or HRAs. HFSAs and HRAs are limited to payment of only permitted coverage items, such as vision and dental expenses, until the statutory minimum annual deductible is met. Limited-purpose HRAs can also compensate for permitted insurance plans that cover a specific disease or illness or that provide a fixed amount per day of hospitalization.

This range of benefits does not breach the “no other insurance” rule of HSAs. It should also be noted that the limited-purpose programs could pay for preventive care before the statutory minimum annual deductible is satisfied. The definition of preventive care was described in IRS Notice 2004-23.

Suspended HRAs. Suspended HRAs are employer-funded HRAs that pay all qualified health care expenses for eligible employees. For HSA-eligible employees, elections are made before the beginning of the HRA coverage period in order to forgo or suspend all payments that are not for permitted coverage, permitted insurance or preventive care expenses; thus barring reimbursement at any time of otherwise eligible expenses and retaining entitlement to make tax-free contributions to the HSA.

The employer would continue to “fund” the HRA account even though the employees have elected to suspend full usage of the arrangement. Thus, when the employees end their suspension periods, they are no longer eligible to make HSA contributions, because they are free to receive reimbursement of all health care expenses from the HRA.

Post-Deductible HFSAs or HRAs. With these benefits, HFSAs and HRAs are also considered to be high-deductible insurance products. Remember the rule about no other insurance coverage? These HFSA/HRA plans won’t kick off until after the minimum deductible is met. Reimbursement from HFSA or HRA plans do not have to wait until the HDHP deductible is met, but the “minimum” deductible standard must be met.

In addition, although the deductibles for the HDHP and the other coverage may be satisfied independently by separate expenses, no benefits may be paid before the minimum annual deductible is met, which is $1,200 for single coverage and $2,400 for family coverage in 2011.

Retirement HRAs. Retirement HRAs can accumulate funds during an account holder’s working years and make those dollars available upon retirement. HRAs may not reimburse any health care expenses except permitted coverage, permitted insurance and preventive care during an individual’s employment. When retirement HRAs begin to make reimbursements, participants are ineligible to make further contributions to HSAs.

Mix and Match. Combinations of the above plans can also work. For instance, employees could be covered by limited-purpose HFSAs and retirement HRAs and still be eligible to make contributions to individual HSA arrangements.

Yes—you can have it all. Employers sometimes don’t understand that they can and should have general-purpose HFSAs along with limited-purpose HFSAs and HSAs. Why would they want to do that? Some employees simply don’t want to establish and maintain an HSA. They are familiar with how HFSAs work (paying their large expenses even before they have made all their contributions for the year, unlike most HSAs, which generally limit distributions to amounts already accumulated) plus, there are also extra tax forms to complete. So make sure your employer/clients include the full range of benefits in their cafeteria plans, including general-purpose HFSAs and dependent care assistance accounts.

Contributions Versus Disbursements
Don’t confuse being “eligible to make contributions” to HSAs with being “eligible to receive payments” from them. HSAs can pay for qualified medical expenses of account holders, their spouses and dependents even though the account holders are no longer eligible to make contributions. Another note, spouses and dependents do not need to be covered by underlying HDHPs in order to have their health care expenses reimbursed from the HSAs.

Employee Education
Employee education is a must when blending benefits with so many specific rules. Start with the basic information about your employer/clients’ plans and try to keep educational materials simple and to the point.

Being away on military duty is stressful enough to those serving in the military as well as their families. Extra expenses and/or reduced compensation may be in store for the families of those who are on active duty, since employers may or may not augment a reservist’s military salary with differential pay. Luckily, there are acts in place to protect military members and their family. For example, SCRA ensures personnel are protected from things like evictions and repossessions. Of course, landlords and lenders will do an active military search to ensure the person is actually eligible for SCRA and they don’t do anything that breaches the act.

Without their regular stream of income, military families may find themselves short of cash for everyday expenses. That’s where the HEART Act comes into play.

