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Represents management exclusively in every aspect of employment, benefits, labor, and immigration law and related litigation Over 750 attorneys in 53 locations nationwide Current caseload of over 5,000 litigations and approximately 300 class actions Founding member of L&E Global 3

This presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances. Indeed, health care reform law is highly complicated and it supplements and amends an existing expansive and interconnected body of statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.). The solutions to any given business’s health care reform compliance and design issues depend on too many varied factors to list, including but not limited to, the size of the employer (which depends on complex business ownership and employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether its employees work full time or part time, the importance of group health coverage to the employer’s recruitment and retention goals, whether the employer has a collectively-bargained workforce, whether the employer has leased employees, the cost of the current group health coverage and extent to which employees must pay that cost, where the employer/employees are located, whether the employer is a religious organization, what the current plan covers and whether that coverage meets minimum requirements, and many other factors. IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.) 4

HRA, FSA, HSA Account Basics – Similarities and Differences How These Different Accounts Work Together HRA, FSA and HSA and the Affordable Care Act Accounts FSAs: the New Carryover Rule and Excepted Benefit Criteria Required and Optional Amendments to Your Plan(s) 5

Generally, out-of-pocket payments for medical care o Defined in the Internal Revenue Code o Payments on behalf of account beneficiary o Prescribed medication o NOT amounts covered by insurance or otherwise o Generally includes health insurance premiums (except HSAs and FSA’s) 6

What is an HRA? o Paid for by the employer only, no salary reduction contributions o Not provided under a cafeteria plan o Reimburses employee for Qualified Medical Care Expenses up to maximum dollar amount o Generally considered to be group health plan Who can have an HRA? o Employees and retirees, and their spouses and dependents 7

What if a participant doesn’t use maximum amount? o May be able to carry-over to next year o Carry-over cannot be paid out in cash or other benefits What expenses are eligible for reimbursement? o Qualified medical care expenses of employee, spouse, or dependents o Includes IRC §213(d) medical expenses (including group health plan premiums) o Expenses must be substantiated 8

Pros o Carry-over from one year to next may be permitted o Maximum reimbursement amount does not need to be immediately available to employees o Coverage period can be less than 12 months o Not subject to IRC §125 regulations governing health FSAs Cons o Medical expenses must be incurred during the coverage period o Substantiating expenses can be costly and time consuming o Subject to regulation as group health plan 9

What is an HSA? o A trust or custodial account maintained exclusively for purpose of reimbursing the account holder for the payment of qualified medical expenses Who can have an HSA? o Eligible individuals covered by a high deductible health plan Who is an eligible individual? o Individual who is covered by a HDHP and not covered by any other health plan (with certain exceptions) How do you establish an HSA? o Eligible individuals or Employer may open an HSA in the individual’s name 10

What is an HDHP? o Annual deductible for 2014 must be at least $1,250 for self-only coverage or $2,500 for family coverage o Out-of-pocket expenses (including the deductible) for 2014 cannot be more than $6,350 for self-only coverage or $12,700 for family coverage What other types of health coverage are permitted? o Cannot have other insurance that covers the same benefits as the HDHP o Permitted coverages: AD&D, dental, vision, and long-term care 11

Who can contribute to an HSA? o Any eligible individual o If HSA established by Employer, then employer and/or the employees o If established by self-employed/unemployed individual, then that individual and possibly other family members How are HSA contributions treated for tax purposes? o Employer contributions are not included in employee’s gross income o Employer contributions are tax-deductible to Employer o Individual’s contributions are tax deductible 12

Pros o Employer’s contributions are excluded from employees’ taxes o Individual’s contributions are tax-deductible up to $3,300 each year for individual coverage or $6,550 for family coverage for 2014 o Contributions may be made until April 15 of the following year o Accounts owned by individual o Health care expense distributions are not subject to tax Cons o Employer cannot recover any portion of its contribution to an employee’s HSA o Employee and Employer reporting requirements o Employer must offer HDHP o May not be “group health plan” 13

What is an FSA? o Employer plan permitting employees to pay for certain health care expenses on pretax basis How are FSAs funded? o Employee salary deferral election prior to beginning of plan year o Irrevocable election o Employer contributions optional How do employees get reimbursed for eligible expenses? o Employee is reimbursed up to the deferral election amount for qualifying expenses during that year o Qualified expenses must be incurred during the FSA’s defined “period of coverage” o Expenses must be substantiated 14

What are contribution limits? o $2,500 When can salary deferral elections be changed? o Life change events What about expenses incurred outside Coverage Period? o Grace period o $500 carry-over rule 15

Pros o Generally, cannot reimburse for expenses incurred outside of the coverage period o $2,500 plan limit o For Employers: use it or lose it rule Cons o For Employees: Use it or lose it rule o For Employers: The maximum reimbursement amount must be immediately available to employees each coverage period Coverage period must be 12 months Subject to regulation as “group health plan” 16

