By: Sue
Sieger, CFCI
With the rush of regulatory guidance as of late, it is easily forgotten that the Health Insurance Portability and Accountability Act (HIPAA), was written in 1996 to ensure that someone changing jobs had ample opportunity to obtain new health coverage without preexisting condition limitations. Within a 63 day window, an employee can obtain proof of creditable coverage, to bridge the gap between two health insurance plans.
Under HIPAA's administrative simplification provisions, covered entities (health plans, health care clearinghouses, and most health care providers) are required to comply with three primary mandates as follows:
HIPAA is jointly enforced by the Department of Labor, the Internal Revenue Service and the Department of Health and Human Services. Failure to comply will result in monetary daily penalties of varying amounts. The Department of Labor is responsible for protecting the plan's promise of benefits to participants, and will periodically audit benefit plans for compliance.
Where do you begin? Establish a privacy team and learn about HIPAA and how it applies to your organization. Be aware of the deadlines. Seek legal counsel if you aren't sure how to comply. Implement the required privacy, EDI, and security provisions as they apply to your organization.
Once again, Sue Sieger, CFCI, attended the Employer Council on Flexible Compensation's (ECFC) Annual Cafeteria Plan Symposium, held August 14-16, 2002, in Reno, NV. Harry Beker of the IRS commented on several issues and we have highlighted a few of them below:
BUSINESS PLAN: The IRS is expected to issue guidance in the next year regarding COBRA when the qualifying event is divorce; an expanded look at double dipping arrangements; retroactive enrollments; and debit cards. With FSA participation on the horizon for federal employees, it appears that the IRS will review its stance on debit cards and very likely issue guidance before the end of the year.
PREMIUM REIMBURSEMENT ACCOUNTS: As health insurance premiums continue
to rise, some employers find it easier, and less expensive, to give employees
money to get health insurance on their own. The IRS commented that there is a disagreement
within the IRS and Treasury as to whether such arrangements violate HIPAA's
health status nondiscrimination rules. Individual underwriting may cause
coverage to cost more or be unavailable. However, giving each employee the same
amount of money may avoid the discrimination issue.
Employers should be cautious about these arrangements until formal guidance is
available.
DEPENDENT CARE MISTAKE: Harry Beker answered the following change of status question, "What if both a husband and wife each elect $5,000 through each of their respective Section 125 plans and discover their error after the plan year begins?" Harry commented that "electing beyond the cap is not a qualifying event and neither participant should be allowed to change their elections because of that reason."
HRAs: Harry summarized the variety of plan designs available under the HRA Section 105 tax law. Whereas a plan document may not be required by the tax rules, for all practical purposes it would keep information uniform and consistent. Several areas of HRA administration are left up to the employer to determine what is in the plan and what is not. When asked why some of HRA areas were left in a vague tense, Harry commented that "in order to rule prior to the end of the IRS business plan year 6/30/2002, and to avoid the immediate involvement of the Department of Labor, the Revenue Ruling of late June did not involve any of the matters that would have likely led to a delay in the guidance."
SCHEDULE F: When asked if the IRS might reinstate the Schedule F reporting requirement for cafeteria plans, Mr. Beker said that the IRS has no plans to do so.
The standard mileage rate for use of a car for medical reasons will go down to 12 cents per mile in 2003. (2002 limit is 13 cents per mile.)
The Federal Employees Health Benefits Program will increase 11.1% next year, compared to the typical 15%-20% increases projected for most employers.
Federal Workers will be offered Section 125 Plan Flexible Spending Accounts in July 2003.
Cancer is the No. 1 long-term disability cause says insurer UnumProvident Corp.
Kaiser Family Foundation reports that "After three consecutive years of sharp increases in the cost of health coverage, 61% of firms report they are very or somewhat worried that the cost of health insurance will out-strip their ability to afford health insurance for their employees. When asked about the likelihood they will raise employee costs next year, 43% of all firms and 78% of large firms (200 or more workers) say they are very or somewhat likely to increase the amount that employees must pay for coverage in 2003."
