Nancy E. Parkinson, CPP Health, Accident & Retirement
Content coverage: • Health Insurance • Traditional Health Insurance Plans • Health Maintenance Organizations (HMOs) • Preferred Provider Organizations (PPOs) • Sick Pay • STD • LTD • 3rd Party Sick Pay • Worker’s Compensation Insurance • FMLA • Retirement and Deferred Compensation Plans
Health & Accident Insurance Contribution- Tax Treatment Non-Taxable Contributions • Contributions made by an employer • Contributions made under a Section 125 Cafeteria Plan • If employer reduces salary and then reimburses premium to employee, then the premium is taxable to the employee • Premiums must be for Employee, Spouse, Dependents (on 1040) • For purposes of this provision dependent status will continue to apply to a person who is receiving more than ½ his/her support from the taxpayer even if their earnings more than the annual exemption.
Health & Accident Insurance Contribution- Tax Treatment Cont. • Taxes Excluded • Federal Income Tax • Employment Taxes • Social Security • Medicare • FUTA Exclusion from Social Security , Medicare & FUTA must: • Based on one of the following • Plan is written • Referred to in employment contract • Employees contribute to the plan • Employer contributions are made to a separate fund • Employer is required to contribute
Health & Accident Insurance Contribution- Tax Treatment Cont. • Premiums for life partners are federal taxable unless recognized as a spouse under state law. • If the employee’s domestic partner is of the same sex as the employee, the partner does not qualify as the employee’s spouse for federal tax purposes regardless of the state law. • The partner may qualify as a dependent if partner receives more that ½ support from employee, lives with employee, and the relationship does not violate local law.
Health Care Reform Act • Effective March 30, 2010. • Extends dependent (child) age limit to 27. • For children under age 26, the plan cannot define “dependent” for purposes of eligibility other than in terms of relationship between child and participant (employee) • Plan cannot limit coverage based on marital status of child (but it doesn’t have to cover a spouse of a child or a child of a child)
Benefits received directly or indirectly reimbursing the employee for medical expenses incurred are not included in employee’s income Any reimbursements in excess of actual expenses are taxable income to the employee Payments for loss of limb or disfigurement as part of AD&D are not included in income (payments must not be related to time lost from work). Health Care Reform Act changed definition of “medical expense” re: medicines. • Health & Accident Insurance Contribution- Tax Treatment Cont.
Health Insurance – Nondiscrimination Requirements • If insurance is provided through third party insurance company there is no requirement. • If employer is self-insured (reimbursing employees’ medical expenses from its own funds), employer may not discriminate in favor of highly compensated employees in either benefits or eligibility. • IRS Code Section 105(h)
Discriminatory Plan • Amounts paid to highly compensated employees must be included in taxable income • Highly Compensated employees: • 5 highest-paid officers • Owner of more than 10% of employer’s stock • Top-paid 25% of employees Although discriminatory reimbursements are taxable to the highly compensated employees receiving them, they are not subject to federal income tax withholding or employment taxes.
Medical Savings Accounts (Archer MSA) • Established by Health Insurance Portability and Accountability Act (HIPA) of 1996 • Small Employers (no more than 50 employees). • Eligibility can continue for all employees until the year after the employer has 200 employees. At that point only employees currently enrolled can continue to contribute • Employee must be covered only by high deductible health insurance plan. • For 2011 annual deductible • $2,050 – $3,050 for individual • $4,100 - $6,150 for family. • Maximum out-of-pocket expenses can be no more than • $4,100 for individual coverage • $7,500 for family coverage. • Cannot be part of Cafeteria Plan
Medical Savings Accounts (Archer MSA) Cont. • Contributions can be made by employer or employee (not both) • Employee contributions are deductible from income on personal tax return. • Subject to federal income tax withholding and employment taxes. • Employer contributions are excludable from income. MSA Contribution Limitations • Employee deduction cannot exceed employee’s compensation • Deduction or Contribution is limited to: • 65% of the plan deductible for individual coverage • 75% of the plan deductible for family coverage. • Employer contributions must be the same amount for each employee • either dollar amount or percentage of applicable deductible. • Employer contributions in excess are included in income.
Medical Savings Accounts (Archer MSA) Cont. • Distributions from MSAs are excluded from income if they are for medical expenses incurred by employee or his/her dependents. • Person for whom expenses are incurred must be covered only by high deductible health plan. • Distributions of earnings included in income are • subject to an additional 15% tax • unless made after age 65, disability, or death • MSA Trustee or Custodian is not required to determine use of distributions; this is the responsibility of the account holder.
