HSAs – Interaction with Cafeteria Plans, HRAs and COBRA Peter Antonie Compliance Communications Specialist Employee Benefits Corporation The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

HSAs – Interaction with Cafeteria Plans, HRAs and COBRA Webinar HSAs can be included in a Cafeteria Plan HSAs need to be documented in the Cafeteria Plan Transition issues need to be addressed prior to implementing an HDHP with HSAs Interaction of HSAs at the participant level can lead to compliance issues We can answer your questions about how HSAs interact with Cafeteria Plans, HRAs or COBRA

Today’s Agenda Quick Review of HSAs HSAs in a Cafeteria Plan Documenting employer and employee contributions Limited or Post Deductible Health Care FSA Transition issues when HSAs are added to an existing cafeteria plan Cafeteria plan participant issues Designing an HRA to accommodate HSAs HRA participant issues Transition issues affected by COBRA Common compliance issues

Quick Review HSAs authorized under IRS Code § 223 Account established in the individual’s name – not the employer’s Owned by the account holder Portable with the individual – not tied to employer Not a group health plan – not subject to COBRA, FMLA, HIPAA, ERISA, etc. Eligible to make or receive HSA contributions Not another individual’s tax dependent Not entitled to (enrolled in) Medicare Covered by a qualified High Deductible Health Plan (HDHP) Not covered by any disqualifying coverage

Quick Review HSA Contributions By individual or family member as tax deduction at year-end (post-tax) Is a $ for $ adjustment to gross income By individual as pre-tax deduction in cafeteria plan Is a $ for $ adjustment to gross pay By employer (employer’s contribution reduces the maximum the individual can contribute)

HDHP & HSA Limits* * minimum = deductible, maximum = out-of-pocket 2012 min/max Single $1,200/$6,050 Family $2,400/$12,100 2012 contribution limit Single $3,100 Family $6,250 2013 min/max Single $1,250/$6,250 Family $2,500/$12,500 2013 contribution limit Single $3,250 Family $6,450

HSAs in a Cafeteria Plan IRS Code § 223 prompted amendment of § 125 to allow HSAs in Cafeteria Plans Must adopt or amend the Cafeteria Plan for pre-tax HSA contributions through the premium only component same as documenting pre-tax medical or dental Pre-tax contributions are an election Are considered “premiums” for medical care Regulation allows for prospective changes (no event needed – Final Proposed Treasury Regulation 1.125-2) Any employer contributions to HSAs are noted in the employer contribution section

Adoption Agreement or Amendment

HSAs Documented as Premiums

HSA Contributions Through a Cafeteria Plan Employee contributions are a pre-tax election Employee’s elected amount can be changed any pay period, prospectively (no permitted election change event necessary) Annual maximum contribution amounts include employee and employer contributions $3,100/single; $6,250/family (2012) $3,250/single; $6,450/family (2013)

HSA Contributions Through a Cafeteria Plan Any employer HSA contributions are through the cafeteria plan if employees can make pre-tax contributions (Treasury Regulation §54.4980G-5) Employer contributions reduce the amount an individual can contribute HSA contributions (employer and employee) are taken into account when §125 Contributions & Benefits and Key Employee 25% Concentration nondiscrimination tests are performed

Adoption Agreement or Amendment

HSA Contributions through a Cafeteria Plan §125 Nondiscrimination Testing HSA contributions (employer & employee) treated as premiums HSAs are taken into account when performing the §125 Contributions & Benefits test* and Key Employee 25% Concentration test Failing either or both tests means the HCEs or Key employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs) *The C&B Availability test fails if HCEs receive contributions and some eligible employees get no contribution

HSA Contributions through a Cafeteria Plan Employer reports employee pre-tax and any employer HSA contributions on W-2, in box 12 with code W Employer responsible to monitor that*: Employee is enrolled in HDHP coverage offered by employer Employee has no disqualifying coverage offered by employer Employee is eligible for $1,000 catch-up contribution * Not responsible to monitor another employer’s plan or spousal coverage

HSA Contributions Through a Cafeteria Plan Employee is responsible to monitor that*: Employee is an eligible individual Employee is not covered by any disqualifying coverage Employee does not over-contribute Employee only seeks HSA distributions for qualified medical care expenses * Reported through IRS Forms 8889 and 5329