Charles D. Spencer & Associates, Inc found that COBRA premiums charged by employers averaged $501.71 per month, and of 180 employers surveyed, just 16.2% of eligible beneficiaries opted for COBRA.
California enacts paid family/medial leave. Beginning July 1, 2004, workers will be able to take leave and receive 55% of their pay for up to six weeks after they have a new child or to take care of a seriously ill child, spouse, parent or domestic partner. The program will be paid by additional payroll taxes (avg. $26/yr) through the state's disability insurance system.
As predicted earlier this year, the IRS ruled on additional employee benefit plan issues before the end of their business plan year June 30, 2002. These issues included cafeteria, defined contribution, and retirement plans (before the end of their business plan year June 30, 2002.)
In April 2002, we reported the announcement of Revenue Ruling 2002-19, approving obesity as a medical condition. In addition, IRS Notice 2002-24 announced the suspension of the Form 5500 Schedule F filing requirement for cafeteria plans in April 2002.
IRS Officials Donna Crisalli and John Sapienza participated in the Employer's Council on Flexible Compensation's (ECFC) teleconference on Medical Expenses May 21, 2002. They have eluded to some potential changes in interpretative views regarding cosmetic and naturopathic remedies. In short, there may be some changes pertaining to the eligibility of teeth bleaching and vitamin and/or herbal supplements, when used in the treatment of a current disease or medical condition. They also agreed that all forms of birth control including condoms and spermicides available over-the-counter, are permissible expenses because they control a function of the body. Diagnostic testing equipment such as over-the-counter pregnancy test and ovulation kits were also considered accepted by the IRS officials. The comments recorded on May 21, 2002 were informal IRS comments. However, the discussion of these controversial claim issues lends promise of some formal acknowledgement to come.
The IRS also issued Revenue Ruling 2002-27 on May 20, 2002. The ruling discusses the impact of automatic enrollment of insured benefits (group insurance) in a cafeteria plan arrangement (negative election) and forced participation where no other coverage exists. The IRS allows the use of automatic enrollment as long as employees get adequate notice of the process, their right to decline and how to decline coverage, and information about the election deadlines and length of coverage. The ruling also recognizes that the elections may carry forward from year to year, unless changed by the employee during open enrollment.
The IRS addressed the affect that automatic enrollment may have on the definition of "compensation" under Code Section 415. Section 415 imposes limitations on contributions and benefits under qualified retirement plans. Section 415 specifically states that an employee's compensation includes "any amount contributed by the employer at the employee's election that isn't includible in the employees' gross income by reason of Section 125." The Ruling provides that as long as the retirement plan definition of compensation is amended, the plan's definition of compensation will not fail to satisfy Section 415 (3) merely because the definition treats "deemed 125 compensation" as subject to Section 125. To avoid being in violation of Section 401(a), qualified retirement plans that have treated deemed 125 compensation as compensation for purposes of Section 415 (3) must be amended to include "deemed 125 compensation" on or before the end of the 2002 plan year.
June 26, 2002, Revenue Ruling 2002-41 and IRS Notice 2002-45 were issued regarding the tax treatment of "health reimbursement arrangements" (HRA) (also known as "personal care accounts" and "105 plan accounts"). According to the release:
"HRA's must:
HRA's are considered group health plans subject to COBRA continuation.
The press release also says that "HRAs 'may provide' that an FSA funded by salary reduction reimburses expenses before the HRA." It also indicates that the medical expenses must be "substantiated," but does not define substantiation. The Revenue Ruling (2002-41) also states that if the HRA is available only to employees who participate in the offered high deductible major medical plan paid from the employer's cafeteria plan, the HRA meets the nondiscrimination requirements of Section 105(h)."
