Janet LeTourneau

This article examines the rules for participants going on an unpaid Family and Medical Leave Act (FMLA) leave. Regulation 1.125-3 summarizes employees’ rights to continue or revoke coverage and cease payment for healthcare flexible spending accounts (FSAs) when taking an unpaid FMLA leave and specifications for participants returning from leave. The leading principle outlined mandates employers offer coverage under the same conditions as would have been provided if the employee were continually working during the entire leave period.

Coverage Continuation
Employers may require an employee who chooses to continue coverage while on FMLA leave to be responsible for the share of premiums that would be allocable to the employee if the employee were working. FMLA requires the employer to continue to contribute their share of the cost of employees’ coverage.

Flexible benefits plans may offer one or more payment options to employees who continue coverage while on unpaid FMLA. These options are pre-pay, pay-as-you-go, and catch-up.

• Pre-pay is paying for coverage in advance of the FMLA leave. This may be a difficult method of continuing coverage for a couple of reasons. The first consideration is if participants cannot afford to have extra funds taken from their paycheck and the second consideration is a timing issue. Most leaves involve an incident or circumstance that is not planned, making the pre-pay option impossible to deduct from participants’ paychecks. However, if planning in advance is feasible, the coverage can be paid on a pre-tax basis through the flexible benefits plan.
• The pay-as-you-go option means that participants pay their share of coverage payments on a schedule as if they were not on leave. This method would require the participant to write a check to the employer each month or pay period in order to continue coverage. Since no payroll is taking place, this payment is with after-tax dollars.
• Catch-up contributions allow employees to continue coverage but suspend coverage payments during their leave. Contributions are made up upon their return. The advantage is that contributions can be taken out on a pre-tax basis through a flexible benefits plan. The downside for the employer is if the participant does not return from the leave, the employer may have reimbursed expenses in anticipation of the participant making up the coverage payments.

The flexible benefits plan may offer one or more of the payment options and may include the pre-pay option for employees on an FMLA leave even if this option is not offered to employees on a non-FMLA leave. However, the pre-pay option may not be the only option offered.

As long as employees continue healthcare FSA coverage, or employers continue it on their behalf, the full amount of the election for the healthcare FSA, less any prior reimbursements, must be available to the participant at all times, including the FMLA leave period.

Coverage Revocation
Prior to taking an unpaid leave, participants may revoke existing healthcare FSA coverage. Failure to make required payments during an FMLA leave may also result in lost coverage. Regardless of the reason for the loss of coverage under FMLA, plans must permit employees to be reinstated in the healthcare FSA upon their return. 

Depending on the plan document language, returning employees may decide not to elect coverage into the healthcare FSA; or plans may require returning employees to be reinstated in healthcare coverage. If the employer requires reinstatement into the plan, they must also require those returning from an unpaid leave not covered by the FMLA to also resume participation upon return from leave.

The employer also has the right to recover payments for benefits when the employee revokes coverage. 

If coverage under the healthcare FSA terminates while employees are on FMLA leave, employees are not entitled to receive reimbursement for claims incurred during leave. Even if employees wish to be reinstated upon return for the remainder of the plan year, employees may not retroactively elect healthcare FSA coverage for claims incurred during leave when coverage was terminated.

Employees have the right to reinstate coverage at the level before their FMLA leave and make up unpaid coverage payments; or they may resume coverage on a prorated basis at a level that is reduced  for the period during FMLA leave for which no premiums were paid. This pro-rated level of coverage is further reduced by prior reimbursements and future coverage payments are due in the same monthly amounts payable before the leave.

• Reinstate Coverage. Using the facts from the chart, and upon the participant’s return from FMLA, the annual election will remain at $1,200. The election, or coverage amount, for the remainder of the year is as follows: original annual election minus reimbursed to date ($1,200 minus $600) equals $600. The new per-pay- period contributions will increase to $80 per pay period. Remember, they are making up contributions from the three-month leave. The employee will contribute $1,200 [$400 contributed prior to the leave plus $800 ($80 times 10)]. The employer exposure is $1,200 ($600 disbursed prior to leave plus $600 available upon their return. Now let’s see what happens if employees choose to prorate coverage upon their return from FMLA leave.
• Prorate Coverage. The calculation is different in this instance. A new annual election is determined. This is done by prorating the original annual election for the months participants were absent. Using the same facts as above, the annual election amount minus six pay periods that were missed ($1,200 minus $300) equals $900. The new prorated annual election, reduced by prior reimbursements ($900 minus $600), equals $300. The per pay period contribution remains the same as before at $50 per pay period. In this instance the employee will contribute $900 ($400 plus $500) with an employer exposure of $900 ($600 plus $300). 

