The Saxon Advisor - May 2020

Compliance Check

what you need to know

Eligible Automatic Contribution Arrangement (EACA). For failed ADP/ACP tests, corrective distributions must be made towards participants within 6 months after the plan year ends – June 30, 2020.

SF HSCO Expenditures. The last day to submit SF HSCO expenditures, if applicable*, for Q2 is July 30, 2020. *Applicable for employers with 20+ employees doing business in SF and Non-Profits with 50+ employees.

Form 5500 and Form 5558. The deadline for the 2019 plan year’s Form 5500 and Form 5558 is July 31, 2020 (unless otherwise extended by Form 5558 or automatically with an extended corporate income tax return).

Form 8955-SSA. Unless extended by Form 5558, Form 8955-SSA and the terminated vested participant statements for the plan year of 2019 are due July 31, 2020.

Form 5558. Unless there is an automatic extension due to corporate income tax returns, a single Form 5558 and 8955-SSA is due by 2½ months for the 2019 plan year.

Form 5330. For failed ADP/ACP tests regarding excise tax, Form 5330 must be filed by July 31, 2020.

401(k) Plans. For ADP/ACP testing, the recommended Interim is due August 1, 2020.

In this Issue

  • Upcoming Compliance Deadlines:
    • Eligible Automatic Contribution Arrangement (EACA)
    • The deadline for the 2019 plan year’s Form 5500 and Form 5558 is July 31, 2020.
  • Providing an HSA, FSA, or HRA Health Plan for your Employees
  • Fresh Brew Featuring Lexi Kofron
  • This month’s Saxon U: How To Legally Work With Gig And Contract Workers
  • #CommunityStrong: Families Forward Donation Drive

How To Legally Work With Gig And Contract Workers

Join us for this interactive and educational Saxon U seminar with Pandy Pridemore, The Human Resources USA, LLC, as we discuss how to legally work with Gig and Contract Workers.

Providing an HSA, FSA, or HRA Health Plan for your Employees

Bringing the knowledge of our in-house advisors right to you...

When open enrollment hits annually, it is not uncommon for employers to feel exasperated when staring down a list of acronyms such as HSA, FSA and HRA. As it should go without saying, the most common first thought is, “What does any of this mean?” Even the most seasoned experts have difficulty with understanding the complexities of various care options.

““It is your account; yours if you leave the employer and can contribute as long as you have an HDHP and can use the funds until they are gone, even if you are no longer in an HDHP.” said Kelley Bell, a Group Health Benefits Consultant at Saxon Financial.

Advice from Kelley

Fresh Brew Featuring Lexi Kofron

"Stay calm and collected on phone calls, and stay organized!"

This month’s Fresh Brew features Lexi Kofron, a Client Service Specialist at Saxon.

Lexi’s favorite brew is a Cinnamon Dolce Latte. Her favorite local spot to grab his favorite brew is at Starbucks

Scott’s favorite snack to enjoy is Pretzels and Hummus.

Learn More About Lexi

This Month's #CommunityStrong:
Families Forward Donation Drive

This May the Saxon family donated a bunch of household items and outdoor activities to Families Forward. Their staff goes out each week in masks and gloves to hand out these donations to the families in need through their program. Here are some pictures they provided when they passed out the donations and our trunk load of donations!

Are you prepared for retirement?

Saxon creates strategies that are built around you and your vision for the future. The key is to take the first step of reaching out to a professional and then let us guide you along the path to a confident future.

Monthly compliance alerts, educational articles and events
- courtesy of Saxon Financial Advisors.

Providing an HSA, FSA, or HRA Health Plan for your Employees

When open enrollment hits annually, it is not uncommon for employers to feel exasperated when staring down a list of acronyms such as HSA, FSA and HRA. As it should go without saying, the most common first thought is, “What does any of this mean?” Even the most seasoned experts have difficulty with understanding the complexities of various care options. That’s why in this installment of CenterStage, Kelley Bell, a Group Health Benefits Consultant at Saxon Financial, is here to break down the ‘alphabet soup’ that is HSAs, FSAs and HRAs.

What Is an HSA?

An HSA stands for a Health Savings Account. Kelley stated that HSAs work in conjunction with your existing HDHP plan (given you already have one) to cover costs associated with eligible medical, dental and vision expenses. Available to open just like a bank savings account, Kelley said, “It is your account; yours if you leave the employer and can contribute as long as you have an HDHP and can use the funds until they are gone, even if you are no longer in an HDHP.” For most, this applies to retirement. If you are reasonably healthy throughout your working life, Kelley said you can carry a large HSA balance into retirement. At that point, the funds can be used to cover the out-of-pocket medical costs that often increase with you as you age.

In addition to all the above, certain tax advantages exist within an HSA plan:

  • Contributions are excluded from federal income tax.
  • Interest earned is tax referable.
  • Withdrawals for eligible expenses are exempt from federal income tax.

HSAs are typically available through employers, but individuals can establish one, as well. Many banks offer HSA programs for their customers, meaning if your employer does not offer the benefit, you can create an HSA account there.

What Is an FSA?

An FSA is a Flexible Savings Account. Much like an HSA, these plans cover the payment of medical, dental and vision-related expenses, and contributions you make to the plan are tax-deductible. Similarly, when you open an FSA account, you’re typically provided with a debit card or checkbook, so the funds can be accessed in the account. However, Kelley stated an FSA plan has a catch: “An FSA cannot roll over unused funds from year to year and is not portable.” Therefore, any contributions made to the plan that have not been spent by the end of the year are forfeited.

Some employers, as Kelley noted, do have options that will help you avoid complete forfeiture of unused funds. Certain employers allow their employees to carry over up to $500 of unused funds into the following year, while others will extend the use of the funds for up to two and a half months into the new year. Employers generally will offer one or the other, but never both. Some, however, offer no such option at all.

Kelley mentioned general purpose FSA coverage, and stated it can “make you ineligible for HSA contributions.” She continued to add that certain types will not prevent HSA eligibility, i.e. limited FSA for vision, dental, parking or “post-deductible FSA” which reimburses you for preventative care or for medical expenses that are incurred “after the minimum annual HDHP deductible has been met.” As a result of forfeiting any unused funds in the account, an FSA is best used by someone who has ongoing and predictable medical expenses. In this situation, it is likely you will deplete the funds in the account, whereas if you are considered healthy and have limited medical expenses (i.e. minor illness, sinus infection), the potential for forfeiture is high, and you may have to forgo the account. FSAs are employer-sponsored and typically are an option as part of a ‘cafeteria plan’.

What Is an HRA?

An HRA is a Health Reimbursement Arrangement. Like the other plans described in this article, an HRA is a tax-free employer funded amount of money for healthcare expenses. Contributions, as Kelley explained, “can be excluded from gross income, meaning that won’t pay taxes on that money and reimbursements from the HRA are tax-free when used for qualified medical expenses.” Depending upon the type of HRA, unused funds may or may not be rolled over from one year to the next. However, employers may also allow employees to use their HRA funds even into their retirement.

