Highlights of the Health FSA Contribution Limit

Are you overwhelmed by all of the legislation coming through lately? Don't worry - we've got you covered!

Here are some of the highlights of the FSA contribution limit:

• Applies to all employers who sponsor a health FSA
• Effective as of the start of the 2013 plan year
• May not change plan year simply to delay application of the limit
• Employee salary reduction contribution may not exceed $2,500 per health FSA per year
• Amount applies regardless how many family members are covered by the health FSA (i.e., a simple employee can contribute up to $2,500 and a married employee with four children can contribute up to $2,500)
• Limit is per employee (so a married couple could each contribute $2,500, even if both are employed by the same employer)
• Employer contributions, whether direct or through flex credits, do not count toward the $2,500 limit
• If the plan offers a grace period to incur claims, amounts reimbursed during the grace period do not apply to the $2,500 limit
• Contributions to HRA's, HSA's, dependent care FSAs and/or for pre-taxation of premiums do not count toward the $2,500 limit
• An employee with two employers during the year (who are not part of the same controlled or affiliated service group) who each sponsor a health FSA could contribute $2,500 to each health FSA
• Must amend the plan to reflect this change by December 31,2014 (which is longer than employers normally have to amend a section 125 plan)
• The $2,500 limit is indexed for inflation

ACTION NEEDED:

• Verify that the administrator of the FSA is prepared for this change
• Communicate the limit to employees as part of FSA enrollment for 2013
• Amend the plan to include the new limit by December 31, 2014

HealthCare Reform Timeline

We have partnered with our colleagues at UBA to provide you with a timeline of changes that will affect employers and group health plans in 2012 and beyond:

2012:

August 1, 2012

• Minimum Loss Ratio letters (applies only to fully insured plans)

First Plan Year Beginning On or After August 1, 2012

• First dollar preventive care services for women (not applicable to grandfathered plans; one year moratorium for certain religious institutions)*

First Open Enrollment Beginning after September 23, 2012

• Uniform Health Plan Summary of Benefits and Coverage (SBC)

2013:

January 1, 2013

• Employer W-2 reporting for benefits provided during prior year (not applicable to employers that issued fewer than 250 W-2's for 2011)
• Health FSA contributions limited to $2,500*
• Increased Medicare health insurance tax withholding on high-income individuals
• Repeal of employer business deduction for qualified retiree drug programs +

March 1,2013

• Employee notice requirement re: exchanges (minimal details have been released on this requirement)

July 31, 2013

• Patient-centered outcomes ("comparative effectiveness") fee due for plan years ending between October 1, 2012 and December 31, 2012

* or start of 2013 plan year, if later

+ 2013 tax year

2014:

Plan Coverage Provisions - Plan Design

• Pre-existing conditions exclusion not applicable to adults (or children)
• Employee waiting period for coverage cannot exceed 90 days
• Annual limits prohibited on essential health benefits
• Limits on cost-sharing (deductibles and out-of-pocket maximums)*
• Wellness programs may increase penalty/reward to 30%
• Clinical trials coverage*

Other Provisions Impacting Employer-Based Coverage

• Exchanges available to individuals and small employers (employers with fewer than 100 employees, although state may drop the threshold to 50 employees)
• Qualified Health Plans (QHP's) participating in exchanges may be offered through cafeteria plans
• Shared responsibility ("play or pay") penalty for employers with 50 or more full-time employees (or full-time employee equivalents) who fail to provide minimum, affordable coverage to full-time employees

Employer Reporting and Notice Requirements

• Employer reporting: providing minimum essential coverage
• Employer reporting: furnishing of qualifying and affordable coverage
• Return filing requirements for employers not offering coverage

Individual Mandate Effective

• Penalty applies if individual fails to obtain coverage through employer, exchange or a government program
• Individual subsidies are available up to 4x the federal poverty level