In either scenario, employees are not covered for the time they are on FMLA if coverage is revoked. They may not turn in claims that were incurred during leave whether they choose reinstatement or prorated coverage upon their return.

Certain restrictions apply when an employee’s FMLA leave spans two flexible benefits plan years. A flexible benefits plan may not operate in a manner that enables employees on FMLA leave to defer compensation from one plan year to a subsequent flexible benefits plan year. In other words, employees may not pre-pay for coverage in one plan year that pays for coverage in the subsequent plan year.

If on paid FMLA leave, the employer may mandate that the employee’s share of premiums be paid by the method normally used while the employee was working.

And, finally, employees on FMLA leave have all the rights to change their elections according to the change in status rules under IRS Regulation 1.125-4 when returning from an unpaid leave of absence. They may also enroll in benefits for new plan years or any benefits that may have been added by the employer while they were on leave.

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. 

Discount programs, such as the employee discount at a retailer, coffee shop, or even car dealership, are common in many businesses and have been around for several years. But many employees and employers may not realize that these are actually tax-advantaged programs, described in IRC Section 132(a). Recent guidance on “friends and family” discounts could take discount programs to a whole new level—a taxable level, that is. Here’s a refresher course of how non-taxable discounts may be provided. 

The employer must determine:

• The percentage used to determine a qualified employee discount;
• The employees who may receive non-taxable discounts; and
• The price of the property or service being discounted.

The IRS Office of Chief Counsel released Memorandum 20171202F on March 24, 2017 that walks through the process of determining whether an employer’s “friends and family” discounts are taxable or non-taxable. It outlines and discusses qualified employee discounts as it relates to services. 

Percentage of discount
IRC Section 132(c)(1) defines a qualified employee discount for services as 20 percent of the price at which the services are being offered by the employer to customers. The services for which the discount applies must be one provided by the employer to customers in the ordinary course of its business. 

In the case of property being sold by the employer, a qualified employee discount for property is the gross profit percentage of the price at which the property is being offered by the employer to customers. 

Employees eligible for non-taxable discount
The employee discount rules broadly define the term of “employee” to include an individual currently employed by the employer, an individual who retired from the employer, or became disabled while working for the employer, or a widow or widower of any one of these. Spouses and dependent children of the above mentioned groups are also treated as “employees” for purposes of qualifying for a nontaxable benefit.

Price of the discounted service or property
An established price for services is required in order to determine if the percentage of the employee discount exceeds 20 percent. The price can be determined in one of two ways:

• The price at which the service is being offered to customers at the time of the employee’s purchase establishes the basis for determining the percentage of the discount. For instance, a published price such as prices found in current ads or flyers. If a quantity discount applies to customer pricing, then employees’ purchases must contain the designated quantity.
• If the employer offers a discounted price to a discrete customer or to consumer groups, and all the sales at that discounted price comprise at least 35 percent of the employer’s gross sales for a representative period, the discounted price may be used. A “representative period” is the taxable year of the employer immediately preceding the taxable year in which the service is provided to employees at a discount. 

Facts
Memorandum 20171202F did not make the employer’s name public, but indicated the employer was in the rental business. The employer allowed employees to sign up individuals, including themselves, to receive a discount off published rates for services. These individuals could be spouses or domestic partners, family members, and friends. After signing up at no cost to become a “member,” they receive a point for every dollar spent that is then applied to receive discounts on future services. This is the identical process used by the general public.

In addition to the point discounts, employees and their designees receive a percent discount off the published rates. Though the discount rates were not part of the facts for this memorandum, employees may even find discounts greater than the percent on the open market. Other facts concerning discounts and pricing to large customers were not properly supported from this employer for the IRS to evaluate total sales with discounted pricing.

Conclusion
Although fringe benefits of qualified discounts may be excluded from gross income, that same fringe benefit may be taxable to employees even though they did not actually receive the fringe benefit. 

Only individuals meeting the definition of employee under IRC Section 132(h) and Treasury Regulation Section 1.132-1(b)(1) qualify for a nontaxable fringe benefit of a qualified employee discount. While the employees may designate others, such as friends, for the discounts, the employer must collect and pay to the IRS taxes based on the value of discounts given to such individuals from the employee who designated such ”non-employees.”

