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DISCLAIMER: This blog is published for general information only - it is not intended to constitute legal advice and cannot be relied upon by any person as legal advice.  U.S. Treasury Regulations require us to notify you that any tax-related material in this blog (including links and attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties, and may not be referred to in any marketing or promotional materials.  While we welcome you to contact our authors, the submission of a comment or question does not create an attorney-client relationship between the Firm and you. 

Entries in Code Section 125 Plans (7)

Friday
Jan222016

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. 

Monday
Nov042013

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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Tuesday
Nov272012

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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Monday
Oct292012

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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Friday
Dec022011

Implementing an HSA with HDHP: How Hard Could it Be?

High-deductible health plans (HDHPs) with a Health Savings Account (HSA) feature are growing in popularity.  While implementing an HDHP/HSA arrangement can be complicated, having a sense of the landscape can prevent uncomfortable bumps and bruises.  This post explores some of the general eligibility questions we are asked most frequently.  It is the first in a series on HDHP/HSA arrangements, and we hope that together these posts will provide a useful overview on implementing an HDHP/HSA arrangement.

1.  Can an employer offer a health flexible spending account (FSA) to employees not enrolled in the HDHP and a dependent care assistance plan (DCAP) to all employees, and are there any problems with this?  There are no problems with offering a DCAP to all employees.  There are no problems with offering a health FSA or health reimbursement account (HRA) to those employees not participating in the HDHP/HSA.  There may, however, be minor issues in the first year of HSA coverage for those employees who previously were covered by a health FSA or HRA, and there are also issues for employees whose spouses are covered under a health FSA or HRA.

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