ACA Affordability – Managing Risk

Submitted by Ken Stevenson, Vice President of Employee Benefits at Earl Bacon Agency

Beginning with Plan years that started in 2015 Applicable Large Employers (50 or more fulltime employees including equivalents in the PRECEDING calendar year) had to concern themselves with a little thing called the “Affordability Threshold”.  The original Affordability Threshold was 9.5%.  Not a nice neat round 10%.  That would have been too easy.  Yes 9.5%.  Then it became a question of 9.5% of what and the IRS had more answers for that too.  But this column isn’t about the rational for the number, the indexing or any of the safe harbors.  By now we have learned to live with the Affordability Threshold whether its 9.5% or 9.69%.  We’ve, for the most part, figured out which safe harbor or safe harbors to use when filing under 4980H.

This column is about managing the risk of meeting or missing the Affordability Threshold and the consequences it brings.

As agents and brokers, an entirely new demand is being asked of employers and it must be approached with caution.  Because the consequences are severe and unlike any experienced before.  The IRS doesn’t play, so when an employer calls saying they received a letter from the IRS telling them they are being penalized, guess who is assumed responsible?  Remember the letter (IRS letter 226J) is for something that transpired several years ago.  Personnel may have changed and/or conversations may have been forgotten since then.  But again, this column is not about what to do after getting a letter from the IRS but managing the risk beforehand.

So, let’s look at the risk.  You can take the approach of zero risk.  In 2019 the Affordability Threshold is 9.86% of annual income and the federal poverty level (FPL) for a single individual is $12,490 in income annually.  So that means that an employer using the FPL safe harbor should have their employee’s monthly health insurance contribution be no more than $102.63 for their plan to be deemed affordable ($12,490 / 12 months = $1040.80 monthly income x 9.86%  = a maximum contribution of $102.63 ).  That puts the employer at ZERO risk of being fined due to failure to meet the affordability threshold.  Depending on the industry, economy and labor market, this may be a suitable approach.  However, for many employers it’s not economically feasible as using the FPL safe harbor produces the maximum out of pocket for employers. For those employers, it becomes a delicate balance of cost, plan design, multiple plan offerings, choosing a more appropriate safe harbor, measurement and stability options, etc.  to avoid the risk of an IRS penalty.  Some employers, and brokers, spend large sums of money on affordability calculators or outside consultants to do testing, just to make sure they are not subject to the IRS penalties.  They seek ZERO risk.  But do they need to?  It is worth it?  Remember when the ACA passed, and employers were asking is it cheaper to just pay the fine?  This may be in a different context but it’s worth exploring.

Here is an example.  Employer B&A.  B&A typically has around 250 employees.  Turnover is high and they elected to use a standard monthly measurement period.  There is a wide variance in incomes.  About 10% are minimum wage employees which also has the highest turnover.  Those employees average only about 3 months employment.  It now becomes a simple math problem.  The employee contribution is currently $165 per month on their lowest cost plan.  Roughly 25 employees will not meet the affordability threshold.  Since the group has a 60-day waiting period, the risk exposure is roughly 30 days (90-60) X 25 X $312.50 = $7,812.50.  Remember the penalty is prorated monthly.  The first option that many employers choose is to increase contribution levels for the whole group and avoid the penalty.  B&A determined that if they did that it would cost them an additional $18,000 a year.  So while they were at risk of an IRS fine, the cost of that fine was lower than increasing contributions for the entire group.  One final point on the application of the penalty.  Remember an employer penalty is only applied when a fulltime employee BOTH purchases an individual plan in the Marketplace AND receives a premium tax credit.  B&A felt that an even smaller number of those 25 “at risk” employees would meet that criteria.  Most were young and either on their parents plan or buying health insurance was just not a priority for them.  So that $7,812.50 penalty risk would most likely be much less and they were willing to accept that.

In this case accepting some risk was worth it for the employer.  But its important to document a conversation like this because there is still nothing more frightening for an employer than seeing that IRS letterhead.