Medical Savings Accounts (Archer MSA) Cont. • Employer Contributions • Box 12 R on W-2 • Plan trustees report on 5498-MSA • Reported on employee’s personal tax return • Employee Deductions • Box 1, 3 and 5 on W-2 • Employee takes deduction on personal income tax return for amount contributed • Plan trustees report on 5498-MSA • Distributions • Plan trustees report on 1099-MSA
Long Term Care Insurance • Treated as accident and health insurance under “Health Insurance Portability and Accountability Act of 1996” • Employer provided coverage is excluded from income • Benefits are excluded from income • If per diem – excludible limit is $300/day in 2011 (indexed for inflation) • Excess will be excluded to the extent of actual cost of care • Restrictions • Not subject to COBRA • Cannot be part of Cafeteria Plan • If part of flexible spending arrangement it is included in employee’s taxable income
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) • Requires health plan sponsors to provide employees and their beneficiaries with the opportunity to elect continued group health coverage for a given period should their coverage be lost due to “qualifying event” • Applies to employers with 20 or more employees (FTEs) on typical business day. • Coverage period generally is 18 to 36 months • Coverage same as provided to similarly situated beneficiaries who have not suffered the qualifying event. • Employees who purchased health care coverage under a cafeteria plan (including flexible spending) are eligible for COBRA continuation at level of coverage before event. • Long Term Care Insurance is not included in COBRA
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Qualifying Events • Death of covered employee – 36 months • Covered employee’s termination of employment or reduction in work hours (other than gross misconduct) – 18 months • If the reason for absence is employee’s military service – 24 months • If another qualifying event occurs (other than employer’s bankruptcy) period extends to 36 months. • Qualified beneficiary (employee or dependent) is disabled under Social Security Act during the first 60 days of continued coverage - 29 months • If another qualifying event during 29 months (other than employer bankruptcy) coverage extends to 36 months
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Employer’s bankruptcy • Coverage is life of retiree or retiree’s spouse. • Once retiree dies – 36 months for retiree’s spouse and children from date of retiree’s death • Divorce or separation of covered employee • (date of divorce is the qualifying event) – 36 months • Dependent child losing that status – 36 months • Premium Requirements • Can be up to 102% of the group premium paid for similar coverage under the plan by the employer and employees. • The maximum premium increases to 150% for disabled qualified beneficiaries after the 18th month of continuation coverage. • Premium payment may not be required earlier than 45 days after the qualified beneficiary elects continuation of coverage
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Election and notice provisions • Election period must last at least 60 days from the date when coverage was terminated or the qualified beneficiary receives notice – which ever is later. • Plan must provide written notice of COBRA continuation coverage within 90 days of when coverage begins • Employee or Employer must notify plan administrator of qualifying event, responsibility and timing depends on the event • Once aware of the qualifying event, plan administrator has 14 days to notify qualified beneficiaries of their rights.
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Penalties for Noncompliance • Employers subject to $100 per day penalty for each qualified beneficiary (maximum $200 per day per family affected by same qualifying event). • Penalty will not be imposed if failure is due to reasonable cause and is corrected within 30 days of discovery • Unintentional failures due to reasonable cause – maximum penalty is lesser of 10% of employer premiums for group health plans during preceding taxable year to $500,000
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • FMLA/COBRA Interaction • Date employee is to return to work at end of FMLA Leave (or date employee notifies employer he/she is not returning if before end of FMLA Leave) is qualifying date. • Unpaid required premium while on FMLA Leave does not eliminate the employees right to COBRA continuation coverage
American Recovery and Reinvestment Act of 2009 (AARA) • Discounted COBRA Premiums & Subsidies • American Recovery and Reinvestment Act of 2009 (AARA) – provides employees who have involuntarily lost their job chance to pay for continued health insurance at a deep discount. “Assistance eligible individuals” pay 35% of COBRA continuation coverage premium. • Assistance Eligible Individual defined as an employee who has involuntarily lost his/her job • The qualifying event must have occurred between Sept 1, 2008 and May 31, 2010. • Termination has to be involuntary and no caused by employee’s gross misconduct. • Individual can be “assistance eligible” more than once! • Discounted premium is calculated on the amount employee would normally be required to pay for COBRA coverage.
