October 2007
Recap of
20th Annual by Sue Sieger, CFCI Sue
Sieger, CFCI and Kevin
Knopf, from the Treasury Department, was on hand to comment informally on
recent and upcoming cafeteria plan guidance. Mr. Knopf indicated that we can expect
final cafeteria plan regulations at some point in 2008, even though the
project does not specifically appear on the IRS Priority Guidance Plan. Other items that will be forthcoming
from Treasury will include additional pension guidance and HSA guidance, most
of which will be clarification of previously released guidance. Highlights
of what is new in the proposed final cafeteria plan regulations are as
follows: ü
30 day
retroactive enrollment for new hires ü
Calculation of
imputed income on excess Group Term Life (GTL) ü
Confirmation
that premiums paid in last month of the plan year for first month in next
plan year are permitted. ü
Nondiscrimination
testing guidance -New
Definition of Highly Compensated Individual -New
Definition of Key Employee -Guidance
on eligibility test -New
Premium only plan safe harbor What
has not changed? ü
Written plan
document requirement ü
Election change
rules (except for new hire
exception) ü
Use-it-or-lose-it ü
Uniform coverage
rules We will continue to provide our clients updates as the regulations are studied and analyzed. Please feel free to contact our offices if you have any questions or concerns. New Proposed Final Cafeteria Plan
Regulations Released August
6, 2007, the Internal Revenue Service released proposed regulations for
Section 125 cafeteria plans. In
general, these proposed regulations would affect employers that sponsor a
cafeteria plan, employees that participate in a cafeteria plan, and third
party cafeteria plan administrators.
The term cafeteria plan includes a salary reduction plan permitting
employees to pay for any combination of the following: 1) qualified insurance premiums
and/or; 2) flexible spending accounts (FSA) for medical, dental, and optical
care; and/or 3) dependent child or adult daycare expenses; and/or 4) fund a
Health Savings Account (HSA) on a pre-tax basis under Section 125 of the
Internal Revenue Code. Much
of the content found in the proposed final regulations include clarifying
statements relating to Section 125 plan processes and procedures and are
commonly already in practice, but may not have been clearly identified in the
Code. This new guidance from the
IRS will hopefully eliminate some of the gray areas that plan sponsors have
relied on in the past. The new
regulations are proposed to be effective for plan years beginning on or after
January 1, 2009. Taxpayers may
rely on these regulations for guidance pending the issuance of final
regulations. Some
of the items that still appear to be problematic with final proposed regs.
are as follows: ·
IRS Rev. Rul.
69-136 does not consider differential pay provided by an employer to employee
on military leave as “wages” subject to withholding because the
IRS treats such employees as terminated from employment. The final regulations should clarify
that differential pay (much like severance pay) is a “permitted taxable
benefit” under a cafeteria plan (as defined in Prop. Treas.
1.125-1(a)(2)). ·
Prop. Treas.
Reg. 1.125-1(a)(3) indicates that COBRA premiums are qualified benefits;
however, the proposed final regulations do not specifically reference COBRA
coverage of a spouse or dependent child. It would be helpful if the final
regs. would clarify whether or not COBRA premiums are eligible just for the
employee or if premiums for the spouse and/or the child that is a tax
dependent under 105(b) under a health plan are eligible as well. In addition, clarification as to
whether or not that applies to only the health plan sponsored by the
employee’s employer or any other employer. ·
The final regs.
should identify rules for properly adopting a qualified cafeteria plan or
adopting amendments to a cafeteria plan. Specifically addressing that
documents and amendments must be in writing in advance of the effective date. ·
The proposed
regulations create a safe harbor exemption for “premium only
plans” from the contributions and benefits test set forth in Prop.
Treas. Reg. 1.125-7(c) to the extent such plan passes the eligibility test
set forth in Prop. Treas. Reg. 1.125-7(b) (see Prop. Treas. Reg. 1.125-7(f)).
Currently, Prop. Treas. Reg. 1.125-1(a)(5) defines “premium only
plan” as a cafeteria plan that only offers a choice between cash and
payment of the employer provided accident and health insurance premiums. It would be more practical if the regs
would be revised to add a clarification similar to that in Code Section
105(e) that “accident and health insurance” includes coverage
under a Code section 106 accident and health plan for employees (including
HSA contributions) other than coverage under a flexible spending arrangement
as defined in Code Section 106(c)(2).