The benefits of an HRA take action after the employee has met a specific portion (i.e. employee meets 1st $2500 of a $5000 deductible), making it easier for the employee to meet their high deductible. HRAs are good for employers who want more control over how their medical dollars are put to use. Naturally, if the employer is paying the cost of the HRA, it can be of an increased advantage than contributory health insurance premiums and direct payment for out-of-pocket expenses. With an HRA, the employer determines the reimbursements and does not have to contribute the same amount for all employee groups (i.e. tiers of employee coverage, employee/child, employee/spouse and family).

How Saxon Helps

It is important to understand the needs of every client and educate their employees on how to use their healthcare. Saxon values client education and service above all else. We make educating employees a priority and ensure their benefits are understood and easy to use. Saxon represents all of the major carriers, allowing us to secure the best plans and rates for you and your staff, which we review annually.

If you are considering offering an HSA, FSA or HRA insurance plan to your employees, contact Kelley Bell today at (937) 672-1547 or to begin exploring the benefits of adding this superior level of coverage today.

End-of-year FSA expenses: An employer cheat sheet

Do your employees still have unspent funds in their flexible spending accounts (FSA)? Often, reminding employees what expenses their FSA funds can help mitigate this issue. Read this blog post to learn more.

The scenario is all too familiar for employers and human resource managers: The year ends, and employees still have unspent funds in their flexible spending accounts. Whether employees forget that the money in their FSAs must be used or it will be lost, or they simply aren’t aware of which expenses can be covered by FSA funds, their frustration at losing money often falls on the employer.

Reminding employees which expenses are eligible to be covered by an FSA can help mitigate headaches for employers and HR departments in the new year and shed light on lesser-known options for making the best use of remaining funds before the end of the plan year.

As a general rule, an eligible expense is any medical expense the health plan doesn’t cover. This includes things such as out-of-pocket costs, co-pays, co-insurance, hospital visits and prescription drugs. Employees also can apply their FSA funds to dental and vision expenses, which often are not covered in health insurance plans.

Some eligible expenses employees might not be aware of include flu shots, prescription sunglasses, sunscreen that is 30 SPF or higher, grooming for service dogs, acupuncture, arch supports and nutritional consultations. Employees can also use money from FSAs to cover pregnancy tests and prenatal vitamins, hearing aids, canes and wheelchairs. They can also use funds to cover personal trainer fees, as long as a letter of medical necessity accompanies the claim.

The IRS determines which expenses qualify for FSAs and maintains a list on its website. Most FSA administrators have lists on their websites as well. FSA-holders can either search for individual expenses or scroll through the list to see what opportunities they might be missing. But it’s a good idea for employers to provide those lists for employees.

In addition to reminding employees what types of expenses are eligible for coverage by FSA funds, employers should review if their plan has a grace period, runout or rollover. If so, employers should communicate the details with employees, as this can help them take full advantage of the time they have to incur expenses and submit receipts for reimbursement.

A grace period is the amount of time an FSA-holder has after the end of the plan year to spend unused funds or incur expenses. A typical grace period is up to 2.5 months after the plan year ends. A run out is the amount of time an FSA-holder has after the end of the plan year to submit claims for reimbursement. In this case, expenses must be incurred before the end of the plan year. An FSA rollover allows up to $500 to be carried over from one calendar year to the next.

Employees also might not be aware that they can use FSA funds on a medical dependent, whether that dependent is covered by the FSA holder's health plan or not. For instance, if an employee has a 24-year-old daughter not covered by the employer health plan who needs a co-pay for a doctor appointment covered, the employee can use their FSA.

Lastly, it’s also important to make it clear to employees the distinction between an FSA and a health savings account. While many of the same expenses are eligible for coverage by either an FSA or HSA, make sure to remind employees about a few key distinctions. An HSA is not “use it or lose it.” All funds roll into the new year and do not need to be used up before the end of the plan year. And for an employee to use his or her HSA to cover a dependent’s medical expenses, the dependent must be a tax dependent.

Helping employees make the best use of their FSA funds before the end of the year not only positions the employer as a hero for saving employees’ hard-earned money, but it inevitably saves the employer from a headache heading into 2019.

SOURCE: Peterson, M. (19 November 2018) "End-of-year FSA expenses: An employer cheat sheet" (Web Blog Post). Retrieved from

IRS clarifies FSA carryover and HRA coverage issues

Original post by Stephen Miller,

Confusion about carrying over unused funds from year to year in health care flexible spending accounts (FSAs) has received some clarification under IRS Notice 2015-87, issued in December. The guidance also limits the use of health reimbursement arrangements (HRAs), including by an employee’s family members who are not enrolled in the employer’s group health plan.

RELATED: IRS releases final rule on premium tax credits, notice addressing employer coverage

Flexibility for Flex Plans

Since 2013, there have been two options for health FSA extensions that employers can adopt:

  • If a health FSA plan has a carryover feature, participants can roll over up to $500 of unused FSA dollars to the next year but will forfeit any excess over $500 at year-end.
  • Alternatively, an optional grace period can give employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds must be forfeited to the employer.

Plans can offer either the carryover or a grace period, but not both, or they can offer neither. These options apply to FSAs for general purpose health care including prescription drug expenses, and to limited-scope FSAs for dental and vision care. Dependent care FSAs may offer a grace period but not a carryover option.

“One of the key reasons the IRS issued new FSA guidance was to clarify that employers can place some restrictions on the carryover feature,” said Mary V. Bauman, a member of law firm Miller Johnson in Grand Rapids, Mich., and co-author of an analysis of Notice 2015-87.

“Employers were concerned that if they opted to provide the carryover, they might have to maintain small account balances over long periods of time, and that would raise their administrative fees,” added Bill Sweetnam, legislative and technical director at the Washington, D.C.-based Employers Council on Flexible Compensation, which represents employers that sponsor tax-advantaged benefit programs.

Notice 2015-87 gives employers two tools to address concerns over keeping an employee on the FSA plan books when that employee isn’t otherwise an active FSA participant, Bauman explained:

  • Employers can limit the carryover feature to only those employees who elect to make their own contributions for the following plan year.
  • The employer can limit the carryover to only one plan year. “For example, consider an employee with a carryover of $300 for plan year one who doesn’t elect to contribute for plan year two,” said Bauman. “At the end of plan year two, if the entire $300 isn’t used, the employer’s plan can provide that the balance will be forfeited.”

COBRA and Carryovers

The notice provides that a health FSA that allows employees to carry over amounts from one plan year to the next must also allow those who elect COBRA under the FSA to carry over amounts to the next year. Amounts carried over cannot be used by employers in determining the amount of the FSA plan premium charged to former employees who elect COBRA.