As a society, we are always looking for faster, better, more convenient ways of life and benefit plan administration has not escaped the technological expectations of the public mindset. A hot topic in claims administration has been the introduction of debit cards as a faster way to process claim payments. Some Section 125 TPA's have already introduced the debit card as an option for Flexible Spending Account participants. Harry Beker of the IRS recently responded to questions regarding this relatively new approach to health claims processing at the Employer's Council on Flexible Compensation's (ECFC) spring meeting in March 2002. Mr. Beker was reported to confirm that "claim substantiation is and will continue to be a requirement of cafeteria plan administration." Written, paper receipts provide the assurances required in the proposed cafeteria plan regulations that (1) a claim has not been reimbursed or is not reimbursable under another health plan and that (2) the claim was indeed for a legitimate medical expense incurred during the plan's coverage period. If an expense is reimbursed and later found not to be an eligible medical expense, the recipient of the reimbursement must pay the money back to the plan. This may pose some problems with claim cut-off dates in relationship to plan end dates. It is not enough to simply tax the reimbursement and adjust the employee's Form W-2. The IRS recognizes that the submission of paper receipts, claims, and then reimbursements is a slower and more cumbersome process when considering the technological advances of debit cards and other electronic submission and payment methods. Future cafeteria plan rules must set a reasonable and reliable method for substantiating a claim when a participant uses a debit card or some other electronic method.
Editor's Note: The introduction of debit cards definitely sparks appeal from participants, yet from a plan sponsor and claims administrator standpoint, this appears to add more yellow lights than green. Whereas some TPA's have taken the aggressive approach and have begun implementing debit cards for participant use, Benefits Design Group, Inc. has determined that there are still some compliance and substantiation issues, which cause some concern with the immediate implementation of the process. We continue to monitor the guidance available on this topic and will make this convenience available to our customers when the process becomes more uniform and stable.
Did you ever question what the IRS does with informational tax returns like the Form 5500?
Did you ever question how to calculate the "total cost of the fringe benefit plan" on the Schedule F?
Did you ever wonder what the IRS does with all the tax forms sent in by employers and taxpayers each year?
Well, wonder no more!
IRS Notice 2002-24, issued earlier this month, announced the suspension of the cafeteria plan requirement of attaching a Schedule F to the Form 5500 annual information return.
This suspension applies to current and future years, and also to all prior years for which information returns have not been filed.
Previously, all plan sponsors of cafeteria plans, educational assistance programs, as well as adoption assistance programs, have been required under IRC Section 6039D to file the fringe benefit form. Under IRC Section 6039D, all cafeteria plans regardless of business type, business size, number of participants, or ERISA exemption status, had been subject to annual fringe benefit plan requirements.
Cafeteria Plan Sponsors will no longer have fringe benefit filing requirements. However, under certain circumstances the Health FSA (Medical Reimbursement) portion of the cafeteria plan will be subject to ERISA filing requirements unless an exemption applies.
All small unfunded plans (less than 100 participants in the beginning of the plan year), governmental entities and churches are exempt from ERISA, thus have no Form 5500 obligation. Small funded plans, large unfunded plans, and large funded plans will need to file the Form 5500 and attach Schedule C, D, G, H, I as applicable to the plan situation, but will not need to file the Schedule F.
Notice 2002-24 is scheduled to be published in the April 22, 2002 Internal Revenue
Bulletin 2002-16, and will be available on line at www.irs.gov/pub/irs-drop/n-02-24.pdf.
The press release can be found at www.irs.gov/pub/irs-news/ir-02-43.pdf.
President Bush signed into law the Job Creation and Worker Assistance Act of 2002 on March 9, 2002. Most of the changes are effective for years beginning after December 31, 2001. This timeline is consistent with many of items set forth in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Amendments made to EGTRRA will be subject to EGTRRA's sunset provision, which is set to expire for years beginning after December 31, 2010.