The Heroes Earning Assistance and Relief Tax (HEART) Act was signed into law on June 16, 2008. It is a combination of changes to different portions of the law regulating retirement, pension and cafeteria plans. Its purpose is to give military personnel expanded benefits and access to the money they have set aside for retirement or contributed to a flexible spending account (FSA) plan. The act ensures that the most generous interpretation of the plans can be used by plan sponsors and includes special advantages for military personnel.

Cafeteria Plans
Elections are made on a prospective basis at the beginning of any plan year for cafeteria plans-but what happens when an employee is called into active duty overseas? Participants or their families may not be able to incur enough expenses to deplete their accounts, or may simply not have the time or resources to file claims.

The HEART Act added a new Internal Revenue Service (IRS) Section to the 125 Code regarding cafeteria plans. It is called “Special rule for unused benefits in health flexible spending arrangements of individuals called to active duty.”

Called a “qualified reservist distribution,” this means the plan can make cash distributions to eligible individuals of all or a portion of the balance in their FSAs if they: (1) are ordered or called to active duty for a period in excess of 179 days or for an indefinite period of time, and (2) make the distribution during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under the FSA. Distributions can be made without reservists incurring any qualified medical expenses or filing claims.

Typical Questions and the
Related Responses
Which benefits in a cafeteria plan are affected? The health FSA portion of the cafeteria plan is the only benefit affected. There is no effect on the dependent care, adoption assistance, premium payment, individually owned health insurance premium benefit or vacation buy/sell provisions under the plan.

Who can take advantage of the act? To take advantage of this act, individuals must have been ordered or called into active duty for at least 180 days or for an indefinite period of time. That equates to approximately six months or more of scheduled active duty.

How much can be disbursed to a reservist? The official language refers to “all or a portion of the balance in the employee’s account.” Employers may decide this means actual contributions to date minus actual disbursements. Employers could be more generous and reimburse the difference between the annual election amounts minus any previous reimbursements. This calculation is the amount participants would be entitled to at any time during the plan year if they submitted qualified expenses up to their annual election amount.

When can the money be distributed? Distributions can be made at any time during a period beginning on the date of such order and ending on the last date that reimbursement could otherwise be made under the plan. This time frame could include any run-out period noted in a plan document or a 21/2 month “grace” period after the end of a plan year in addition to the run-out period.

What about taxes? Nothing is mentioned about taxes in the new provision. It would be a reasonable assumption that applicable taxes would be applied to any distributions made from health FSAs that are not for qualified medical expenses.

When can plans begin to utilize this special provision? The effective date is for any distribution made after June 17, 2008.

Is this law mandatory for all cafeteria plans? Although the provisions were enacted into law, they are not mandatory. Employers are not required to implement the changes outlined for cafeteria plans.

Do employers have to amend their plan documents? As stated above, the act is not mandatory for cafeteria plans; however, for employers to make this available to their reservists, their cafeteria plans must be amended. Amendments must be dated prior to any such disbursements from a plan.

The HEART Act also encompasses an assortment of mandatory and discretionary changes for individual retirement and qualified pension plans. For example, eligible reservists may obtain a disbursement from a retirement plan without paying an additional penalty, or their families may receive economic stimulus payments and expanded death benefits.

For more information about the HEART Act and how it affects retirement plans, consult a retirement plan specialist.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

I feel like I’m on a roller coaster. You know that feeling. Light-headed as you soar high over the landscape, stomach rising to your throat as you plunge further and further down before pulling up into the next impossible climb.

Then I realize I’m not at the amusement park at all, I’m still trying to keep up with all the health care changes associated with the Patient Protection and Affordable Care Act (The Act). In January I wrote about the rules in effect at that time, and now—just one month later—this article is about changes that have taken place since then.

Over-the-Counter Drugs and Debit Cards
Beginning January 1, 2011, participants must obtain a prescription from their physician in order to pay for over-the-counter (OTC) drugs or medicines through their flex plans. The prescription may be filled through the pharmacy or the participant may turn in a claim to his TPA with a detailed receipt for the item and a copy of his prescription attached to the form. This element of the law has not changed.