“What to charge former employers for the COBRA premium [on their FSA plan] had been questionable,” Sweetnam said. “The guidance makes clear that you can’t base the premium charge on the amount of funds carried over.”

HSAs and FSAs Can’t Overlap

The notice affirms prior guidance stating that employees are not allowed to contribute to a health savings account (HSA) if they contributed during the same year to a general-purpose health FSA, although they may contribute to both an HSA and a limited-scope FSA covering dental and vision care expenses.

“An employee enrolled in a high-deductible health plan who has a carryover at the beginning of that plan year will be HSA-ineligible for the entire year, even if he or she spends down the balance right away,” said Bauman.

“If you have an HSA, you cannot contribute new funds to a general-purpose health FSA in the same year,” and carrying over funds from the prior year is seen as a contribution, said Sweetnam.

HRA Coverage Restricted

Notice 2015-87 also affirms prior guidance holding that an HRA cannot reimburse active employees for the cost of premiums for nongroup health insurance they might purchase on their own, unless those purchased policies cover only “excepted benefits” (such as dental or vision insurance policies).

“Some third-party administrators were making tortured interpretations of the prior guidance and promoting arrangements that the IRS didn’t think were allowable,” Sweetnam noted. “The IRS here is addressing that and putting a stop to it.”

The guidance reiterates that retiree-only HRAs can still reimburse retirees for the cost of premiums for nongroup health insurance policies, whether bought through the private market or on an Affordable Care Act exchange.

“But there was one new issue [in the notice] that is key,” said Bauman. “If an employer provides an HRA with its group health plan, it can only reimburse the uninsured expenses of an employee’s spouse and children if they also are enrolled in the employer’s group health plan.”

Employers with HRAs in place as of Dec. 16, 2015, when Notice 2015-87 was issued, have until the first day of their 2017 plan year to amend the HRA to address this requirement, Bauman noted.

“Since family members not on the group health plan can’t be covered by the HRA, it will require employers to update their systems,” said Sweetnam. Beginning in 2017, “If a charge is made to the HRA for a prescription, for instance, you have to look to see who the prescription is for. If it’s for the employee’s spouse and the employee has self-only coverage, that’s no longer permitted under these rules. It adds a little bit of administrative complexity.”

The new guidance creates some complexity, while in other areas it gets rid of some complexity, Sweetnam said.

11 Health Insurance Tax Facts You Need to Know

Originally posted on April 4, 2014 by Robert Bloink and William H. Byrnes on

Among the many changes the Patient Protection and Affordable Care Act (PPACA) has triggered, amendments to the tax code rank high. Employers and those who advise them may have questions about what expenses qualify for deductions, which tax credits they can take advantage of, and what the new rules mean for grandfathered plans. Individuals may be wondering how HSA distributions are taxed, or whether benefits received under a personal health insurance policy are taxable. If these or other questions are coming your way, fear not, we have the well-researched answers you're looking for.

1. Are premiums paid for personal health insurance deductible as medical expenses?

Premiums paid for medical care insurance, that is, hospital, surgical, and medical expense reimbursement coverage, is deductible as a medical expense to the extent that, when added to all other unreimbursed medical expenses, the total exceeds 10 percent of a taxpayer’s adjusted gross income (7.5 percent for tax years beginning before 2013). The threshold is also 10 percent for alternative minimum tax purposes.

The Patient Protection and Affordable Care Act increased the threshold to 10 percent of a taxpayer’s adjusted gross income for taxpayers who are under the age of sixty-five effective in tax years beginning January 1, 2013. Taxpayers over the age of sixty-five will be temporarily excluded from this provision and the threshold for deductibility for these taxpayers will remain at the 7.5 percent level from years 2013 to 2016.

No deduction may be taken for medical care premiums or any other medical expenses unless a taxpayer itemizes his or her deductions. The limit on itemized deductions for certain high-income individuals is not applicable to medical expenses deductible under IRC Section 213.

Premiums for only medical care insurance are deductible as a medical expense. Premiums for non-medical benefits, including disability income, accidental death and dismemberment, and waiver of premium under a life insurance policy, are not deductible.

Amounts paid for any qualified long-term care insurance contract or for qualified long-term care services generally are included in the definition of medical care and, thus, are eligible for income tax deduction, subject to certain limitations.

Compulsory contributions to a state disability benefits fund are not deductible as medical expenses but are deductible as taxes. Employee contributions to an alternative employer plan providing disability benefits required by state law are nondeductible personal expenses.

If a policy provides both medical and non-medical benefits, a deduction will be allowed for the medical portion of the premium only if the medical charge is reasonable in relation to the total premium and is stated separately in either the policy or in a statement furnished by the insurance company.

Similarly, because the deduction is limited to expenses of the taxpayer, his or her spouse and dependents, where a premium provides medical care for others as well (as in automobile insurance) without separately stating the portion applicable to the taxpayer, spouse and dependents, no deduction is allowed.

If a policy provides only indemnity for hospital and surgical expenses, premiums qualify as medical care premiums even though the benefits are stated amounts that will be paid without regard to the actual amount of expense incurred. Premiums paid for a hospital insurance policy that provides a stated payment for each week an insured is hospitalized, not to exceed a specified number of weeks, regardless of whether the insured receives other payments for reimbursement, do not qualify as medical care premiums and hence are not deductible.

Premiums paid for a stand-alone critical illness policy are considered capital outlays and are not deductible.

A deduction will also be denied for employees’ contributions to a plan that provides that employees absent from work because of sickness are to be paid a percentage of wages earned on that day by co-employees.

Premiums paid for a policy that provides reimbursement for the cost of prescription drugs are deductible as medical care insurance premiums.

Medicare premiums, paid by persons age sixty-five or older, under the supplementary medical insurance or prescription drug programs are deductible as medical care insurance premiums. Taxes paid by employees and self-employed persons for basic hospital insurance under Medicare are not deductible.

Premiums prepaid by a taxpayer before the taxpayer is sixty-five for insurance covering medical care for the taxpayer, his or her spouse, and his or her dependents after the taxpayer is sixty-five are deductible when paid provided they are payable on a level-premium basis for ten years or more or until age sixty-five, but in no case for fewer than five years.

Payments made to an institution for the provision of lifetime care are deductible under IRC Section 213(a) in the year paid to the extent that the payments are properly allocable to medical care, even if the care is to be provided in the future or possibly not provided at all. The IRS has stated that its rulings should not be interpreted to permit a current deduction of payments for future medical care including medical insurance provided beyond the current tax year in situations where future lifetime care is not of the type associated with these rulings.

2. May an employer deduct as a business expense the cost of premiums paid for accident and health insurance for employees?

