HSAs – Interaction with Cafeteria Plans, HRAs and COBRA

Transcript HSAs – Interaction with Cafeteria Plans, HRAs and COBRA

HSAs – Interaction with Cafeteria Plans, HRAs and COBRA

Peter Antonie Compliance Communications Specialist Employee Benefits Corporation

The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form. © 2012 Employee Benefits Corporation 2

HSAs – Interaction with Cafeteria Plans, HRAs and COBRA Webinar

• HSAs can be included in a Cafeteria Plan • HSAs need to be documented in the

Cafeteria Plan

• Transition issues need to be addressed prior

to implementing an HDHP with HSAs

• Interaction of HSAs at the participant level

can lead to compliance issues

• We can answer your questions about how

HSAs interact with Cafeteria Plans, HRAs or COBRA

Today’s Agenda

• Quick Review of HSAs • HSAs in a Cafeteria Plan 

Documenting employer and employee contributions



Limited or Post Deductible Health Care FSA



Transition issues when HSAs are added to an existing cafeteria plan



Cafeteria plan participant issues

• Designing an HRA to accommodate HSAs 

HRA participant issues

Quick Review

• HSAs authorized under IRS Code

§ 223

• Account established in the individual’s name –

not the employer’s

• Owned by the account holder • Portable with the individual – not tied to employer • Not a group health plan – not subject to COBRA, FMLA,

HIPAA, ERISA, etc.

• Eligible to make or receive HSA contributions 

Not another individual’s tax dependent



Not entitled to (enrolled in) Medicare



Covered by a qualified High Deductible Health Plan (HDHP)



Not covered by any disqualifying coverage

Quick Review

HSA Contributions

• By individual or family member as tax deduction

at year-end (post-tax)



Is a $ for $ adjustment to gross income

• By individual as pre-tax deduction in

cafeteria plan



Is a $ for $ adjustment to gross pay

• By employer (employer’s contribution reduces

the maximum the individual can contribute)

HDHP & HSA Limits*

* minimum = deductible, maximum = out-of-pocket

• 2012 min/max – Single $1,200/$6,050 – Family $2,400/$12,100 • 2012 contribution limit – Single $3,100 – Family $6,250 • 2013 min/max – Single $1,250/$6,250 – Family $2,500/$12,500 • 2013 contribution limit – Single $3,250 – Family $6,450 © 2012 Employee Benefits Corporation 7

HSAs in a Cafeteria Plan

• IRS Code

§ 223 prompted amendment of § HSAs in Cafeteria Plans 125 to allow

• Must adopt or amend the Cafeteria Plan for pre-tax HSA

contributions through the premium only component



same as documenting pre-tax medical or dental

• Pre-tax contributions are an election 

Are considered “premiums” for medical care



Regulation allows for prospective changes (no event needed – Final Proposed Treasury Regulation 1.125-2)

• Any employer contributions to HSAs are noted in

the employer contribution section

Adoption Agreement or Amendment

HSAs Documented as Premiums

HSA Contributions Through a Cafeteria Plan

• Employee contributions are a pre-tax election • Employee’s elected amount can be changed

any pay period, prospectively (no permitted election change event necessary)

• Annual maximum contribution amounts

include employee and employer contributions



$3,100/single; $6,250/family (2012)



$3,250/single; $6,450/family (2013)

HSA Contributions Through a Cafeteria Plan

• Any employer HSA contributions are

through the cafeteria plan if employees can make pre-tax contributions (Treasury Regulation §54.4980G-5)

• Employer contributions reduce the amount

an individual can contribute

• HSA contributions (employer and

employee) are taken into account when §125 Contributions & Benefits and Key Employee 25% Concentration nondiscrimination tests are performed

Adoption Agreement or Amendment

HSA Contributions through a Cafeteria Plan

§ 125 Nondiscrimination Testing

• HSA contributions (employer & employee) treated

as premiums

• HSAs are taken into account when performing the

§ 125 Contributions & Benefits test* and Key Employee 25% Concentration test

• Failing either or both tests means the HCEs or Key

employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs) * The C&B Availability test fails if HCEs receive contributions and some eligible employees get no contribution

HSA Contributions through a Cafeteria Plan

• Employer reports employee pre-tax and

any employer HSA contributions on W-2, in box 12 with code W

• Employer responsible to monitor that*: 

Employee is enrolled in HDHP coverage offered by employer



Employee has no disqualifying coverage offered by employer



Employee is eligible for $1,000 catch-up contribution * Not responsible to monitor another employer’s plan or spousal coverage

