Janet LeTourneau

In a continuation of guidance issued as a result of the Supreme Court’s decision in United States v. Windsor, IRS Notice 2014-1 was issued with an effective date of December 16, 2013, and includes information on cafeteria plan mid-year election changes, non-taxable flexible spending account (FSA) reimbursements, and contribution limits for health savings accounts (HSAs) and dependent care assistance programs.

It also affirms some administrative procedures that plan sponsors began allowing immediately following the court decision on June 26, 2013, or the release of Revenue Ruling 2013-17, such as allowing mid-year election changes for the legal marriage of same-sex couples.

Background

The Supreme Court’s decision in United States v. Windsor found Section 3 of the Defense of Marriage Act (DOMA), which provided that only opposite-sex marriages were recognized for federal law, to be unconstitutional. However, Section 2 of DOMA, which allows a state to refuse to recognize the validity of same-sex marriages that were legally performed in another state, was not at issue in this case. As a result, the ruling created many questions for benefits administrators and tax specialists concerning how state laws affected federal tax circumstances.

As anticipated the IRS and Treasury announced that all legal same-sex marriages will be recognized for federal tax purposes—including tax laws related to employee benefits. This tax treatment applies even if a same-sex couple lives in a state that does not recognize same-sex marriage. The administration also said that same-sex couples can begin filing tax returns as “married filing jointly” or “married filing separately” for the 2013 tax year. It addresses how employees can file claims for refunds for income taxes on income previously imputed to them based on the extension of health and welfare benefits extended to a same-sex spouse. Neither the previous ruling nor this new ruling applies to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Mid-Year Election Changes

Cafeteria plans may treat participants who were married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) as if the participant experienced a change in legal marital status. In addition, a participant who marries a same-sex spouse after June 26, 2013, may make a mid-year election if they request it at any time.

A change in tax treatment generally does not constitute a significant change in the cost of coverage and thus would not be allowed under 1.125-4 Regulations. However, the change could be made as a result of the change in legal marital status. The effective date of such changes would be no later than the later of the date that coverage under the cafeteria plan would be added under the cafeteria plan’s usual procedures, or a reasonable period of time after December 16, 2013.

If participants pay for a same-sex spouse’s insurance coverage with after-tax dollars, when and under what circumstances must an employer begin to treat the amount as a pre-tax salary reduction? The Notice clarified this to be no later than the later of the date that a change in legal marital status would be required or a reasonable period of time after December 16, 2013. The employer could issue a revised W-4.

The employee’s salary reduction under a cafeteria plan that the participant is paying on a pre-tax basis is deemed to include the employee cost of spousal coverage, even if it was previously paid on an after-tax basis. This rule applies to the cafeteria plan year including December 16, 2013, and any prior years.

Upon filing their 2013 tax return, the couple may also request a refund of any federal employee taxes paid on account of such coverage.

FSA Reimbursements

The employer may permit participants’ FSAs to reimburse covered expenses incurred by participants’ same-sex spouses that were incurred no earlier than the beginning of the plan year including the Windsor date or the date of the marriage for health FSA, dependent care or adoption expenses.

Contribution Limits for HSAs and Dependent Care Assistance Programs

HSA limits would use the “household” rule if they were married for federal tax purposes with respect to a taxable year. That is, couples who remain married as of the last day of the taxable year, including the 2013 taxable year.

To correct excess contributions, if spouses contributed over the limit during any taxable year, any excess can be distributed from the HSA of one or both spouses no later than the tax return due date for the spouses. Excess contributions not distributed will be subject to excise taxes.

Same-sex married couples are subject to the exclusion limit for contributions to a dependent care FSA if they remain married as of the last day of the taxable year. If the limit is exceeded, elections for one or both can be changed mid-year or the excess contributions will be includable in the spouses’ gross income at the time of their tax filings.

Cafeteria plans allowing a change in election upon a change in legal marital status generally are not required to be amended to permit a change in status election with regard to same-sex spouses in connection with the Windsor decision. However, a plan sponsor may amend their cafeteria plan to permit election changes that were not previously provided for in the written plan document. The cafeteria plan must be amended before the last day of the first plan year beginning on or after December 16, 2013, and can be effective retroactively to the first day of the plan year including December 16, 2013, provided that the cafeteria plan operates in accordance with the guidance under this notice.

WageWorks

As benefit specialists, we are carefully following the application of this ruling and any subsequent guidance that may be issued. In the absence of guidance, we immediately implemented processes that mirror those set forth in 2013-17. This means that a claim that is submitted for a spouse and accompanied by the certification that it is for eligible expenses is paid regardless of the state of residence.

We will be closely watching for any subsequent guidance releases from government agencies and continue to keep you apprised of this issue and how it may affect your employers as additional information becomes available.

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’ve found when administering flexible benefits plans that it’s easy to find out the federal tax treatment of the different benefits, although not quite so easy to stay on top of all the complex rules and regulations for the various components of flexible benefits plans—but that’s a whole different article.

Although we don’t normally comment on state taxation issues, including the District of Columbia, we’ll outline some deviations of federal exclusions from income which may be able to help your employer clients keep on track.

State tax changes are not easy to track. State tax changes can happen any time during the tax year and can deviate from federal treatment. States don’t generally make a national announcement—and that’s why most articles shy away from the subject.

If your employer clients think that every state that withholds for state income tax purposes would unquestionably just follow the federal withholding rules for their states, they would be wrong. There are complexities with state withholding for many states. Although this article cannot pinpoint every deviation for every state, we will give you a general summary of states to keep an eye on.

No State Income Taxes

Let’s start with an easy question: What are the states that do not collect state income taxes?

As of this article, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not collect state income taxes. No worries about flexible benefit withholdings in these states!