In addition, the reference to “cash” should be replaced
with “permitted taxable benefits” to be consistent with other
references within the Code. ·
Prop. Treas.
Reg. 1.125-1(g)(2)(iii) Example #1 indicates that an individual who is self
employed at the beginning of the year but later becomes an employee of the
corporation is deemed to be self employed for the entire year. It seems that the mid-year change from
self employed to common law employee should constitute a change in status;
however, clarification in the final regs would be helpful. ·
Prop. Treas.
Reg. 1.125-1(m) clarifies that employees’ “substantiated”
individual accident and health insurance premiums that are otherwise excluded
under Code Section 106 constitute “qualified benefits” for
purposes of the cafeteria plan rules.
However, guidance is needed regarding the following: (i) COBRA coverage
for spouse/dependent of the employee (ii) the definition of
“substantiated” for purposes of direct reimbursement to the
employee and (iii) the distinction between permissible reimbursement of
premiums through a cafeteria plan (as set forth in Prop. Treas. Reg.
1.125-1(m)) and the prohibition against reimbursement of premiums from a
Health FSA. Caution: Many people confuse the IRS
acknowledgement of the tax deductible status of individual insurance premiums
with pre-tax salary reductions through a cafeteria plan under these proposed
final regs. as a green light of approval for all federal laws (i.e. HIPAA,
ERISA, etc). The proposed
regulations simply indicate that Code Section 125 is not violated if the premiums
for such policies are paid for with “employer” contributions
(e.g. pre-tax salary reductions) and it should not be construed to mean that
such an arrangement satisfies conditions setforth under HIPAA and other
federal laws. ·
Prop. Treas.
Reg. 1.125-1(p)(4) indicates that the prohibition against providing benefits
that deferred the receipt of compensation is not violated where a cafeteria
plan offers vision and dental insurance that requires a mandatory two year
coverage period to the extent certain conditions are satisfied. It would be helpful if language is
added to clarify that the provision applies to both fully insured and self
insured dental and vision arrangements and that the “last month”
exception set forth in (p)(5) applies to dental and vision subject to a two
year election lock. ·
Prop. Treas.
Reg. 1.125-1(p)(5) indicates that a plan does not violate the deferred
compensation rule solely because it uses salary reductions from the last
month of the plan year to pay premiums for accident and health coverage
provided in the first month of the subsequent plan year. It would be helpful
if language were added to clarify that the exception applies equally to fully
insured and self insured accident and health coverage and that plans that
adopt a grace period are not restricted by this rule with respect to benefits
subject to the grace period. ·
Treas. Reg.
1.125-1(q)(1)(vi) indicates that long term care services are not
“qualified” benefits under a cafeteria plan. Code Section 125(f)
indicates that any policy marketed, advertised or offered as “long term
care” insurance is not a qualified benefit. Based on the language in the
statute, it would appear that long term care insurance in general, whether it
provides qualified services or not, would be a “non-qualified
benefit.” Clarification as to whether or not prohibition applies to all
“long term care” services or just “qualified” long
term care services (as defined in Code Section 7702B) would be helpful. ·
Treas. Reg.
§ 1.125-1(c)(6) and (7) together provide that a plan is not a cafeteria
plan if the plan is not in writing or fails to operate in accordance with its
terms or otherwise fails to operate in compliance with Code § 125 or the
regulations, and in such case, an employee’s election between taxable
and nontaxable benefits results in gross income to the employee. It seems more reasonable that the
final regs would allow for a de minimis defect rule, so that written plan
defects or operational defects of a de minimis nature will not disqualify a
plan or result in adverse tax consequences to employees if the plan sponsor
takes appropriate action to correct the defect or prevent the defect(s) from
recurring. ·
Prop. Treas.
Reg. §1.125-1(k)(2) provides a new inclusion rule for excess group term
life insurance offered under a cafeteria plan, effective August 6, 2007.
Under the new rule, the amount includible in an employee’s gross income
is the Table I cost, subject to certain reductions for after-tax
contributions. The entire amount of employee salary reductions and employer
flex credits used to pay for excess group term life insurance coverage is
excludible from the employee’s income. It would be helpful if the IRS would
delay the adoption of these rules until January 1, 2009, which would allow
employers an opportunity to implement them. The calculation of imputed income is
often automated as part of a larger payroll system. To require a change of
this sort without advance warning and time to reprogram the necessary systems
places too great a burden on employers. The IRS will hold a public
hearing on November 15, 2007 to discuss written or electronic comments
submitted by November 5, 2007.