In addition, the term “qualified employee discount” means any discount that does not exceed 20 percent of the price at which services are being offered by the employer to its customers. If the qualified employee discount on services exceeds 20 percent of the price offered to customers, the excess discount is also includable in the employee’s income.

Remind employers to scrutinize employee discounts and take remedial action if the discounts are taxable.  ïƒ¾

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 Heath Savings Accounts (HSAs).

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

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

8.  HSA contributions are non-taxable.

7.  HSA growth through interest and dividends is non-taxable.

6.  Disbursements for qualified medical expenses are non-taxable.

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

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

3.  HSAs roll forward from year to year. Funds can accumulate for expenses incurred during retirement.

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

1.  HSA’s indexed figures are released earlier than any other benefits’. Here are the 2018 HSA limits:

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.

Find out more information on HSAs at: https://www.wageworks.com/employer/health-care/Health_Savings_Account/default.htm.

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. 

There’s more to benefits than just major medical coverage. Other types of insurance are utilized by employers; however, confusion reigns in the murky waters of these “other” types of coverage. On June 10, 2016, the Departments of Labor (DOL), Health and Human Services (HHS) and the IRS (“The Departments”) issued proposed regulations with respect to requirements for short-term limited-duration insurance, travel insurance, similar supplemental health coverage, and prohibition on lifetime and annual limits.

Final rules for these excepted benefits and prohibition on lifetime and annual dollar limits were issued October 28, 2016, and apply to group health plans and health insurance issuers beginning on the first day of the first plan year (or, in the individual market, the first day of the first policy year) beginning on or after January 1, 2017.

Short-Term, Limited-Duration Insurance is designed to fill temporary gaps in coverage when someone is moving from one plan to another or changing jobs, is not an excepted benefit, and is not exempt from the annual or lifetime annual dollar limits. It cannot take the place of regular insurance coverage either.

In order for short-term insurance to qualify as an excepted benefit, the coverage must be less than three months in duration. The plan must have an expiration date specified in the contract (taking into account any extensions that may be elected by the policyholder with or without the issuer’s consent) that is less than three months after the original effective date of the contract. The plan also must prominently display in the contract or any application materials, in at least 14 point type, “THIS IS NOT QUALIFYING HEALTH COVERAGE (“MINIMUM ESSENTIAL COVERAGE”) THAT SATISFIES THE HEALTH COVERAGE REQUIREMENT OF THE AFFORDABLE CARE ACT. IF YOU DON’T HAVE MINIMUM ESSENTIAL COVERAGE, YOU MAY OWE ADDITIONAL PAYMENT WITH YOUR TAXES.”  

Travel Insurance is defined as insurance coverage for personal risks related to planned travel and is a new category of excepted benefits. It may include, but is not limited to, interruption or cancellation of a trip or event, loss of baggage or personal effects, damages to accommodations or rental vehicles, and sickness, accident, disability, or death occurring during travel. Travel insurance is an excepted benefit provided that the health benefits are not offered on a stand-alone basis and are incidental to other coverage.

Similar Supplemental Health Coverage is designed to fill in the gaps in cost sharing of the primary coverage only if the benefits covered by supplemental insurance products are not an essential health benefit (EHB). If any benefit provided by the supplemental policy is either included in the primary coverage or is an EHB in the state where the coverage is issued, the insurance coverage would not be supplemental excepted benefits.

However, supplemental health insurance products that both fill in the gaps of cost sharing in the primary coverage, such as coinsurance and deductibles, and cover additional categories of benefits that are not EHB, would be considered supplemental excepted benefits provided all other criteria are met.

Definition of EHB for Purposes of the Prohibition on Lifetime and Annual Limits
For plan years or policy years beginning on or after January 1, 2017, a plan or issuer that is not required to provide EHB must define EHB for purposes of the prohibition on lifetime and annual dollar limits in a manner consistent with any (1) one of the EHB-benchmark plans applicable in a state under 45 CFR 156.110, and includes coverage of any additional required benefits that are considered EHB consistent with 45 CFR 155.170(a)(2); or (2) one of the three Federal Employees Health Benefit Program (FEHBP) plan options as defined by 45 CFR 156.100(a)(3), supplemented as necessary, to meet the standards in 45 CFR 156.110.