An employer generally can deduct as a business expense all premiums paid for health insurance for one or more employees. This includes premiums for medical expense insurance, dismemberment and sight loss coverage for the employee, his or her spouse and dependents, disability income for the employee, and accidental death coverage.

Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction for health insurance is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to the employer. Where a spouse of an employer is a bona fide employee and the employer is covered as a family member, the premium is deductible. A corporation can deduct premiums it pays on group hospitalization coverage for commission salespersons, regardless of whether they are employees. Premiums must qualify as additional reasonable compensation to the insured employees.

If a payment is considered made to a fund that is part of an employer plan to provide the benefit, the deduction for amounts paid or accrued may be limited.

An accrual basis employer that provides medical benefits to employees directly instead of through insurance or an intermediary fund may not deduct amounts estimated to be necessary to pay for medical care provided in the year but for which claims have not been filed with the employer by the end of the year if filing a claim is necessary to establish the employer’s liability for payment.

3. What credit is available for small employers for employee health insurance expenses?

A credit is available for employee health insurance expenses of an eligible small employer for taxable years beginning after December 31, 2009, provided the employer offers health insurance to its employees.

An eligible small employer is an employer that has no more than twenty-five full time employees, the average annual wages of whom do not exceed $50,000 (in 2010, 2011, 2012 and 2013; the amount is indexed thereafter).

An employer must have a contribution arrangement for each employee who enrolls in the health plan offered by the employer through an exchange that requires that the employer make a non-elective contribution in an amount equal to a uniform percentage, not less than 50 percent, of the premium cost.

Subject to phase-out based on the number of employees and average wages, the amount of the credit is equal to 50 percent, and 35 percent in the case of tax exempts, of the lesser of (1) the aggregate amount of non-elective contributions made by the employer on behalf of its employees for health insurance premiums for health plans offered by the employer to employees through an exchange, or (2) the aggregate amount of non-elective contributions the employer would have made if each employee had been enrolled in a health plan that had a premium equal to the average premium for the small group market in the ratings area.

For years 2010, 2011, 2012 and 2013, the following modifications apply in determining the amount of the credit:

(1) the credit percentage is reduced to 35 percent (25 percent in the case of tax exempts);

(2) the amount under (1) is determined by reference to non-elective contributions for premiums paid for health insurance, and there is no exchange requirement; and

(3) the amount under (2) is determined by the average premium for the state small group market.

The credit also is allowed against the alternative minimum tax.

In 2014 small employers will have exclusive access to an expanded Small Business Healthcare Tax Credit under the Patient Protection and Affordable Care Act (PPACA). This tax credit covers as much as 50 percent of the employer contribution toward premium costs for eligible employers who have low- to moderate-wage workers.

4. Are benefits received under a personal health insurance policy taxable income?


All kinds of benefits from personal health insurance generally are entirely exempt from income tax. This includes disability income; dismemberment and sight loss benefits; critical illness benefits; and hospital, surgical, or other medical expense reimbursement. There is no limit on the amount of benefits, including the amount of disability income, that can be received tax-free under personally paid health insurance or under an arrangement having the effect of accident or health insurance. At least one court has held, however, that the IRC Section 104(a)(3) exclusion is not available where a taxpayer’s claims for insurance benefits were not made in good faith and were not based on a true illness or injury.

The accidental death benefit under a health insurance policy may be tax-exempt to a beneficiary as death proceeds of life insurance. Disability benefits received for loss of income or earning capacity under no fault insurance are excludable from gross income. The exclusion also has been applied to an insured to whom policies were transferred by a professional service corporation in which the insured was the sole stockholder.

Health insurance benefits are tax-exempt if received by the insured and if received by a person having an insurable interest in an insured.

Medical expense reimbursement benefits must be taken into account in computing a taxpayer’s medical expense deduction. Because only unreimbursed expenses are deductible, the total amount of medical expenses paid during a taxable year must be reduced by the total amount of reimbursements received in that taxable year.

Likewise, if medical expenses are deducted in the year they are paid and then reimbursed in a later year, the taxpayer or the taxpayer’s estate, where the deduction is taken on the decedent’s final return but later reimbursed to the taxpayer’s estate, must include the reimbursement, to the extent of the prior year’s deduction, in gross income for the later year.

Where the value of a decedent’s right to reimbursement proceeds, which is income in respect of a decedent, is included in the decedent’s estate, an income tax deduction is available for the portion of estate tax attributable to such value.

Disability income is not treated as reimbursement for medical expenses and, therefore, does not offset such expenses.

Example. Mr. Jones, whose adjusted gross income for 2012 was $25,000, paid $3,000 in medical expenses during that year. On his 2012 return, he took a medical expense deduction of $1,125 [$3,000 - $1,875 (7.5 percent of his adjusted gross income)]. In 2013, Mr. Jones receives the following benefits from his health insurance: disability income, $1,200; reimbursement for 2012 doctor and hospital bills, $400. He must report $400 as taxable income on his 2013 return. Had Mr. Jones received the reimbursement in 2012, his medical expense deduction for that year would have been limited to $725 ($3,000 - $400 [reimbursement] - $1,875 [7.5 percent of adjusted gross income]). Otherwise, he would have received the entire amount of insurance benefits, including the medical expense reimbursement, tax-free.

5. How is employer-provided disability income coverage taxed?


An employer generally can deduct all premiums paid for disability income coverage, as with all premiums paid for health insurance, for one or more employees as a business expense.

Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to an employer.

The deduction of premiums paid for a disability income policy insuring an employee-shareholder was prohibited where the corporation was the premium payer, owner, and beneficiary of the policy. The Tax Court held that IRC Section 265(a) prevented the deduction because the premiums were funds expended to produce tax-exempt income. The Tax Court stated that disability income policy benefits, had any been paid, would have been tax-exempt under IRC Section 104(a)(3).

Taxation of benefits

Sick pay, wage continuation payments, and disability income payments, both preretirement and postretirement, generally are fully includable in gross income and taxable to an employee. Specifically, long-term disability income payments received under a policy paid for by an employer are fully includable in income to a taxpayer.

A disabled former employee could not exclude from income a lump sum payment received from the insurance company that provided the employee’s employer-paid long-term disability coverage. The lump sum nature of the settlement did not change the nature of the payment into something other than a payment received under accident or health insurance.

If benefits are received under a plan to which an employee has contributed, the portion of the disability income attributable to the employee’s contributions is tax-free. Under an individual policy, an employee’s contributions for the current policy year are taken into consideration. With a group policy, an employee’s contributions for the last three years, if known, are considered.

In Revenue Ruling 2004-55, the IRS held that the three-year look back rule did not apply because the plan was amended so that, with respect to each employee, the amended plan was financed either solely by the employer or solely by the employee. The three-year look back rule does not apply if a plan is not considered a contributory plan.