Flexible Spending Arrangements with HSAs Can adopt a Limited Health Care FSA or Post Deductible Health Care FSA for employees who want to make HSA contributions and also have an FSA Regular Health Care FSA is disqualifying coverage – makes individual ineligible to make or receive HSA contributions

Limited Health Care FSA Recognized in IRS Notices 2004-8 & 2008-59 Is not disqualifying coverage Health Care FSA will disqualify an individual from being able to contribute to an HSA Includes the spouse’s Health Care FSA What can it cover? Dental expenses Vision expenses Preventive Care expenses* * Many cafeteria plans, including the BESTflex Plan, do not provide for this – too hard to administer

Limited Health Care FSA If Limited Health Care FSA is to be offered, must adopt or amend Cafeteria Plan to include it Follows all the same rules as a regular Health Care FSA Uniform Coverage rule Use-It-or-Lose-It (forfeiture) rule Third party substantiation of expenses Permitted election change events

Adoption Agreement or Amendment

Limited Health Care FSA Documentd

Post Deductible Health Care FSA Recognized in IRS Notices 2004-8 & 2008-59 Only dental or vision expenses eligible until minimum HDHP deductible is satisfied All medical care expenses incurred after satisfying the minimum HDHP deductible are eligible expenses Follows all the Health Care FSA rules Often not offered to employers No process in place to track deductibles Participant must provide proof of satisfying HDHP deductible

Cafeteria Plan Transition Issues Adoption of HDHP with HSAs creates transition issues for Health Care FSA participants Year-end transition Mid-year transition

Cafeteria Plan Transition Issues Year-end adoption of HDHP with HSAs If employer does not offer the Grace Period, all Health Care FSA participants can begin contributing to the HSAs at start of new plan year IRS Notice 2005-86 Any employer HSA contributions can only be made into HSA eligible employee accounts

Year-End Transition to HDHP with HSAs (cont.) If employer does offer the Grace Period* Participants that have a $0 Health Care FSA balance on last day of plan year can begin contributing to the HSA on first day of new plan year Participants with a Health Care FSA balance at year end must wait until end of run-out period to begin making contributions to the HSA (1st of the month following end of Grace Period) Employer can amend the current plan to remove Grace Period prior to year end and all participants can make HSA contributions starting with new year * IRS Notice 2005-86

Year-End Transition to HDHP with HSAs (cont.) Additional option* Convert all Health Care FSAs to Limited or Post Deductible Health Care FSAs during the grace period Cannot be a choice to participants Challenges for those who do not have dental or vision expenses – could result in forfeitures Requires amendment to delete the Health Care FSA and convert to Limited or Post Deductible Health Care FSA * IRS Notice 2005-86

Cafeteria Plan Transition Issues Mid-Year adoption of HDHP with HSAs Example: Employer offers a calendar year Cafeteria Plan but the health insurance renews on August 1. Employer currently offers an HMO but will offer an HDHP on August 1 with an HSA Employer has many employees enrolled in the Health Care FSA Adoption of HDHP is a Coverage Change – does not permit Health Care FSA participants to revoke or amend their elections (Treasury Regulation 1.125-4(f)) What are the employer’s options?

Mid-Year Adoption of HDHP with HSAs Informal IRS guidance March 2005 Option 1: Convert all participants to a Limited or Post Deductible Health Care FSA on August 1 Unilateral employer action, not participant choice Expenses incurred after August 1 can only be reimbursed for dental or vision care Participants may forfeit money if they do not have enough dental or vision care needs All employees can start making HSA contributions August 1

Mid-Year Adoption of HDHP with HSAs (cont.) Do not convert Health Care FSA Participants who are enrolled in the Health Care FSA cannot immediately contribute to the HSA Cannot revoke Health Care FSA since change to HDHP is a Coverage Change May begin contributing on January 1 if their account balance is $0 or the Grace Period is not present If the Grace Period is present and there is an account balance, the participant can begin contributing to an HSA on April 1 of the next plan year (1st of the month following Run Out period)