The revised definitions apply to policy years beginning on or after January 1, 2017. However, due to policies currently in force, HHS will not take enforcement action against the issuer before April 1, 2017. 

The Departments intend to address hospital indemnity or other fixed indemnity insurance and expatriate health plans in further rulemaking, taking into account comments received on these issues.

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 21st Century Cures Act, signed by President Obama on December 13, 2016, gave small employers a means of providing employees help with their individual insurance premiums and other out-of-pocket qualified medical expenses without violating the provisions of the Affordable Care Act (ACA). Small employers can now provide a specific kind of Health Reimbursement Arrangement (HRA) to help employees with the costs of individual health coverage. 

According to the statutory language under “Title XVIII – Other Provisions” of the Act, qualified small employer health reimbursement arrangements (QSEHRAs) are not considered “group health plans” and do not have to adhere to ACA market reforms, including annual and lifetime limits or preventive care mandates. And, since QSEHRAs are treated as an “excepted benefit” and are not considered group health plans, they are not subject to certain provisions under the Internal Revenue Code and ERISA. QSEHRAs are not subject to Federal COBRA requirements and are not considered Minimum Essential Coverage (MEC) under the ACA.

Employer and Employee Requirements
Eligible employers are those that are not applicable large employers (ALEs) and employ fewer than 50 full-time or full-time equivalent employees. QSEHRAs must be funded solely by an eligible employer with no employee salary reduction contributions allowed.

As a condition of offering the QSEHRA, the employer cannot offer a group health plan to any of its employees. And, in order to receive non-taxable reimbursements from the plan, employees covered by the QSEHRA must be covered by an ACA-compliant health plan. ACA-compliant coverage includes both individual policies and group policies that may be provided through an employee’s spouse’s employer. 

All employees must be eligible; however, QSEHRAs may exclude certain employees without being considered discriminatory, such as those employees:

• Who have not completed 90 days of service.
• Who have not attained age 25.
• Who are part-time or seasonal.
• Included in a collective bargaining agreement.
• Who are considered nonresident aliens and receive no earned income from sources within the United States.

Reimbursement
Any qualified medical expense as defined in section 213(d) that is incurred by eligible employees or their family members are eligible for reimbursement from the plan, including ACA-compliant individual policy premiums. Of course, QSEHRAs may be customized to reimburse only a subset of eligible expenses, depending on the employer’s objectives for the plan. 

The amount of payments and reimbursements for any year cannot exceed $4,950 for employees with single coverage and $10,000 for those with family coverage. For years beginning after 2016, dollar limits will be indexed based on the annual cost of living adjustment (COLA) in multiples of $50. One important note—annual limits must be prorated based on each eligible employee’s months of coverage by the plan. For instance, an employee with family coverage that is eligible on the first day of a 12-month plan year may receive up to $10,000, while another employee with family coverage, hired in the middle of a plan year, would receive only $5,000. Also, employers may offer the maximum limits or make available lower amounts based on their plan design.

Nondiscrimination
The nondiscrimination rules for a QSEHRA are quite simple: the QSEHRA must be provided on the same terms to all eligible employees. There are some permitted variations, however, such as varying limits equal to the price of insurance coverage in the individual health insurance market which vary based on the age of the eligible employee or family members, and the number of family members eligible for coverage.

Documentation, Notice, and Reporting Obligations
The QSEHRA is an ERISA welfare benefit plan, so a plan document and Summary Plan Description must be prepared and distributed. ERISA’s fiduciary and other rules also apply. A QSEHRA is subject to HIPAA privacy and security rules, but is generally not subject to small group plan requirements. 

Written notices must be provided to all employees no later than 90 days before the beginning of each plan year or immediately to newly eligible employees. The notice must include:

• The dollar amount of the benefit for the year.
• A statement requiring all employees to provide the annual benefit amount to any health insurance exchange when applying for advance payment of the premium assistance tax credit.
• A statement noting that if the employee is not covered under minimum essential coverage (MEC) for any month, the employee may be subject to tax under the individual mandate section 5000A for each month and reimbursements under the QSEHRA may be includible in gross income. 

Failure to provide written notices carries a tax of $50 per employee per incident, not exceeding $2,500 for any calendar year. However, for transition relief, the notice to employees may be provided no later than 90 days after the date of enactment of the Cures Act, or March 6, 2017. 