An employer may allow employees to elect, on an annual basis, whether to have premiums for a group disability income policy included in employees’ income for that year. An employee who elects to have premiums included in his or her income will not be taxed on benefits received during a period of disability beginning in that tax year. An employee’s election will be effective for each tax year without regard to employer and employee contributions for prior years.

Where an employee-owner reimbursed his corporation for payment of premiums on a disability income policy, the benefit payments that he received while disabled were excludable from income under IRC Section 104(a)(3).

Where an employer initially paid disability income insurance premiums but, prior to a second period of benefit payments, an employee took responsibility for paying premiums personally, the benefits paid from the disability income policy during the second benefit-paying period were not includable in the employee’s income.

Premiums paid by a former employee under an earlier long-term disability plan were not considered paid toward a later plan from which the employee received benefit payments. Thus, disability benefits were includable in income. If an employer merely withholds employee contributions and makes none itself, the payments are excludable. A tax credit for disability retirement income is available to taxpayers receiving those payments after the minimum age at which they would have received a pension or annuity if not disabled. This credit is called the Disability and Earned Income Tax Credit (EITC).

6. How is personal disability income coverage taxed?


Premiums for non-medical care, such as personal disability income coverage, are not deductible. Only premiums for medical care insurance are deductible as a medical expense.

A deduction is allowed for medical care that is not otherwise compensated for by insurance. The deduction is allowed to the extent that the medical care expenses exceed 7.5 percent of the taxpayer’s adjusted gross income. For taxable years beginning in 2017, the deduction is allowed to the extent that the medical care expenses exceed 10 percent of the taxpayer’s adjusted gross income. The threshold is 10 percent for the alternative minimum tax and there is a transition rule for people over 65. The 10 percent threshold for regular tax does not apply until 2017.

Taxation of benefits

Benefits from personal disability income coverage typically are entirely exempt from income tax. There is no limit on the amount of benefits, including the amount of disability income that can be received tax-free under personally paid disability income coverage.

If benefits are received under a plan to which both an employer and employee have contributed, the portion of the disability income attributable to the employee’s contributions is tax-free.

7. How are amounts distributed from a Health Savings Account (HSA) taxed?

A distribution from an HSA used exclusively to pay qualified medical expenses of an account holder is not includable in gross income. Any distribution from an HSA that is not used exclusively to pay qualified medical expenses of an account holder must be included in the account holder’s gross income.

Any distribution that is includable in income because it was not used to pay qualified medical expenses is also subject to a penalty tax. The penalty tax is 10 percent of includable income for a distribution from an HSA. For distributions made after December 31, 2010, the additional tax on nonqualified distributions from HSAs is increased to 20 percent of includable income.

Includable distributions received after an HSA holder becomes disabled within the meaning of IRC Section 72(m)(7), dies, or reaches the age of Medicare eligibility are not subject to the penalty tax.

Qualified medical expenses are amounts paid by the account holder for medical care for the individual, his or her spouse, and any dependent to the extent that expenses are not compensated by insurance or otherwise. For tax years beginning after December 31, 2010, medicines constituting qualified medical expenses will be limited to doctor-prescribed drugs and insulin. Consequently, over-the counter medicines will no longer be qualified expenses unless prescribed by a doctor after 2010.

With several exceptions, the payment of insurance premiums is not a qualified medical expense. The exceptions include any expense for coverage under a health plan during a period of COBRA continuation coverage, a qualified long-term care insurance contract, or a health plan paid for during a period in which the individual is receiving unemployment compensation.

An account holder may pay qualified long-term care insurance premiums with distributions from an HSA even if contributions to the HSA were made by salary reduction through an IRC Section 125 cafeteria plan. Amounts of qualified long-term care insurance premiums that constitute qualified medical expenses are limited to the age-based limits found in IRC Section 213(d)(10) as adjusted annually.

An HSA account holder may make tax-free distributions to reimburse qualified medical expenses from prior tax years as long as the expenses were incurred after the HSA was established. There is no time limit on when a distribution must occur.

HSA trustees, custodians, and employers need not determine whether a distribution is used for qualified medical expenses. This responsibility falls on individual account holders.

8. When may an account owner transfer or rollover funds into an HSA?

Funds may be transferred or rolled over from one HSA to another HSA or from an Archer MSA to an HSA provided that an account holder affects the transfer within sixty days of receiving the distribution.

An HSA rollover may take place only once a year. The year is not a calendar year, but a rolling twelve-month period beginning on the day when an account holder receives a distribution to be rolled over. Transfers of HSA amounts directly from one HSA trustee to another HSA trustee, known as a trustee-to-trustee transfer, are not subject to the limits under IRC Section 223(f)(5). There is no limit on the number of trustee-to-trustee transfers allowed during a year.

A participant in a health reimbursement arrangement (“HRA”) or a health flexible spending arrangement (“Health FSA”) may make a qualified HSA distribution on a one time per arrangement basis. A qualified HSA distribution is a transfer directly from an employer to an HSA of an employee to the extent the distribution does not exceed the lesser of the balance in the arrangement on September 21, 2006, or the date of distribution. A qualified HSA distribution shall be treated as a rollover contribution under IRC Section 223(f)(5), that is, it does not count toward the annual HSA contribution limit.

If an employee fails to be an eligible individual at any time during a taxable year following a qualified HSA distribution, the employee must include in his or her gross income the aggregate amount of all qualified HSA distributions. The amount includable in gross income is also subject to a 10 percent penalty tax.

General-purpose health FSA coverage during a grace period, after the end of a plan year, will be disregarded in determining an individual’s eligibility to contribute to an HSA if the individual makes a qualified HSA distribution of the entire balance. Health FSA coverage during a plan year is not disregarded, even if a health FSA balance is reduced to zero. An individual who begins HDHP coverage after the first day of the month is not an eligible individual until the first day of the following month.

The timing of qualified HSA distributions therefore is critical for employees covered by general-purpose, that is, non-high-deductible, health FSAs or HRAs:

(1) An employee only should make a qualified HSA distribution if he or she has been covered by an HDHP since the first day of the month;

(2) An employee must rollover general purpose health FSA balances during the grace period after the end of the plan year, not during the plan year, and, of course, he or she must not be covered by a general purpose health FSA during the new year; and

(3) An employee must rollover the entire balance in an HRA or a health FSA to an HSA. If a balance remains in an HRA at the end of a plan year or in a health FSA at the end of the grace period, the employee will not be an HSA-eligible individual.

Beginning in 2007, a taxpayer may, once in his or her lifetime, make a qualified HSA funding distribution. A qualified HSA funding distribution is a trustee-to-trustee transfer from an IRA to an HSA in an amount that does not exceed the annual HSA contribution limitation for the taxpayer. If a taxpayer has self-only coverage under an HDHP at the time of the transfer, but at a later date during the same taxable year obtains family coverage under an HDHP, the taxpayer may make an additional qualified HSA funding distribution in an amount not exceeding the additional annual contribution for which the taxpayer has become eligible.