HSA Contributions Through a Cafeteria Plan

Employee is responsible to monitor that*:

• Employee is an eligible individual • Employee is not covered by any

disqualifying coverage

• Employee does not over-contribute • Employee only seeks HSA distributions for

qualified medical care expenses * Reported through IRS Forms 8889 and 5329

Flexible Spending Arrangements with HSAs

• Can adopt a Limited Health Care FSA

or Post Deductible Health Care FSA for employees who want to make HSA contributions and also have an FSA

• Regular Health Care FSA is

disqualifying coverage – makes individual ineligible to make or receive HSA contributions

Limited Health Care FSA

• Recognized in IRS Notices 2004-8 &

2008-59



Is not disqualifying coverage



Health Care FSA will disqualify an individual from being able to contribute to an HSA

• Includes the spouse’s Health Care FSA • What can it cover? 

Dental expenses



Vision expenses



Preventive Care expenses* * Many cafeteria plans, including the BESTflex Plan, do not provide for this – too hard to administer

Limited Health Care FSA

• If Limited Health Care FSA is to be offered,

must adopt or amend Cafeteria Plan to include it

• Follows all the same rules as a regular

Health Care FSA



Uniform Coverage rule



Use-It-or-Lose-It (forfeiture) rule

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Third party substantiation of expenses



Permitted election change events

Adoption Agreement or Amendment

Limited Health Care FSA Documentd

Post Deductible Health Care FSA

• Recognized in IRS Notices 2004-8 & 2008-59 • Only dental or vision expenses eligible until

minimum HDHP deductible is satisfied

• All medical care expenses incurred after satisfying

the minimum HDHP deductible are eligible expenses

• Follows all the Health Care FSA rules • Often not offered to employers – No process in place to track deductibles – Participant must provide proof of satisfying

HDHP deductible

Cafeteria Plan Transition Issues

• Adoption of HDHP with HSAs creates

transition issues for Health Care FSA participants



Year-end transition



Mid-year transition

Cafeteria Plan Transition Issues

Year-end adoption of HDHP with HSAs

• If employer does not offer the Grace Period,

all Health Care FSA participants can begin contributing to the HSAs at start of new plan year



IRS Notice 2005-86

• Any employer HSA contributions can only

be made into HSA eligible employee accounts

Year-End Transition to HDHP with HSAs (cont.)

If employer does offer the Grace Period*

• • •

Participants that have a $0 Health Care FSA balance on last day of plan year can begin contributing to the HSA on first day of new plan year Participants with a Health Care FSA balance at year end must wait until end of run-out period to begin making contributions to the HSA (1 st of the month following end of Grace Period) Employer can amend the current plan to remove Grace Period prior to year end and all participants can make HSA contributions starting with new year * IRS Notice 2005-86

Year-End Transition to HDHP with HSAs (cont.)

Additional option*

– Convert all Health Care FSAs to Limited or Post

Deductible Health Care FSAs during the grace period

• Cannot be a choice to participants • Challenges for those who do not have dental or

vision expenses – could result in forfeitures

– Requires amendment to delete the Health Care

FSA and convert to Limited or Post Deductible Health Care FSA * IRS Notice 2005-86

Cafeteria Plan Transition Issues

Mid-Year adoption of HDHP with HSAs

• Example: Employer offers a calendar year

Cafeteria Plan but the health insurance renews on August 1.



Employer currently offers an HMO but will offer an HDHP on August 1 with an HSA



Employer has many employees enrolled in the Health Care FSA



Adoption of HDHP is a Coverage Change – does not permit Health Care FSA participants to revoke or amend their elections (Treasury Regulation 1.125-4(f))

Mid-Year Adoption of HDHP with HSAs

Informal IRS guidance March 2005 Option 1:

• Convert all participants to a Limited or Post

Deductible Health Care FSA on August 1

• Unilateral employer action, not participant choice • Expenses incurred after August 1 can only

be reimbursed for dental or vision care

• Participants may forfeit money if they do

not have enough dental or vision care needs

• All employees can start making HSA

contributions August 1

Mid-Year Adoption of HDHP with HSAs (cont.)

Option 2:

• Do not convert Health Care FSA • Participants who are enrolled in the Health Care

FSA cannot immediately contribute to the HSA



Cannot revoke Health Care FSA since change to HDHP is a Coverage Change



May begin contributing on January 1 if their account balance is $0 or the Grace Period is not present



If the Grace Period is present and there is an account balance, the participant can begin contributing to an HSA on April 1 of the next plan year (1 st of the month following Run Out period)

Mid-Year Adoption of HDHP with HSAs (cont.)