Reporting involves including the amount of employer QSEHRA contributions on employee W-2s, effective for calendar years beginning after December 31, 2016. However, QSEHRA amounts are not included in calculations for the Excise Tax on High Cost Employer-Sponsored Health Coverage (Cadillac Tax), and thus, no Excise Tax reporting is required. That’s great news for small employers establishing QSEHRAs.

Transition Relief
The 21st Century Cures Act not only makes QSEHRAs effective for plan years beginning after December 31, 2016, it also extends limited transitional relief for small employers, first given to all plans through Notice 2015-17, for plans beginning before December 31, 2016.

Closing
Since the passage of the ACA, IRS Notices 2013-54 and 2015-17 required that HRAs be integrated with employer-sponsored ACA-compliant group health plans. This signaled the end of stand-alone HRAs used by many small employers to assist their employees in purchasing individual health policies. Small employers no longer had a way to help their employees with the growing costs of insurance coverage and medical expenses, leaving small employers and their employees in a lurch.

With this new QSEHRA, small employers can once again offer a plan with meaningful benefits for their 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. 

Under the Affordable Care Act (ACA), a fund for a new nonprofit corporation to assist in clinical effectiveness research was created. To aid in the financial support for this endeavor, certain health insurance carriers and health plan sponsors are required to pay fees based on the average number of lives covered by welfare benefits plans. These fees are referred to as either Patient-Centered Outcome Research Institute (PCORI) or Clinical Effectiveness Research (CER) fees.

The applicable fee was $2.17 for plan years ending on or after October 1, 2015 and before October 1, 2016.  For plan years ending on or after October 1, 2016 and before October 1, 2017, the fee is $2.26.  Indexed each year, the fee amount is determined by the value of national health expenditures. The fee phases out and will not apply to plan years ending after September 30, 2019.

As a reminder, fees are required for all group health plans including health reimbursement arrangements (HRAs), but are not required for health flexible spending accounts (FSAs) that are considered excepted benefits. To be an excepted benefit, health FSA participants must be eligible for their employer’s group health insurance plan and may include employer contributions in addition to employee salary reductions. However, the employer contributions may only be $500 per participant or up to a dollar for dollar match of each participant’s election. 

HRAs exempt from other regulations would be subject to the CER fee. For instance, an HRA that only covered retirees would be subject to this fee, but those covering dental or vision expenses only would not be, nor would employee  EAPs, disease management programs, and wellness programs be required to pay CER fees.

How are Fees Calculated?
Fees may be calculated for nonexempt HRAs and health FSAs by counting each participant, without regard to spouses and dependents also covered by the plans, if the plan sponsor has no other relevant self-insured plans. Also, if employers have more than one qualifying self-insured plan, they may be considered as one plan so long as all the plans have the same plan year.

Relying on the “one plan” method does have its drawbacks. Let’s say employers sponsor a self-insured health plan and a nonexempt health FSA or HRA. For CER fee purposes, the count would start with the health plan and include all covered lives including the employee, spouse and all dependents. Anyone not enrolled in the employer’s health plan, but participating in nonexempt HRAs or health FSAs, would be counted as one additional covered life.

Who Pays the Fees?
For self-insured plans the plan sponsor would be liable to pay the fees. Generally, the plan sponsor will be the employer. For fully-insured plans, the insurance carrier will need to pay the fees.

Fees are reported and paid once per year with the submission of Form 720 (Quarterly Federal Excise Tax Return). Fees are due by July 31 of the year following the end of the plan year and must be submitted with the Form 720 filing.

Calculating and Submitting the Fee for Self-Insured Plans
Plan administrators can use one of several methods for calculating the average number of lives covered under an applicable self-insured health plan.

• Actual Count Method: Add the total number of covered employees under the plan on each day of the plan year and divide that number by the total number of days in the plan year.
• Snapshot Method: Choose a date(s) during the first, second or third month of each quarter and add the total number of covered employees during those dates and divide by the number of dates on which a count was made. For example, the total of the number of covered lives on January 15, April 15, July 15 and October 15 divided by 4. Each date used for the second, third and fourth quarter must be within 3 days of the first quarter date.

The number of lives covered on a date is equal to the sum of (1) the number of participants with self-only coverage on that date; plus (2) the number of participants with coverage other than self-only coverage on the date multiplied by 2.35; or,

The number of lives covered on a date equals the actual number of lives covered on the designated date.