Exchanges

• State-based Insurance exchanges (some may be run by federal government)
• Co-ops / multi-state plans / interstate compacts possible
• Small business health options (SHOP) exchanges available
• Navigators
• Initially available only to individuals and small employers (employers with fewer than 100 employees, although state may drop the threshold to 50 employees); states may expand to large employers in 2017
• Cost sharing available for individuals below 2.5x the federal poverty level

Exchanges - Benefit Designs and Qualified Plans

• Minimum essential benefits required for exchange plans
• Optional additional required benefits
• Qualified plans to offer "metal" levels of coverage (platinum [90%], gold [80%], silver [70%] and bronze [60%]
• Health care quality rewards via market-based incentives

Insurer Provisions

• Guaranteed issue*
• Guaranteed renewability*
• Modified community-rating ("fair health insurance premium) requirements (small group market only)*
• Insurance risk pools

Medicaid Expansion (unless state opts out)

Nondiscrimination Requirements

• Currently applies to self-funded plans
• Effective date for fully insured plans indefinitely delayed*
• Will impact ability to provide different eligibility, benefits and premium subsidies to different groups

Automatic Enrollment

• Applies to employers with more than 200 employees
• Effective date delayed until at least 2014

Excise on High Cost "Cadillac" Plans (effective 2018)

* = Grandfather rules apply

PPACA Medicare Withholding

Our partners at UBA have helped to provide you with what employers need to know right now about Health Care Reform:


HIGHLIGHTS OF ADDITIONAL MEDICARE WITHHOLDING FOR HIGH EARNERS

• Effective Jan. 1, 2013
• Applies to all employers
• Must withhold an additional 0.9 percent of the employee's share for Medicare/HI (from 1.45 percent to 2.35 percent) once the employee's wages exceed $200,000
• Employer does not match this additional 0.9 percent
• Additional 0.9 percent is not capped
• Additional withholding only applies to wages over $200,000, beginning in the pay period the $200,000 threshold is met
• Additional amount will be reported with other Medicare withholding in Box 6 of the W-2
• Employee's tax obligation is not synchronized with the withholding requirement
• Employee owes the extra 0.9% on wages and other compensation over $200,000 if single, $250,000 if married and filing jointly, and $125,000 if married and filing single - employer simply withholds on wages in excess of $200,000 regardless of employee's situation
• No obligation to notify high earners of additional withholding
• Similar requirement applies to self-employed once their income exceeds $200,000

ACTION NEEDED:

• Verify payroll system/payroll vendor is prepared to withhold the additional tax as needed beginning January 2013
• Consider advising affected employees that:
• Additional withholding will occur
• Withholding is a rough estimate of the actual household tax obligation, and they should review their circumstances, including estimated tax payments, and plan accordingly

Click here for more information:

IRS LINK

Note: There is another new Medicare tax on high earners that imposes no obligation on employers. A 3.8 percent tax is payable on the lesser of the taxpayer's net investment income and modified adjusted gross income over the levels described above. Net investment income excludes wages, self-employment income, distributions from IRA's and qualified plans, and tax-exempt interest and dividends. It includes dividend and interest income, annuities, royalties and rents unless derived in the ordinary course of business, net gains on the disposition of property, and income from a variety of other passive activities. The capital gain from selling a principal residence is considered net income to the extent it exceeds the excludable amount ($250,000 if single or $500,000 if married and filing jointly).


*This information is general and is provided for educational purposes only. It reflects UBA's understanding of the available guidance as of the date shown and is subject to change. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors. 

HHS Report on MLR Rebates

We're bringing you the latest HealthCare Reform Update thanks to our partners at UBA:

HHS Report on MLR Breakdown of Upcoming Rebates


HHS has released a report on the first round of rebates to be provided under health care reform's medical loss ratio (MLR) requirements.  The report contains calendar year 2011 data--insurers are required to pay rebates by August 1, 2012 based on their 2011 MLR.


The report provides a detailed breakdown of the rebates to be provided based on 2011 MLRs--both by market type (individual, small and large group markets) and by state.  

• HHS estimates that nearly 12.8 million individuals will receive rebates totaling more than $1.1 billion.
• The vast majority of individuals are insured by insurers that meet or exceed the MLR standard--89% in the large group market and 83% in the small group market.
• Insurers in the large and small group markets are expected to return $386 million and $321 million, respectively, in rebates for 2011. 

An insurer that issues a rebate must provide a notice explaining the rebate and how it is calculated.  For 2012 only (i.e., with respect to the 2011 MLR reporting year), the notice requirement also applies to insurers who are not required to provide rebates because their 2011 MLR meets or exceeds the standard.  For the full report, see http://www.healthcare.gov/law/resources/reports/mlr-rebates06212012a.html .


Employers and advisors must gear up for compliance to properly handle these rebates and evaluate the permitted uses.  Adding to the complexity is that separate rules apply to ERISA plans, non-federal governmental plans, and non-ERISA, non-governmental plans. (See suggestions from an attorney responding to an inquiry by UBA member Scott Howell immediately below.)


The water was muddied by DOL Technical Release 2011-4 (see http://www.dol.gov/ebsa/newsroom/tr11-04.html).  Basically, the DOL says plan fiduciaries need to go through an analysis of whether some or all of an MLR rebate constitutes plan assets, and if so, how the funds should be held and used.  Then the IRS released guidance (in the form of numerous Q&As) on whether MLR rebate payments are taxable to the employee (see http://www.irs.gov/newsroom/article/0,,id=256167,00.html).  The DOL and IRS guidance is too technical to summarize in just a few sentences; however, I think I can give you a safe strategy so your clients don't have to spend time and money trying to analyze all of this.


Strategy - Consider the MLR rebate as plan assets to the extent employees contribute to the premium.  The employer should not keep any rebate amount greater than the total amount of premiums and other plan expenses paid by and attributable to the employer.  Within 3 months of receipt of an MLR rebate, return any amount paid by and attributable to employees.  This avoids any requirement to hold the funds in trust.  To avoid most (but not all) payroll headaches and tax issues with employees, consider returning the funds to employees by providing a one-time reduction in a monthly premium (e.g. a premium holiday). 


The guidance allows a fiduciary to weigh the costs to the plan as well as the ultimate plan benefit when deciding on an allocation method.  If the cost of calculating and distributing a proportional amount of a rebate to former employees approximates or exceeds the amount of the proceeds, a fiduciary is permitted to limit the allocation to current plan participants.  In addition, if it is not cost-effective to distribute cash payments to employees (because the amounts are de minimis, or they would produce negative tax consequences for the employees), a fiduciary may use the rebate for other permissible plan purposes (e.g. credit against future employee premium payments, or benefit enhancements).


Note that if an employee paid premiums on a pre-tax basis (i.e., through a cafeteria plan), the return of those premiums (whether received in cash or as a credit against future premiums) will be subject to both income and employment taxes.

Supreme Court Largely Upholds PPACA

Our partners at UBA have helped us to provide you with the latest on Health Care Reform:

The Supreme Court Largely Upholds PPACA

Yesterday, the U.S. Supreme Court upheld the individual mandate and most of the Patient Protection and Affordable Care Act (PPACA).  As expected, it was a close decision -- 5-4 -- with Chief Justice Roberts and Justices Breyer, Ginsburg, Kagan and Sotomayor agreeing that the individual mandate is a permissible tax. Because the individual mandate was found to be acceptable, most of the rest of the law (including the exchanges and the requirement that larger employers provide minimum coverage or pay penalties of their own) automatically stands.  For additional information on the decision, CLICK HERE.