For New Hampshire and Tennessee, there is no withholding on personal income tax, only on interest and dividends. Again, a no-brainer—no state withholding for flexible benefits. However, keep in mind that health savings accounts (HSAs) may accumulate interest or dividends if invested. This information should be clearly summarized on forms sent from the HSA custodian.

Flexible Benefits Plans

New Jersey and Pennsylvania are the last holdouts and do not completely conform to federal tax withholding laws when it comes to cafeteria plans. For instance, Pennsylvania taxes dependent care expenses for employees that are provided outside of a cafeteria plan.

For health reimbursement arrangements (HRAs), every state is on board with federal withholding practices. Some states may tax payments made to providers, so employers need to carefully understand state laws in those states where they have employees.

Health savings accounts (HSAs) are not recognized in every state; for example, while some states follow federal guidelines for HSAs in general, they do not allow COBRA continuation premiums to be paid on a nontaxable basis. This means there is a great deal of opportunity for employer and employee education.

Transit, Parking and Bike Expenses

California does not cap the amount of benefits that may be excluded for qualifying ride-sharing arrangements. Just be aware that this arrangement has a more expansive definition of transit expenses than the federal definitions.

Some states limit amounts that may be excluded from state income and are less than federal levels. An example is Mississippi, which does not follow federal withholding for transit, parking or bike expenses. Still other states don’t allow for salary reduction at all for these types of expenses.

In Summary

The world of consumer-directed benefit accounts, including health FSAs, dependent care FSAs, HRAs, HSAs as well as transit, parking and bike benefits have very complex administrative regulations and taxation rules. The best source of the most up-to-date information for state withholding questions is a state’s Department of Revenue. Contact them with questions to obtain updates on state tax laws.

It is critical that employers understand  the tax treatment of the products they offer 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.

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. The Consumer Price Index rose enough since the third quarter of 2013 to warrant an increase in some of the indexed figures for 2014.

Social Security and Medicare Wage Base

For 2014, the Social Security wage base increases to $117,000 from $113,700 in 2013. 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, as of the 2013 taxable year, if taxpayers have self-employment income that exceeds specific threshold amounts, they are liable for a .9 percent “additional Medicare tax.”

Indexed Compensation Levels

The indexed compensation levels for determining who is considered highly compensated remains unchanged for 2014: (See Table 1)

401(k) Plans

In 2014 the maximum for elective deferrals remains unchanged at $17,500. The catch-up contribution for those 50 or older remains at $5,500 for 2014 (no change from 2013). That means those age 50 or older may generally defer up to $23,000 into their 401(k) plans during the 2014 taxable year.

Health FSAs

We started tracking an additional indexed figure in 2013—the annual limit for participant salary reductions for health flexible spending accounts (FSA). For plan years starting on or after January 1, 2014, a participant’s salary reduction amount for the FSA portion of a cafeteria plan may not exceed $2,500. This did not change from 2013; however, this does not preclude employer contributions from being added to participants’ health FSAs—as long as the contributions are not convertible to cash.

Adoption Credit

For 2014 this tax credit increases from $12,970 to $13,190. The credit starts to phase out at $197,880 of modified adjusted gross income (AGI) levels and is completely phased out when modified AGI reaches $237,880.

The exclusion from income provided through an employer or a Section 125 cafeteria plan for adoption assistance also has a $13,190 limit for the 2014 taxable year. And, remember, participants may take the exclusion from income and the tax credit if enough expenses are incurred to support both programs separately.

Health Savings Accounts (HSA)

Minimum deductible amounts for the qualifying high-deductible health plan (HDHP) remain the same at $1,250 for self-only coverage and $2,500 for family coverage in 2014. Maximums for the HDHP out-of-pocket expenses increase to $6,350 for self-only coverage and $12,700 for family coverage.

Maximum contribution levels to an HSA also increased for 2014—to $3,300 for self-only coverage and $6,550 for family coverage. The catch-up contribution allowed for those 55 and older is set at $1,000 for 2014. Remember, there are two requirements in order to fund an HSA: You must have qualifying HDHP coverage and no other coverage under another employer’s plan or from a health FSA that is not specifically compatible with an HSA.

Archer Medical Savings Accounts (MSA)

For a high-deductible insurance plan that provides self-only coverage, the annual deductible amount must be at least $2,200 but not more than $3,250 for 2014. Total out-of-pocket expenses under a plan that provides self-only coverage cannot exceed $4,350. For a plan that provides family coverage, the annual deductible amount must be at least $4,350 but not more than $6,550, with out-of-pocket expenses that do not exceed $8,000.

Although new MSAs are not allowed, maximum contributions to an existing MSA that are attributable to a single-coverage plan is 65 percent of the deductible amount. Maximum contributions for a family plan 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 participants’ tax filings was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form. The limits for daycare credit expenses are $3,000 of expenses covering one child and $6,000 for 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 an employer’s cafeteria plan or taking the daycare credit.

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 daycare credit is reduced dollar-for-dollar by contributions to or benefits received from an employer’s cafeteria plan. Employees 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 2014 the monthly parking amount increases from $245 in 2013 to $250. The 2014 monthly limit for transit decreases from $245 in 2013 to $130 in 2014 unless Congress acts because previous legislation expired December 31, 2013.

Long Term Care

For a qualified long term care insurance policy, the maximum non-taxable payment is now $330 per day for 2014.

One final note: By participating in a cafeteria plan, participants 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.

This is a continuation of my previous article on the Affordable Care Act (ACA) changes affecting health flexible spending arrangements (health FSAs). This month we will discuss requirements for HRAs offered starting January 1, 2014.