Mid-Year Adoption of HDHP with HSAs (cont.) Plan ahead Run a short plan year in the Cafeteria Plan to make it match the health insurance plan year (e.g., 1/1 – 7/31) Requires that employer anticipates change to HDHP with HSAs prior to cafeteria plan renewal on January 1 so amendment can be made for short plan year Then, year end transition issues apply

Participant Scenarios Scenarios assume participant has HDHP coverage with HSA contributions Spouse’s employer implements new health plan Spouse acquires new job and benefits Participant marries individual who has existing health coverage Participant’s spouse loses job and health benefits

Participant scenarios (cont.) Issues to consider: Does participant have HDHP coverage after the event? Does participant have any disqualifying coverage after the event? What effect does the event have on the participant's future HSA contributions?

Designing an HRA to Accommodate HSAs Underlying plan that HRA is linked to must itself be an HDHP HRA cannot reimburse any deductible expenses until employee has had out-of-pocket expenses equal to or greater than the HDHP minimum deductible amounts HRA may need to be amended by January 1 to assure minimum reimbursement threshold amounts comply with any inflationary increase in the HDHP deductible minimums

Designing an HRA to Accommodate HSAs Example: employer’s HDHP deductible is $2,500/single, $5,000 per family aggregate; 100% reimbursed thereafter HRA design: Single plan: first $1,250* not paid, remaining $1,250 paid 100% Family plan: first $2,500* not paid, remaining $2,500 paid 100% *this accommodates the 2013 minimum HDHP out-of-pocket deductible expense

HRA Participant Issues Participant’s employer has HDHP with HSA compatible HRA As long as participant's spouse does not have disqualifying coverage* that includes the participant, the participant can make HSA contributions *Non-HDHP medical plan, Health Care FSA or non-compatible HRA

Health Care FSA vs HRA vs HSA Feature Health Care FSA EBC HRA HSA Contributions Employer and employee Employer Maximum Contribution Set by employer Indexed annually Tax status of ER contributions Excludable from EE income Same Portability None Individual account HDHP Not required Required Non-Medical expenses Not allowed Subject to 20% penalty + tax

Health Care FSA vs HRA vs HSA (continued) Feature Health Care FSA EBC HRA HSA Coverage Period 12 months Plan determines Does not apply Uniform coverage rule Applies Substantiation requirements Plan must substantiate Individual substantiation Reimbursement order FSA pays last unless HRA document over rides HRA pays first unless HRA document stipulates FSA Cannot have FSA or HRA cover same expenses

Transition Issues Affected By COBRA Qualified beneficiary (QB) eligibility for HSAs Adoption of HDHP at renewal Adoption of HDHP mid-year

Transition Issues Affected By COBRA QB eligibility for HSAs If COBRA coverage is HDHP, QB can make HSA contributions If QB does not elect COBRA for HDHP coverage, cannot make HSA contributions unless covered by HDHP through another plan Spouse’s HDHP coverage Individual health plan HDHP coverage

Transition Issues Affected By COBRA Adoption of HDHP at renewal Requires new coverage information to QBs Open enrollment for QBs if new insurer Requires new premium rate information

Transition Issues Affected By COBRA Adoption of HDHP mid-year Change of coverage for active employees allows change in coverage for QBs Change in premium for active employees allows change in applicable premium for QBs An exception to the 12-month Determination Period rules Open enrollment for QBs if new insurer Requires new premium rate information

Common Compliance Issues For Employers Not documenting pre-tax HSAs in the cafeteria plan Not documenting employer’s contribution to HSAs in the cafeteria plan Not performing due diligence on employee eligibility for HSA contributions Not including HSAs in census report for nondiscrimination testing Not adjusting (amending) the HRA reimbursement thresholds to accommodate new HDHP minimums Not providing advance notice of HDHP adoption for COBRA QBs

Summary HSAs can be included in the cafeteria plan HSAs need to be documented in the cafeteria plan Transition issues need to be addressed prior to implementing an HDHP with HSAs Interaction of HSAs at the participant level can lead to compliance issues

Questions? Thanks for Attending!! Any questions can be addressed by e-mail or phone at your convenience Compliance Department 800 346 2126 compliance@ebcflex.com Thanks for Attending!! Visit our online blog: http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx