Alphabet Soup: Review and What’s New with HRAs, FSAs & HSAs Presented by: Darcy L. Hitesman, Esq – 63 rd Avenue North Maple Grove, MN Phone: Website: October 6, 2011 Government Payroll Review Seminar (GPRS)

Introduction Lots has happened Lots is happening Focus on the defined contribution methods 2

Legal Box Outer limits Lots of room inside – Flexibility – Responsibility 3

How the Code Works General rule: – Anything provided by an employer to an employee in return for services is taxable income to the employee. Exception: – Unless there is a specific Code section the exempts it from being taxable income. The Catch: – When a Code provision exempts something from income, it usually requires compliance with a number of requirements in return. 4

HIPAA Portability Unlike privacy and security, not all group health plans are subject to HIPAA Portability requirements. Analysis Is it a group health plan? – Broadly defined – Employer sponsored plan that provides medical benefits – HSA is not group health plan 5 Excepted status is important because dictates application of other requirements, including many requirements under Health Care Reform.

HIPAA Portability Does a listed exception apply? – Retiree only plan Fewer than 2 current employees – Health FSA Maximum benefit does not exceed two times salary reduction or if greater salary reductions plus $500; and employer offers another plan that is subject to HIPAA Portability (e.g., major medical) Most are excepted – HRAs To be excepted, must meet Health FSA requirements above Most are not excepted and must comply with HIPAA Portability – Stand alone dental; stand alone vision Separate policy if insured Not integral if self-insured (e.g., separate election, separate premium) 6

HIPAA Portability – Long Term Care Coverage Excepted if under separate policy or not integral Most falls within exception – Wellness and EAP Not unless another exception applies Most are not excepted and must comply with HIPAA Portability – Blanket exceptions: Independent Non coordinated Supplemental (special rules) – Examples: accident coverage, auto insurance, work comp., specified disease; fixed indemnity 7

Goal Refresh regarding methods – Similarities – Differences Update – “New” ways they are being used – Health Care Reform 8

Today’s Agenda 9 Code §ReviewWhat’s New Health Reimbursement Arrangement HRA 105 Health Flexible Spending Account Health FSA 105 Health Savings Account HSA 223

10 HEALTH REIMBURSEMENT ARRANGEMENT PEHP PMA VEBA HRA ICMA America’s VEBA MSA PRA MSRS-HCSP REBA PSA VEMA PEBSCO All versions of the same thing…HRA RHSA

Health Reimbursement Arrangement Self-insured medical plan under Code §§ 105, 106 – First recognized by IRS in 2002 – Written plan document – 213(d) medical expenses (including medical premiums) Limited scope Post deductible Tied to major medical 11

Health Reimbursement Arrangement – Expenses of employees (including former); spouse (DOMA); dependents – Claims substantiation and adjudication Independent third party substantiation Claimant representations Third party adjudication Ordering rules Mutual exclusivity 12

Health Reimbursement Arrangement Nondiscrimination testing – Bargained – Non-bargained Highly compensated individual Eligibility Benefits 13 If you treat people differently…nondiscrimination issue.

Health Reimbursement Arrangement Entirely employer funded – No choice to participate Nothing in return if waive Exception – No salary reduction Not related to cafeteria plan Exception – No employee after-tax contribution – Conversion Mandated; set NO CHOICE! – Carryover from one year to the next year permitted – Spend down permitted Consider COBRA 14

Health Reimbursement Arrangement Other Federal Laws – HIPAA Privacy/Security Covered entity Business Associate Policies and procedures – HIPAA Portability Most HRAs are subject – COBRA – Bunch of others… USERRA FMLA GINA WHCRA NMHPA Health Care Reform 15

Moving on… 16 Code §ReviewWhat’s New Health Reimbursement Arrangement HRA 105 Health Flexible Spending Account Health FSA 105 Health Savings Account HSA 223

HRAs: What’s New? New ways to use New laws that impact – Health Care Reform 17

HRAs to Pay Premiums Group medical premiums Individual medical premiums Ordering issues with cafeteria plan ability to pay premiums pre- tax Actives; post employment (including retirees) Nondiscrimination testing – Just premiums – Premiums “plus” 18

HRAs for Wellness Credits Stand alone or enhancement to existing Additional contribution – employer contribution Nondiscrimination testing – Just premiums – Premiums “plus” 19 Note: Wellness maximum for standard based program increases to 30% for 2014.