On Friday, September 13, 2013, the Treasury published Notice 2013-54 which preserves all health reimbursement arrangements (HRAs) that are integrated with an underlying group health plan but eliminates an employer’s ability to use a stand-alone or other tax-favored arrangement, including premium reimbursement arrangements or cafeteria plans, to help employees pay for individual health policies on a tax-free basis. In addition, the notice addresses a number of specific topics related to FSAs and HRAs.

What Kind of HRAs May Employers Offer?

For HRAs to be offered in compliance with new ACA requirements (beginning January 1, 2014), there is an exhaustive list of plan types that are available.

Most HRAs reimburse all or a subset of eligible medical expenses as described under IRS Code Section 213(d) and can continue if those eligible for the HRA are also eligible for and enrolled in employer-­sponsored ACA-compliant group medical coverage, which is called an “integrated HRA.” Employer-sponsored ACA-compliant group medical coverage may be provided by the employer that offers the integrated HRA or employees may certify they have coverage under a spouse’s ACA-compliant group medical plan.

However, there are a couple of new rules that go along with integrated HRAs. First, participants must be able to permanently opt out of and waive future reimbursements from the HRA annually and the plan should be designed so that remaining HRA amounts are forfeited upon termination of employment. This enables employees to obtain individual coverage on exchanges and be eligible for premium tax credits.

HRAs exclusively for retirees and/or other former employees can also continue. Participants in a retiree HRA generally would not only be considered as having met the individual mandate (and thus, have no penalty), but also would be considered ineligible for premium tax credits available on the public exchanges, or marketplaces.

In addition, the funds in retiree HRAs may be used to purchase individual coverage. These retiree HRAs must also allow participants to permanently opt out of and waive future reimbursements from the HRA at least annually.

Under a somewhat aggressive interpretation, HRAs that reimburse just vision or dental expenses may go forward into 2014. Under current regulations, limited-scope dental or vision benefits will be excepted from the ACA’s market reform provisions if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan…

The regulation further provides that benefits are not an integral part of a group health plan unless (1) a participant has the right to elect not to receive coverage for the benefits and (2) if a participant elects to receive coverage for the benefit, the participant must pay an additional premium or contribution for that coverage.

Consequently, because an HRA is not an insured arrangement, in order for dental or vision benefits provided through an HRA to be excepted from the ACA, employees who elect to have dental or vision coverage provided by the HRA must be charged a premium or contribution. This is problematic since an HRA must be paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a Section 125 cafeteria plan.

Notice 2013-54 did not address this issue at all, but this seems like an area in which Treasury could provide relief by issuing guidance that an employee’s payment of a premium for dental or vision benefits on an after-tax basis under a stand-alone HRA would not result in the plan losing its status as an HRA.

What If an Employer Has an Ineligible HRA?

Unused amounts that were credited to the HRA may be used to reimburse medical expenses in accordance with the terms of the HRA with no additional employer funds added to the plan. This is called a spend-down option.

This spend-down option may apply to all participants in the ineligible HRA or apply to one individual participant who is no longer covered by an employer-sponsored ACA-compliant group medical plan.

HRAs may no longer reimburse individually owned insurance policies. Employers sponsoring HRAs or who plan to implement HRAs or other tax-advantaged plans to allow participants to pay their individually owned policy premiums with pre-tax dollars can no longer do so.

The IRS and Treasury Department made an important change in closing this option so that employers cannot easily eliminate group coverage or send their employees to a public exchange yet still offer tax-free reimbursement for the payment of non-group coverage.

Employers need to be aware that any reimbursement or payment of individual

coverage—inside or outside of an exchange—cannot be made with tax-­advantaged funds.

San Francisco Health Care Ordinance HRA

The ACA eliminates the use of an HRA to deliver benefits to comply with the San Francisco Health Care Ordinance (SFHCO). However, it does allow HRAs and other state, local and tribal governments’ HRAs to continue until the later of January 1, 2014, or the first day of the plan year following the close of a regular legislative session after September 13, 2013.

Ninety-day waiting period. In order for active-employee HRAs to retain their integrated status, they can only be made available to employees who are also eligible for and enrolled in underlying ACA-compliant health coverage. Thus, HRAs must assure that their waiting periods are no less than that of the underlying health coverage. Note that the ACA requires that waiting periods for entry into the plan not exceed 90 days (60 days in California, plus other states may vary).

If the HRA document does not currently reflect these terms, a simple amendment to the plan can be adopted that states the eligibility and entry dates into the HRA are the same as the underlying health insurance plan. This ensures no disconnect if the waiting period changes in the health insurance plan. 

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 list of changes to flexible benefits that are rocketing toward us from the Affordable Care Act (ACA) could reach to the moon and back. This article covers just a few of those changes—changes that might have been overlooked, but are important to-do items to check off every employer’s list.

Keeping Health FSAs as an Excepted Benefit

It used to be that assuring that a health flexible spending account (FSA) was classified as an excepted benefit was important for two primary reasons: so COBRA continuation was not offered when the account was “overspent” and to assure health FSA elections were not swept into the W-2 reporting requirements. In order for FSA plans to also be compliant with the new ACA requirements, they must meet the HIPAA excepted benefit rules beginning on January 1, 2014.

Generally, this means that only individuals eligible for employer-provided major medical coverage can be offered a health FSA. Employers who want to continue to offer cafeteria plans that contain health FSAs must have an underlying ACA.

In addition, a health FSA is considered an excepted benefit only if it limits the maximum payable to two times a participant’s salary reduction or, if greater, a participant’s salary reduction plus $500. If a health FSA fails either of these conditions, it is subject to ACA’s market reforms, i.e.,  no cost sharing for preventive services and no annual or lifetime limits. By definition, a health FSA will not meet these ACA requirements.