Medicare Part D Disclosures Due by March 1, 2019 for Calendar Year Plans

The plan sponsor must complete the online disclosure reporting if the health plan(s) prescription drug coverage is creditable or non-creditable within 60 days after the beginning of the plan year. For calendar year health plans, the deadline for the annual online disclosure is March 1.

Timing of Disclosures to CMS
The disclosure notice must be provided within the following time frames:

  • Within 60 days after the beginning date of the plan year;
  • Within 30 days after the termination of a plan’s prescription drug coverage; and
  • Within 30 days after any change in the plan’s creditable coverage status.

The CMS reporting requirement applies if the group health plan(s) covers any Medicare-eligible individuals at the start of each plan year. This includes anyone on Federal COBRA or State Continuation.

For more information, visit: CMS Creditable Coverage Disclosure Form

Update on the Women’s Contraceptive Coverage Regulations

Submitted by Carol Taylor, Account Executive and Compliance Officer, Kirby Employee Benefits, Jupiter, FL

Since the passage of the Affordable Care Act in 2010, the coverage for preventive care has been a changing landscape. There have been numerous changes to the U.S. Preventive Services Task Force ratings for A & B recommended evidence-based items or services.

Among the requirements, FDA-approved contraception methods and contraceptive counseling at no cost-sharing to the insured (when provided by a network provider) has also seen a number of changes in guidance.

Since the release of final regulations in June 2013, to be effective as of the 2014 plan year, there was an exemption for religious employers from providing the coverages for contraception if they have a religious objection to doing so. The religious employer was defined as those listed in the Internal Revenue Code 6033(a)(3)(A)(i) or (iii), which are churches, their integrated auxiliaries, conventions or associations of churches, or any religious order.

The religious exemption allowed those non-profit employers to not be required to offer, contract, refer or pay for contraceptive coverage, which was to be done through a self-certification to their carrier or administrator, as well as the Department of Health & Human Services. The insurance carrier or administrator is then required to notify plan participants that no-cost contraception would be available to them, and with rules released in August of 2014, that HHS would arrange for the insurer or TPA to provide those.

The landscape changed again in June 2014 with the U.S. Supreme Court decision in Burwell v. Hobby Lobby et. al., which expanded the religious exemption to closely held corporations with strong religious objections to covering contraceptives. These employers were to use the same methods of certifying that the non-profit religious employers were using.

Fast-forward to November 2018 when the two latest revisions were released, allowing for expanded religious or moral objection to covering contraceptive methods, including certain ones that may be viewed as abortifacients and/or sterilization procedures.

The first rule provides an exemption to entities and individuals that object to services covered by the mandate on the basis of sincerely held religious beliefs. They would be exempt from the mandate and no longer required to provide contraceptive coverage, in full or in part. The rules under this section maintain the availability of the accommodation, where the insurer or the administrator is responsible for providing those services to the plan participants, but it would be voluntary at the option of the employer. They would also be able to offer those methods they did not object to, but could exclude those for which they have objections.

The second rule gives nonprofits, small businesses and individuals with non-religious moral convictions opposed to those services similar protections to those with religious objections.

For individuals with religious or moral objections with either employer-sponsored or individual market coverage, the exemption would be allowed where the plan sponsor and/or carrier is willing to offer a plan to them that omits the offending contraceptive coverage.

These new rules were to take effect on January 14, 2019. In last-minute decisions by two different courts, the rules have been delayed. The first court decision came from a federal judge in California on Sunday, January 13, 2019. It suspended the rule from being implemented in 13 states that had filed suit: California, Connecticut, Delaware, Hawaii, Illinois, Maryland, Minnesota, New York, North Carolina, Rhode Island, Washington, Virginia and the District of Columbia. The second court decision came on Monday, January 14, in a separate case brought by Pennsylvania and New Jersey, which prevents the rules from going into effect while the lawsuits are ongoing.