Submit your own comment letter to IRS: IRS representatives have made
it known that there is strength in numbers. Written or electronic comments
must be received by November 5, 2007. Electronic comments can be sent
electronically via the Federal Rulemaking Portal at http://www.regulations.gov
(IRS REG-142695-05). Written submissions should be sent to: CC:PA:LPD:PR
(REG-142695-05), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044. And submissions may be hand delivered
Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG-142695-05), Courier’s Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC. Health Care Statistics at a Glance The 2007 Employer Health Benefits Survey released Sept. 11, 2007 by
the Kaiser Family Foundation and
Health Research & Educational Trust finds: "Since
2001, premiums for family coverage have increased 78 percent, while wages
have gone up 19 percent and inflation has gone up 17 percent ... The average
premium for family coverage in 2007 is $12,106, and workers on average now
pay $3,281 out of their paychecks to cover their share of the cost of a
family policy. Insurance
premiums for job-based health plans increased by 6.1% this year the lowest
rate of increase since 1999. The
number of firms offering high-deductible plans increased by nearly 30%, and
premiums for these plans were the lowest of all plans while employers made
generous contributions to spending accounts for their workers. Nationally,
however, fewer employers seem to be offering insurance to their workers: The
percentage of small firms offering health benefits dropped to 59 percent in
2007, compared to 68 percent in 2001. For businesses with three to nine
workers, the numbers were even lower (45 percent in 2007, compared to 58
percent in 2001) though virtually all companies with 200-plus workers offered
health coverage.” According
to a new consumer survey conducted by
International Communications Research (ICR) and commissioned by “The
poll, conducted in July 2007, asked a nationally representative sample of -- 68.6 percent: greater national emphasis on
preventive health services -- 61.3 percent: government-required health insurance
for everyone (universal
healthcare) -- 48 percent: Health Savings Accounts with tax
incentives that encourage people
to save money for their medical needs. The
survey found that 50.2 percent of respondents said they knew of an instance
where taking preventive health measures might have avoided a major illness
for themselves, their family or friends. Yet, despite this personal
experience, 38.5 percent said they don't worry about their health until
there's a problem, and 39.5 percent said they don't know what preventive
health measures they should take.” IRS Notice 2007-76 Qualified Transportation Benefits This notice is issued to delay the effective date of Revenue Ruling 2006-57, 2006-47 I.R.B. 911. Revenue Ruling 2006-57 provides guidance to employers on the use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringes under Internal Revenue Code §§ 132(a)(5) and 132(f). Treasury and the IRS have become aware that certain transit systems may need additional time to modify their technology and make it compatible with the requirements for vouchers set forth in Revenue Ruling 2006-57. Therefore, the ruling's effective date, which was set for January 1, 2008, is delayed to January 1, 2009. Nevertheless, employers and employees may rely on Revenue Ruling 2006-57 with respect to transactions occurring prior to January 1, 2009. TOP
5 THINGS EMPLOYERS SHOULD KNOW ABOUT HSAs 1.
An employer that
contributes to its employees' health savings accounts (HSAs) isn’t
required to verify each employee's HSA eligibility before it contributes to
his or her HSA. An employer that contributes to an employee's HSA is only
responsible for determining the following with respect to an employee's HSA
eligibility and maximum annual limit on HSA contributions: (1) whether the
employee is covered under a high-deductible health plan (HDHP) sponsored by
that Employer; (2) whether the employee is covered under a non-HDHP (including a general-purpose health
flexible spending arrangement (health FSA) or general-purpose health
reimbursement arrangement (HRA)) sponsored by that employer; and (3) the
employee's age (for age 55 catch-up contributions). The employer may rely on
the employee's representation as to his or her date of birth. The IRS has informally indicated that
the burden of determining HSA eligibility falls almost entirely on the
employee and that the employer won't be liable if it turns out that the
employee is ineligible for an HSA. 2.
Note:
Even though employers aren't required to do so, it may be best
practice to provide educational materials and interactive tools to help
employees determine whether they are eligible for an HSA, as well has have
them sign a certification that they understand the conditions upon which the
HSA is tax deductible, prior to withholding amounts from their salary. 3.