If a taxpayer fails to be an eligible individual at any time during a taxable year following a qualified HSA funding distribution, the taxpayer must include in his or her gross income the aggregate amount of all qualified HSA funding distributions. The amount includable in gross income also is subject to a 10 percent penalty tax.

9. What employers are eligible for the new tax credit for health insurance, and how does it work?

The new health insurance tax credit is designed to help approximately four million small for-profit businesses and tax-exempt organizations that primarily employ low and moderate-income workers. The credit is available to employers that have twenty-four or fewer eligible full time equivalent (“FTE”) employees paying wages averaging under $50,000 per employee per year.

IRC Section 45R provides a tax credit beginning in 2010 for a business with twenty-four or fewer eligible FTEs. Eligible employees do not include seasonal workers who work for an employer 120 days a year or fewer, owners, and owners’ family members, where average compensation for the eligible employees is less than $50,000 and where the business pays 50 percent or more of employee-only (single person) health insurance costs. Thus, owners and family members’ compensation is not counted in determining average compensation, and the health insurance cost for these people is not eligible for the health insurance tax credit.

The credit is largest if there are ten or fewer employees and average wages do not exceed $25,000. The amount of the credit phases out for business with more than ten eligible employees or average compensation of more than $25,000 and under $50,000. The amount of an employer’s premium payments that counts for purposes of the credit is capped by the average premium for the small group market in the employer’s geographic location, as determined by the Department of Health and Human Services.

Example: In 2013, a qualified employer has nine FTEs (excluding owners, owners’ family members, and seasonal employees) with average annual wages of $24,000 per FTE. The employer pays $75,000 in health care premiums for these employees, which does not exceed the average premium for the small group market in the employer’s state, and otherwise meets the requirements for the credit. The credit for 2013 equals $26,250 (35 percent x $75,000).

Additional examples can be found here.

10. How do the rules for obtaining the tax credit change over the years?

To obtain the credit, an employer must pay at least 50 percent of the cost of health care coverage for each counted worker with insurance.

In 2010, an employer may qualify if it pays at least 50 percent of the cost of employee-only coverage, regardless of actual coverage elected by an employee. For example, if employee-only coverage costs $500 per month, family coverage costs $1,500 per month, and the employer pays at least $250 per month (50 percent of employee-only coverage) per covered employee, then even if an employee selected family coverage the employer would meet this contribution requirement to qualify for the tax credit in 2010.

Beginning in 2011, however, the percentage paid by an employer for each enrolled employee must be a uniform percentage for that coverage level. If an employee receives coverage that is more expensive than single coverage, such as family or self-plus-one coverage, an employer must pay at least 50 percent of the premium for each employee’s coverage in 2011 and thereafter.

Thus, grandfathered health insurance plans that provide, for instance, for 100 percent of family coverage for executives and employee-only coverage for staff will qualify for the tax credit in 2010 but not in 2011 or beyond.

(1) Prohibition of lifetime benefit limits;

(2) No rescission except for fraud or intentional misrepresentation;

(3) Children, who are not eligible for employer-sponsored coverage, covered up to age twenty-six on a family policy, if the dependent does not have coverage available from his or her employer;

(4) Pre-existing condition exclusions for covered individuals younger than nineteen are prohibited; and

(5) Restricted annual limits for essential benefits.

Grandfathered health plans are exempt from the following additional requirements that apply to new and non-grandfathered health plans:

(1) No cost sharing for preventive services;

(2) Nondiscrimination based on compensation;

(3) Children covered up to age twenty-six on family policy regardless of whether a policy is available at work. Grandfathered status for the adult dependent coverage ends on January 1, 2014;

(4) Internal appeal and external review processes;

(5) Emergency services at in-network cost-sharing level with no prior authorization; and

(6) Parents must be allowed to select a pediatrician as a primary care physician for their children and women must be allowed to select an OB-GYN for their primary care physician.



IRS rule allowing flexible spending account carry-overs has pros and cons for employers

Originally posted November 17, 2013  by Jerry Geisel on

Employers have a new option to reduce the likelihood that employees will forfeit contributions to their flexible spending accounts, but companies need to evaluate the pros and cons of the approach before deciding whether to adopt the new “carry-over” design.

The option, which the Internal Revenue Service and the Treasury Department announced last month, allows employees to carry over up to $500 in FSA contributions remaining at the end of a plan year to use in the next plan year.

That is an alternative to the modification of the 1984 IRS use-it-or-lose-it rule, which requires FSA participants to forfeit money remaining in their accounts at the end of a plan year. Under the 2005 modification, employers can establish “grace-period” FSAs that allow employees to roll over the entire unused account balance to pay for expenses incurred during the first 21/2 months of the next plan year before the money is forfeited.

Grace-period FSAs are used by more than 40% of employers that offer an FSA, according to consultant Aon Hewitt.

After a year of examining the issue, federal regulators approved the new carry-over approach. However, employers can use either grace-period or carry-over FSAs, but not both. Employers also can continue to offer standard FSAs in which unspent balances are forfeited at the end of a plan year.

The carry-over approach also does not affect the $2,500 limit on annual FSA contributions imposed by the 2010 health care reform law.

The carry-over approach will cut back on “wasteful year-end FSA health care spending by limiting the risk of forfeiture and, in turn, reducing the incentive to spend down as year-end approaches in order to avoid losing unused funds,” the Treasury Department said in a statement when it unveiled the alternative.

At least some employers are expected to adopt carry-over FSAs.

“We will see some movement” to the carry-over approach, said Nicole Wruck, a senior director and health and welfare practice leader with Aon Hewitt in Lincolnshire, Ill. “It seems like a win for many participants.”

“You won't have this rush to spend at the end of the year. Employees will be more careful about spending” FSA account balances, said Jody Dietel, chief compliance officer for WageWorks Inc., a San Mateo, Calif.-based FSA administrator.

“My best guess is that employers will feel this approach is an enhancement that employees will welcome,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

But others say employees who anticipate major health care expenses early in a plan year, such as orthodontia, could be losers under a carry-over FSA approach.

Andy Anderson, a partner at law firm Morgan, Lewis & Bockius L.L.P. in Chicago, said with a grace-period FSA, an employee could roll over up to $2,500 and have up to $5,000 to pay major health care expenses early in the next plan year. By contrast, the employee would have a maximum of $3,000 to use in the next plan year under a carry-over FSA.

A potential disadvantage for employers in the carry-over FSA approach is that forfeitures on unused balances could decrease significantly. That could cost employers because many use forfeitures to offset administrative expenses incurred in offering FSA programs, experts say.