In more understandable terms, all of the above means that employers can contribute to health FSAs, but can contribute no more than $500 or, if more, a match of up to $1 for every dollar elected by the participant.

Cafeteria Plans May No Longer Reimburse Individually Owned Insurance Policies

This may not be a big deal for most of your clients; however, for the few employers sponsoring cafeteria plans that allow for participants to pay their individually owned policy premiums with pre-tax dollars—the alert needs to be sounded.

I’ll have more to say on the subject next month, but right now employers need to be aware that any reimbursement or payment of individual coverage inside or outside of an exchange cannot be made with untaxed dollars.

Amendment for Fiscal Year Cafeteria Plans

This may be one of the most misunderstood ACA provisions issued to date and applies only to employers with non-calendar year plans. Employees who wish to seek coverage on the exchange, but who would otherwise be prevented from doing so because their elections are generally irrevocable for the plan year, can be allowed to make a change if their employer amends the company’s plan to allow this additional change in status.

A couple of points to remember: Because of employer shared responsibility rules, the provision applies only to “applicable large” employers (i.e., at least 50 full-time employees, or full-time equivalents based on hours of service during the preceding calendar year). However, many industry experts believe that small employers may get relief and be allowed the same treatment.

This is also only applicable to cafeteria plans that began in 2013 and that run benefits on a fiscal plan year rather than a calendar year.

While the guidance came out before the delay (until 2015) of the “employer mandate” of shared responsibility or play or pay, it allows employers to amend their plans and allows employees who enroll for exchange coverage to drop their employer coverage—essentially providing an additional qualified change in status reason.

Why would this be a critical amendment? ACA was written to assure that employees and individuals could purchase insurance coverage through state exchanges. Allowing employees to change cafeteria elections mid-year allows maximum flexibility for employees.

90-Day Waiting Period

Health plan years that start on or after January 1, 2014 may not contain a waiting period for entry into the plan that exceeds 90 days (60 days in California, plus other states may vary). In order for health FSAs to retain their status as an excepted benefit, they can only be made available to employees who are also eligible for underlying ACA-compliant health coverage. Thus, health FSAs must have waiting periods that are no less than the underlying health coverage.

Therefore, the waiting period for the premium-only portion and the health FSA portion of employers’ cafeteria plans should mirror the waiting periods for any underlying health insurance plans.

If a cafeteria plan document does not currently reflect these terms, a simple amendment to the cafeteria plan can be adopted and it must state that the eligibility and entry dates into the cafeteria plan are the same as the underlying health insurance plan. This ensures no disconnect if the waiting period changes in the health insurance plan.

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.

COBRA continuation, with all of its rules and regulations, may be hard for employers to understand and execute in an accurate and timely manner. This is a broad overview of the subject that highlights triggering events and timing deadlines, and discusses how COBRA applies to health care flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs).

Employers That Must Comply

Regardless of the entity type—regular C corporation, sub chapter S corporation, partnership, nonprofit organization or limited liability company—any public employer that offers ERISA (Employee Retirement  Income Security Act of 1974) group health benefits must offer COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985). However, there are a few exceptions—employers with 20 or fewer employees are exempt, as well as church-controlled and federal government entities.

To be considered church-controlled, substantially all covered individuals (or spouses/dependents) are employees or clergy for a church that is an approved tax-exempt place of worship or a tax-exempt organization controlled by or associated with the church. “Controlled” means that officers/directors are appointed by a church board, and “associated with” means that the employees share the same religious convictions. A detailed analysis is required to substantiate a church-controlled plan and the Internal Revenue Service (IRS) provides a private letter ruling, giving all the facts and circumstances.

A federal government plan means the government of the United States. However, the Federal Employees Health Benefits Amendments Act of 1998 (FEHBA) has requirements similar to COBRA that government plans must offer to their employees.

Plans That Must Comply

Group health plans, which include health FSAs, HRAs, vision, dental and prescription drug plans, must comply with COBRA as well as wellness programs if they go beyond merely the promotion of good health. On-site clinics are required to offer COBRA if the plan goes beyond treating minor injuries and illnesses. And, employee assistance programs (EAPs) must offer COBRA if there is a visit component that provides care.

Plans exempt from COBRA include qualified long term care plans, short and long term disability, group term life policies, health savings accounts (HSAs) and Archer medical savings accounts (Archer MSAs). Fitness centers, fixed indemnity or hospital indemnity plans and accidental death and dismemberment policies are also exempt. However, a hospital rider on any of these policies could trigger a COBRA obligation.

The best advice is for employers to seek legal counsel if they are in doubt about when to offer COBRA continuation.

Terminology and Conditions

Some of the words and phrases used when discussing COBRA can be confusing, so we’ll spell these out.

A qualified beneficiary is someone covered by a group health plan who has an independent right to elect continuation of that plan on COBRA.

A qualified beneficiary can also participate in open enrollment at the beginning of each plan year, as covered under a plan by virtue of employment, or if the beneficiary was a spouse or child of a covered employee on the day before a qualifying event.

A covered individual is defined as someone who is covered by a group health plan, but has no independent right to initially elect COBRA or re-elect at open enrollment (e.g., parent, domestic partner or a spouse added after COBRA continuation is elected).

Deadlines

After a qualifying event or being notified of a qualifying event, plan administrators have 14 days to send out COBRA notices or 44 days if the employer is also the plan administrator and the qualifying event is termination, reduction of hours or the covered employee’s death. The COBRA beneficiary then has an election period of 60 days from either the qualifying event or from the date the notice was sent, whichever is later. Sending the COBRA rights notice in a timely manner is of utmost importance, since there is no limit on the election period if the rights notice is not sent.

