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Entries in Cafeteria Plans (8)


IRS Issues Guidance on Employer Health Plan Opt-Out Payment Arrangements

Late last month the IRS released, in the form of 26 Q/As in Notice 2015-87, guidance on the application of various provisions of the Affordable Care Act to employer-sponsored health coverage.  The Notice covers a number of important issues, including the effect of health reimbursement account contributions, cafeteria plan flex credits, and employer opt-out payments on an employee’s cost of coverage for purposes of determining affordability under Code § 4980H(b).  The Notice also addresses the application to government entities of the employer shared responsibility rules, information reporting for applicable large employers, health savings account matters for persons eligible for benefits through the Department of Veterans Affairs, COBRA continuation coverage for carried over health flexible spending account balances, and penalty relief for employers that make a good faith effort to comply with the ACA reporting rules. 

Regarding employer opt-out arrangements, for months the IRS has stated, informally in various settings, that an employer should include the value of an opt-out payment in determining and reporting an employee’s cost of coverage.  (An opt-out payment is taxable income provided to an employee for waiving coverage under the employer’s health plan.)  Under this rule an opt-out payment might cause an employee’s cost of coverage to become unaffordable, thereby potentially subjecting the employer to an assessable payment.  Though the statutory and regulatory basis for this position is somewhat thin, a senior official at the IRS confirmed this view to us last summer. 

Oddly enough, Notice 2015-87 both confirms and retreats from this position.  Specifically, it provides that until the issuance of further guidance a payment under any opt-out payment arrangement in place prior to December 17, 2015 need not be reported on Form 1095-C and will not, on its own, cause an employer to be subject to a shared responsibility penalty.  Further (as confirmed by communication with the principal author of the Notice) and again until IRS guidance states otherwise, a payment under a conditional opt-out arrangement (for example, one requiring an employee to show proof of coverage under the spouse’s plan in order to receive the payment) adopted at any time need not be reported on Form 1095-C and will not, on its own, cause an employer to be subject to a shared responsibility penalty. 

Though the Notice provides that, for the time being, opt-out payments under certain arrangements need not be added to an employee’s cost of coverage for purposes of reporting and determining affordability, such payments will be added to an employee’s cost of coverage for purposes of determining (i) the employee’s eligibility for a subsidy on the Exchange, and (ii) whether the employee might be exemption from a penalty under the individual mandate. 


IRS Guidance Confirms Treatment of Same Sex Spouses under Cafeteria Plans

IRS Notice 2014-01, issued yesterday, provides helpful guidance for the administration of cafeteria plans after the U.S. Supreme Court’s decision in the Windsor case.  The guidance provides answers to a number of questions that employers and plan administrators have been asking, including the following:

May a participant who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) be treated as if he or she experienced a change in legal marital status?  Yes.  The decision to recognize same sex marriages for federal law purposes for the first time amounts to change in legal marital status.  Accordingly, a cafeteria plan may permit such a participant to revoke an existing election and make a new election in a manner consistent with the change in legal marital status.

Would a change in the tax treatment of a benefit offered under a cafeteria plan be considered a significant change in the cost of coverage?  No.  The fact that same sex married couples can be covered without the imputation of income (and pre-tax dollars can be used to purchase benefits) does not constitute a significant cost change for purposes of permitting a status change.  For periods between June 26 and December 31, 2013, however, a cafeteria plan will not be treated as having failed to meet the cafeteria plan requirements if the plan permitted a participant with a same-sex spouse to make a mid-year election change based on a significant change in the cost of coverage.

At what point must an employer begin to allow pre-tax salary reductions for same sex married couples?  If an employer receives notice before the end of the cafeteria plan year including December 16, 2013 (the publication date of the IRS Notice) that a participant is legally married, then the employer must begin treating the amount that the employee pays for the spousal coverage as a pre-tax salary reduction under the plan no later than the later of (a) the date that a change in legal marital status would be required to be reflected for income tax withholding purposes under Code Section 3402, or (b) a reasonable period of time after December 16, 2013.

At what point may a cafeteria plan permit a participant's flexible spending account to reimburse covered expenses for a same sex spouse?  A cafeteria plan may permit FSA reimbursements for the covered expenses of a same-sex spouse, or of a same-sex spouse's dependent, that were incurred during a period beginning on a date that is no earlier than (a) the beginning of the cafeteria plan year that includes the date of the Windsor decision or (b) the date of marriage, if later.  This would include a health, dependent care, or adoption assistance FSA to reimburse covered expenses of the participant's same-sex spouse.

Much more post-Windsor guidance is expected early next year to deal with a variety of issues under retirement plans as well as, in general, the possible retroactive effect of the invalidation of Section 3 of the Defense of Marriage Act. 


IRS Modifies Health FSA Rules to Permit Carryover of up to $500

 Late last week the IRS released Notice 2013-71, modifying the health flexible spending account (“health FSA”) use-it-or-lose-it rule to allow participants to carry over up to $500 in unused health FSA funds.  Although not unexpected (the Service has hinted at such a change a number of times over the past year), this new feature is welcome relief to participants and plan sponsors.  Plan sponsors may adopt this optional amendment effective as early as the 2013 plan year.

Notice 2013-71 provides that a plan sponsor may, at its option, allow a participant to carry over up to $500 of unused health FSA funds to the immediately following plan year.  Unused health FSA funds are those remaining at the end of the plan’s run-out period (if any), and do not count against the limit on participant salary reduction contributions.  Accordingly, a participant could elect to contribute the full $2,500 (as indexed in future years) permitted by law and also carryover as much as $500.

An employer wishing to adopt this new carryover feature must...

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Working with the New Annual Limit on FSA Contributions

The Patient Protection and Affordable Care Act modified the rules relating to cafeteria plans to impose a new $2,500 annual limit on the amount that an employee may elect to contribute to a health flexible spending account (“health FSA”), effective January 1, 2013.  The modification came in the form of new Section 125(i) of the Internal Revenue Code, and the IRS recently issued Notice 2012-40 to explain the new rules.  Many of our clients have asked us to explain how the new $2,500 limit will work. 

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HSAs in Operation: Ten Common Questions

It’s open enrollment season and many employers are implementing high-deductible health plans (HDHPs) with a Health Savings Account (HSA) feature.  Our prior posts about HDHPs and HSAs have explored the general eligibility requirements for HDHP/HSA arrangements and HSA contributions.  Today we address common questions about the operation of an HDHP/HSA arrangement.

1.  Can employees change their HSA contribution amounts at any time during a plan year or are they restricted to making a change only if a qualifying event occurs as defined by the IRS?  Generally employees may make prospective changes to their HSA contribution amounts at any time and for any reason, though employers may restrict election changes to once a month and upon loss of HSA eligibility.  HDHP coverage, however, is subject to the familiar election change rules.

2.  Can HSA funds be used to pay for medical expenses incurred prior to the establishment of the HSA, but while an individual was covered under the HDHP?  Qualified medical expenses generally must be incurred after the HSA is established in order to be reimbursable on a tax-free basis.  State trust law determines when an HSA is established, and most state trust laws require that a trust actually be funded (i.e., a deposit made) in order to be established.  Note, it is the employee’s responsibility to determine whether the reimbursement is subject to tax.

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