For now, the previous regulations stand until the court cases make their way up the chain, likely headed for the U.S. Supreme Court.

HRA Expansion: An In-Depth Look at the Proposed Rule

Submitted by Annette Bechtold, Senior Vice President of Regulatory Affairs and Reform Initiatives for OneDigital

In response to President Trump’s October 12, 2017 Executive Order, the Departments of Health and Human Services, Treasury and Labor issue the proposed rule expanding Health Reimbursement Arrangements. This third and final rule aims to provide employers with additional options when offering health benefits to their employees while providing employees with greater opportunity to purchase coverage of their choosing.


As we know, the ACA’s market rules put some restrictions on how, and when, employers may use HRAs in their benefits program. The 2013 IRS notice clarifies that an HRA is a health plan. As such, it must contain all the ACA group health plan mandates unless integrated with a group’s ACA-compliant health insurance plan. The Departments clarify that “an employer-sponsored HRA cannot be integrated with individual market coverage.” This type of employer payment plan would need to satisfy market reforms, including the prohibition on annual limits integration with an ACA-compliant plan. In its design, it would fail to comply with ACA health plan mandates and prohibition on integration of an HRA with individual health coverage. This practice does not meet the market reform or integration rule. Therefore, the Departments prohibit this practice.

The October 29, 2018, proposed rule allows employers to integrate their HRA with individual health insurance coverage as long as it is nondiscriminatory in its implementation. The subsequent release of IRS Notice 2018-88 addresses the interaction of this HRA expansion and the ACA’s employer shared responsibility provisions, e.g., offering a health plan that meets affordability and minimum value requirements, and self-funded nondiscrimination rules. The rule and notice address the following areas:

HRA Integration Requirements

For an HRA be considered an ACA-compliant health plan, it must be integrated. This new proposed rule provides new integration rules applicable to individual health coverage integrated with an HRA. To meet integration requirements, employers and plan sponsors must:

  • Require participants and dependents to be enrolled in individual health insurance coverage for each month they are enrolled in an HRA
  • Prohibit offering an HRA and traditional insurance to the same class of employees
  • Offer HRA integrated with individual coverage on the same terms to each participant within the class
  • At least annually, allow participants to opt-out of, and waive , future reimbursements from HRA
  • Regularly substantiate and verify enrollment in individual coverage
  • Provide notice to eligible participants regarding offer and enrollment of HRA.

It is important to note that when considering the eligibility of these premiums for pretax treatment under an employer’s cafeteria plan, employers may not allow salary reductions to purchase a qualified health plan through the exchange. However, they may allow salary reductions for premiums to purchase individual coverage outside the exchange, subject to all other cafeteria plan rules.

Excepted Benefits

The proposed rule sets additional criteria for limited excepted benefits with regard to these arrangements. Excepted benefits include certain types of coverage — e.g., accident, disability, dental, vision, short-term health policies, workers’ compensation, some FSAs, etc. and are not subject to ACA health plan rules.

Employers that wish to provide an HRA without regard to whether employees have coverage or have coverage that meets market requirements may do so if the HRA meets the following requirements:

  1. The HRA must not be an integral part of the plan.
  2. The HRA must provide limited benefits (no more than $1,800, indexed for inflation).
  3. The HRA may only provide reimbursement of individual premiums if they consist solely of excepted benefits or group health plan coverage that solely consists of excepted benefits – this includes short-term limited duration insurance policy premiums and COBRA premiums.
  4. The HRA must be made available to all similarly situated individuals.

Effect on Premium Tax Credits

Under the ACA, premium tax credits are available only to those who buy individual insurance coverage through the exchange, have no offer of minimum essential coverage or whose offer is not affordable, and meet the income requirements for subsidization of premiums. Therefore, an individual covered by an HRA integrated with individual health coverage would be ineligible for a premium tax credit unless it is an excepted benefit.

