Alphabet Soup: Review and What’s New with HRAs, FSAs & HSAs

1. Alphabet Soup: Review and What’s New with HRAs, FSAs & HSAs Presented by:Darcy L. Hitesman, Esq. 12900 – 63rd Avenue NorthMaple Grove, MN 55369Phone: 763-503-6620Website: www.HitesmanLaw.com October 6, 2011 Government Payroll Review Seminar (GPRS)

2. Introduction • Lots has happened • Lots is happening • Focus on the defined contribution methods

3. Legal Box • Outer limits • Lots of room inside • Flexibility • Responsibility

4. How the Code Works • General rule: • Anything provided by an employer to an employee in return for services is taxable income to the employee. • Exception: • Unless there is a specific Code section the exempts it from being taxable income. • The Catch: • When a Code provision exempts something from income, it usually requires compliance with a number of requirements in return.

5. HIPAA Portability • Unlike privacy and security, not all group health plans are subject to HIPAA Portability requirements. • Analysis • Is it a group health plan? • Broadly defined • Employer sponsored plan that provides medical benefits • HSA is not group health plan Excepted status is important because dictates application of other requirements, including many requirements under Health Care Reform.

6. HIPAA Portability • Does a listed exception apply? • Retiree only plan • Fewer than 2 current employees • Health FSA • Maximum benefit does not exceed two times salary reduction or if greater salary reductions plus $500; and employer offers another plan that is subject to HIPAA Portability (e.g., major medical) • Most are excepted • HRAs • To be excepted, must meet Health FSA requirements above • Most are not excepted and must comply with HIPAA Portability • Stand alone dental; stand alone vision • Separate policy if insured • Not integral if self-insured (e.g., separate election, separate premium)

7. HIPAA Portability • Long Term Care Coverage • Excepted if under separate policy or not integral • Most falls within exception • Wellness and EAP • Not unless another exception applies • Most are not excepted and must comply with HIPAA Portability • Blanket exceptions: • Independent • Non coordinated • Supplemental (special rules) • Examples:  accident coverage, auto insurance, work comp., specified disease; fixed indemnity

8. Goal • Refresh regarding methods • Similarities • Differences • Update • “New” ways they are being used • Health Care Reform

9. Today’s Agenda

10. HEALTH REIMBURSEMENT ARRANGEMENT PEHP PMA ICMA HRA MSA VEBA VEMA PRA MSRS-HCSP America’s VEBA REBA PSA PEBSCO RHSA All versions of the same thing…HRA

11. Health Reimbursement Arrangement • Self-insured medical plan under Code §§ 105, 106 • First recognized by IRS in 2002 • Written plan document • 213(d) medical expenses (including medical premiums) • Limited scope • Post deductible • Tied to major medical

12. Health Reimbursement Arrangement • Expenses of employees (including former); spouse (DOMA); dependents • Claims substantiation and adjudication • Independent third party substantiation • Claimant representations • Third party adjudication • Ordering rules • Mutual exclusivity

13. Health Reimbursement Arrangement • Nondiscrimination testing • Bargained • Non-bargained • Highly compensated individual • Eligibility • Benefits If you treat people differently…nondiscrimination issue.

14. Health Reimbursement Arrangement • Entirely employer funded • No choice to participate • Nothing in return if waive • Exception • No salary reduction • Not related to cafeteria plan • Exception • No employee after-tax contribution • Conversion • Mandated; set • NO CHOICE! • Carryover from one year to the next year permitted • Spend down permitted • Consider COBRA

15. Health Reimbursement Arrangement • Other Federal Laws • HIPAA Privacy/Security • Covered entity • Business Associate • Policies and procedures • HIPAA Portability • Most HRAs are subject • COBRA • Bunch of others… • USERRA • FMLA • GINA • WHCRA • NMHPA • Health Care Reform

16. Moving on…

17. HRAs: What’s New? • New ways to use • New laws that impact – Health Care Reform

18. HRAs to Pay Premiums • Group medical premiums • Individual medical premiums • Ordering issues with cafeteria plan ability to pay premiums pre-tax • Actives; post employment (including retirees) • Nondiscrimination testing • Just premiums • Premiums “plus”

19. HRAs for Wellness Credits • Stand alone or enhancement to existing • Additional contribution – employer contribution • Nondiscrimination testing • Just premiums • Premiums “plus” Note: Wellness maximum for standard based program increases to 30% for 2014.

