See below for important legal and regulatory updates including contribution limits, health care reform, and other updates.
Note: Content provided is not intended as legal or tax advice.
The Internal Revenue Service (IRS) increases contribution limits for Health Savings Accounts (HSAs), high deductible health plans (HDHPs) and out-of-pocket maximums annually. The increases for HDHP minimum annual deductibles and out-of-pocket maximums allow plan sponsors more flexibility when determining potential deductibles.
2018 HSA Limits
2017 HSA Limits
Per IRS regulations, pretax employee contributions to Health Flexible Savings Accounts (FSAs) will be capped at $2,650 as of January 1, 2018 (up from the 2017 limit of $2,600). Some important rules regarding the cap include:
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 gives veterans the option to make pre-tax Health Savings Account (HSA) contributions while they receive hospital care or medical services for a service-connected disability, beginning 2016. Previous legislation disqualified veterans from making HSA contributions for any month that they received any VA benefits at any time during the previous three months. The new legislation applies only to those employees receiving VA benefits and not TRICARE which is administered by the Department of Defense.
On Oct. 31, 2013, the U.S. Department of the Treasury and the Internal Revenue Service announced that the longstanding “use-it-or-lose-it” provisions governing flexible spending accounts had been altered.
Employers that sponsor a health FSA may choose to allow employees to carry over unused amounts of up to $500 to reimburse qualified medical expenses incurred in the next year. Employers may choose to allow employees either the $500 rollover or a grace period of up to two and a half months (though employers are not required to allow either). A health FSA cannot, however, offer both a rollover and a grace period. The guidance does not impact dependent care FSAs. Employers must amend plan documents in order to offer this new provision.
The change aims to make FSA plans more consumer-friendly by allowing employees to retain some of their tax-advantaged savings and helps make health FSAs accessible to employees at all income levels. It also helps to eliminate the incentives for unnecessary end-of-the-year spending.
The stop-gap funding measure signed by President Donald Trump on Tuesday, January 22 included a delay of the Cadillac Tax until 2022. The Cadillac Tax, originally imposed as part of the Affordable Care Act (ACA), is an excise tax on high-cost employer health plans meant to fund increased Federal expenditures on health care.
The Cadillac Tax was scheduled to take effect in 2018 and, when effective, would take contributions to health Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), and Health Savings Accounts (HSAs) into account when determining taxable benefits. Almost from inception, the Cadillac Tax has faced broad bipartisan opposition and has been subject to several attempts at repeal. Legislators initially succeeded in delaying the tax until 2020 in December 2015 and have now further delayed the tax until 2022. It is likely that legislators will continue to fight for an eventual repeal of the tax.
PPACA’s restriction on imposing annual dollar limits as stated in Section 2711 of the Public Health Service Act means some changes for Health Reimbursement Arrangements (HRAs). Starting January 1, 2014, HRAs combined with a traditional group health plan that complies with the regulations does not violate the law and would be allowed to have an annual limit. However, stand-alone HRAs not integrated with group medical plans may not be able to exist under most scenarios. Despite the fact that there will be some exceptions as to how HRAs are to be used, they will most likely continue to thrive once all the provisions of the Patient Protection and Affordable Care Act (PPACA) are fully implemented.
The PPACA and the Internal Revenue Service (IRS) state the following regulations regarding Health Reimbursement Arrangements (HRAs):
Qualified Small Employer Health Reimbursement Arrangements (“QSEHRAs”)
The 21st Century Cures Act, signed into law in December 2016, allows certain small employers to offer stand-alone HRAs and to not have them implicate the PCRA group health plan rules. Qualified Small Employer Health Reimbursement Arrangements (“QSEHRAs”) are limited to employers with less than fifty full time or equivalent employees that do not offer a group health plan. Employers alone must fund QSEHRAs, employee contributions are not allowed. Additional guidance was issued by the IRS in Notice 2017-67.
Health Flexible Spending Accounts (FSAs) can continue to be offered by employers and impose an annual dollar limit. However, the FSA cannot be the only program offered. An employer must also offer group medical coverage. The FSA and group medical plan do not have to be integrated. In other words, an employee could elect only the FSA. Both, however, must be offered.
PRAs under PPACA
A Premium Reimbursement Account (PRA) is a type of Flexible Spending Account (FSA) that allows employees who are not covered on a group health plan to pay their individual premiums on a pre-tax basis.
Under the Patient Protection and Affordable Care Act, the following changes regarding PRAs go into effect:
Under the ACA, a new non-profit called the Patient-Centered Outcomes Research Institute www.PCORI.org was created to support clinical effectiveness research. The Institute is funded in part by fees (“PCORI fees”) paid by insurance companies and employers offering self-funded plans with Health Reimbursement Arrangements (HRAs) and some Health Flexible Spending Accounts (FSAs).
