1. Government Payroll Review Seminar
Health Care Reform: The more we learn, the less we understand… Don Henley
October 27, 2016
Government Payroll Review Seminar
Presented by
Darcy L. Hitesman, Esq.
IRS Circular 230 Disclosure: To insure compliance with Treasury Regulations, we are required to inform you that any tax advice contained in this communication (including any attachments) was not intended or written by us to be used, and may not be used by you or anyone else, for the purpose of: (i) avoiding penalties imposed by the Internal Revenue Code; or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed in this communication.

2. Government Payroll Review Seminar 10/27/16
Today’s Agenda
Integrated HRAs
Employer Contributions and Cafeteria Plans
Government Payroll Review Seminar 10/27/16

3. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Health Care Reform has significantly limited the way in which HRAs can be used.
Stand alone, full scope HRAs are no longer permitted.
Group health plan subject to HCR mandates, including preventive care and no maximums on certain types of benefits.
By definition, HRA cannot satisfy these mandates; must be recognized under and exception.
Integrated HRAs are one type of HRA still permitted. IRS Notice
Government Payroll Review Seminar 10/27/16

4. Government Payroll Review Seminar 10/27/16
Integrated HRAs
“Integrated” has specific purpose and specific meaning.
By being integrated with another group health plan that is subject to HCR mandates, the HRA does not have to independently satisfy the HCR mandates.
The other group health plan might be sponsored by the same employer, but does not have to be.
HRA sponsored by one employer could be integrated with the group health plan coverage sponsored by a different employer.
Government Payroll Review Seminar 10/27/16

5. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Requirements
Employer of HRA must offer group health plan subject to HCR mandates.
HRA requires person to be covered by group health plan subject to HCR mandates.
HRA must include opt-out ability.
Government Payroll Review Seminar 10/27/16

6. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Employer sponsoring HRA must also sponsor group health plan subject to HCR mandates.
To be credited with HRA contributions, employee must be enrolled in group health plan that satisfies HCR mandates.
HRA coverage is for the employee.
Spouse and child(ren) can have reimbursable expenses if they are covered under a group health plan subject to HCR mandates.
Government Payroll Review Seminar 10/27/16

7. Government Payroll Review Seminar 10/27/16
Integrated HRAs
To be reimbursable, the person that generates the expense must be enrolled in other group health plan that satisfies HCR mandates.
Exception does not require the other group health plan subject to HCR mandates to be that of the employer that is sponsoring the HRA.
Could be that of employee’s employer
Could be that of spouse’s employer
May be situations where by plan design would want to restrict.
Government Payroll Review Seminar 10/27/16

8. Government Payroll Review Seminar 10/27/16
Integrated HRAs
HRA must include ability to “permanently” opt-out.
Ability to permanently opt-out available at least annually.
Technically could be a suspension because could opt-out for a time certain.
No new contributions; no distributions out during time certain; as if it did not exist.
Government Payroll Review Seminar 10/27/16

9. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Opt-out ability tied to impact of having HRA.
Might want to opt-out to preserve eligibility for HSA contributions.
Might want to opt-out because having the HRA available disqualifies person from qualifying for subsidy at exchange.
Applies only to employee (whether active or former).
No separate ability of spouse or child to opt-out; tag along with employee.
Government Payroll Review Seminar 10/27/16

10. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Scope of reimbursable expenses
Maximum scope depends upon nature of the other group health plan coverage.
If other group health plan does not provide at least 60% minimum value (MV), maximum reimbursable expenses under HRA limited to:
Copayments, coinsurance, deductibles and premiums under other group health plan that satisfies HCR mandates in which enrolled; and
Medical care under Section 213(d) that is not essential health benefits (EHBs).
Note: Assuming all persons are covered under other group health plan subject to HCR mandates.
Government Payroll Review Seminar 10/27/16

11. Government Payroll Review Seminar 10/27/16
Integrated HRAs
If other group health plan provides at least 60% minimum value (MV), maximum reimbursable expenses under HRA are Section 213(d) expenses (but not individual major medical policies).
In both descriptions, used “maximum” because may be situations where by plan design would want to restrict.
Government Payroll Review Seminar 10/27/16

12. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Practicalities
If allow group health plan other than that sponsored by HRA sponsor –
Significant administrative issues
Tracking ins and outs of other employer coverage
Tracking degree of coverage of other employer coverage
Dealing with multiple types of other group health plan coverage
Form 1094/1095 issues
May want to design to lessen administrative issues!
Government Payroll Review Seminar 10/27/16

13. Government Payroll Review Seminar 10/27/16
Integrated HRAs
Practicalities (continued)
HCR requirements that still apply include:
1094/1095 reporting (HRA is a self- insured medical plan)
PCORI fees
SBCs
Caution: Not all HCR requirements are waived; this just addresses the HCR mandates.
Government Payroll Review Seminar 10/27/16