Once a beneficiary elects COBRA continuation, he has 45 days to make a premium payment. Basically, a beneficiary can wait and see if health coverage is needed for this period of time. If coverage is anticipated from other employment or a similar situation, he may wait 59 days to elect COBRA coverage and another 44 days to submit a COBRA payment. If a beneficiary does not require medical attention and has procured other coverage, he is under no obligation to make the initial COBRA payment.

After a beneficiary begins COBRA coverage, he has an ongoing monthly premium payment due, generally at the beginning of the month. Full payments must be received within a 30-day grace period following the date the premium was due.

Triggering Events That Result in Loss of Coverage

Different events warrant different COBRA coverage periods. Most qualifying events provide an 18-month coverage period: termination of employment—voluntary or involuntary—for reasons other than gross misconduct, or reduction in hours of employment. An employer does not have to offer COBRA when gross misconduct occurs.

Some qualifying events allow for a 36-month period of coverage and apply to the spouse and dependent(s) only in the case of divorce, legal separation, death of the employee, loss of dependent status, or employee’s Medicare entitlement (rarely a triggering event due to Medicare secondary payer rules).

In the case of bankruptcy proceedings of the employer that causes substantial elimination of coverage under the plan for retirees, a retiree can be covered for their lifetime.

Qualified beneficiaries may lose elected COBRA coverage if they fail to make timely premium payments, become covered by a group health plan without pre-existing condition limitations or become entitled to Medicare after electing COBRA. Cancellation of all group health plans by employer, for cause and at the first of month following 30 days after being deemed no longer disabled by the Social Security Administration (SSA) can also cause termination of COBRA.

Health FSAs

Existing regulations do limit the circumstances in which COBRA must be offered to participants in a health FSA. COBRA need not be offered for the balance of the plan year in which the qualifying event occurs if the FSA is exempt from the following HIPAA certification requirements.

 1. The maximum benefit paid is not greater than two times the salary reduction amount or, if greater, the employee’s salary reduction election plus $500.

 2. The employee has other health coverage available through the employer and future COBRA premiums (contributions) to the health FSA equal to or exceeding potential future benefits (disbursements).

Let’s look at an example that illustrates the HIPAA certification exemption requirements. An employer sponsors a health care insurance plan and a health FSA with a maximum reimbursement amount of $1,200 and contributes $400 to the plan annually, leaving the employee with a maximum election of $800.

This benefit would be exempt from HIPAA certification because the maximum benefit paid ($1,200) is not more than two times the employee’s maximum reimbursement ($800 times 2 equals $1,600) and the employer offers other health coverage.

If the maximum reimbursement amount is greater than two times the salary reduction amount, move on to part two of the equation.

This example starts with an employer who sponsors a health care insurance plan and a health FSA with a maximum reimbursement amount of $800. The employer contributes $450 to the plan annually, leaving the employee with a maximum election of $350.

This benefit would be exempt from HIPAA certification because the maximum benefits paid ($800) is not greater than the employee’s salary reduction election plus $500 ($350 plus $500 equals $850) and the employer offers other health coverage.

COBRA need not be offered in a subsequent year if a health FSA is exempt from HIPAA and contributions for the plan year  equal or exceed the annual election amount. By plan design, this could always be the case.

The regulations also emphasize that health FSAs required to offer COBRA must abide by all the other COBRA requirements applicable to group health plans.

Health Reimbursement Arrangements

Although health FSAs have an exception to offering COBRA, no such exception applies to HRAs. HRAs are considered self-funded welfare benefit plans that provide medical coverage and are subject to the COBRA continuation rules.

COBRA Premiums for FSAs and HRAs

Another quandary faces plan sponsors once they realize that COBRA continuation coverage must be offered for their HRAs and FSAs. What is the premium required in order to continue a participant’s health FSA or HRA? The answer differs for each plan.

Generally, health FSA monthly COBRA premiums are determined by the following formula: annual election amount divided by 12 months.

COBRA premium must be actuarially determined prior to the beginning of the first plan year of a new HRA. In subsequent plan years, the premium may be determined based on the HRA’s past claims experience.

In no case can similarly situated participants be charged different COBRA premiums. For example, a participant with a $30,000 account balance in his HRA must be charged the same monthly COBRA premium as a participant with a $5,000 balance. Similarly situated does not refer to an account balance, but rather to facts such as family versus single coverage or annual limits.

Keep in mind that a two percent administrative fee may be added to the participant’s continuation coverage premiums. This fee helps offset any additional costs borne by the employer.

Each qualified beneficiary has an independent right to elect coverage for the remaining uniform coverage balance of the health FSA or HRA on the day before the qualifying event. Notices need to be sent to employees, spouses and dependents. In the case of a divorce, the spouse and each dependent is provided with a notice. And each spouse and dependent may independently elect the cash balance in the account.

HIPAA Certification of Creditable Coverage Requirements

HIPAA certification requirements that ensure portability of insurance from one plan to the next, certify specific creditable coverage for a stated period of time. This enables those with what would be considered pre-existing conditions to continue coverage for those conditions.

Health care reform prohibits group health plans from imposing pre-existing condition exclusions, making certificates of creditable coverage unnecessary after January 1, 2015, when this ACA provision has been instituted in all health plans. Of course, guidance should be forthcoming confirming when the HIPAA certificates of creditable coverage are no longer needed.

COBRA and the Affordable Care Act (ACA)

We receive plenty of questions every day about the ACA, but one of the most frequently asked questions is whether the ACA eliminates COBRA. COBRA is not dead, thus plans must offer COBRA continuation following a qualifying event—even after 2014. It may be that coverage will be purchased through the health care marketplaces rather than continued under COBRA, but thats one to watch and see what happens.

What are an employer’s COBRA obligations if a qualified beneficiary enrolls in an exchange or individual market before electing COBRA or if a qualified beneficiary enrolls in an exchange or individual market after electing COBRA? The same obligations and rules apply as with any other insurance coverage.

A COBRA election does not impact eligibility for exchange coverage, either. Qualified beneficiaries eligible for or enrolling in COBRA are still generally eligible for exchange coverage. However, qualified beneficiaries who enroll in COBRA instead of exchange coverage cannot enroll in the exchange until the next annual open enrollment rolls around. When COBRA is elected, the next special enrollment opportunity occurs when COBRA is exhausted.

What about the eligibility for a subsidy in an exchange? The qualified beneficiaries who elect COBRA are treated as having an eligible employer sponsored plan and are not eligible for the subsidy. However, if qualified beneficiaries do not elect COBRA,  they may be eligible for a subsidy even if their employer’s coverage is affordable and meets the minimum value criteria.

We’ll continue to watch the future of COBRA continuation coverage. For now, it still must be offered, but whether anyone enrolls once marketplace coverage and subsidies are available is to be determined.

Does This Affect Your Employer/Clients?

Yes! Be sure your employers understand that COBRA obligations continue in 2014 and beyond. Ensure that your employers understand the ramifications of COBRA continuation on all their welfare benefit plans. Also, encourage employers to review and update their COBRA forms and procedures now.

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.

What started out as a tax refund suit came to a dramatic and far-reaching conclusion on June 26, 2013, when the Supreme Court of the United States  (SCOTUS) held that the definition of marriage contained in the Defense of Marriage Act (DOMA) is unconstitutional. SCOTUS stated, “DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.”

The ripples from this decision will be many and affect multitudes of people in the United States, not to mention the federal tax code.

In addition to the Affordable Care Act’s (ACA) mountain of changes, this decision provides even more work for employers, third party administrators, payroll vendors, accountants and lawyers for years to come.

Background

DOMA created a federal definition of marriage. Prior to DOMA, the definition and regulation of marriage was treated as being within the authority and realm of individual states. Since a 1958 revenue ruling, the federal government followed state laws on marriage and cohabitation. Thus, all states inherently held rein over marriage and divorce issues, with some states even defining “common law” marriage arrangements. This ended with DOMA.

In 1996 President Bill Clinton signed DOMA into law. As a result of Section 3 of DOMA, the definitions of “marriage” and “spouse,” for the purpose of constructing federal laws and regulations, excluded same-sex partners. However, in early 2011, the Department of Justice announced that it would no longer defend the constitutionality of Section 3.

Supreme Court’s Ruling

SCOTUS’ ruling was very narrow and found Section 3 of DOMA, which provided that only opposite-sex marriages were recognized for federal law, to be unconstitutional. However, Section 2 of DOMA (which allows a state to refuse same-sex marriages or to recognize the validity of same-sex marriages that were legally performed in another state) was not at issue in this case and, as a result, still stands.

SCOTUS reminded the federal government that whether any couple is legally married is determined at the state level. For decades couples have received marriage licenses from the state, had them duly signed and then submitted for recording purposes. The federal government and employers, for the most part, simply asked taxpayers to check a box—single or married—for submissions such as tax returns.

SCOTUS’ ruling went on to say that DOMA violated basic due process and equal protection principles applicable to the federal government by writing inequality into the entire Internal Revenue Code. It is already estimated that more than 1,000 federal statutes and many more regulations will be affected by this one decision.

The good news? All states have laws related to marriage. However, states are now divided on same-sex marriages. As a result, the ruling creates as many questions as it answers:

 •  Whether married same-sex couples are entitled to refunds on federal taxes previously paid.

 •  Whether a person may seek reimbursement for qualified expenses incurred by a same-sex spouse from flexible spending accounts (FSAs) and/or health reimbursement arrangements (HRAs) that were previously denied.

 •  What’s the effective date for such determinations (e.g., the date on which the couple was married)?

 •  What implications does this ruling have on the administration of tax-advantaged benefits, such as a health FSA?

These and similar questions must be addressed by the federal government and various state agencies.

It is clear that the DOMA ruling will affect the federal tax arena as well as benefit and pension plan documents, health privacy, Social Security benefits, pension payments and taxes on inheritances.

Current State Treatment of Same-Sex Marriages

The following states permit same-sex marriages to be performed: CA, CT, DE (7/1/2013), IA, ME, MA, MD, MN (8/1/2013), NH, NY, RI (8/1/2013), VT, WA and DC.

The following states (and territory) do not permit same-sex marriage to be performed and do not recognize same-sex marriages that were performed in another state: AL, AK, AZ, AR, FL, GA, HI, ID, IN, KS, KY, LA, MI, MS, MO, MT, NE, NC, ND, OH, OK, PA, SC, SD, TN, TX, UT, VA, WV, WI, WY and Puerto Rico.

The following states recognize same-sex civil unions that offer some protections for same-sex couples, including same-sex couples married in other states: CA, CO, HI, IL, NV, NJ and OR.

OPM Guidance

The first hint of the administration’s application of this decision to the issue of benefits appeared on July 1, 2013, in an eight-page memorandum issued by the United States Office of Personnel Management (OPM). This memo is not official guidance on the subject. Rather, it is the application of the decision to one (albeit a very large and important) employer. The full memo is available at: http://www.opm.gov/retirement-services/publications-forms/benefits-administration-letters/2013/13-203.pdf.

The OPM memo immediately extends federal benefits to same-sex spouses, without regard to state of residence.

In the coming months and years the IRS will issue guidance on this and many more questions. They now have to sift through the entire federal tax code and determine whether the SCOTUS decision on DOMA requires changes. The IRS will also direct taxpayers if tax returns may be amended and refiled along with the time span of any retroactive tax action.