“There is likely to be less to offset expenses,” said Jay Savan, a partner with Mercer L.L.C. in Atlanta.

Pending additional regulatory guidance, several unknowns remain involving the interaction of carry-over FSAs and rules affecting contributions to health savings accounts.

Under IRS rules, contributions to HSAs are not allowed when employees are enrolled in general-purpose FSAs. However, when the IRS authorized grace-period FSAs, it said HSA contributions would be allowed during the grace period by converting to a limited-purpose FSA in which balances could be used only to pay for dental, vision and preventive care services.

While consultants say IRS officials have informally said that HSA contributions could be made for individuals with carry-over FSAs — so long as the FSA was amended to be limited purpose — there has been no official guidance.

“The current guidance does not address this, so employers need to tread carefully” said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.

IRS Releases Tax Benefit Inflation Adjustments for 2014

Originally posted

Internal Revenue Service (IRS) Revenue Procedure 2013-35 provides the cost-of-living adjustments to certain items for 2014 as required under the Internal Revenue Code. This revenue procedure includes updates for numerous items including:

Adoption Assistance Programs
For taxable years beginning in 2014, under § 137(a)(2) the amount that can be excluded from an employee’s gross income for the adoption of a child with special needs is $13,190. Under § 137(b)(1) the maximum amount that can be excluded for amounts paid or expenses incurred by an employer for qualified adoption expenses furnished through an adoption assistance program for other adoptions by the employee is $13,190. The amount excludable from gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $197,880 and completely phases out with modified adjusted gross income of $237,880 or more.

Health Flexible Spending Arrangements (Health FSA)
The Affordable Care Act amended § 125 to provide limitations on Health FSAs. The dollar limitation on voluntary employee salary reductions for a health FSA is adjusted for inflation for taxable years beginning after December 31, 2013. For taxable years beginning in 2014, the dollar limitation is $2,500.

Medical Savings Accounts

  • Self-only coverage. For taxable years beginning in 2014, the term "high deductible health plan" as defined in § 220(c)(2)(A) means, for self-only coverage, a health plan with an annual deductible not less than $2,200 and not more than $3,250, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,350.
  • Family coverage. For taxable years beginning in 2014, the term "high deductible health plan" means, for family coverage, a health plan with  an annual deductible not less than $4,350 and not more than $6,550, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,000.

Qualified Transportation Fringe Benefit
 For taxable years beginning in 2014, the monthly limitation under § 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $130. The monthly limitation under § 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $250.



FSA use-it-or-lose-it rule changed!

Originally posted October 31, 2013 by Kathryn Mayer on

Use-it-or-lose-it is no more.

The U.S. Department of the Treasury and the IRS on Thursday issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements. Participants now can carry over up to $500 of their unused balances remaining at the end of a plan year.

The rule will go into effect for the 2014 plan year.

Effective immediately, employers that offer FSAs that don't include a grace period will have the option of allowing employees to roll over up to $500 of unused funds at the end of this plan year.

An employer cannot offer a FSA carryover provision and an FSA grace period at the same time, officials said.

For nearly 30 years, employees eligible for FSAs have been subject to the use-it-or-lose-it rule, meaning any account balances remaining unused at the end of the year are forfeited.

FSAs allow employees to contribute pre-tax dollars to pay for out-of-pocket health care expenses – including deductibles, copayments, and other qualified medical, dental or vision expenses not covered by the individual’s health insurance plan.

Health savings accounts, on the other hand, are similar vehicles, but allow participants to build up savings over time.

The move, the departments announced, is making “FSAs more consumer-friendly and provide added flexibility.”

“Across the administration, we’re always looking for ways to provide added flexibility and commonsense solutions to how people pay for their health care,” Treasury Secretary Jacob Lew said in a statement. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”

The change responds directly to more than 1,000 public comments the Treasury fielded. Employers and employees complained about the difficulty for employees to predict future needs for medical expenditures. Many FSA users said they scrambled at year end to spend the remaining amounts, often buying unnecessary medical supplies.

IRS officials said they believe a $500 rollover cap is appropriate because most employees who lost money under the rule lost far less than that amount.

Bob Natt, executive chairman of Alegeus Technologies, a health and benefits payments firm, said he’s grateful the administration has “eliminated the most significant barrier to FSA participation – namely consumers’ fear of losing their money.”

He said that though more than 85 percent of large employers offer FSAs, only about 20 percent of eligible employees actually enroll, mainly for “fear of forfeiting unused funds at the end of the plan year.”

“With this new provision in effect, there is really no reason for eligible employees not to enroll and contribute to an FSA," Natt said. "All contributions are tax-free, the employee’s full election is available on the first day of the plan year, and now unused funds up to $500 can be rolled over to the next plan year.”

Alegeus Technologies has been lobbying for four years to modify the use-it-or-lose-it provision, he said.

Wageworks, a benefits management provider of consumer-directed benefits, has also been pushing the administration for flexibility on FSA provisions. The company's CEO, Joe Jackson, said it's a very "positive change" and a long time coming.

"The timing of this change could not be better, as most companies are now in their open enrollment period," Jackson said. "We encourage all eligible employees to take advantage of this change and sign up for an FSA and lower their health care expenses.”

The rule will have far-reaching effects: An estimated 14 million families participate in FSAs.

Under the Patient Protection and Affordable Care Act, the amount an employee can set aside in an FSA dropped to $2,500 this year. The $500 carryover won’t reduce the $2,500 maximum a worker can contribute to a FSA each year, Treasury officials said.

Regs Limit Use of HRAs for Exchange-Purchased Coverage

Original content from

On Sept 13, 2013, federal agencies issued further guidance via IRS Notice 2013-54 and DOL Technical Release 2013-03, reiterating that health reimbursement arrangements (HRAs), premium reimbursement arrangements (PRAs) and other employer payment plans cannot be used to pay for individual policy premiums on a pre-tax basis, such as when indivdiual coverage is purchased by employees through a public health insurance exchange or on the individual market.

For a true “retiree-only plan” under the tax code and ERISA, employers can still sponsor an HRA or PRA and reimburse individual policy premiums on a pre-tax basis.

Also, employers can provide their active employees with a defined dollar amount, on a pre-tax basis, to purchase group coverage through a private exchange, as explained in the SHRM Online articles "On Private Health Exchange, Choice Drives Satisfaction" and "Time for Defined Contribution Health Benefits?"

A set of frequently asked questions and answers (FAQs) issued by federal regulators on Jan. 24, 2013, will limit the use of employer-provided health reimbursement arrangements (HRAs) to fund employee purchases of individual (nongroup) coverage on government-run health care exchanges, scheduled to launch in 2014.