I reported in January that participants could not use their health care debit cards to purchase OTC drugs or medicines. This part of the law has changed with IRS Notice 2011-5, which allows the continued use of health flexible spending account (FSA), health reimbursement arrangement (HRA), and health savings account (HSA) debit cards for the purchase of OTC drugs and medicines if:
a Prior to the purchase, the prescription for the OTC medicine is presented (in any format, i.e., electronic or paper) to the pharmacist.

a The OTC medicine is dispensed by the pharmacist in accordance with applicable law.

a A prescription number is assigned.

a The pharmacy retains a record of the prescription number, the name of the purchaser (or name of the person for whom the prescription applies) and the date and amount of the purchase.

a All of these records are available to the employer or its agent upon request.

a The debit card system will not accept a charge for an OTC medicine unless a prescription number has been assigned.

a All the requirements of this guidance are met.

Get a prescription for Claritin? Yes, that’s what The Act requires. And, in order for the card to work, you must present the prescription to the pharmacist who will fill and dispense the OTC drug just like they do for drugs that are only available by prescription, such as antibiotics.

How does the debit card know the difference between OTC prescriptions and prescriptions for antibiotics? The answer is: It doesn’t have to. Both are prescriptions, delivered through the pharmacy, and will automatically be coded as prescriptions.

Want more information? Go to www.irs.gov/pub/irs-drop/n-11-05.pdf to view the entire Notice.

Nondiscrimination Rules for
Fully-Insured Group Health Plans
Another requirement embedded in The Act is that non-grandfathered, fully-insured group health plans must apply the nondiscrimination rules under Internal Revenue Code (IRC) Section 105(h) for plans starting on or after January 1, 2011. Historically, these nondiscrimination rules applied to self-insured group health plans. It is not within the scope of this article to outline these nondiscrimination rules, but suffice it to say the testing is onerous and the regulatory guidance is thin.

In addition, The Act is very serious about compliance. Generally, up to $100 per day per individual could be assessed to the employer for the noncompliance period. Because regulatory guidance is essential to the operation of these provisions, compliance with these rules will not be required until after regulations or other administrative guidance has been issued.

Compliance with The Act will not apply until plan years, beginning a specified period after guidance has been issued. The delay was announced through Notice 2011-1. Read the entire Notice at: www.irs.gov/pub/irs-drop/n-11-01.pdf.

Social Security and Medicare Wage Base
You may see an increase in your paycheck. Starting January 1, 2011, the tax rate for employee withholding was reduced to 5.65 percent instead of the 7.65 percent withheld in previous years. The temporary Social Security rate of 4.2 percent will be applied to wages up to the maximum taxable wage base of $106,800, which remains unchanged for 2011.

Employers matching FICA rate remains at 7.65 percent of wages up to the maximum taxable amount. The Medicare portion of 1.45 percent is applied to all wages.

Tax Breaks Extended through 2011
Congress was busy prior to their holiday break. The transit and vanpooling monthly limit, which increased to $230 in 2009, was set to expire at the end of 2010. As a part of the extension of the Bush Tax Cuts, the $230 monthly limit was extended to December 31, 2011.

In addition, the dependent care tax credit limits of employer-related child care expenses that can be taken into account for the child and dependent care tax credit were retained at their current levels of $3,000 for families with one child and $6,000 for families with two or more children.

And last, the maximum annual adoption credit will remain at $13,360 for 2011. It was also set to expire and roll back to $10,000 per year before Congress extended this tax break. The refundable credit starts to phase out at $185,210 of modified adjusted gross income (AGI) levels and is completely phased out when modified AGI reaches $225,210.

I do expect more changes and clarifications as the year progresses, and I’ll keep you updated. Don’t worry if you begin to feel dizzy—it’s just the health care reform roller coaster.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

We’re no longer poised on the brink of the new year or health care reform. We’ve already jumped into another year of changes and uncertainty. Everyone from participants to advisors has loads of questions about what’s going to happen. While I can’t predict the future, we can look at what has changed and is in effect right now and what you and your employer clients should be considering.

