Janet LeTourneau

Health Savings Accounts (HSAs) are individually owned healthcare reimbursement accounts that allow tax-free dollars to fund the account. Interest or dividends accumulate tax free, and payment of qualified medical expenses are tax free. And, to make it the grand slam of all benefits, there is no limit on the amount of money that may accumulate in the HSA. That’s why an HSA is a healthcare benefit that can be used now and for future medical needs.

Requirements for setting up and contributing to an HSA

• Must be covered by a qualified high-deductible health plan (HDHP). The HDHP must satisfy minimum deductible amounts and certain out-of-pocket maximums.
• May not be covered by any other insurance plan that is not an HDHP or that covers benefits provided by the HDHP.
• May obtain “permitted insurance” or “permitted coverage” products such as policies that provide dental, vision, accident, disability, and long term care benefits.
• The HDHP may also provide preventive care that is below the minimum deductible amount or with a deductible.
• Cannot be covered by health plans that provide co-payments or first dollar coverage for prescriptions.

An individual setting up an HSA must be eligible to establish the account on the first day of any month. For instance, if she is covered by an HDHP on June 15, the HSA could be established on or after July 1. She also does not have to decide before the beginning of the plan year what to contribute for the entire plan year. Generally, changes to HSA elections do not require a change in status and may be changed as often as monthly if the plan document supports this option.
Easy set up and pre-tax contributions transferred to the HSA makes saving money easy.

Reimbursements/payments from an HSA
Individuals do not have to be covered by an HDHP for any month. In other words, although participants may not be able to contribute to their HSA, the funds are still available to pay for qualified medical expenses—including COBRA continuation premiums.

Qualified medical expenses include COBRA or Uniformed Services Employment and Reemployment Rights Act (USERRA) continuation coverage, long term care insurance and services, prescribed drugs and medicines, any health plan premium while the individual is receiving unemployment, and, after age 65, any qualified health insurance other than a Medicare supplemental policy.
Add a debit card for accessing the funds and here’s a benefit that everyone will want.

Putting HSA money to work
HSAs are personally owned savings vehicles. They earn interest and can be invested. Just like a 401(k) plan, investment options are available. Remember, interest and earnings are not taxed and the HSA balance is not limited.

HSAs are powerful retirement planning tools. A financial adviser can illustrate how funds from an HSA, when used for eligible medical expenses, will go a lot further than from a 401(k) plan. That’s because the HSA money is not taxed if withdrawn for eligible medical expenses.

Medical expenses continue to rise. It is estimated that couples retiring right now might expect to spend about $250,000 on medical expenses during their retirement. Funding in an HSA now can be there to pay medical expenses in the future. In fact, contributing the maximum limits every year to an HSA may reap more benefits at retirement. Qualified medical bills paid from an HSA are not taxable and this preserves money in the 401(k) account. And HSAs do not require any obligatory withdrawals.

Young or old, large or small medical bills —everyone benefits.

On October 12, 2017, President Trump issued Executive Order 13813 promoting Healthcare Choice and Competition across the United States. This took the form of a Notice to expand the flexibility and use of HRAs to provide more Americans with additional options to obtain quality, affordable, healthcare.

The proposed rules of this Notice created two new types of Health Reimbursement Arrangements (HRAs). An Individual Coverage HRA and an Excepted Benefit HRA. Both reverse the previous Administration’s position on HRAs. The rules are only proposed at this point and the IRS requested comments. WageWorks submitted comments on all aspects of the new HSAs and changes to some of the proposed rules are inevitable. Therefore, employers should not rely on these proposed regulations; and in any event, the rules would be effective for plan years starting on or after January 1, 2020.

Departments of Health and Human Services (HHS), the Treasury Department, and Labor Department proposed new rules on October 23, 2018, that would provide employers with significant new flexibility in how they fund health coverage through HRAs. If finalized, this flexibility would empower individuals to take greater control over what health insurance benefits they receive. The Treasury estimates that more than 10 million employees would benefit from this change within the next decade.

The proposed regulations remove the current prohibition on using HRA funds to purchase individual health insurance coverage; however, an array of stipulations apply to assure these new HRAs do not create an unstable individual market and that they coordinate with current Affordable Care Act premium subsidies. Both HRAs include nondiscrimination rules that limit their use. The proposed nondiscrimination rules are designed to prevent negative consequences against older and sicker individuals and to prevent employers from incenting employees who may be unhealthy or more costly to be removed from the employer’s plan.

Individual Coverage Health Reimbursement Arrangement (ICHRA)
The proposed regulations would permit the ICHRA to be integrated with individual health plan coverage in order to reimburse individual coverage premiums and qualified medical out-of-pocket expenses, provided that the ICHRA meets a few conditions.

First, the employer cannot offer any employee a choice between an ICHRA and employer-sponsored group health plan coverage. Plus, the participants and their dependents must be enrolled in individual health insurance coverage purchased in the individual market. Substantiation of individual coverage must take place at enrollment and with each reimbursement request. WageWorks submitted comments suggesting that existing guidance regarding debit cards be used to create a methodology to allow auto-substantiation of coverage.