The PCORI fee applies to almost all HRAs, including retiree HRAs. However, HRAs limited to dental and vision expenses are exempt. Most FSAs are exempt, including any FSAs funded entirely by employee elections and those covering dental and vision only. If there is an employer contribution, the FSA is still exempt if the employer contribution is limited to the lesser of the employee’s contribution or $500 per year.
The PCORI fee applies to plan years ending on or after October 1, 2012 and before October 1, 2019.
The fee is due on July 31 of the calendar year following the end of the plan year. This fee is considered an ordinary and necessary business expense and is deductible.
On June 26, 2013, the Supreme Court ruled that Section 3 of the federal Defense of Marriage Act, or “DOMA,” was unconstitutional. DOMA provided that only individuals of the opposite sex can be officially recognized as being married or spouses to one another. Since it was overturned, there have been immediate implications for employers who offer retirement, fringe benefits and health insurance benefits to employees whose same-sex marriages were performed in states where same-sex marriages are permitted or recognized.
On December 16, 2013, the IRS issued guidance that employees can now elect pre-tax coverage of their same-sex spouse under their health and dependent care flexible spending arrangements (FSAs) and HSAs, per the Windsor ruling regarding DOMA.
Legally married, same-sex spouses can now not only be covered under an employer-sponsored health plan, but they can also use tax-free funds stashed in an employer’s FSA, HRA or HSA for qualified medical expenses for health, dental and vision services. Before DOMA was overturned, FSA and HSA consumers could not reimburse expenses for their same-sex partners, and while HRA consumers could, they could not do so without imputation of income.
The guidance results in a number of possible actions by employers or employees because it instructs that: employees may make a mid-year election change due to a change in legal marital status; employers may need to re-characterize amounts paid by employees for their spouse’s health coverage as pre-tax salary reductions; and, employees may seek a refund for federal income tax and federal employment tax amounts paid on an after-tax basis for their spouse’s health coverage where that coverage can now be considered a pre-tax salary reduction.
Dependent Care FSAs cover day care needed for the FSA owner to work and include care costs for tax dependents under the age of 13 or an elderly parent or spouse who is physically or mentally incapable of self-care and lives with the FSA owner.
The PATH Act made permanent the parity between the parking and transit portion of the commuter tax benefit, ending a quarter century old policy that incentivizes commuters to drive alone.
For 2018, Qualified Transportation Benefits monthly pre-tax limits will increase to $260/month for transit passes and $260/month for parking (up from $255). Employers may, at their discretion, increase monthly pre-tax contributions to the $260 maximum beginning January 1, 2018.
While the recent tax reform bill, H.R. 1, eliminated the employer deduction for transportation and parking benefits, employees may still contribute pre-tax to commuter services programs.
2018 Commuter Limits*
|Transit & Vanpooling||$250||$255||$255||$260|
Beginning January 1, 2017, employees may claim a medical deduction of 17 cents per mile they drive using a car, van, pickup or panel truck for medical care. Some examples include trips to the pharmacy and visits to doctors, therapists and other medical specialists. If workers take buses, taxis, trains or subways, they can be reimbursed for the full amount.
As of January 1, 2011, ACA legislation made it mandatory for individuals to receive a written prescription from their health care providers in order to get reimbursed for most qualifying out-of-pocket expenses using their tax-advantaged funds.
Drugs and medications in need of a prescription:
Items that do not require a prescription:
Under the ACA, companies are required to extend their employee health coverage to include dependents – which include biological, foster and adopted children – until they are 26 years old. This is mandatory regardless of whether the dependents have the opportunity to enroll in health insurance on their own, as of September 23, 2010. The only exceptions to this rule are grandfathered plans, which do not have to provide coverage to young adults who can enroll in another employer-sponsored health plan, until January 1, 2014.
For the purposes of tax-advantaged account and employer health plan coverage, the definition of “dependent” was extended to all children under age 27 on March 30, 2010. This change amends definition of dependent in Code Section 105(b) only.
HSA-qualified HDHPs are required to cover 100% of preventative care, per a requirement that all health plans cover minimum prevention benefits. “Grandfathered” plans are exempt from the preventative care requirement; regulators defined “grandfathered” as plans that existed as of March 23, 2010, and have not been substantially changed since. This requirement was effective the first plan year on or after September 23, 2010.
Contraceptive methods and counseling are now considered preventative care and have to be covered by health insurance. For most plans, this went into effect on Jan. 1, 2013. There are exemptions for certain religious employers that meet certain criteria. For those who wish to be exempted, but do not meet all the criteria, the HHS has delayed the enforcement to the provision, which was originally set for August 2013, and has proposed accommodation.
Certain States, including Maryland, have enacted laws requiring first-dollar coverage of male sterilization by all fully-insured health plans in the state. The IRS has not, so far, issued a ruling on whether male sterilization is preventive care for purposes of determining HSA eligibility. There is currently confusion in the marketplace because it is unclear whether or not a fully-insured plan issued in Maryland can be an HSA-eligible HDHP.