American Recovery and Reinvestment Act of 2009 (AARA) Cont. • Assistance for the subsidy ends with first month beginning on or after the earlier of: • 15 months after 1st day of 1st month of eligibility • End of maximum required period of COBRA continuation coverage • Date the individual becomes eligible for Medicare benefits or health coverage under another group health plan (after end of any applicable waiting period) • Employee must notify plan upon eligibility for other coverage
American Recovery and Reinvestment Act of 2009 (AARA) Cont. • Regular COBRA continuation notice must now also include: • Description of beneficiary’s right to premium reduction • Forms necessary to establish eligibility & apply for premium reduction • Contact information for group health plan administrator • Description of extended election period for individuals who had COBRA continuation coverage in effect on Feb 17, 2009 • If available, option to enroll in different coverage than what beneficiary was covered by (prior to the qualifying event) • Beneficiary’s obligation to notify plan of eligibility under another group health plan or Medicare and subsequent penalties for not providing such information • Employer can face penalties for not providing notices to eligible individuals
American Recovery and Reinvestment Act of 2009 (AARA) Cont. • Employer can allow an assistance eligible individual to change coverage options. If allowed: • Premium must be no more than than premium paid by individual for coverage prior to termination of employment • Different coverage must also be offered to employers’ active employees • Coverage requirements: • Must include health care coverage • Cannot be a flexible spending arrangement • Cannot be for treatment at an on-site medical facility maintained by employer that consists primarily of first-aid services, prevention & wellness care, or similar care
American Recovery and Reinvestment Act of 2009 (AARA) Cont. • High earners may have to pay back subsidy as tax payment (if modified AGI exceeds $145,000 ($290,000 for joint filers) – employer does not make this determination but is made when filing Form 1040 • High earners can “opt out” of the COBRA subsidy • Employer is usually responsible for subsidizing COBRA discount and claiming reimbursement of that amount against its payroll taxes on Form 941
Health Reimbursement Arrangements (HRA) • Paid solely by employer (not salary reduction election or cafeteria plan) • Not limited by number of employees or only to employees who • have High Deductible health plans. • Reimburses employee for medical care expenses (for employee, spouse & dependents). • Reimbursements up to maximum dollar amount • (unused portion carried forward to subsequent coverage periods). • Unused portion cannot be paid to employee at end of year (or at termination)
Health Reimbursement Arrangements (HRA) Contd • Benefits under HRA: • Generally excluded from employee’s gross income • Qualifications for exclusion: • May only reimburse expenses for medical care as defined in IRC section 213(d) • Expenses must be substantiated • Expenses may not be for prior taxable year, incurred before date the HRA began, or before employee enrolled in HRA
Health Reimbursement Arrangements (HRA) Contd • Qualifications for exclusion • No right to receive cash or any benefit (other than reimbursement of medical care expenses). • If any person has such a right currently or in an future year, all distributions to all persons under HRA in current year are included in gross income (even amounts paid to reimburse medical care expenses). • Arrangements outside HRA that provide for adjustment of employee’s compensation will be considered in determining eligibility for exclusion. • If bonus at retirement is related to HRA balance or severance is paid only to employees who have HRA balance, then all reimbursements for all participants are disqualified.
Health Reimbursement Arrangements (HRA) Contd • Qualificationsfor exclusion (Cont) • Reimbursements can be to former employees and retirees up to the unused balance. • Employer may reduce maximum balance after retirement or termination for any administrative costs of continuing coverage. • Employer may or may not provide an increase in amount available after an employee retires or terminates employment. • If HRA allows payment of medical benefits to designated beneficiary other than the employee’s spouse or dependents payments are not excludable from income • – effective 8/14/06 (delayed until 2009 for HRA provisions created before 8/14/06)
Health Reimbursement Arrangements (HRA) Cont • HRAs and Cafeteria Plans • Employer contributions to an HRA may not be attributable to salary reductions or provided under a section 125 cafeteria plan to be excluded from taxable income • Look at all circumstances in determination • If salary reduction election for coverage period exceeds the actual cost of the accident or health plan coverage for that period, salary reduction is attributable to HRA – Look to COBRA rates for this. • If correlation exists between maximum reimbursement amount available and amount of salary reduction election for accident and health plan then reduction is attributable to HRA
Health Reimbursement Arrangements (HRA) Cont • HRAs and Flexible Spending Accounts (FSAs) • Amount credited to HRA must not be directly or indirectly based on amount forfeited under FSA • If medical expenses are reimbursable under HRA and FSA, • HRA must be exhausted before FSA • Before FSA plan year begins, the plan document can specify coverage • In no case can HRA and FSA reimburse the same medical care expenses. • Reimbursements can be paid with debit/credit cards • Change in “medical expense” definition – effective January 1, 2011. Only reimbursable if such medicine or drug is a prescribed drug or is insulin.