Items affected by the Tax Act of 2002 are as follows:
By Karen
Rolland, CFCI
The IRS had a busy year 2001! Following is a partial summary of items relating to Section 125 (Flex) and Section 132 (Transportation) plans that the IRS ruled on this past year. For your convenience and information, cites have been included, in the event you would like further information on any of the topics.
January 2001
Our office periodically receives technical questions from our customers and brokers regarding the laws governing flexible benefit plans. The most common question is "Where does the law say...?" Unfortunately, there is no master manual that indexes all of the possible questions and answers for the programs regulated by the Internal Revenue Code. We have a number of reliable sources, the most important being the IRS itself in the form of its web site, opinion letters, advice memorandums, revenue rulings, and the Code.
Federal Registers can be viewed in their entirety at www.access.gpo.gov.
Forms, Publications, Information Letters can all be viewed at the IRS official website www.irs.gov.
by Sue
Sieger, CFC
COBRA regulations finalized in January 2001, clarify how medical reimbursements are affected at employee terminations.
There are only two situations in which a medical reimbursement account can reimburse employees for expenses incurred after their termination date:
1)
If claims are presented during the "forfeiture
period" for expenses incurred prior to the date the employee terminates.
This time period may vary by plan and is most often defined as 60 days
following the end of the plan year.
OR
2) If the employee elects COBRA and claims are presented during the COBRA coverage period and forfeiture period. This would include expenses incurred in the coverage period before the employee's termination date and would be extended to include expenses incurred after their termination date.
COBRA is only offered to a terminating employee if a positive balance remains in their medical reimbursement account. An employee who is electing COBRA would only be allowed to do so for the remainder of the plan year in which they were a participant and would not have open enrollment rights to the following plan year.
If an employee exercises their option under COBRA they should complete a COBRA election form and should continue to appear (and be funded) on all billing statements for Service Option #1. Service Option #2 should forward supplemental information with their payroll registers for reconciliation purposes. A COBRA participant can be required to pay 102% of the "premium," which may include scheduled monthly contributions and monthly administration fees.
If an employee should exercise their COBRA rights for Medical Reimbursement, and you have previously reported the employee as terminated, please file a copy of the COBRA notice with Benefits Design Group, Inc. This will allow their account to be reactivated for claim filing.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was signed into law at the end of May. It constitutes the most comprehensive reform of qualified plans and other retirement arrangements since the 1980s. Although many types of benefits are affected by the new legislation, flex plans were left largely untouched except in the areas of discrimination testing rules and adoption assistance guidelines. The majority of the changes introduced by this legislation are generally effective for plan years beginning after December 31, 2001 but some changes will be phased in gradually over a period of up to ten years. The act will expire December 31, 2010 and revert to the laws in place before EGTRRA was passed.
In general, EGTRRA increases the annual dollar limitations for defined benefit plans, defined contribution plans, elective deferral plans, and other forms of retirement funding programs. It also eases the administration burden relating to employer administration of retirement programs and eases the tax consequences to account holders by allowing more flexible guidelines for distribution and accumulation of retirement plan assets.
From a flex standpoint, the changes relate primarily to adoption assistance, the federal childcare tax credit, and discrimination testing guidelines.
Adoption Assistance-Employer sponsored adoption assistance programs, including those included as a benefit under a flex plan, benefit from the following changes:
Federal Childcare Tax Credit-The legislation makes the following changes to the federal childcare tax credit, effective for years beginning after December 31, 2002:
Since there was no corresponding enhancement to the dependent care exclusion under Section 129, the credit increase may cause more employees to bypass dependent care flex accounts in favor of the credit. This may cause some discrimination testing problems for smaller companies.
Discrimination Testing Guidelines - EGTRRA simplifies the top-heavy rules used to define key employees as follows:
1.
An
officer with compensation greater than $130,000 (indexed in $5,000 increments
for inflation); or
2.
A five
percent owner; or
3.
A one
percent or more owner with compensation greater than $150,000
This article highlights some of the more significant changes relating to flex and retirement plans. Further information is available at the following web sites:
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