Over-The-Counter Drugs and Debit Cards
As of this article’s writing, beginning January 1, 2011, participants may not use their health care debit cards to purchase over-the-counter (OTC) drugs or medicines. The IRS granted a grace period so that vendors could update their lists and programming to comply with these new rules. So, depending on the vendor, OTC drugs or medicines may be available at one vendor up to January 15, 2011, while other vendors may have updated their lists sooner.

This can cause confusion among participants who use different merchants and will increase phone calls to TPAs and floods of visits to the employers’ human resources departments.

Participants are going to have all kinds of questions about how to pay for OTC drugs or medicines through their flex plans. They first must obtain a prescription from their physician that complies with state prescribing laws. I’ve had lots of questions about what the prescription should say. Different states have different requirements for prescriptions. The participants’ physicians are familiar with the rules for their states and will fill out a prescription accordingly.

Prescriptions may be filled through a pharmacy or participants may turn in claim forms to the TPAs with a detailed receipt for the item(s) and a copy of their prescription attached. The SIGIS Association (Special Interest Group for IIAS Standards) is still working with the IRS and Treasury to clarify the use of the card for prescribed OTC drugs and medicines.

Update on W-2 Reporting
As I reported in November 2010, the value of all employer-provided health ­insurance must be disclosed on an ­em­ployee’s W-2. However, the IRS announced October 12, 2010, that this new reporting requirement will be optional for 2011. The draft version of Form W-2 that is currently available includes the codes and boxes for reporting.

Guidance on this new requirement is expected by the end of 2010. Necessary information appears to include the COBRA rate of all health coverage whether fully insured or self-insured, employer contributions to health reimbursement arrangements (HRAs), employer contributions and cafeteria plan salary reductions to HSAs or employer contributions to MSAs, and both non-elective and salary reductions to health FSAs. Dental and vision costs, accident and disability insurance, long term care insurance and after-tax funded hospital indemnity and/or specified disease coverage are not included in this W-2 reporting requirement.

It’s important to note that this value is simply to be reported starting next year; it does not affect the employee’s taxable income in any way.

HRA Reporting to CMS
Employers who sponsor certain health reimbursement arrangements (HRAs) may be asked for additional information from their HRA plan administrators. The Centers for Medicare and Medicaid Services (CMS) now requires the entity that pays the claims for the employer’s HRA report participant, spouse and dependent information. CMS wants to make sure that they are second payer if the HRA participant, spouse or dependent is enrolled in Medicare and has other health coverage. Unfortunately, “other health coverage” includes HRAs.

HRAs that need to report include:
• HRAs that cover essential benefits (CMS has not yet provided a definition of “essential”). Providers that pay claims (i.e., plan service providers or third party administrators) are responsible for reporting. They are referred to as the responsible reporting entity (RRE).

• All HRAs, whether the HRA would be considered a standalone or embedded HRA.

• Participants who are actively at work and enrolled as a Medicare recipient or dependent of an active worker who is a Medicare beneficiary.

Exceptions to HRA reporting consist of:
• HRAs that only cover non-essential benefits. For instance, a limited-purpose HRA that covers just dental or vision would not have to report.

• No retroactive reporting. The first filing will generally be for new coverage that starts October 1, 2010, and subsequent plan year starts. HRA coverage should be reported as soon as possible after the effective date of coverage.

• Retiree-only plans.

• Participants with an account balance of less than $1,000 at the beginning of the coverage period.

Participant, spouse and dependent information is gathered from the employer and/or participant and sent via file to CMS by the plan’s TPA.

If your employer client sponsors an HRA, make sure they know that reporting is required. They should contact their TPA to ensure timely reporting to CMS and quickly respond to requests from their TPA for information to complete the report.

Do you or your employers want more information about this reporting requirement? Take a look at the CMS website at: www.cms.gov/mandatoryinsrep/.

What to Do Right Now
As I mentioned in my November 2010 column, employers need to optimize their plans now. Don’t wait for rules to change or see how health care reform is all going to shake out.

• Ensure that employee contributions toward premiums are being paid with pre-tax dollars.

• Provide debit cards for convenience and security to not only pay for health care related expenses but for parking and transit plans.