HRAs Replacing Retiree Obligation Reduce OPEB impact Still have implicit subsidy – Statutory obligation to make available – Combined with actives until age 65 But, not a contribution to cost element 20

Health Care Reform* Tax consequence of adult child (see handout) OTC (see handout) W-2 reporting (later slide) Cadillac tax (later slide) PHSA benefit mandates – Because generally not excepted from HIPAA Portability – Substantive – Administrative Enhanced claims, appeals and external review (later slide) Uniform Summary of Benefits and Coverage Auto enrollment 21 *not exhaustive

W-2 Reporting Requirement Effective 2012 (reported in 2013) Aggregate cost of applicable employer sponsored coverage Excludable under Section 106 or would be excludable if paid by the employer Any coverage that meets the definition of group health plan for COBRA, subject to certain exceptions 22

W-2 Reporting Requirement Exceptions include – Long term care – Modified HIPAA Excepted Benefits Rule On site medical – Stand alone vision, stand alone dental – Specified illness, fixed indemnity where paid by employee on after tax basis – HSAs – Special rule for health FSAs First step: Identify your group health plans and identify which are excepted from HIPAA Portability 23 HRAs indefinitely excluded under interim guidance.

W-2 Reporting Requirement Just reporting Transitional relief for employer filing fewer than 250 Form W-2s for preceding calendar year 24

Cadillac Tax Effective % on amount in excess of threshold – “Excess” – amount by which aggregate cost of employee’s applicable employer sponsored group health plan exceeds threshold – Threshold – $10,200/$27,500 – Employee by employee – Monthly calculation Applicable employer sponsored group health plan – Made available to employee by employer – Excludable from gross income under 106 or would be if employer paid for it 25

Cadillac Tax Excluded from group health plan – Modified excepted from HIPAA Portability rule – Does not exclude (i.e., includes) on- site medical clinics Aggregate – Determined by employer; allocated by employer – Reported to HHS by employer – Insured group health plan paid by insurance carrier – Self-insured group health plan paid by plan administrator (e.g., employer) 26 HRA contribution is included.

Enhanced Claims, Appeals, and External Review Effective: has been a moving target Applies to group health plans not excepted from HIPAA Portability – Special grandfathered plan rule Same as major medical coverage – Full and fair review – Claims and appeals Special rule regarding substantial compliance – Time frames, notice requirements – Culturally and linguistically appropriate – External review for medical judgment and rescissions; means contracting with IROs 27 Most HRAs are subject; future guidance excluding or modifying expected.

Next type of program… 28 Code §ReviewWhat’s New Health Reimbursement Arrangement HRA 105 Health Flexible Spending Account Health FSA 105 Health Savings Account HSA 223

29 HEALTH FLEXIBLE SPENDING ACCOUNTS Flex Spending Account Health FSA Medical reimbursement plan FSA Reimbursement account Health expense account All versions of the same thing…Health FSA Unreimbursed Medical Account

Health Flexible Spending Account Self-insured medical plan under Code §§ 105, 106 “Qualified benefit” for cafeteria plan under Code § Section 125 Plan Employee Contribution Health Flexible Spending Account Group Medical Benefits Dependent Care Expense Reimbursement Plan Group Dental Benefits

Health Flexible Spending Account Self-insured medical plan under Code §§ 105, 106 Written plan document – 213(d) medical expenses (no premiums, no LTC, no HSA) Limited scope Post deductible Tied to major medical – Expenses for employees (including former); spouse (DOMA); dependents – Claims substantiation and adjudication Independent third party substantiation Claimant representations Third party adjudication Ordering rules 31

Health Flexible Spending Account “Qualified benefit” under Code § 125 – Salary reduction – Employer contributions (including cash-in-lieu) – Irrevocable elections; limited exceptions – Uniform coverage – Use it or lose it rule – No deferral of compensation 32

Health Flexible Spending Account Nondiscrimination testing – Two levels Code § 105 – applies to component Code § 125 – applies to overall cafeteria plan – Bargained – Non-bargained – Each has eligibility and benefits tests Key employee concentration test does not apply to governmentals – Each has own target group definition; not the same 33