Because PPACA has been upheld, employers need to move forward with implementing the changes required by the law.  The most immediate requirements are:

• All group health plans, regardless of size, must provide "summaries of benefits coverage" (SBC) with the first open enrollment beginning on or after Sept. 23, 2012.  The content and format of these SBCs must meet strict guidelines, and the penalties for not providing them are high (up to $1,000 per failure).  Insurers will be expected to provide the SBCs for fully insured plans, while self-funded plans will be responsible for preparing their own.
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• Employers that issued 250 or more W-2s in 2011 must report the total value of each employee's medical coverage on their 2012 W-2 (which is to be issued in January 2013).
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• High income taxpayers (those with more than $250,000 in wages if married and filing jointly, or more than $200,00 if single) must pay additional Medicare tax, and employers will be responsible for deducting a part of the tax (an additional 0.9 percent on the employee's wages in excess of $200,000) from the employee's pay beginning in 2013.
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• The maximum employee contribution to a health flexible spending account (FSA) will be $2,500 beginning with the 2013 plan year.
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• The Patient Centered Outcomes fee (also called the comparative effectiveness fee) is due July 31, 2013.  The fee is $1 per covered life for the 2012 year.  Insurers will remit the fee on behalf of the plans they cover, while self-funded plans will pay the fee directly.

Politically, while House Republicans have pledged to repeal PPACA, it is unlikely a repeal bill would pass the Senate, and it would be vetoed in any event by President Barack Obama.  The fall elections, of course, could result in a change in control of Congress and/or the White House, and Republican victories would likely re-energize efforts to repeal PPACA or to discontinue funding needed to implement various parts of the law.

The opinion is long (193 pages) and complex, and we will provide additional details -- through both written alerts and a webinar -- once there has been more time to study the opinion.   

This information is general and is provided for educational purposes only, and does not contain legal advice.  You should not act on this information without consulting legal counsel or other knowledgeable advisors. 

Thanks to our partnership with our friends at UBA, we are able to provide you with the latest Health Care Reform Update:

PREPARING FOR THE SUPREME COURT DECISION

ON HEALTH CARE REFORM

The U.S. Supreme Court is expected to publish its decision on the legality of the Patient Protection and Affordable Care Act, or PPACA (also called health care reform, HCR and ACA), by the end of June.  What they will decide is anyone's guess.  Here are the possibilities (in no particular order), and a brief overview of what the decision would mean to employers that sponsor group health plans.  For additional information on the issues the Court is considering,
CLICK HERE.


Entire Law is Constitutional
If the Court decides that all parts of the law are constitutional, employers will need to move forward with implementing the changes that the law requires.  For 2012 and 2013, these include:

• Providing summaries of benefits coverage with the first open enrollment on or after Sept. 23, 2012
• Reporting the value of medical coverage on the 2012 W-2
• Reducing the maximum health flexible spending account (FSA) contribution to $2,500 (beginning with the 2013 plan year)
• Paying the Patient Centered Outcomes fee (due July 31, 2013)

Note: Details on these requirements are included in recent Employer Compliance Alerts.


Part of the Law is Constitutional and Part is Not
The Court could decide that the requirement that individuals obtain health coverage or pay a penalty (the "individual mandate") exceeds Congress' authority but that other parts of the law are permissible.  They could then either specify which parts should stay and which should go, or they could send the case back to a lower court to determine the details.  Either way, employer obligations to comply with the law would continue, and the actions needed for 2012 and 2013 would continue to apply.


Entire Law is Unconstitutional
The Court could decide that the entire law is flawed, in which case employers will not need to implement the changes that were to take effect for 2012 and later.  There would be some uncertainty (and choices) with respect to the parts of the law that have already been implemented.  Keep in mind that if the plan or policy has been amended or written to include the 2010 and 2011 changes, the plan document or policy will need to be revised to remove the changes -- the mere fact that the law is unconstitutional will not void the changes in the plan or policy.
Several carriers -- Aetna, Humana and UnitedHealthcare -- have stated that they will continue to administer their policies to include many of the changes that have already been implemented, even if that is not legally required.  Employers that have self-funded plans will need to decide -- and those who have fully insured plans may need to decide -- if they want to roll back changes such as:

• Covering dependent children to age 26 (there will be tax issues with this unless the IRS provides a waiver)
• Elimination of lifetime and annual maximums for most benefits
• Elimination of pre-existing condition limitations for dependents under age 19
• First-dollar coverage for preventive care
• Excluding over-the-counter prescription drugs for health FSA and health savings account (HSA) coverage

The Supreme Court decision is unlikely to end the debate over PPACA, particularly with the fall congressional and presidential elections looming.  If the Supreme Court upholds the law, House Republicans have pledged to introduce legislation to repeal it, but they likely do not have the votes in the current Congress to prevail.


This information is general and is provided for educational purposes only, and does not contain legal advice.  You should not act on this information without consulting legal counsel or other knowledgeable advisors.

FSA Limits & Tax Credits

Are you concerned how the  laws surrounding Flexible Spending Accounts will affect you in the years to come? Don't worry... we've got the answers for you! We've worked with our partners at UBA to bring you latest updates in Health Care Reform:


The IRS on Wednesday provided regulatory relief for health care flexible spending account (FSA) participants and also said it is reconsidering its longtime use-it-or-lose-it rule for FSAs! 


Employer benefits lobbying groups, including the American Benefits Council (ABC) had complained that the new $2,500 annual limit set to go into effect on January 1, 2013 would effectively force noncalendar-year plans to comply with the rule before the statutory effective date. 


Let's break it down: If an employee has an FSA with a fiscal year that begins on July 1, 2012, elects to contribute $3,600 during that plan year, making contributions of $300 a month from July 1, 2012 through June 30, 2013, the employee would violate the $2,500 annual limitation for 2013, the ABC noted, because the employee would have contributed $300 a month for the first six months of 2013 and $208.33 for the last six months of 2013 (a total of $3,050 during 2013).



In Notice 2012-40, the IRS said participants in noncalendar-year plans can still make the maximum contributions to their FSAs during the first year that a mandated FSA contribution cutback goes into effect under the health care reform law.


In addition, the IRS made clear that amounts that remain in so-called grace period FSAs can be rolled over to the next year without those funds counting against the $2,500 limit.  Grace period FSAs -- allowed by the IRS under a 2005 rule -- are those in which unused balances from the prior plan year can be used to pay expenses that are incurred during the first 2.5 months of the next plan year.


The guidance also addresses plan grace periods and provides relief for "certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer."  Further, the notice clearly establishes that the limit in PPACA does not does not apply to certain employer nonelective contributions (sometimes called flex credits), nor does it apply to non-healthcare FSA contributions, HSAs, HRAs or health plan premium payments made under a Section 125 plan.


Finally, in a development that stunned benefit experts, the IRS also disclosed that it considering "modifying" its 28-year-old use-it-or-lose-it rule.  If use it or lose it were eliminated, FSAs would become even more popular.  The fear of losing unused contributions is a disincentive for some employees to participate, and others contribute less than they would in the absence of the requirement, experts said.


Few small employers claim small employer tax credit 


Few of the estimated 1.4 million to 4 million eligible small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010, according to a recent report from the Government Accountability Office (GAO).  The GAO noted that only 170,300 small employers claimed the tax credit, which represents only 7 percent (plus or minus 3 percent) of the estimated eligible small employers. 


The cost of credits claimed was $468 million, and most claims were limited to partial rather than full percentage credits because of the average wage or full-time equivalent (FTE) requirements.  The report noted that only 28,100 employers claimed the full credit percentage in 2010.   In addition, 30 percent of claims had the base premium limited by the state premium average


The report, "Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity," noted that employer representatives, tax preparers and insurance brokers that GAO interviewed identified a number of factors limiting the credit's use:

• Approximately 83 percent of small employers do not offer health insurance, and the tax credit was not large enough to incentivize these employers to begin offering insurance

• Rules on FTEs and average wages are too complex

• Calculating and filing a claim for the credit is too complex

The GAO noted that options to address these factors (such as expanded eligibility requirements) have trade-offs, including less precise targeting of employers and higher costs to the federal government.