If the HRA with individual coverage were unaffordable, the employee would be eligible for a PTC provided they meet all other criteria. The Departments lay out a new calculation to determine affordability.

Step 1: Identify employee’s required contribution. This is the amount the employee would need pay for coverage. The required contribution is the difference between:

  • premium for self-only coverage of lowest cost silver plan in employee’s rating area
  • new HRA dollars the employer provides (for self-only coverage type)

Step 2: Determine employee’s maximum allow affordable premium contribution – this is the employee’s maximum payment responsibility.

  • employee’s household income x required percentage (i.e.. 9.86% for 2019)

Step 3: Compare contributions

  • The required premium contribution is greater than the allowable contribution = UNAFFORDABLE
  • The allowable contribution is higher than the employee contribution = AFFORDABLE

Interaction with ERISA

ERISA obligations and responsibilities for employers in the design, delivery and operation of the benefit plan apply to group health plans. Individual health plans do not fall under ERISA and are not considered part of an employer-sponsored plan and, as such, are not eligible for COBRA as long as:

  • Coverage purchased is voluntary for employees
  • Employer/plan sponsor does not select or endorse an issuer/carrier
  • Reimbursement for non-group health insurance premiums is limited only to individual coverage
  • Employer/plan sponsor receives no consideration
  • And each participant is notified annually that individual coverage is not subject to ERISA

Special Enrollment Periods

The Departments recognize that employers offering a new HRA integrated with individual health coverage may do so outside the individual market annual open enrollment. This would result in individuals being unable to participate in the program. Therefore, the proposed rule adds some additional circumstances by which an individual could enroll outside of the annual open enrollment.

Specifically, the rule would:

  1. Allow employees and their dependents to enroll or change individual health insurance coverage outside of the individual market annual open enrollment period if they gain access to an HRA integrated with individual health insurance coverage
  2. Apply the new special enrollment period to individuals who are provided QSEHRAs
  3. Establish the coverage effective date as the first day of the first month following the individual’s plan selection
    • If plan selection is made prior to the HRA effective date, then coverage begins on the first day of the month following the qualifying event or first of the month if triggering date is on the first of the month
    • Individuals may elect to report the qualifying event up to 60 days after the date of the qualifying event and qualify for the special enrollment period during the regular special enrollment period window.
  4. Include this special enrollment period in the limited open enrollment periods available off Exchange

Integration with ACA employer shared responsibility requirements

  • 4980H(a) – Failure to offer – Penalty does not apply If employer offers HRA to 95% of full-time employees and their dependents
  • 4980(b) – Penalty does not apply if employer’s HRA offer is affordable
  • Neither penalty is contingent on whether any full-time employee receives a premium tax credit (PTC)

Minimum Value; if HRA is affordable, it automatically meets minimum value

Affordability; if the allowable contribution is higher than the employee’s required contribution, it is affordable

The IRS and Treasury address the finer points of the affordability calculation in their notice and, to make it more workable for employers, anticipate releasing guidance finalizing the following safe harbors:

  • Calendar year safe harbor: affordability for CY plan based on cost in prior calendar year
  • Non-calendar year safe harbor: affordability of first month of plan year applies to full plan year
  • Location safe harbor: may use lowest cost silver plan in rating area of employer site rather than EE residence
  • Affordability safe harbor: use of 4980H safe harbors, e.g. W-2, rate of pay, and FPL, to determine affordability and minimum value for individual HRAs

Integration with §105(h) Nondiscrimination Rules

Section 105(h) prohibits self-funded plans from discriminating in favor of highly compensated individuals (HCIs). Specifically, to avoid violating the nondiscrimination rules, all benefits available to HCIs, and their dependents, must be available to all other participants and their dependents. The maximum dollars available must be uniform for all. Employers may not vary these dollars due to age or years of service. If a plan is found to be discriminatory, the excess benefits the HCIs receive become taxable (i.e., included in gross income).