An employer can
avoid the HSA comparability rules if the employer contributions to the HSA
are made under a Section 125 cafeteria plan arrangement. However, employer contributions will
still be subject to the Section 125 discrimination testing rules. 4.
Even if the HSA
if funded 100% by employee contributions, if the employer allows the employee
to do so through pre-tax payroll salary reductions, you will need the
language set up in a Section 125 Plan Document (or amendments for existing
plans). 5.
HSAs that are
funded through pre-tax salary reductions, allow employees and employers to
save payroll taxes which may generate additional tax savings. (Check with your state laws to
determine whether or not HSA contributions are tax deductible at the state
level.) 6.
Employers will
need to report any amounts collected from employees through pre-tax salary
reductions under a cafeteria plan and/or
any amounts contributed directly by an employer on behalf of an HSA account
holder on the employee’s W-2.
Both are considered to be “employer contributions” for
purposes of W-2 reporting.
“Employer contributions” should be reported in 10
Things You Must Know About COBRA and Your Employee Benefit Plan. By Cindy L. Davis Cindy Davis is an attorney
with The Law Office of Cindy L. Davis, P.C., representing plan sponsors, plan
trustees and employee benefit plan service providers in all areas of benefit
plan design, operation and compliance. You can reach Ms. Davis at
507.858.1400 or cindy@cindydavislaw.com.
1.
If your company has
20 or more employees COBRA applies to your group health plans. To determine whether you hit the 20
employee threshold for the Consolidated Omnibus Budget Reconciliation Act of
1985 (“COBRA”) you must count the number of employees your company
had on a typical business day in the preceding year rather than the number of
employees who participated in or who were eligible to participate in your group
health plan. In addition, you
must count the employees of all companies with sufficient common ownership. 2.
Fractions apply
to part-time employees. The COBRA
rules apply a special rule for counting part-time employees for purposes of
counting the number of employees your company had on a typical business
day. Part-time employees count as
a fraction of an employee. The
fraction is equal to the number of hours that the part-time employee works
divided by the number of hours that must be worked to be considered fulltime
eligible to participate in the plan. 3.
Alternative
coverage can be offered in lieu of COBRA. Employers have the option of offering
individuals who are eligible for COBRA the option of electing alternative
coverage in lieu of COBRA. One
example of alternative coverage is the employer continuing to pay the
employer contribution toward the cost of coverage that the employer pays for
active employees for 6 months and the individual only pays the equivalent of
the employee contribution for coverage. To illustrate, if an individual
who is eligible for COBRA elected alternative coverage in lieu of COBRA and
the employer pays $500/month toward the $850/month cost for family coverage
under the plan, the employer would pay $500/month of the $850/month for
family coverage for the COBRA-eligible individual for six months. At the end of six months there would
be no additional rights to continue coverage under the plan. 4.
The plan
document must provide for alternative coverage in lieu of COBRA. The option for individuals to elect
alternative coverage in lieu of COBRA must be stated in the written plan
document for the relevant plan. 5.
An insurance
policy does not satisfy the written plan document requirements under the
Employee Retirement Income Security Act (“ERISA”) for employee
benefit plans, which includes group health plans. Most insurance policies do not include
the following information required by ERISA: a.
Designation of
the plan administrator; b.
The ERISA named
fiduciary of the plan; c.
The plan year; d.
The plan number;
and e.
The plan name. The
insurance policy often will not satisfy the ERISA requirements for a Summary
Plan Description. The employer
can correct these deficiencies by adopting a wrap around document for its
group health plan and any other employee benefit plan it sponsors. 6.
If your group
health plan is insured make sure you know what the continuation of coverage
rights apply under state laws. Many states, including Wisconsin and
Minnesota, have laws that give participants in insured group health plans the
right to elect to continue coverage if they lose coverage as a result of
specified events such as termination of employment, divorce or death of the
employee. The requirements for
such coverage vary from state to state. For example, under Wisconsin law the
maximum amount an individual may be charged for continuation coverage is 100%
of the amount for active employees compared to 102% under 7.
You will need to
coordinate continuation of coverage rights under COBRA and state law if your
company’s group health plan is insured. An insured group health plan
sponsored by an employer with 20 or more employees must give those who are
eligible for continuation coverage with most generous rights under state and
federal law. For example, under 8.