• Form 5500 Method: For a plan offering self-only coverage, combine the total participating employee count at the beginning of the plan year with the total participating employee count at the end of the plan year and divide by 2.

For plans offering self-only and other than self-only, covered lives equals the sum of total participants covered at the beginning and the end of the plan year.

Ensure your employers are informed and compliant with this ACA requirement. 

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. 

Background
On June 16, 2015, final regulations concerning the requirements of Summary of Benefits and Coverage (SBC) were published for all group health plans, including Health Reimbursement Accounts (HRAs). However, the necessary changes to the SBC template were not released until April, 2016. Text for the template and supplementary materials are to be utilized beginning on the first day of the first open enrollment period that begins on or after April 1, 2017. That means plans with a plan year beginning date of January 1 would begin to employ the new template for open enrollment starting in late 2017 for the January 1, 2018 plan year. 

For all SBCs
Changes made to the SBC improve readability for consumers, provide more information about cost sharing, enhance language to explain deductibles, and address individual and overall out-of-pocket limits.

Form language and formatting must be precisely reproduced, unless instructions allow or instructed otherwise. Use 12 point font preferably in Arial and Garamond and replicate all symbols, formatting, bolding and shading where applicable.  Changes from the sample are generally not permitted.

Detailed instructions for group health plan coverage and individual health insurance coverage are available from the Centers for Medicare and Medicaid Services (CMS). The SBC template, completed sample SBC, and all SBC materials and supporting documents authorized for use on and after April 1, 2017, are available at: cms.gov. Enter “SBC Template” in the search bar in the upper right-hand corner of the page.

Integrated HRAs
HRAs are considered group health plans and HRA information must be included on all SBCs for health plans integrated with HRAs. Below is sample language for an integrated HRA that may be added to the SBC for a major medical plan:

1. In the Answers column to the first row- “What is the overall deductible?” on page 1 add the following language: 

“If you participate in your employer’s HRA, the HRA will pay for or reimburse you for certain, qualified medical expenses (including co-pays and coinsurance) up to the balance available in your HRA.” Your HRA has an overall limit of $XXXX per plan year, even if your need is greater. You’re responsible for all expenses above this limit. The chart starting on page 2 describes specific coverage limits, such as limits on the number of office visits.

2. A text box should be added following the Coverage Examples on page 6 that states:

“If you participate in your employer’s HRA, the HRA will pay for or reimburse you for certain, qualified medical expenses (including co-pays and coinsurance) for amounts under the deductible, up to the balance available in your HRA.” Your HRA has an overall limit of $XXXX per plan year, even if your need is greater. You’re responsible for all expenses above this limit.

Stand-Alone HRAs
HRAs not integrated with group health plan coverage will use the template used for all group health plans.

Employers with HRAs will welcome this information if carrier SBCs cannot be customized for their plans.

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 (COLA) and inflation adjustments that apply to dollar limitations set forth in certain IRS Code Sections. The Consumer Price Index was 0.3 percent and warranted slight increases in some indexed figures for 2017.

Social Security and Medicare Wage Base
For 2017, the Social Security wage base is $127,200. 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 applies to all wages.

In addition, starting with the 2013 taxable year, individuals were liable for a 0.9 percent “Additional Medicare Tax” on all wages exceeding specific threshold amounts. 

Indexed Compensation Levels
Highly compensated and key employee definitions:

401(k) Plans
In 2017 the maximum for elective deferrals is $18,000 and the catch-up contribution for those 50 or older is $6,000. That means if you are age 50 or over during the 2016 taxable year, you may generally defer up to $24,000 into your 401(k) plan.

Healthcare FSA
We started tracking an additional indexed figure in 2013 for the annual limit for participant salary reductions for the healthcare flexible spending account (FSA). For plan years starting on or after January 1, 2017, the participant salary reduction amount to the cafeteria plan’s healthcare FSA portion of the plan may not exceed $2,600. However, this does not preclude employer contributions (as long as they are not convertible to cash) from being added to participants’ healthcare FSAs.

Adoption Credit
For 2017 this tax credit is $13,570. The credit starts to phase out at $203,540 of modified adjusted gross income (AGI) levels, and is completely phased out when modified AGI reaches $243,540.

The exclusion from income provided through an employer or a Section 125 cafeteria plan for adoption assistance also has a $13,570 limit for the 2017 taxable year. And remember–a participant may take the exclusion from income and the tax credit if enough expenses are incurred to support both programs separately.