Without any new guidance or modification, employers that offer different HRA maximums to different classes or raise their HRA contribution due to change in age, under the age-banded premium categories in the individual market, would violate the 105(h) rules. Treasury and IRS anticipate releasing future guidance to address these situations.

For these two circumstances, new guidance will indicate that the HRA will not fail if it meets all of these conditions:

  • The HRA provides the maximum dollar amount, made available to all members of a particular class, be uniform.
  • Any increases in the price of coverage due to age are uniform for all participants in that class who are of the same age.
  • And the HRA reimburses premium only with no claims reimbursement.

Applicability Dates

The rule contains a significant amount of questions for which the Departments seek feedback. These comments are due back by December 28, 2018. NAHU is preparing comments to all request made in the original proposed rule and the IRS/Treasury Notice. Due to the volume of questions and request, NAHU anticipates a response no earlier than spring of 2019.

The proposed rule, if adopted, would apply to groups and insurance issuers for plan years beginning on or after January 1, 2020. However, the Departments have asked commenters to address whether this date is appropriate.


This new rule provides an interesting alternative to traditional health benefits. Its feasibility and attractiveness to employers is contingent on any modification in the final rules and the particular circumstance of the individual employer and the individual state marketplace coverage cost and availability. Until the Departments receive all the comments, review them and address them in the next version of this regulation, this option remains unavailable.

HHS Adjusts Civil Monetary Penalties

Submitted by Compliance Committee Chair Joan Fusco, Chief Compliance Officer at Savoy Associates

HHS has announced annual adjustments of civil monetary penalties. The latest adjustments are based on a cost-of-living increase of 2.04%.

Here are the highlights:

  • HIPAA Administrative Simplification. HIPAA administrative simplification encompasses standards for privacy, security, breach notification and electronic healthcare transactions. The HITECH Act of 2009 created liability for Business Associates and substantially increased the penalty amounts creating four categories of violations. The penalty amounts for each violation are:
    • Lack of knowledge: The minimum penalty is $114 (up from $112), the maximum penalty is $57,051 (up from $55,910) and the calendar-year cap is $1,711,533 (up from $1,677,299).
    • Reasonable cause and not willful neglect: The minimum penalty is $1,141 (up from $1,118), the maximum penalty is $57,051 (up from $55,910) and the calendar-year cap is $1,711,533 (up from $1,677,299).
    • Willful neglect, corrected within 30 days: The minimum penalty is $11,410 (up from $11,182), the maximum penalty is $57,051 (up from $55,910) and the calendar-year cap is $1,711,533 (up from $1,677,299).
    • Willful neglect, not corrected within 30 days: The minimum penalty is $57,051, the maximum penalty is $1,711,533 (up from $1,677,299) and the calendar-year cap is $1,711,533 (up from $1,677,299).
  • Medicare Secondary Payer.The Medicare Secondary Payer statute prohibits a group health plan from “taking into account” the Medicare entitlement of a current employee or a current employee’s spouse or family member and imposes penalties for violations. The indexed amounts for violations applicable to employer-sponsored health plans are:
    • The penalty for an employer that offers incentives to Medicare-eligible individuals not to enroll in a plan that would otherwise be primary is $9,239 (up from $9,054).
    • The penalty for willful or repeated failure to provide requested information regarding group health plan coverage is $1,504 (up from $1,474).
    • The penalty for responsible reporting entities that fail to provide information identifying situations where group health plan is primary is $1,181 (up from $1,157).
  • Summary of Benefits and Coverage.An SBC generally must be provided to participants and beneficiaries before enrollment or re-enrollment in a group health plan. The penalty for a health insurer’s or non-federal governmental health plan’s willful failure to provide an SBC is $1,128 (up from $1,105) for each failure.

These adjustments are effective for penalties assessed on or after October 11, 2018, for violations occurring on or after November 2, 2015.