Health Flexible Spending Account Other Federal Laws – HIPAA Privacy/Security Covered entity Business Associate Policies and procedures – HIPAA Portability Most are excepted – COBRA – Bunch of others… USERRA FMLA GINA WHCRA NMHPA Health Care Reform 34

Moving on… 35 Code §ReviewWhat’s New Health Reimbursement Arrangement HRA 105 Health Flexible Spending Account Health FSA 105 Health Savings Account HSA 223

Health FSAs: What’s New? New ways to use New laws that impact- Health Care Reform 36

Working With Other Programs Coordinate with HRA that only pays premiums – Premiums paid through HRA – “Plus” paid through health FSA Allowing “employee only” option – Does not impact spouse or dependents HSA contribution eligibility Wellness credits but watch HIPAA Portability 37

Health Care Reform Tax consequence of adult child OTC $2,500 maximum salary reduction (later slide) W-2 reporting Cadillac tax PHSA benefits mandates – Substantive – Administrative Enhanced claims regulations External review Uniform Summary of Benefits and Coverage Auto enrollment Cadillac tax Preventive care Annual and lifetime maximums 38 Note: Most cases do not apply because generally excepted from HIPAA Portability.

$2,500 Salary Reduction Maximum Effective 2013 Just health FSAs Previously no statutory maximum True employer contributions should be outside – No cash out available – Watch out for HIPAA Portability Flat dollar amount – Not like dependent care FSA limit Per participant; family status irrelevant No combination with spouse No coordination or offset with available tax credit – Not indexed for inflation – Aggregate for employer 39

Next type of program… 40 Code §ReviewWhat’s New Health Reimbursement Arrangement HRA 105 Health Flexible Spending Account Health FSA 105 Health Savings Account HSA 223

41 HEALTH SAVINGS ACCOUNTS It is what it is!!!

Health Savings Account First recognized by IRS in 2003 Not group health plan – Not COBRA Exists under § 223 of the Code Often part of cafeteria plan under § 125 of the Code – Employee contributions – Employer contributions (including wellness credits) 42

Health Savings Account Tax favored “IRA-type” accounts – Designed to accumulate – No forfeitures – Self-adjudicated – To beneficiary upon death Separate trustee Invested; tax-free earnings Limited employer involvement – Can’t limit access – Can’t limit distributions Strategically implement – No mid year – Coordinate with other programs Two part analysis – Contributions in – Distributions out 43

HSA Contributions In Must be “eligible” for HSA contribution Monthly determination Subject to statutory maximums per year – Special rules if become eligible during a year Catch up contributions for those over 55 Employer reports on W-2, Box 12, Code W 44

HSA Contributions In Must be covered by “qualified high deductible health plan” – Comprehensive health plan meeting specific statutory requirements Deductible Out of pocket maximum – First dollar preventive – Prescription drugs subject to deductible Monthly determination 45

HSA Contributions In Must not be covered by “other coverage” unless “permitted” Other coverage is coverage that pays an expense prior to the satisfaction of the high deductible under the qualified high deductible health plan – Includes (i.e., bad other coverage) Regular health FSA Regular HRA Coverage through spouse Coverage through employer Outside comprehensive individual coverage 46

HSA Contributions In – Permitted (i.e., not bad other coverage) Disease specific Indemnity Dental, vision Prescription discount cards Supplemental Most EAPs and wellness programs Limited scope health FSA Limited scope HRA Post deductible HRA Cannot be covered under Medicare 47

HSA Distributions Out Distribution for anything Not required to be covered under qualified high deductible health plan Taxable unless a medical expense for accountholder, spouse (DOMA), dependent – Distribution amount as taxable income – Excise tax too – No exceptions for inadvertent – “Medical expense” Section 213(d) but Limited insurance premiums – Long term care insurance – COBRA – While receiving unemployment compensation – Certain premiums for retirees (must be age 65 or over) 48

Moving on… 49 Code §ReviewWhat’s New Health Reimbursement Arrangement HRA 105 Health Flexible Spending Account Health FSA 105 Health Savings Account HSA 223

HSAs: What’s New? Health Care Reform OTC Non-medical penalty to 20% 50

Questions 51

Thank you Darcy L. Hitesman Hitesman & Wold, P.A – 63 rd Avenue North Maple Grove, MN Visit our website to register to receive our informational Client Alerts! 52