The employer must offer the ICHRA on the same terms to all employees in a “class” and employees must have the ability to opt-out of receiving the ICHRA so that they may receive a premium tax credit for coverage purchased in the individual marketplace.

Permissible “classes” of employees are full-time, part-time, seasonal, collectively bargained, under age 25, employees within a 90-day waiting period, foreign and work abroad, and working in the same rating area. There are certain exceptions for age, family size, and former employees. WageWorks’ comments included a request that classes be expanded to include salaried and hourly employees.

And finally, employers must provide a detailed written notice to employees at least 90 days before the beginning of each plan year. WageWorks’ comments asked that a model notice or model language be provided for employers to use.

Additionally, since the ICHRA is integrated with individual coverage, it is not subject ERISA provided five requirements are met:

• Participation in the ICHRA is voluntary;
• The employer has no role in the selection or endorsement of any individual coverage products;
• There are limits on reimbursements;
• The employer receives no consideration from coverage providers; and,
• Annual notification is provided.

A section 125 cafeteria premium plan can be offered with an ICHRA for “excess contributions” to cover the premium cost over and above the benefit offered by the employer through the ICHRA. As a reminder, a cafeteria plan cannot be used for exchange coverage premiums.

Excepted Benefit Health Reimbursement Arrangement (EBHRA)
This HRA reverses the previous Administration’s stance by allowing a new type of HIPAA–excepted benefit in addition to current HRAs that offer excepted benefits such as vision and dental.

This new status as an excepted benefit means that the employee who is covered under the EBHRA is not considered enrolled in “minimum essential coverage” and would not be precluded from receiving a premium tax credit on an Exchange. There are five requirements that must be met in order to offer EBHRAs:

1. The employer must offer other major medical health coverage. However, participants in the EBHRA do not have to be enrolled in the health coverage, they just simply must be offered the coverage;
2. The HRA is limited to $1,800 annually (not including rollovers from year to year), subject to annual indexing (WageWorks comment letter requested that a higher annual election be considered);
3. The HRA can reimburse eligible health care expenses and COBRA premiums or contributions, excepted benefit coverage such as dental and vision, and short-term limited-duration insurance (list is not exhaustive);
4. The HRA may not be used to reimburse premiums or contributions for other medical coverage (individual or group); and
5. The HRA must be provided on a uniform basis to all similarly situated employees.

With the EBHRA, the employer might want to offer an additional separate HRA that only provides vision and/or dental benefits. This would allow participants to utilize the $1,800 EBHRA limit plus have additional funds available for vision and dental expenses.

HHS also proposes rules that would provide a special enrollment period in the individual market for individuals who gain access to an HRA integrated with individual health insurance coverage or who are provided a QSEHRA.

Plan years for both an ICHRA and EBHRA are generally 12 months. However, they do not have to be on a calendar year and may be a short plan year. Short plan years would need to prorate any annual limits for just the months covered by the short plan year. Note that an employer cannot offer both an ICHRA and an EBHRA to the same class of employees.

WageWorks sought clarification and changes to these proposed rules and anticipates final regulations sometime in 2019 with the proposed rules allowing employers to offer these coverage options beginning on or after January 1, 2020.

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.

IRS issued Notice 2018-99 regarding tax-exempt organizations and nondeductible parking fringe expenses paid or incurred after December 31, 2017. The new rules respond to questions from taxpayers about calculating the amount of parking expenses, which are no longer tax deductible and, for some entities, must be reported. The notice also helps tax-exempt organizations to determine how these nondeductible parking expenses create or increase unrelated business taxable income (UBTI).

Background
The Tax Cuts and Jobs Act, signed into law December 22, 2017, delivered historic tax relief for workers, families, and job creators. It also made several changes to the Tax Code, and among them provided that employers could no longer deduct costs for subsidized or paid commuter benefits such as parking and transit programs.

Notice 2018-99
A key part of this guidance is a special rule enabling many employers to retroactively reduce the amount of their nondeductible parking expenses. The proposed regulations include guidance on the determination of nondeductible parking expenses and other expenses for qualified transportation fringes and the calculation of increased UBTI. Employers will have until March 31, 2019, to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees.

How a taxpayer determines the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or owns or leases all or a portion of a parking facility where its employees park. In the first instance, the disallowance amount is based on the amount paid to the third party by the taxpayer; and, in the second, a taxpayer may use any reasonable method in determining the disallowance amount.

As a safe harbor, the notice describes a four-step method that will be considered reasonable to calculate the portion of parking expenses that are subject to UBTI. The notice also states that using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method, because a deduction is disallowed for expenses of providing qualified transportation fringes regardless of its value.

In addition, for tax years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots cannot be a reasonable method.

Notice 2018-100
Provides tax penalty relief in 2018 to tax-exempt organizations that offer these benefits and were not required to file a Form 990-T (Exempt Organization Business Income Tax Return) last filing season.

Note that a tax-exempt organization that has less than $1,000 in unrelated business income is not required to file a Form 990-T and thus is not required to pay the unrelated business income tax.

Conclusion
By retroactively reducing the amount of their nondeductible parking expense, many churches, schools, hospitals, and other tax-exempt organizations may be able to reduce their associated UBIT. Such a change made in parking arrangements may apply retroactively to January 1, 2018.

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.