17 HRAsHSAsHealth FSAs Part of Cafeteria Plan?No, but can offer bothYes, but not requiredYes EligibilityEmployees and retirees, but NOT self- employed Employees, retirees, and self-employed if only covered by HDHP Employees FundingOnly employerEmployer, employee, and other eligible individuals Employer and Employee Eligible ExpensesIRC §213(d) expenses, health insurance premiums, long-term care expenses IRC §213(d) expenses, long-term care expenses, but generally not health premiums IRC §213(d) expenses, but not health insurance premiums or long-term care expenses

HRAsHSAsHealth FSAs Expenses Covered under another plan No Contribution LimitsNo. Set by employerFor 2014: Individual $3,300 Family $6,550 Catch-up contributions allowed $2,500 Carry-over to next year? Yes, by plan designYesNo, except grace period and $500 carry- over Tax Treatment of Employee Contributions No employee contributions are allowed Pre-tax salary reductions allowed or deduction permitted if individual/post-tax Pre-tax salary 18

HRAsHSAsHealth FSAs Tax Treatment (Employee) of Employer contributions and reimbursements Excluded from tax Pre-tax; excluded from tax Tax Treatment (Employer) of Employer Contributions Deductible upon reimbursement of expense Deductible in year contribution made Deductible upon reimbursement of expense Subject to ERISA?YesYes, but only if employer is involved Yes Subject to HIPAA privacy rules? YesYes, if considered health plan under definition of HIPAA regulations Yes Subject to COBRA?YesYes, if subject to ERISAMaybe PortabilityNoYesNo 19

If coverage provided for the same medical care expense under both an HRA and a health FSA: o Default Rule: HRA funds must be exhausted prior to FSA reimbursement o HRA and FSAs can be designed to avoid over-lapping coverage 20

HSA participants may also be covered by a HRA if the HRA is a “post-deductible” HRA HSA participants may also be covered by a “limited use” FSA 21

Under limited circumstances, an HRA can be provided along with another health plan funded by employee salary reductions If individual’s spouse has FSA or HRA individual cannot have HSA if spouse’s FSA or HRA can pay medical expenses before HDHP is met 22

Generally, imposes certain requirements (the “market reforms”) for group health plans Market reforms impacting HRAs, HSAs, and FSAs are: o The annual dollar limit prohibition o The preventive services requirements 23

How are HRAs integrated for purposes of satisfying these market reforms? Two integration methods: 1.Minimum Value Not Required, or 2.Minimum Value Required. 24

For purposes of satisfying the annual dollar limit prohibition and the preventive services requirements, an HRA is integrated with another group health plan if: 1.The employer offers another group health plan; 2.Employees covered by the HRA enrolled in the other group health plan; 3.Only employees enrolled in the other group health plan are eligible to enroll in the HRA; 4.HRA reimbursements are limited to certain expenses; 5.HRA provides an opt-out feature. 25

For HRAs that do not limit reimbursements to certain expenses, the HRA is integrated: 1.Employer must offer group health plan that provides minimum value; 2.Employees covered by the HRA are enrolled in the MV group health plan; 3.Only employees enrolled in MV group health plan may enroll in the HRA; 4.HRA provides opt-out. 26

HRAs designed to reimburse employees for individual policy premiums o An HRA cannot be integrated with individual market coverage or individual policies provided under an employer payment plan Retiree-only HRAs generally not subject to the market reforms o But retirees covered by a standalone HRA are not eligible for the ACA premium tax credit for any month they are covered by the HRA 27

ACA Market Reforms apply to “group health plans” ACA Market Reforms do not apply to Excepted Benefits, including: o AD&D, disability income, workers’ compensation, and liability o Limited scope benefits, including health FSAs 28

Benefits provided under a health FSA will be considered “excepted benefits,” if: o Employer offers other group health plan coverage o Maximum benefit payable does not exceed specific limits o Health FSA is offered through a cafeteria plan 29

Individuals are eligible for ACA premium tax credit for exchange coverage only if: o The individual is not eligible for employer-sponsored coverage that is affordable and provides minimum value Employers offering a primary health plan with an integrated HRA, reimbursement amounts made available in the current year under the HRA may be considered for either the affordability or minimum value requirements, not both 30

On November 18, 2013, the IRS modified the use-or-lose rule for health care FSAs Employers may permit carry-over of up to $500 to the next plan year Plan amendment is required Cannot adopt carry-over rule if plan provides for a grace period Cafeteria plans offering health FSAs must be amended to limit participant salary reduction elections to $2,500 by the end of 2014 Plan Year 31

To adopt the new $500 carryover provision, the cafeteria plan must be amended By the last day of plan year from which amounts will be carried over To eliminate grace periods if the Plan provided 32

Cafeteria plans offering health FSAs must be amended to limit participant salary reduction elections to $2,500 by the end of 2014 Plan Year 33

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