States that don’t recognize same-sex marriages may not see much change at this time. However, for multi-state employers, this will be a challenging time to adopt benefits and processes for some states, while retaining current practices for all other states.

For benefit specialists, it’s important to carefully follow the application of this ruling and any subsequent guidance that may be issued from government agencies to determine if any adjustments need to be made to code sections and plan documents. We’ll continue to follow the application of the SCOTUS decision in future columns.

And as with any change, the journey starts one step at a time. Or, in this instance, one revenue ruling or regulation at a time.

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.

Employer dynamics are constantly changing and questions can arise about the impact of merger and acquisition (M&A) activity on employee benefits and particularly, on participants in a flexible spending account (FSA) plan.

Fortunately, the IRS agrees that participants shouldn’t be punished just because their company has merged with another. The participants elected to fund FSA plan elections for unreimbursed medical and dependent care expenses through pre-tax salary redirection. It’s a great tax savings, but because the IRS is involved, there are lots of rules and regulations. Often overlooked in all the details of M&A deals is the proper handling of employees’ health FSAs.

Generally, FSAs will fall into two categories: employees who have money in their accounts, but not enough expenses incurred to draw on the funds, and participants who have received reimbursements in excess of their year-to-date contributions.

The IRS uses Revenue Ruling 2002-32 to explain exactly how to transfer the balance to the new employer. By using specific facts and circumstances within this revenue ruling, the IRS guides the buyer and the seller on how to continue a participant’s health FSA coverage once the company’s sale is complete.

The first of the following examples allows for continuation of coverage under the seller’s health FSA with salary redirections made under the buyer’s plan. The second example illustrates how coverage and salary redirection are handed off to the buyer.

Coverage Continues Under Seller’s Plan

The facts in this company merger are as follows: (1) The selling company maintains the health FSA plan; (2) during the plan year, a buyer acquires a portion of the seller’s assets; and (3) the seller’s employees become employees of the buyer.

The two parties agree that the seller will continue its health FSA plan and coverage for all transferred employees. The buyer must also have an existing health FSA plan or be prepared to adopt a new health FSA plan. Salary redirections take place from the buyer’s payroll—the transferred participants are now the buyer’s employees. Health FSA participants will continue to seek reimbursement from the seller for the remainder of the plan year.

Example: Joe works for Cellar Sales. He made a $1,200 annual election to his health FSA plan that started on January 1. On July 1, Joe’s division was sold and he became an employee of Buy Right. Joe has contributed $600 to his health FSA account, but has incurred no medical expenses to date. Prior to Revenue Ruling 2002-32, Joe would have been considered a terminated employee from Cellar Sales and would have either forfeited his $600 or been able to elect COBRA continuation coverage, if applicable.

With this new ruling, Joe’s new paycheck from Buy Right will continue to take his health FSA pre-tax deductions and deposit them into Joe’s Cellar Sales’ FSA account. He will continue to send future requests for reimbursement to Cellar Sales.

Coverage Is Transferred to Buyer’s Plan

The facts are the same as in scenario one, except the buyer agrees to provide coverage for the new employees. Again, the buyer must have an existing plan or will adopt a new plan with salary redirections started through the buyer’s payroll account.

All affected plan participants’ accounts consisting of contributions and earlier reimbursements are transferred to the new employer. Participants will request reimbursement for expenses incurred either before or after the acquisition from their new employer. The participants enjoy uninterrupted coverage.

Example: Let’s look at Joe again with a different set of facts and circumstances. Although Joe has contributed $600 to Cellar Sales’ FSA plan, his balance will be transferred to his new employer. Thus, instead of sending his request for reimbursements to Cellar Sales, he will turn in claims to his new employer, Buy Right.

Even if Joe incurred eligible expenses in March, his claim would be submitted to Buy Right and reimbursed from Buy Right’s FSA plan, because his account balance was transferred to the new company.

Just a Few Rules

Transferring the participant’s accounts means just that. Unless the participant has a valid change of status, no midyear election changes are allowed because of a merger or acquisition. However, keep in mind, both buyer and seller must maintain an FSA plan, and the FSA plans must also allow for the same period of coverage. In other words, both plans must provide coverage based on the same plan year.

Of course, in both scenarios, the seller and the buyer should document the arrangement outside the FSA plan and spell out appropriate financial terms. These arrangements would take into consideration contributions and reimbursements received before the merger.

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.

While the majority of people are thinking about summer vacations, sunshine and getting out their convertibles, benefit specialists are hunkering down to map out enrollment for a plan year that won’t even start until January 2014.

Why? Because the Affordable Care Act (ACA) changes are coming like a snowball getting bigger and bigger as it rolls downhill. But is it really a giant snowball or can you break down the 2014 ACA changes and make snow cones?

I’ve been talking about health care reform since November 2009-and there’s still a lot to talk about, especially with all that’s changing in 2014. The state insurance exchanges are now known by their new name-marketplaces. But be aware that there’s an avalanche of differences among the states’ marketplaces: how they are accessed, who is sponsoring them, and if they are public or private marketplaces.

The good news is that what seems overwhelming doesn’t have to be. Employers and individuals will be able to go out to a marketplace and compare health insurance policies, coverage and premium rates-and there will be people available to help if needed. There is a 5 to 12 page application that must be completed by anyone purchasing insurance. The application’s length depends on how many are in the family unit to be covered. Applications are located at www.cms.gov/CCIIO/resources/Forms-Reports-and-Other-Resources/index.html#Affordable%20Insurance%20Exchanges.