Health Savings Account (HSA)
Minimum deductible amounts for the qualifying high-deductible health plan (HDHP) remained the same at $1,300 for self-only coverage and $2,600 for family coverage for 2017. Maximums for the HDHP out-of-pocket expenses remained the same at $6,550 for self-only coverage and $13,100 for family coverage for 2017.

Maximum contribution levels to an HSA for 2017 are increased to $3,400 for self-only coverage and remains the same at $6,750 for family coverage. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2017. Remember, there are two requirements in order to fund an HSA: you must have qualifying HDHP coverage and no other impermissible coverage (such as coverage under another employer’s plan or from a healthcare FSA that is not specifically compatible with an HSA).

Archer Medical Savings Account (MSA)
For high-deductible insurance plans that provide self-only coverage, the annual deductible amount must be at least $2,250 but not more than $3,350 for 2017. Total out-of-pocket expenses under plans that provide self-only coverage cannot exceed $4,500. For plans that provide family coverage in 2017, the annual deductible amount must be at least $4,500 but not more than $6,750, with out-of-pocket expenses that do not exceed $8,250.

Although new MSAs are not allowed, maximum contributions to existing MSAs that are attributable to single-coverage plans is 65 percent of the deductible amount. Maximum contributions for family-coverage plans are limited to 75 percent of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.

Dependent and/or Child Daycare Expenses
Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the tax 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. Limits for 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 cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a participant filing a single return, or filing as “Head of Household.” For a married couple filing separate returns, the limit is $2,500 each. 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. 

Commuter Accounts
For 2017 the monthly parking amount remains at $255 and the 2017 monthly limit for transit remains the same at $255.

Long Term Care
For a qualified long term care insurance policy, the maximum non-taxable payment increases to $360 per day for 2017.

Finally, by participating in a cafeteria plan, the participant will be lowering their 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.

The Department of Labor (DOL), Department of Health and Human Services (HHS), and the Internal Revenue Service (IRS), collectively known as “The Agency” issued one FAQ and a model COBRA Notice on June 21, 2016, and the Equal Employment Opportunity Commission (EEOC) provided a new Sample Notice required by the Americans with Disabilities Act (ADA) for wellness programs effective as of the first plan year beginning on or after January 1, 2017. 

COBRA Notice
Generally, employers with 20 or more employees must offer COBRA for their group health plans. This entails providing written COBRA notices at the beginning of health insurance coverage explaining a participant’s COBRA rights and COBRA election notices upon eligibility for COBRA coverage.

In 2004 and again in 2013 the DOL issued requirements and model COBRA notices to assist employers with COBRA compliance. The 2013 model notices included the Affordable Care Act (ACA) and continuation coverage available from the Marketplace. Updated model notices issued May 2, 2014, reflect that coverage is now available in the Marketplace and provides information on special enrollment rights in the Marketplace.

This latest FAQ expands on additional information that may be included in the COBRA notice. This incorporates other information about the Marketplaces, such as:

• how to obtain assistance with enrollment, including special enrollment;
• the availability of financial assistance;
• information about Marketplace websites;
• contact information;
• general information regarding particular products offered in the Marketplaces; and
• other information that may help qualified beneficiaries choose between COBRA and other available coverage options.

COBRA election notices may be also tailored to particular groups such as young adults who age out of dependent coverage under their parents’ coverages. The Agency Guidance notes the language should be “easily understood by the average plan participant” and not too lengthy. 

Using the DOL’s model COBRA Notice is not mandatory; however, employers may want to add suggested information to help qualified beneficiaries understand their rights and available options. There is no regulatory deadline for inserting this information into an employer’s COBRA notice.

ADA Notice
In separate guidance, new rules from the final ADA Wellness Regulations require employers who offer wellness programs that collect employee health information to provide a notice to employees informing them of:

• what information is collected,
• how it will be used,
• who will receive it, and
• what will be done to keep it confidential. 

In issuing this final rule, the ADA sought to provide consistency with the Health Insurance Portability and Accountability Act (HIPAA) and the ACA rules on wellness program incentives. Also, the ADA wanted to ensure that participation in wellness programs was voluntary. 

Unlike HIPAA and the ACA, the ADA places limits on disability-related inquiries and medical examinations related to wellness programs, regardless of how the information obtained is ultimately used.