Health Reimbursement Arrangements (HRA) Cont • Nondiscrimination rules applicable to HRAs • Section 105(h) same as for self-insured medical reimbursement plans • HRA is subject to COBRA • HRA must provide for continuation of maximum reimbursement with increase(s) at same time and same increment as similarly situated non-COBRA beneficiaries • Plan can provide for continued reimbursement regardless of election of continuation coverage (not mandatory) • No Reporting Requirement for HRA.
Health Savings Accounts (HSA • Medicare Prescription Drug Improvement and Modernization Act of 2003 • Effective for Taxable years beginning after 12/31/03 • Tax-exempt trust or custodial account created exclusively to pay for qualified medical expenses of the account holder (employee) and his or her spouse and dependents. • Subject to rules similar to those for IRAs
Health Savings Accounts (HSA ) Cont • Qualifications for exclusion • Individuals must be only in high deductible health plan (HDHP) • Annual deductible for 2011 • at least $1,200 for individual coverage • out of pocket expense limits no more than $5,950 • $2,400 for family coverage • out of pocket no more than $11,900 for family coverage. • no amounts payable for medical expenses until family has incurred annual covered medical expenses in excess of minimum annual deductible • An HDHP can have a smaller deductible or none at all for preventive care.
Health Savings Accounts (HSA ) Cont • Qualifications for exclusion (cont’d) • The insurance can be a PPO or POS – in which case the annual out-of-pocket limit is determined by services within the network • Contributions • Contributions can be made by the employer and employee • All contributions are aggregated for purposes of maximum contribution limit. • Contributions to Archer MSAs reduce the limit available for HSA for tax exclusion • Any amount over the limit is includable in gross income • There is a 6% excise tax for excess individual and employer contributions in addition to all federal taxes
Health Savings Accounts (HSA ) Cont • Contributions (cont’d) • Maximum annual contribution is the lesser of • 100% of annual deductible or • Maximum deductible permitted same as Archer MSA • For 2011 maximum is • $3,050 for an individual • $6,150 for a family • Catch up is allowed for individuals at least 55 years old on the last day of the tax year. • For 2009 and beyond $1,000
Health Savings Accounts (HSA ) Cont • Contributions (cont’d) • No contributions can be made once the individual is eligible for Medicare (65 years old). • Amounts can be rolled over from an Archer MSA and IRA, or • another HAS • Employer contributions must be the same for everyone with comparable coverage either at the same amount or percent of deductible • Comparability is applied separately to part-time workers (normally less than 39 hours per week). • Employers can make a one-time transfer of balance in employee’s HRA or FSA to an HSA. Maximum amount is lesser of HSA or FSA balance on date of transfer OR September 21, 2006. Must be completed by January 1, 2012.
Health Savings Accounts (HSA ) Cont • Contributions (cont’d) • Transfer from an IRA is permitted as a one-time contribution to an HSA – up to maximum deductible contribution limit at the time of the contribution • Transfers from an an HRA, FSA, or IRA are treated as rollover contributions and are non taxable • EXCEPTION: unless employee is not an eligible individual with coverage under an HDHP at any time during the 12 months beginning with the month of the HSA distribution)
Health Savings Accounts (HSA ) Cont • HSA and HDHP can be included in a Cafeteria Plan • HSAs are not subject to COBRA continuation coverage • Calculating Comparable Contributions • Sect 4980G mandates use of calendar year for comparability testing purposes • Several ways to comply with testing requirements: • Pay-as-you-go basis • Look-back basis • Pre-funded basis • Impermissible Contribution Methods do exist!
Health Savings Accounts (HSA ) Cont • Distributions • Excluded from gross income if • qualified medical expenses of employee, spouse or dependents. • If not used for qualified medical expenses • included in gross income • subject to additional 10% tax unless • after death, • disability, • or the employee reaches 65 years old.
Health Savings Accounts (HSA ) Cont • Distributions • Qualified medical expenses • Generally health insurance premiums are not qualified except: • Qualified long term care insurance • COBRA health care continuation coverage • Health insurance premiums while the individual is receiving unemployment compensation benefits • Individual over 65 for Medicare premiums and employer share of premium for employer provided health insurance • Cannot use HSA funds to pay premiums for Medigap policies.