Calculating the
premium for COBRA is not always as simple as dividing the annual benefit
amount by 12. The monthly COBRA
premium for group health plans that are not funded through insurance, Health
Reimbursement Arrangements (HRA) for example cannot be determined by dividing
the maximum available benefit amount by 12. You must calculate the premium based
on reasonable actuarial estimates of future costs or, based on past cost
(adjusted for cost-of-living increase) if coverage under the plan has not
significantly changed from prior COBRA determination periods. The employer must establish a 12-month
COBRA determination period for each group health plan. Once you calculate the
COBRA premium for a 12-month COBRA determination period it generally cannot
be re-calculated. 9.
The designated
Plan 10.
The Plan Navigate
COBRA and state continuation of coverage laws carefully. There are many requirements and the
potential cost to employers for failing to comply is significant. Disclaimer ©
2007 The Law Office of Cindy L. Davis, P.C. This information is
intended for general information purposes only and should not be construed as
legal advice or legal opinions on any specific facts or circumstances.
An attorney-client relationship is not created or continued by sending and
receiving this information. Please contact The Law Office of Cindy
L. Davis, P.C if you would like further information regarding the matters
discussed in this newsletter. FEDERAL TAX NOTICE:
July 2007
Where, Oh Where, are the FINAL
Cafeteria Plan Regulations? by Sue Sieger, CFCI As
late as March of this year, at the Employer Council on Flexible
Compensation’s (ECFC) Annual Conference in While
we have been waiting for final cafeteria plan regulations, the IRS has been
extremely busy issuing other guidance and proposed regulations. Some of the highlights of recent
guidance are as follows: IRS ISSUES PROPOSED REGULATIONS ON TAX
EXEMPTION FOR CHILDREN WHOSE PARENTS ARE DIVORCED, SEPARATED, OR LIVING APART [Prop.
Treas. Reg. Sec. 1.152-4, 72 Fed. Reg. 24192 (May 2, 2007)] For
a copy: http://edocket.access.gpo.gov/2007/pdf/E7-8378.pdf On
May 2, 2007, the IRS issued proposed regulations regarding when parents who
are divorced, separated, or living apart are entitled to claim a child as a
dependent. These reflect changes to the definition of dependent in Code Section
152 that were made by the Working Families Tax Relief Act (WFTRA) and any
subsequent legislation. These proposed regulations would apply to taxable
years beginning after the date they are published as final regulations and
they include several detailed examples, which illustrate how the special rule
applies in hypothetical situations.
The proposed regulations would replace old provisions, as well as
provide clarifications on complex tax rules. The
following is a summary of the proposed regulations: As
you may recall, a taxpayer generally
may only claim a tax exemption for a child who is the taxpayer's
"qualifying child" or "qualifying relative" under Code
Section 152. Code Section 152 includes a special rule for children whose
parents are divorced or legally separated under a divorce decree or separate
maintenance, are separated under a written separation agreement, or live
apart at all times during the last six months of the calendar year. Under
the special rule, the child is treated as the qualifying child or qualifying
relative of the noncustodial parent if these three requirements
are met: (1)
over half of the child's support during the year is from one or both parents;
(2)
the child is in the custody of one or both parents for more than half of the
year; and (3)
the custodial parent signs a written declaration that he or she will not
claim the child as a dependent, which the noncustodial parent attaches to his
or her tax return. The
proposed regulations provide
additional guidance and clarification regarding the special rule.
“Custodial parent" is defined as the parent with whom the child
resides for the greater number of nights during the calendar year (guidance
is provided on how to treat nights when the child resides with neither
parent). In
addition, the proposed
regulations clarify that the special rule can apply to parents living
apart who were never married to each other and they establish detailed
requirements regarding the custodial parent's declaration (e.g., the
custodial parent's release of the claim to the child must not be conditioned
on the noncustodial parent's payment of support) and methods for revoking the
declaration. The
proposed regulations also note
that a child who is treated as a qualifying child or qualifying relative of a
noncustodial parent under the special rule of Code Section 152 is treated as
a dependent of both parents for purposes of the tax exclusions
relating to health coverage under Code Sections 105 and 213, including the
Medical FSA and Medical HRA. Reminder: Only
a custodial parent may claim the Dependent Care FSA deduction and/or
Federal Childcare Tax Credit.
Special rules DO NOT
apply. IRS Final Regulations Address HSAs Not
Established by December 31 and Accelerated Employer Contributions [Prop. Treas. Reg. Sec.