IRS Releases 2019 Tax Limits

The IRS has provided tax inflation adjustments for tax year 2019:

  • The dollar limit on employee salary reduction contributions to health FSAs will be $2,700 (up from $2,650 in 2018).
  • The maximum amount of payments and reimbursements under a QSEHRA will be $5,150 for self-only coverage and $10,450 for family coverage (up from $5,050 and $10,250 for 2018).
  • HSA-compatible high-deductible health plans:
    • The annual deductible for self-only coverage must not be less than $1,350 for self only and $2,700 for family (no changes from 2018).
    • The out-of-pocket maximum is $6,750 for self-only and $13,500 for family.
    • The annual contribution limit is $3,500 for self-only and $7,000 for family.


Sometimes A Lack of Regulation Creates Problems

Typically, when the federal government announces that it won’t be seeking regulatory action any time soon, both brokers and employer group plan sponsors rejoice. However, in this case, a lack of federal regulatory activity may cause headaches for companies that offer certain kinds of wellness programs, and their advisors. Two federal wellness program regulations from the Equal Employment Opportunity Commission (EEOC) are being vacated as of January 1, 2019. The EEOC just announced that rather than replace them in October of 2018, as initially planned, new regulations will not come until the summer of 2019 at the earliest. That means many group wellness plans offered in 2019 will need to make some compliance decisions and many brokers will need to help them.

Last year, a federal judge ordered the EEOC to revise two regulations originally crafted to give employers a clear safe harbor to operate voluntary wellness programs that didn’t conflict with the Americans with Disabilities Act (ADA) or the Genetic Information Nondiscrimination Act (GINA). These rules apply to any wellness program that requires participation in a medical service and/or the provision of medical history information to get a wellness incentive. The judge deemed the incentive limits in the rules arbitrary and asked the EEOC to act quickly to revise them. When the EEOC announced that they didn’t plan on revising the regulations until 2021, the judge issued an order vacating them on January 1, 2019.

In the order, the Judge strongly suggested that the EEOC revise both regulations and their incentive limits before the New Year, so as to not cause problems for group health plan administrators. However, they failed to act, so employers no longer have a wellness program compliance safe harbor to protect them, should a participant claim an ADA or GINA violation. Furthermore, since the court ruled that the incentive limits in the current EEOC rules lack a sound legal footing, the absence of new regulations will make it difficult for wellness plan sponsors to set the value of their program awards in 2019.

Employers that offer wellness programs that are subject to the EEOC rules have a few different options for 2019, all of which have their potential pitfalls.

The most dramatic choice a company could make would be to discontinue the group wellness program until the EEOC issues new regulations. Doing so would offer a business complete legal protection, but it would deprive both the employer and the employees the benefits of a group wellness plan.

Another safe and relatively simple choice would be to amend the group wellness program criteria so that no participant has to share medical history data or obtain medical services to get a reward. Lots of group wellness plans already operate under these parameters, so there are many existing program models to follow. However, this option would require a restructuring of the employer’s existing plan, with all of the work and headaches that come along with that.

If an employer group decides to keep asking for medical history information or requiring participants to receive a medical service to get a program reward, then the group will need to make decisions about how they will structure their awards in the year ahead. Whatever choice the employer makes will include some legal risk.

One option would be to continue the 2018 program reward structure into 2019, continuing to follow the old EEOC rules regarding award amounts. These rules limited award values to no more than 30% of the total single employee premium, even if the participant enrolled in family coverage. Participating spouses incented to give a medical history could also earn an award valued up to 30% of the single premium. If the wellness program included a smoking cessation program with medical testing, then the total award value could not exceed 50% of the single employee premium.

Keeping the old reward structure might seem like an appealing choice; it would require no changes, and if challenged, the employer could claim that they were acting in good faith by continuing to follow the old rules in the absence of new ones. However, since the federal judge vacated these rules and declared this incentive formula invalid, employers who follow this path will need to be prepared to make incentive changes if someone files a complaint, and they also risk potential enforcement action for ADA and or GINA violations.