HRAs are employer-funded notional accounts that are often, but not always, linked to high-deductible group health plans. They typically consist of an employers' promise to reimburse an employee's out-of-pocket medical expenses through a dollar amount contributed annually to the employee's HRA, with unused amounts carried over to help reimburse medical expenses in future years. When the employment relationship ends, the HRA reverts back to the employer since, unlike a health savings account (HSA), an HRA is not employee owned and not portable. (To learn about HRAs and how they operate, see the SHRM Online article "Consumer-Driven Decision: Weighing HSAs vs. HRAs.")

The new guidance, jointly issued by the U.S. Departments of Health and Human Services, Labor and Treasury, distinguished between HRAs that are "integrated" with other coverage as part of a group health plan and HRAs that are not integrated ("stand-alone" HRAs).

The FAQs clarify that an HRA that is not integrated with group health plan coverage but provided as a stand-alone benefit is subject to the Patient Protection and Affordable Care Act (PPACA) prohibition on limiting the amount of an employee's annual health care spending subject to insurance coverage.  Beginning in 2014, for employers with more than one employee, restricted annual dollar limits are not permitted.

Because of the prohibition on annual dollar limits, an employer-sponsored, stand-alone HRA cannot be used to fund the purchase of individual market coverage, or an employer plan that provides coverage through individually purchased policies, including those that might be purchased on a government-run exchange.

Public Exchanges and HRAs Don't Mix

"Some employers had hoped that with the advent of the [government-run] exchanges in 2014, they would be able to offer their employees a fixed-dollar contribution through an HRA, which would permit the employee to take advantage of the tax subsidies currently available through HRA coverage but get the employer out of the health insurance business," explained Timothy Jost, a professor at the Washington and Lee University School of Law in Virginia, in a commentary about the new FAQs posted on the journal Health Affairs' blog.

In addition, "some consumer advocates had hoped that employees would be able to couple funds offered by employers through HRAs with advance premium tax credits available through the exchanges to make individual health policies truly affordable," Jost wrote.

However, he noted, the FAQs clarify that this approach will not be permitted. "The agencies intend to issue further guidance on the issue but have concluded that stand-alone HRAs used to purchase individual coverage will not be considered to be integrated coverage that complies with the annual dollar limit requirement" under the PPACA.

Moreover, if employees are offered an HRA and group coverage but decline the latter, they still may not use the HRA to purchase individual policies, Jost said.

Not a Blanket Prohibition?

However, according to Peter Antoine, a compliance communications specialist at Middleton, Wisc.-based Employee Benefits Corporation, the fact that under the FAQ guidance a stand-alone HRA is subject to the no-limit provision does not mean that it can’t be used to reimburse the cost of an individual plan, even one purchased on an exchange. Rather, “the non-integrated HRA would have to have an unlimited benefit available, unless certain exemptions apply that weren’t spelled out in the FAQs,” he told SHRM Online.

Moreover, Antoine explained that “we believe that non-integrated HRAs that operate as health flexible spending accounts (FSAs), as described in IRS Notice 2002-45 and Internal Revenue Code Section 106, are not subject to the no-limit provision. Consequently, a stand-alone HRA that satisfies the health FSA definition could have a limited benefit, reimburse individual plan premiums and comply with health care reform.”

However, an analysis by law firm McKenna Long & Aldridge LLP concludes:

"Note that some experts have challenged whether the annual dollar limit prohibition even applies to an HRA used to fund individual premiums, since the law only prohibits annual dollar limits on EHBs [essential health benefits]. ... Other experts argue that the HRA premium reimbursement arrangements for individual market coverage should be exempt from the annual dollar limit prohibition as health flexible spending accounts meeting the definition of Code Section 106(c)(2) (i.e. the maximum amount available for reimbursement under the plan may not exceed 500% of the value of the coverage). However, the Departments apparently take a different view given the clear statement in the FAQ that HRAs reimbursing employees for individual market insurance premiums will violate the annual dollar limit prohibition."

Private Exchanges: Employer's Subsidy and Employee's Contributions Remain Pre-Tax

In Aon Hewitt's private Corporate Health Exchange, which launched in fall 2012 for plan year 2013, "the contracts between insurers and employers are traditional group contracts" covered under the Employee Retirement Income Security Act (ERISA), Ken Sperling, Aon Hewitt national health exchange strategy leader, explained to SHRM Online. "The employee contributions are still covered under Section 125, so the employer subsidy is deductible and the employee contributions are pre-tax, just like today. Nothing changes from a tax perspective." 

Private exchanges are not eligible for government-subsidized coverage, and thus differ from the new public exchanges (to learn more, see the SHRM Online article "On Private Heatlh Exchange, Choice Drives Satisfaction.")


What you may not know about your FSA

By Jody Dietel

With fall just around the corner, benefits managers are gearing up to educate employees about flexible spending accounts for the open enrollment period. While benefits professionals may have a good handle on the tax-advantaged benefits accounts that can save participants up to 40 percent on health care, dependent care and commuting expenses, there’s still plenty about FSAs that benefit pros may not know.

Now is the perfect time for HR managers to keep details of FSAs top of mind and help employees understand the fine print so they recognize why enrolling this fall is the smart financial decision.

Eligible expenses for FSA users number in the thousands. You may be surprised at the breadth of products and services that are covered by FSAs. Participants can save big on a wide range of expenses: from dental and vision care with a health care FSA; and nannies and after-school care with a dependent care FSA. While we’re at it, don’t forget to elect your monthly commuter benefits: mass transit commuting expenses and parking for work. To explore a list of items that participants can purchase using an FSA, check

Some eligible expenses may surprise you. While the most common covered expenses include co-pays, prescription drugs and dental and vision care, there are plenty of expenses often eligible for reimbursement that may come as a surprise.  They include acupuncture treatments; doctor-ordered weight loss programs; the additional costs of gluten free food items for those with diagnosed gluten sensitivity issues; mileage to/from medical appointments and smoking cessation programs.

FSA participants need to re-enroll each year. While many other benefits like health insurance do not require employees to sign up year after year, FSAs usually don’t include automatic reenrollment. Employees should look for FSA enrollment forms each year when they get their benefits package.

Contributions can occasionally be changed mid-year or opened after open enrollment. FSA contributions are not always set in stone.  A life changing event, such as a birth or death in the family, can sometimes allow participants to change the amount they decided set aside during open enrollment later in the year or start an account altogether.

The entire FSA contribution is available from day one. Unlike money from an employees’ annual salary which trickles in via paychecks every two weeks, FSA participants have access to the money they elect to contribute from day one. For families who face costly surprises early in the plan year, having the money available right off the bat can be a lifesaver.

FSAs contribute to an employers’ bottom line too. Just like participants, employers don’t have to pay payroll taxes on any of the money employees contribute directly to their FSA as opposed to receiving it in a paycheck.

FSAs are a great vehicle for employees to save hard-earned dollars. As we head into open enrollment, benefits managers helping everyone brush up on FSA details is an important step.