Option 3 Plan ahead

• • •

Run a short plan year in the Cafeteria Plan to make it match the health insurance plan year (e.g., 1/1 – 7/31) Requires that employer anticipates change to HDHP with HSAs prior to cafeteria plan renewal on January 1 so amendment can be made for short plan year Then, year end transition issues apply

Participant Scenarios

Scenarios assume participant has HDHP coverage with HSA contributions

• Spouse’s employer implements

new health plan

• Spouse acquires new job and benefits • Participant marries individual who has

existing health coverage

• Participant’s spouse loses job and

health benefits

Participant scenarios (cont.)

Issues to consider:

• Does participant have HDHP coverage after

the event?

• Does participant have any disqualifying

coverage after the event?

• What effect does the event have on the

participant's future HSA contributions?

Designing an HRA to Accommodate HSAs

• Underlying plan that HRA is linked to must

itself be an HDHP

• HRA cannot reimburse any deductible

expenses until employee has had out-of pocket expenses equal to or greater than the HDHP minimum deductible amounts

• HRA may need to be amended by January

1 to assure minimum reimbursement threshold amounts comply with any inflationary increase in the HDHP deductible minimums

Designing an HRA to Accommodate HSAs

Example: employer’s HDHP deductible is $2,500/single, $5,000 per family aggregate; 100% reimbursed thereafter HRA design: Single plan: first $1,250* not paid, remaining $1,250 paid 100% Family plan: first $2,500* not paid, remaining $2,500 paid 100% * this accommodates the 2013 minimum HDHP out-of-pocket deductible expense

HRA Participant Issues

Participant’s employer has HDHP with HSA compatible HRA

• As long as participant's spouse does not

have disqualifying coverage* that includes the participant, the participant can make HSA contributions *Non-HDHP medical plan, Health Care FSA or non-compatible HRA

Health Care FSA vs HRA vs HSA

Feature Contributions Maximum Contribution Tax status of ER contributions Health Care FSA Employer and employee Set by employer Excludable from EE income Portability HDHP Non-Medical expenses None Not required Not allowed EBC HRA Employer Set by employer Same None Not required Not allowed

HSA Employer and employee Indexed annually Same Individual account Required Subject to 20% penalty + tax

Health Care FSA vs HRA vs HSA

(continued) Feature Coverage Period Uniform coverage rule Substantiation requirements Reimbursement order Health Care FSA 12 months Applies Plan must substantiate FSA pays last unless HRA document over rides EBC HRA Plan determines Does not apply Plan must substantiate HRA pays first unless HRA document stipulates FSA HSA Does not apply Does not apply Individual substantiation Cannot have FSA or HRA cover same expenses

Transition Issues Affected By COBRA

• Qualified beneficiary (QB) eligibility

for HSAs

Transition Issues Affected By COBRA

QB eligibility for HSAs

• If COBRA coverage is HDHP, QB can make

HSA contributions

• If QB does not elect COBRA for HDHP

coverage, cannot make HSA contributions unless covered by HDHP through another plan



Spouse’s HDHP coverage



Individual health plan HDHP coverage

Transition Issues Affected By COBRA

Adoption of HDHP at renewal

• Requires new coverage information

to QBs

• Open enrollment for QBs if new insurer • Requires new premium rate

information

Transition Issues Affected By COBRA

Adoption of HDHP mid-year

• Change of coverage for active employees allows

change in coverage for QBs

• Change in premium for active employees allows

change in applicable premium for QBs



An exception to the 12-month Determination Period rules

Common Compliance Issues For Employers

• Not documenting pre-tax HSAs in the cafeteria plan • Not documenting employer’s contribution to HSAs

in the cafeteria plan

• Not performing due diligence on employee

eligibility for HSA contributions

• Not including HSAs in census report for

nondiscrimination testing

• Not adjusting (amending) the HRA

reimbursement thresholds to accommodate new HDHP minimums

• Not providing advance notice of HDHP adoption

for COBRA QBs

Summary

• HSAs can be included in the cafeteria plan • HSAs need to be documented in the

cafeteria plan

• Transition issues need to be addressed prior

to implementing an HDHP with HSAs

• Interaction of HSAs at the participant level

can lead to compliance issues

Questions?

• Any questions can be addressed by e-mail or phone at your convenience

Compliance Department 800 346 2126 [email protected]

• Thanks for Attending!!

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