The sample notice includes all ADA required information, including a sentence describing the wellness program as voluntary, the right not to participate, and a caveat regarding incentives. Also incorporated is a statement of privacy and security of personally identifiable health information. Although employers do not have to use the precise wording in the sample notice, they must convey the same meaning in their customized notices. 

Notices are to be distributed prior to employees providing health information and with plenty of time for participants to decide whether or not to participate in the wellness program. Notices may be provided via email or hard copy and those with disabilities may require the notice in an alternate format. 

Although employees’ signed authorizations are not required, (spouses’ written authorizations may be) best practice would be to obtain signed authorization from employees to comply with other requirements such as HIPAA and the Genetic Information Nondiscrimination Act (GINA).  

We are fast approaching the New Year. Now is the time for employers to review all notice requirements to include the latest terminology to keep their notices compliant.

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. 

Beware of wellness programs that sound too good to be true in that they promise incredible tax savings for employers and tax-free reimbursement of already tax-free payroll deductions. 

In an Office of Chief Counsel Internal Revenue Service (IRS) Memorandum, the IRS steps through the facts, law, and analysis to clearly spell out their conclusion on wellness programs that provide cash awards for participation or provide tax-free reimbursements of required employees’ contributions paid with untaxed dollars. And, although this advice may not be used or cited as a precedent, it unmistakably demonstrates the IRS thought process for these types of wellness programs.

Facts
An employer provides employees with certain benefits under a wellness program at no cost. The wellness program provides health screening and other health benefits that would be considered eligible medical expenses that could be treated on a tax-favorable basis. The program also provides cash rewards that do not qualify as section 213(d) medical expenses, such as gym membership fees.

A second employer situation contains the same circumstances as the first, but in this scenario, employees elect to participate in the wellness plan by making salary reductions through a cafeteria plan.

And a third scenario contains the same facts as situation 2, except that the program includes a reimbursement of all or a portion of the required employees’ contributions made through salary reduction.

Law and Analysis
Generally, IRC Section 106(a) excludes employer-provided coverage under an accident or health plan from employees’ income. Under IRC Section 105(b), employees may exclude amounts received through employer-provided accident or health insurance if the reimbursement is for medical care incurred by the participant. There is also an exception to paying FICA on wages for any payment to or on behalf of an employee under a cafeteria plan.

However, there is no exclusion from income for amounts received as a reward, incentive, or other benefit provided by the wellness program that is not medical care as defined under IRC Section 213(d). These amounts are included as income, unless excludable as an employee fringe benefit under IRC Section 132, and taxed as such. Under IRC Section 132-6(c), a cash fringe benefit (other than overtime meal money and local transportation fare) is never excludable as a de minimis fringe benefit.

The Memorandum provides a good example of a de minimis fringe benefit. A wellness program that provides a tee-shirt to every participant would be considered a de minimis fringe benefit and excludable from taxable income. Note however, that a tee-shirt is not an eligible medical expense as described under IRC Section 213(d). In addition, an employer payment of gym membership fees, which also does not qualify as medical care, would be includible in employees’ income, regardless if provided through a wellness plan or program.

The IRS has seen similar schemes in the past. Revenue Ruling 2002-3 addresses this situation known as double dipping. The employer has an arrangement under which employees reduce their salaries on a pre-tax basis to pay health insurance premiums. In addition, the employer makes untaxed payments to employees that reimburse a portion of the health insurance premiums paid by salary reduction. Revenue Ruling 2002-3 holds that the exclusions under sections 106(a) and 105(b) do not apply to amounts that the employer pays to employees to reimburse employees for amounts paid by employees for health insurance coverage excluded from gross income under section 106(a) (including salary reduction amounts pursuant to a cafeteria plan).  

Conclusion
An employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program. Also, employers may not exclude from an employee’s gross income reimbursements of premiums for participating in a wellness program if the premiums for the wellness program were originally made by salary reduction through a section 125 cafeteria plan.

Who Loses?
Ultimately, both the employer and employees lose. Employees will be taxed on these amounts and must file amended returns and pay any resultant penalties for underpayment of taxes. The employer will also lose because they will have to re-characterize the amounts as taxable, pay appropriate employer taxes, issue amended W-2s, and pay failure to withhold penalties.

Want to read the entire Memorandum, including all the applicable IRS code section references? It is IRS Memorandum number 201622031 at: https://www.irs.gov/pub/irs-wd/201622031.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.