20. HRAs Replacing Retiree Obligation • Reduce OPEB impact • Still have implicit subsidy • Statutory obligation to make available • Combined with actives until age 65 • But, not a contribution to cost element

21. Health Care Reform* • Tax consequence of adult child (see handout) • OTC (see handout) • W-2 reporting (later slide) • Cadillac tax (later slide) • PHSA benefit mandates • Because generally not excepted from HIPAA Portability • Substantive • Administrative • Enhanced claims, appeals and external review (later slide) • Uniform Summary of Benefits and Coverage • Auto enrollment *not exhaustive

22. W-2 Reporting Requirement • Effective 2012 (reported in 2013) • Aggregate cost of applicable employer sponsored coverage • Excludable under Section 106 or would be excludable if paid by the employer • Any coverage that meets the definition of group health plan for COBRA, subject to certain exceptions

23. W-2 Reporting Requirement • Exceptions include • Long term care • Modified HIPAA Excepted Benefits Rule • On site medical • Stand alone vision, stand alone dental • Specified illness, fixed indemnity where paid by employee on after tax basis • HSAs • Special rule for health FSAs • First step:  Identify your group health plans and identify which are excepted from HIPAA Portability • HRAs indefinitely excluded under interim guidance.

24. W-2 Reporting Requirement • Just reporting • Transitional relief for employer filing fewer than 250 Form W-2s for preceding calendar year

25. Cadillac Tax • Effective 2018 • 40% on amount in excess of threshold • “Excess” – amount by which aggregate cost of employee’s applicable employer sponsored group health plan exceeds threshold • Threshold –  $10,200/$27,500 • Employee by employee • Monthly calculation • Applicable employer sponsored group health plan • Made available to employee by employer • Excludable from gross income under 106 or would be if employer paid for it

26. Cadillac Tax • Excluded from group health plan • Modified excepted from HIPAA Portability rule • Does not exclude  (i.e., includes) on-site medical clinics • Aggregate • Determined by employer; allocated by employer • Reported to HHS by employer • Insured group health plan paid by insurance carrier • Self-insured group health plan paid by plan administrator (e.g., employer) • HRA contribution is included.

27. Enhanced Claims, Appeals, and External Review • Effective: has been a moving target • Applies to group health plans not excepted from HIPAA Portability • Special grandfathered plan rule • Same as major medical coverage • Full and fair review • Claims and appeals • Special rule regarding substantial compliance • Time frames, notice requirements • Culturally and linguistically appropriate • External review for medical judgment and rescissions; means contracting with IROs • Most HRAs are subject; future guidance excluding or modifying expected.

28. Next type of program…

29. HEALTH FLEXIBLE SPENDING ACCOUNTS Flex Spending Account Medical reimbursement plan Health FSA FSA Health expense account Reimbursement account Unreimbursed Medical Account All versions of the same thing…Health FSA

30. EmployeeContribution Section 125 Plan Group Medical Benefits Group Dental Benefits Health Flexible Spending Account Dependent Care Expense Reimbursement Plan Health Flexible Spending Account • Self-insured medical plan under Code §§ 105, 106 • “Qualified benefit” for cafeteria plan under Code § 125

31. Health Flexible Spending Account • Self-insured medical plan under Code §§ 105, 106 • Written plan document • 213(d) medical expenses (no premiums, no LTC, no HSA) • Limited scope • Post deductible • Tied to major medical • Expenses for employees (including former); spouse (DOMA); dependents • Claims substantiation and adjudication • Independent third party substantiation • Claimant representations • Third party adjudication • Ordering rules

32. Health Flexible Spending Account • “Qualified benefit” under Code § 125 • Salary reduction • Employer contributions (including cash-in-lieu) • Irrevocable elections; limited exceptions • Uniform coverage • Use it or lose it rule • No deferral of compensation