54.4980G-4 (June 1, 2007)] For a copy: http://www.access.gpo.gov/su_docs/fedreg/frcont07.html The IRS has issued proposed
regulations, providing guidance on how employers can make comparable contributions to their
employees' HSAs in two specific situations: 1) What happens when an Employee has not established
an HSA by December 31? The
2007 proposed regulations provide
a means for employers to comply with the comparability rules with respect to
employees who have not established an HSA by December 31 and employees who
may have established an HSA but not notified the employer of that fact. The
employer must first provide written notice (which may be delivered
electronically) to all such employees, by January 15 of the next calendar
year, stating that each eligible employee who, by the last day of February,
both establishes an HSA and notifies the employer that he or she has done so
will receive a comparable contribution to the HSA. A model notice that
employers may use as a basis in preparing their own notices can be found in
the 2007 proposed regulations.
The employer must then make a comparable contribution (plus reasonable
interest), by April 15, to the HSA of each eligible employee who establishes
an HSA and so notifies the employer by the end of February. 2) Can an Employer speed up HSA
contributions for some employees? The
2007 proposed regulations also
allow an employer to accelerate part or all of its contributions for any
calendar year to the HSAs of employees who have incurred qualified medical
expenses during that year that exceed the employer's year-to-date HSA
contributions. Employers that accelerate contributions must do so on an equal
and uniform basis for all eligible employees in similar situations throughout
the calendar year. Until
final regulations are issued, the 2007 proposed regulations may be relied on
for guidance. Or, until final regulations
are issued, employers may continue to rely upon the provision of the 2005
proposed regulations that the 2006 final regulations removed and
reserved. The proposed
regulations are intended to amend the final comparability regulations that
the IRS issued in 2006. Comparability rules do not apply to employer HSA
contributions that are made through a Section 125 cafeteria plan. Prior guidance had addressed the
acceleration of HSA contributions made through a cafeteria plan for employees
whose medical expenses exceeded their contributions. The proposed regulations
address how to provide the same opportunity outside of a cafeteria plan and
still satisfy the comparability rules. If final regulations are not published
during 2007, employers that decide to rely on the 2005 instead of the 2007
proposed regulations would not have to make comparable contributions for the
2007 calendar year to the HSAs of any employees who fail to establish HSAs by
December 31, 2007. Note: The 2005 proposed
regulations had provided that an employer was not required to make comparable
contributions
for a calendar year to an employee's HSA if the employee had not established
an HSA by December 31 of that year. The 2006 final regulations, without
explanation, removed that particular provision and "reserved" the
issue (i.e., did not address it). IRS
RELEASES 2008 HSA LIMITS The
Tax Relief and Health Care Act of 2006 required that for tax years beginning
after December 31, 2006, any COLA for HSA contributions and HDHP requirement
for a calendar year be based on the Consumer Price Index changes as of the
close of the 12 month period ending on March 31 of the calendar year. In
addition, the IRS is required to publish the adjusted amounts for a year no
later than June 1 of the preceding calendar year. Slightly ahead of schedule, the IRS released the 2008
HSA limits on May 11, 2007 as follows: 2008 Annual
HSA Contribution Limit: Self-only: $2,900 Family: $5,800 HDHP
Limits: Minimum
Deductible: Self-only: $1,100 Family: $2,200 Maximum
Out-of-pocket: Self-only: $5,600 Family: $11,200 PROCEED
WITH CAUTION… WHEN
ADDING A HSA-COMPATIBLE INSURANCE PLAN
TO YOUR EXISTING FLEX PLAN. Participation
in a traditional “General-Purpose” Medical Reimbursement Account
will disqualify an employee from making or receiving HSA contributions. You
can amend your existing employee benefit plan(s) to include the “HSA
compatible” Limited-Purpose Medical Reimbursement Account and/or add a
component to permit the payroll deduction of HSA contributions before taxes,
so that both employer and employee can save the additional social security
payroll taxes. Note: Employees participating
in a “General-Purpose” Medical Reimbursement Account CANNOT individually
elect to convert to the “Limited-Purpose Medical Reimbursement Account
in the middle of a plan year.