Now is the time for you to help your employer-clients step back, take a deep breath and build a strategic plan. Plans don’t need to be complicated; in fact a simple plan might look something like this:

 1. Employer size. Determine how many employees an employer has and which regulations apply to them.

 2. Benefits. List every benefit the employer offers. This includes health coverage plans and voluntary products. Be sure to include tax-advantaged accounts that help employees defray out-of-pocket expenses, because these plans will continue to be an important part of coverage provided to employees.

 3. Demographics. It’s important to understand the average income levels and who is accessing benefits. Subsidies are available to employees for up to 400 percent of the federal poverty limit (about $46,000 for an individual) and, depending on the average income of the employee population, subsidies are an important factor in the decision process.

 4. Coverage. Is the employer required to provide health coverage to employees? Do they want to continue to offer health insurance? Does the employer want to continue to provide dollars for health insurance?

 5. Budget. How much is the employer currently spending on benefits?

Keep in mind that your employer-clients will most likely want to continue the tax-advantaged accounts for employees (both flexible spending accounts [FSAs] and health savings accounts [HSAs]) because these benefits help employees defray out-of-pocket expenses.

Once the strategic plan is in place, build on it by assessing what insurance plans are available that fit the employers size and budget. Take into consideration the employee demographics and employer size, because that may impact whether the employer is required to pay mandate penalties, as well as whether they guide their participants to the public marketplace for individual insurance plans or make group policies available.

Finally, help your employers understand the importance of sending out participant notices and disclosures concerning the marketplaces. Notices are located at www.dol.gov/ebsa/.

Getting the word out about marketplaces is critical to the successful implementation of the ACA.

Flexible Benefit Plans

Benefits administrators need their own game plan for clients. Health reimbursement arrangements (HRAs) can deliver considerable tax-advantaged dollars to participants enrolled in their employer’s health coverage through a private marketplace.

Employers can soften the blow of a higher deductible plan with an HRA. In some cases an HRA can be established to deliver premium dollars to lower-paid employees in order to achieve affordable coverage, a requirement in certain marketplaces through SHOPs and public marketplaces. However, premium dollars cannot be delivered to employees through an HRA.

Employers can allow employees to defray other out-of-pocket health care expenses with tax-advantaged dollars through an FSA or even allow other voluntary benefits to be purchased on a tax-advantaged basis through a cafeteria plan-jut keep in mind that there are strict compliance regulations.

Employee Education

Employers need to share the information they are gathering with their employees, as well as the decisions they are making now. An employers first course of action should be to dispel any misinformation that’s out there. The only way to accomplish this mission is to educate employees as soon as information becomes available.

You, as their trusted advisor, are in a prime position to guide employers.

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.

Leading into 2014, this is a banner year for changes within the benefits world. A topic on everyone’s mind is exchanges and just what kind of medical coverage will be available. Below are a couple of facts about exchanges that are timely. Enrollment is set to begin on October 1, 2013.

Exchange SHOP

The Small Business Health Options Program (SHOP), available for state exchanges, will promote health insurance availability for small employers. Beginning in 2014, small businesses with more than one and fewer than 50 employees can obtain a health care tax credit when purchasing employer-provided group insurance through an exchange. States can extend SHOP to employers with up to 100 employees.

Qualified employers may select coverage from one of the “metal” coverage levels for their employees. These categories are bronze, silver, gold and platinum and denote differing amounts of coverage. This employee choice model allows eligible employees to select any coverage offered within the chosen metal range. Employers can also choose a specific plan, or plans, available for their employees to purchase within a SHOP.

Additionally, SHOP assists the small employer by aggregating premiums into one billing statement to facilitate employer contributions to employees’ health insurance choices and premium payments.

One Year Delay for Some SHOP Options

Thirty-three of the health exchanges run by the federal government will not be ready this year, as originally outlined. This does not mean that the various metal coverage levels and a selection of plans will not be available on a state-run exchange SHOP; it simply means that the federally-facilitated SHOP (FF-SHOP) will not be available during 2014.

The FF-SHOP will be available for plan years beginning on or after January 1, 2015, and will provide qualified employers a choice of two methods to make certified health plans available to qualified employees.

Keep in mind there will also be state run as well as private exchanges from which small employers may choose the type of insurance they already offer to their employees. Some employers may not want to push their employees to an exchange in order to get individual insurance. However, now is the time to work with your employer/clients as a trusted advisor to plan for new choices coming in 2014 and beyond.

Health Insurance Deductibles for Small Group Health Plans

Along with the FF-SHOP delay described above, this is a good time to remind you of another restriction both employers and employees will be seeing in small group health insurance plans beginning on or after January 1, 2014.

A $2,000 individual and $4,000 family deductible limit kicks in for any plan other than large group or self-insured plans. These annual deductible limits will be indexed for plan years starting after December 31, 2014.

One popular plan design, where an employer “buys down” to a higher deductible through the use of a health flexible spending account (FSA) or a health reimbursement arrangement (HRA) is also out of the question. In the past, employers might offer their employees a high-deductible health plan and establish a side account, such as an HRA, to offset the higher costs to enrollees. Final policies by the agencies have barred this type of arrangement.

Education

A Department of Health and Human Services (HHS) website (www.healthcare.gov) provides different types of information from key features of the Affordable Care Act (ACA) law, information for you, and a timeline for what’s changing and when. It also contains the full text of ACA. You probably don’t want to read the entire law, but other topics on this website are very helpful. The timeline is especially useful to get the thousand-foot view and a general understanding of changes to the law. First, employers need to be educated and then take on the daunting challenge of educating all employees.

This isn’t Survivor. Employers and employees do not want to be dropped onto an island on their own with hundreds of insurance products to sift through. Nor do they want to be “voted off” the island, so employers will be looking to their trusted advisors for a good road map to follow into the changes proliferated by ACA. 

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.