Health Savings Accounts (HSA ) Cont • Employers are not required to determine whether HSA • distributions are used for qualified medical expenses. • Employee makes determinations and must maintain records to • substantiate. • Employers can provide eligible individuals with debit, credit or • stored-value cards – same guidance as under HRAs
Health Savings Accounts (HSA ) Cont • In 2004, IRS issued guidance clarifying how FSAs and HRAs interact with HSAs • Employee covered under DHDP and a health FSA or HRA that pays or reimburses medical expenses, not eligible to make contributions to an HSA • CAN make contributions to an HSA for period of time employee is covered under certain specified types of employer-provided plans that reimburse employee medical expenses • Limited purpose health FSA or HRA • Suspended HRA • Post-deductible health FSA or HRA • Retirement HRA
Health Savings Accounts (HSA ) Cont • Effect of FSA grace period on HAS eligibility • In 2005, IRS issued guidelines clarifying an employee participating in an FSA and covered by a grace period (for incurring medical expenses after the end of the plan year) is not eligible to contribute to an HSA until after the FIRST DAY of the FIRST MONTH following the end of the grace period. • Employer could adopt one of two options which will affect employees’ HSA eligibility during the cafeteria plan period • General purpose health FSA during grace period • Mandatory conversion from health FSA to HSA compatible • health FSA for all participants
Health Savings Accounts (HSA ) Cont • W2 Reporting Requirements • Employer contributions and salary reductions contributions (pre-tax deductions) • Box 12W on W-2 • Employer contributions over limits • Box 1,3, and 5 on W-2 with taxes in boxes 2, 4, and 6 • Employee contributions not made by salary reduction • Box 1, 3, and 5 on W-2 • Employee can deduct up to the annual limit on personal tax return
Family Medical Leave Act (FMLA) • Allows employees to take up to 12 weeks of unpaid leave in any 12 month period • Newborn or newly adopted child • Take care of seriously ill child, spouse, or parent • Care for themselves if they are seriously ill • Employee’s spouse, child or parent is a covered military member on active duty, OR has been notified of an impending call to active duty in support of a contingency operation (can take up to 26 wks in a 12 month period to care for covered military service member with a serious injury or illness) • Guarantees continuation of employees’ health benefits while on leave
Family Medical Leave Act (FMLA) Cont • Applies to private sector employers with 50 or more employees (including part-time and employees on leave or suspension, but not laid-off employees) • For public sector employees, FMLA applies if the public agency has 50 employees working within a 75-mile radius of employee’s worksite • Employee must have been employed by employer for at least 12 months and have worked at least 1,250 hours within the previous 12-month period • the 12 months of employment need not be consecutive • Employment prior to a continuous break in service of 7 years or more does not need to be counted, unless: • For fulfillment of National Guard or Reserve • Period of approved absence or unpaid leave
Family Medical Leave Act (FMLA) Cont • Employer decides what constitutes a 12-month period. If employer fails to make decision clear, the 12-month period is the one most favorable to the employee • Employer can require employee to take leave • “Serious Health Condition” defined in FMLA regulations • Intermittent leave • Can be several days or weeks at a time or by working reduced hours • Reduced hours can be deducted from an exempt employee’s salary without jeopardizing exempt status • If employee would be required to work overtime if not for FMLA leave, hours employee would have been required to work may be counted against FMLA entitlement
Family Medical Leave Act (FMLA) Cont • Designation as paid or unpaid leave • Employer an require employee to use paid leave available to the employee • Employer must designate leave as paid or unpaid FMLA leave within 5 days of receiving notice from employee a leave will be taken. • Notice must be in writing. • Must inform employee of number of hours, days, or weeks that will be counted against the employee’s FMLA leave entitlement • Employer must notify employee of eligibility to take FMLA leave within 5 business days after either employee requests leave or employer learns employee’s leave may be for an FMLA qualifying reason. If employee is not eligible for FMLA, notice must indicate at least one reason why employee is not eligible or has no FMLA leave available.
Family Medical Leave Act (FMLA) Cont • Regulations provide for a notice of FMLA rights and responsibilities of the employer separate from the eligibility notice. Notice must include the following information: • FMLA leave designations • How 12 mo period and “single 12-mo period” are determined • Employee certification requirements • Substitution of paid leave for unpaid leave • Premium payment requirements to maintain health benefits • Job restoration rights, including effect of a “key employee” designation • Potential liability for health insurance premiums if employee does not return to work