The plan year has already begun for those with January 1 start dates, but employers still have options to maximize benefits and tax savings. The employer can allow enrollment in a new benefit after the beginning of the new plan year. Think about voluntary products that won’t cost the employer any money—but employees see as a real benefit.

Of course, health care reform is a moving target with promises and threats of repeals and changes in the coming months. I will keep my ear to the ground and continue to report the latest changes on the health care reform front.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living adjustments (COLA) that apply to dollar limitations set forth in certain IRS code sections. Even though the economy may be recovering, most indexed figures remain the same for the second year in a row.

Social Security and Medicare Wage Base
For 2011, the Social Security wage base will remain at $106,800. This wage base has remained the same for three consecutive years—the first time since indexing started in 1975. The tax rate for employee withholdings remains at 7.65 percent. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent is applied to all wages.

Indexed Compensation Levels
The indexed compensation levels for determining who is highly compensated or a key employee remain the same as 2010:

Compensation Level                                 2008           2009            2010            2011
Highly Compensated Employee        $105,000    $110,000    $110,000    $110,000
Top Paid Group of 20 Percent            $105,000    $110,000    $110,000    $110,000
Key Employee, Officer                          $150,000    $160,000    $160,000    $160,000

401(k) Plans
The maximum for elective deferrals will remain at $16,500 for 2011. And for those 50 or older, the catch-up contribution rate will also remain the same as 2010 at $5,500 for 2011. That means if you are aged 50 or over during the 2011 taxable year, you may generally defer up to $22,000 into your 401(k) plan.

Adoption Credit
For 2011, this refundable tax credit increases from $13,170 to $13,360. The credit starts to phase out at $185,210 of modified adjusted gross income (AGI) levels, and is completely phased out when modified AGI reaches $225,210.

The exclusion from income provided through an employer or a Section 125 cafeteria plan also has a $13,360 limit for the 2011 taxable year. And remember—a participant may take the exclusion from income and the tax credit if enough expenses were incurred to support both programs separately.

Health Savings Account (HSA)
Minimum deductible amounts for qualifying high-deductible health plans (HDHP) remain at $1,200 for self-only coverage and $2,400 for family coverage in 2011. Maximums for the HDHP out-of-pocket expenses remain at $5,950 for self-only coverage and $11,900 for family coverage.

Maximum contribution levels to an HSA are unchanged at $3,050 for self-only coverage and $6,150 for family coverage in 2011. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2011.

Archer Medical Savings Account (MSA)
For a high-deductible insurance plan that provides single coverage, the deductible amount must be between $2,050 and $3,050 for 2011. Total out-of-pocket expenses under a plan that provides single coverage cannot exceed $4,100. The deductible amount must be between $4,100 and $6,150 for a plan that provides family coverage in 2011, with out-of-pocket expenses that do not exceed $7,500.

Although new MSAs may not be established, the maximum contribution to an MSA that is attributable to a single-coverage plan is 65 percent of the deductible amount. Maximum contributions for a family-coverage plan is 75 percent of the deductible amount. MSA and HSA contributions must be coordinated for the taxable year and cannot exceed the HSA maximums.

Dependent and/or Child
Daycare Expenses
Just a reminder. Although the daycare expense limit associated with a cafeteria plan is not indexed, the credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form.

The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a single parent filing as “head of household.” For a married couple filing separate returns, the limit is $2,500 each.

The limits for the daycare credit expenses are $3,000 of expenses covering one child and $6,000 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be “deemed” as earning $250 per month for one qualifying child and $500 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.

The current child and dependent care tax credit limits are scheduled to sunset on December 31, 2010. Without Congressional action, the limits for the daycare credit will revert to $2,400 of expenses covering one child and $4,800 for families with two or more children on January 1, 2011.

The daycare credit is reduced dollar for dollar by contributions to or benefits received from an employer’s cafeteria plan. An employee may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.

Long Term Care
For a qualified long term care insurance policy, the maximum non-taxable payment is now $300 per day for 2011.

Finally, by participating in a cafeteria plan, the participant will be lowering his income for the Earned Income Tax Credit (EITC). Check out the new limits in IRS Publication 596 “Earned Income Credit” and for more information about this tax credit.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.