14. Government Payroll Review Seminar 10/27/16
To Do List
Do you have an HRA?
Is it/does it need to be integrated?
Do you want to narrow the scope in light of administrative issues?
Government Payroll Review Seminar 10/27/16

15. Government Payroll Review Seminar 10/27/16
Health Flex credits
Government Payroll Review Seminar 10/27/16

16. Employer Contributions to Cafeteria Plans
Two periods of time
Before HCR
With HCR
NOT AS SIMPLE AS NO MORE EMPLOYER CONTRIBUTIONS PERMITTED
Government Payroll Review Seminar 10/27/16

17. Government Payroll Review Seminar 10/27/16
Before HCR
Employer decided how much to contribute.
Employee portion of responsibility paid pre- tax through cafeteria plan.
Employee does not take group health plan coverage, employer contribution dollars (all or a portion of) were available for other cafeteria plan benefits, including cash.
Generally had the ability to place restrictions on employer contribution such as:
Used first for medical coverage
If taken in cash, less than dollar for dollar
Taxable compensation available to salary reduce into other programs like Section 457 plan.
Government Payroll Review Seminar 10/27/16

18. Government Payroll Review Seminar 10/27/16
Pre-HCR
Government Payroll Review Seminar 10/27/16

19. Government Payroll Review Seminar 10/27/16
With HCR
Applicable large employers (“ALEs”) are concerned about Play or Pay penalties.
Part (b) penalty looks at Minimum Value (“MV”) and affordability.
“Affordability” determined by formula.
Cost of single coverage, lowest cost option.
What would hypothetical employee have to pay for that coverage.
Note: After any employer contribution has been subtracted.
Government Payroll Review Seminar 10/27/16

20. Government Payroll Review Seminar 10/27/16
With HCR
Premium Cost
Employer Contribution
Employee Responsibility
$500
$0*
$500 – FPL
FPL*
*By design, affordable.
For affordability, may need to be able to count the employer contribution dollars.
Otherwise, not enough that dollars are available to pay the cost of major medical coverage.
Determine amount of employer contribution that needs to be counted for affordability -- that amount needs to be restricted.
Government Payroll Review Seminar 10/27/16

21. Government Payroll Review Seminar 10/27/16
With HCR
IRS Notice recognizes two options:
Health flex credits
Conditional employer contribution
Both require a cafeteria plan. 
Plan design issue.
Both require plan language.
Both require administrative changes.
Which makes the most sense for a particular employer depends upon the facts and circumstances.
Government Payroll Review Seminar 10/27/16

22. Government Payroll Review Seminar 10/27/16
Health Flex Credits
One of the two options recognized by IRS Notice
Employer makes a contribution to the flex plan.
If contribution’s use is limited to medical options (payment of Section 213 medical expenses which includes premiums) available through the flex plan, employer can count employer contribution dollars towards affordability.
Called “Health Flex Credits.”
Government Payroll Review Seminar 10/27/16

23. Government Payroll Review Seminar 10/27/16
“Medical Options”
Major medical premium
Dental premium
Vision premium
Hearing premium
Health FSA (full scope or limited scope)
NOT
Cash
Group term life
Long term disability
Adoption assistance
Dependent care reimbursement
HRA
Government Payroll Review Seminar 10/27/16

24. Government Payroll Review Seminar 10/27/16
“Medical Options”
Have to have enough options so not forfeiting dollars if do not take major medical coverage.
May not have other health coverage premiums.
If have other health coverage premiums, may not be enough to use all of the employer contribution.
Because not available in cash, any portion allocated to health FSA is not part of $2550 and must be limited to $500 to maintain excepted status.
Remember: Only need to limit portion of employer contribution to count.
Government Payroll Review Seminar 10/27/16

25. Combination Employer Contributions
Government Payroll Review Seminar 10/27/16

26. Government Payroll Review Seminar 10/27/16
Situation 1
Situation 1: Employer sponsors cafeteria plan.
Employee A elects major medical coverage. Health flex credit allocated to major medical premium. Any remaining health flex credit allocated to other health options under cafeteria plan, keeping in mind maximum on health FSA. Next look to unrestricted ER contribution.
Any remaining employee responsibility, salary reduction.
Any remaining unrestricted ER contribution, taxable cash.
Government Payroll Review Seminar 10/27/16

27. Government Payroll Review Seminar 10/27/16
Situation 2
Situation 2: Employer sponsors cafeteria plan. 
Employee A does not elect major medical coverage.  Allocates restricted ER contributions to other health options under cafeteria plan, keeping in mind maximum on health FSA.  Determine what remains -- forfeited.  Look at the other non-health options made.  Allocate unrestricted ER contributions. Remaining employee responsibility through salary reduction.  [No ability to use amounts already forfeited.] 
Government Payroll Review Seminar 10/27/16