Adding HSA coverage at a time other than the start of the Section 125
Plan Year may leave some employees ineligible to make or receive HSA contributions
for the remainder of the Section 125 Plan Year. ___________________________________________________________________________________ What if your company is adding a
high-deductible health plan (HDHP)/health savings account (HSA) option to its
Section 125 cafeteria plan, effective July 1, 2007. The HDHP has a $1,250
individual/$2,500 family deductible. Can participants deposit in their HSA
the 2007 limit of $2,850 (individual) or $5,650 (family), as long as they
remain eligible for the HSA plan through 2008? Yes.
Under the new provisions that took effect January 1, 2007, a Participating
Employee who becomes an HSA Eligible Individual mid-year and remains HSA
eligible as of December 1st of that year, may make HSA contributions for the
entire calendar year, if the Participating Employee remains eligible for HSA
contributions for the entire calendar year after the year in which the
Participating Employee begins HSA contributions. This is known as the
“testing period” in the Code. A Participating Employee who does not
satisfy this continuous eligibility rule must pay income tax and a 10%
penalty on any excess HSA contributions made. For
example, if an individual with individual HDHP coverage starts an HSA in July
2007, the normal contribution limit would be 6/12 of $2,850, or $1,425.
However, the 2006 amendments to the HSA law allow this individual to
contribute up to the full $2,850 for 2007. If the individual contributes more
than $1,425, he or she must remain in the HDHP through 2008. If the individual
does not remain in the HDHP through 2008, he or she will be taxed on the 2007
contribution that is more than $1,425, plus a 10% penalty. Source: Code Sec. 223(b)(8)(A), as added by the Tax Relief
and Health Care Act of 2006 (P.L. 109-432, 120 Stat 2922). Please contact our offices so we can help
you review your existing benefit plan, make design recommendations, and
determine if you will need an amendment to your legal documents before you
begin the renewal process.
Q
& A QUESTION: Company A is changing health
insurance plans effective July 1, 2007.
Company A’s health
plan deductibles will be increasing from $500 per person to $1500 per person
and the employee share of the premium will be increasing by $50/payroll
effective July 1, 2007. Company
A’s Section 125 Plan renewed on January 1, 2007. Can the employees of Company A
increase the pre-tax premiums to accommodate the increase to their share per
payroll? Can the employees of
Company A increase their Medical Flexible Spending Accounts (FSA) because
their deductible has changed? ANSWER: The
answer will be yes and no depending upon which question you are
addressing. Participant elections under
a Section 125 Plan generally must be irrevocable and can't be changed during
the period of coverage (typically, the 12-month plan year). Section 125 Plans
can be designed to permit mid-year election changes for participants who
experience one of several events recognized by the IRS as allowing an
exception to the irrevocability requirement ("permitted election change
events"), so long as the mid-year election changes are
"consistent" (as defined by the IRS) with the applicable event. The
IRS regulations and other formal guidance have recognized 14 specific events
that constitute an eligible reason to make a mid-year election change. These
events fall into three broad groups highlighted below: Changes in Status. The following events are considered to be changes in
status: certain changes in the employee's legal marital status (e.g.,
marriage or divorce); certain changes in an employee's number of dependents
(e.g., birth or adoption of a child); certain changes in the employment
status of the employee or a spouse or dependent (e.g., commencement of
employment); events that cause a dependent to satisfy or cease to satisfy
dependent eligibility requirements (e.g., attainment of a certain age); a
change in residence of the employee, spouse, or a dependent; and, for
adoption assistance benefits, the commencement or termination of adoption
proceedings. In order to meet the consistency rule, the election change
generally must be on account of and correspond with a change in status that
affects eligibility for coverage under an employer's plan. Cost or Coverage Changes (does not
apply to Health FSAs). The cost or
coverage change events allow certain mid-year election changes when there are
changes in cost or coverage under other plans (e.g., a component benefit plan
or a plan of another employer) that take effect during the Section 125 plan
year instead of at the beginning of the year. For example, certain election
changes are permitted if there is a significant mid-year increase in the cost
charged to employees for employer-sponsored major medical coverage. These cost or coverage change rules
will apply to Premiums and Dependent Care FSAs only. Therefore, the employee in the
example above would only be permitted to change the elections for the health
premiums and would not be able to change the Medical FSA election. Other Laws or Court Orders. These events coordinate cafeteria plan election
changes with requirements under other, non-cafeteria plan laws (e.g., HIPAA,
COBRA, and HSA rules). For example, elections to make HSA contributions with
pre-tax salary reductions under a cafeteria plan can be changed prospectively
at any time. In order for a Plan
|