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 Excise Tax, or Cadillac Tax, has been delayed for two years. Previously slated to become effective for taxable years beginning in 2018, the tax will now be effective beginning 2020. The dollar amount of what is considered a high cost health plan will be increased also to reflect the delay in the excise tax’s effective date. The same bill provides that the excise tax would be eligible for a corporate tax deduction.
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.
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):
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.
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.
2017 HSA Limits
2016 HSA Limits
Per IRS regulations, pretax employee contributions to Health Flexible Savings Accounts (FSAs) will be capped at $2,550 as of January 1, 2015 (the limit prior to 2015 was $2,500). Some important rules regarding the cap include:
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.
Parity would be retroactively set to $250/month for 2015 and would increase to $255/month in 2016. (Technically, the language sets the baseline at $175, back to 2001, and there have been COLA adjustments since then bringing the $175 to $250 in 2015). For additional information please refer to Division Q Section 105.
How Does The Retroactive Increase Work?
This provision will only help those who:
Unless the IRS alters its guidance, commuters who received transit benefits from their employer, but do not fall into one of the categories above, will not benefit from the Congressional action taken.
*Employees located in Massachusetts and Wisconsin: The States of Massachusetts and Wisconsin do not recognize the increase to the monthly before-tax contribution limits. If you reside in Massachusetts or Wisconsin, your maximum pre-tax contribution limit is $130 per month for transit expenses and $255 per month for parking expenses. If you elect a transit contribution amount greater than $130, the excess above this amount is subject to tax under the Massachusetts and Wisconsin tax codes and will be added to your taxable wage.
Beginning January 1, 2016, employees may claim a medical deduction of 19 cents per mile they drive using a car, van, pickup or panel truck for medical and dental care. Some examples include trips to the pharmacy and visits to doctors, dentists, 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.
The penalty on HSA distributions that are not used for qualified medical expenses is 20% of the disbursed amount, effective January 1, 2011.