28. Government Payroll Review Seminar 10/27/16
Situation 3
Situation 3: Employer sponsors cafeteria plan.
Employee elects major medical coverage.  ER contributions (restricted and open) used first to pay for the major medical coverage.  If cost of major medical coverage exceeds ER contribution, remainder is employee responsibility.  Salary reduction.
Government Payroll Review Seminar 10/27/16

29. Government Payroll Review Seminar 10/27/16
Situation 4
Situation 4: Employer sponsors cafeteria plan. 
Employee waives major medical coverage.  Restricted ER contribution is forfeited (nothing else for employee to elect).  Unrestricted ER contribution is available to pay employee responsibility with respect to any other benefits elected under cafeteria plan.  What is not covered by the unrestricted ER contribution is the employee’s responsibility and can be paid pre-tax under the cafeteria plan. [No ability to access amounts already forfeited.]
Government Payroll Review Seminar 10/27/16

30. Government Payroll Review Seminar 10/27/16
Considerations
Amount of employer contribution.
Amount need to be able to count for affordability.
Only works if have enough choices (i.e., health options).
Administratively challenging.
Plan amendment.
Communication.
Government Payroll Review Seminar 10/27/16

31. Conditional Employer Contributions
One of the two options recognized by IRS Notice
Employer contribution tied to major medical.
Elect major medical, employer contribution applies to offset premium cost.
Remainder of premium cost (if any) is employee responsibility.
Can be paid pre-tax under cafeteria plan.
Government Payroll Review Seminar 10/27/16

32. Conditional Employer Contributions
If employee waives coverage under major medical and provides proof of coverage, employee receives cash in lieu payment.
Has to be through flex plan to protect “choice.”
Administrative forms
Form by which employee waives coverage
Form by which employee submits proof of other coverage
Plan language
Communication
Other administrative issues
Government Payroll Review Seminar 10/27/16

33. Government Payroll Review Seminar 10/27/16
“Other Coverage”
Group coverage from another source (e.g., spouse’s employer)
Medicare
Tricare
NOT individual policies
Government Payroll Review Seminar 10/27/16

34. Government Payroll Review Seminar 10/27/16
“Proof”
Can be attestation.
Enough unless reason to believe otherwise.
Affirmative duty to notify of change.
Government Payroll Review Seminar 10/27/16

35. Waiver with Proof of Other Coverage
Need this to happen first so know nature of employer contribution; is it conditional, not conditional, combination of both
Government Payroll Review Seminar 10/27/16

36. Government Payroll Review Seminar 10/27/16
Conditional
In order to receive employer contribution in cash, employee must waive employer sponsored coverage and provide proof of other coverage. 
If the proof of other coverage is not provided, or not adequate, the employer sponsored coverage is waived but there is no employer contribution paid as cash in lieu. 
The employer contribution is forfeited unless proof of other coverage is provided. 
Under these circumstances, the employer can count the employer contribution dollars towards affordability.
Government Payroll Review Seminar 10/27/16

37. Government Payroll Review Seminar 10/27/16
Not Conditional
There is no requirement that the employer contribution be conditional.
If coverage is waived (i.e., not taken), but proof of other coverage is not provided, a contribution that is not conditional may be paid in cash.  However, that employer contribution cannot be counted for purposes of affordability. 
It is as if the employer contributed nothing towards the cost of coverage.  This makes it extremely likely that the coverage offered is not affordable. 
To the extent a person would waive the employer sponsored coverage, go to the exchange for coverage, and receive a subsidy, the employer would be penalized.
Government Payroll Review Seminar 10/27/16

38. Combination Employer Contributions
Nothing precludes an employer from making two contributions.
One of which is conditional, and therefore can be counted towards affordability.
One of which is not conditional and cannot be counted towards affordability.
Two ways to accomplish:
Two separate cafeteria plans
One cafeteria plan with two steps
Government Payroll Review Seminar 10/27/16

39. Two Cafeteria Plans Plan # 1
Government Payroll Review Seminar 10/27/16

40. Two Cafeteria Plans Plan # 2
Government Payroll Review Seminar 10/27/16

41. One Cafeteria Plan; two steps within
Government Payroll Review Seminar 10/27/16

42. Government Payroll Review Seminar 10/27/16
To Do List
What do you have?
Does it allow you to “count” employer contribution dollars towards affordability?
If not, would either of the two options allow the dollars to be counted?
Government Payroll Review Seminar 10/27/16

43. Questions
Thank you!
Darcy L. Hitesman Hitesman & Wold, P.A – 63rd Avenue North Maple Grove, MN Phone:
KNW Group - August 15, 2016 43