33. Health Flexible Spending Account • Nondiscrimination testing • Two levels • Code § 105 – applies to component • Code § 125 – applies to overall cafeteria plan • Bargained • Non-bargained • Each has eligibility and benefits tests • Key employee concentration test does not apply to governmentals • Each has own target group definition; not the same

34. Health Flexible Spending Account • Other Federal Laws • HIPAA Privacy/Security • Covered entity • Business Associate • Policies and procedures • HIPAA Portability • Most are excepted • COBRA • Bunch of others… • USERRA • FMLA • GINA • WHCRA • NMHPA • Health Care Reform

35. Moving on…

36. Health FSAs: What’s New? • New ways to use • New laws that impact- Health Care Reform

37. Working With Other Programs • Coordinate with HRA that only pays premiums • Premiums paid through HRA • “Plus” paid through health FSA •  Allowing “employee only” option • Does not impact spouse or dependents HSA contribution eligibility • Wellness credits but watch HIPAA Portability

38. Health Care Reform • Tax consequence of adult child • OTC • $2,500 maximum salary reduction (later slide)  • W-2 reporting • Cadillac tax • PHSA benefits mandates • Substantive • Administrative • Enhanced claims regulations • External review • Uniform Summary of Benefits and Coverage • Auto enrollment • Cadillac tax • Preventive care • Annual and lifetime maximums Note: Most cases do not apply because generally excepted from HIPAA Portability.

39. $2,500 Salary Reduction Maximum • Effective 2013 • Just health FSAs • Previously no statutory maximum • True employer contributions should be outside • No cash out available • Watch out for HIPAA Portability • Flat dollar amount • Not like dependent care FSA limit • Per participant; family status irrelevant • No combination with spouse • No coordination or offset with available tax credit • Not indexed for inflation • Aggregate for employer

40. Next type of program…

41. HEALTH SAVINGS ACCOUNTS It is what it is!!!

42. Health Savings Account • First recognized by IRS in 2003 • Not group health plan • Not COBRA • Exists under § 223 of the Code • Often part of cafeteria plan under § 125 of the Code • Employee contributions • Employer contributions (including wellness credits)

43. Health Savings Account • Tax favored “IRA-type” accounts • Designed to accumulate • No forfeitures • Self-adjudicated • To beneficiary upon death • Separate trustee • Invested; tax-free earnings • Limited employer involvement • Can’t limit access • Can’t limit distributions • Strategically implement • No mid year • Coordinate with other programs • Two part analysis • Contributions in • Distributions out

44. HSA Contributions In • Must be “eligible” for HSA contribution • Monthly determination • Subject to statutory maximums per year • Special rules if become eligible during a year • Catch up contributions for those over 55 • Employer reports on W-2, Box 12, Code W 

45. HSA Contributions In • Must be covered by “qualified high deductible health plan” • Comprehensive health plan meeting specific statutory requirements • Deductible • Out of pocket maximum • First dollar preventive • Prescription drugs subject to deductible • Monthly determination                 

46. HSA Contributions In • Must not be covered by “other coverage” unless “permitted” • Other coverage is coverage that pays an expense prior to the satisfaction of the high deductible under the qualified high deductible health plan • Includes (i.e., bad other coverage) • Regular health FSA • Regular HRA • Coverage through spouse • Coverage through employer • Outside comprehensive individual coverage

47. HSA Contributions In • Permitted (i.e., not bad other coverage) • Disease specific • Indemnity • Dental, vision • Prescription discount cards • Supplemental • Most EAPs and wellness programs • Limited scope health FSA • Limited scope HRA • Post deductible HRA                                •  Cannot be covered under Medicare

48. HSA Distributions Out • Distribution for anything • Not required to be covered under qualified high deductible health plan • Taxable unless a medical expense for accountholder, spouse (DOMA), dependent • Distribution amount as taxable income • Excise tax too • No exceptions for inadvertent • “Medical expense” • Section 213(d) but • Limited insurance premiums • Long term care insurance • COBRA • While receiving unemployment compensation • Certain premiums for retirees (must be age 65 or over)

49. Moving on…

50. HSAs: What’s New? Health Care Reform • OTC • Non-medical penalty to 20%