The other possibility is abandoning the EEOC rules altogether, and applying the longstanding HIPAA/ACA wellness requirements concerning award value if they are relevant. The ACA/HIPAA incentive value rules only impact health-contingent wellness programs that ask participants to meet a health goal before they get an award. Unlike the EEOC rules, the ACA/HIPAA requirements do not apply to participatory programs, and their limits apply to the overall premium a person pays for coverage, rather than the single premium rate, making it possible for reward values to be much higher for participants with family coverage. Employers that elect this course of action also would be operating in good faith, but since there is no longer a legal safe harbor, their program could be subject to a legal challenge about potential violations of the ADA and/GINA. The group health plans that follow this path will also have to be prepared to make program incentive changes at some point, assuming that the EEOC will eventually adopt revised requirements.

No matter what choice an employer makes, they should make sure their ERISA plan documents reflect any changes they make to their group wellness plan and stay alert to any new regulatory action by the EEOC during 2019. Brokers can show their value by helping their clients on all of these fronts.

IRS Publishes 2018 ACA Employer Reporting Forms and Instructions

Breathe a sigh of relief that the newly published 2018 forms and instructions for employer ACA reporting include no substantive changes. As a result, employers will have a relatively easy time following the now-established routine for the forms.

But, the few cosmetic changes to the forms won’t stifle the sighs – or groans – of frustration from employers that had hoped that ACA reporting would be simplified or abolished. The most recent hopes that Congress would take up simplified reporting in a package of employer-focused proposals were dashed last month. But, there is a possibility that action on simplified reporting may come up at a later date.

Most notably, the 2018 instructions maintain the 250 forms or more electronic filing threshold based on each type of form filed. This is a welcome respite given proposed IRS regulations published in May, 2018 that expanded mandatory electronic filing of information returns by aggregating most information returns when calculating the 250 form threshold.

Instructions for Forms 1094-B and 1095-B can be found here.

Instructions for Forms 1094-C and 1095-C can be found here.

Form 1094-B can be found here.

Form 1094-C can be found here.

Form 1095-B can be found here.

Form 1095-C can be found here.

Flexible Spending Accounts – Different Strokes for Different Plans

Flexible spending accounts (FSAs), also called Section 125 plans after the relevant section of the Internal Revenue Code, are commonplace benefits. But, perhaps because they are common, some employers and employees don’t understand some of the regulations that apply to these plans.

IRS Publication 969 titled “Health Savings Accounts and Other Tax-Favored Health Plans” is an excellent primer for FSAs and other tax-favored benefits. The most recent version used for preparing 2017 tax returns can be found here.

Among the recent questions received at Compliance Corner was this one: If an employer offers an HSA and a FSA, and an employee elects both is that permissible? Once again with compliance questions, there is no short answer!

The difficulty arises because, according to the IRS in Revenue Ruling 2004-45, an “eligible individual” for a HSA is an individual covered under a high deductible health plan (HDHP) who does not have “coverage for any benefit which is covered under the high deductible health plan.” The FSA, as it is traditionally designed, violates this rule.

But, there is a work around as the Revenue Ruling notes. The work around is a “limited purpose FSA.” A “limited purpose FSA” allows reimbursement of dental and vision expenses. A typical FSA covers medical expenses allowed by IRS Code Section 213(d) – which is much more expansive than dental and vision services.

Another example of a “limited purpose FSA” is known as a “post-deductible FSA.” The “post-deductible FSA” is aptly named as the plan doesn’t reimburse for any medical expenses incurred before the minimum HDHP deductible has been met.

Both the “limited purpose FSA” and the “post-deductible FSA” are covered on page 4 of IRS Publication 969.

Revenue Ruling 2004-45 can be found here.

Caution if Offering Health Coverage to Non-Employees

A frequent Compliance Corner question asks whether employers can include independent contractors in their health plans or other benefits. The answer to this question is more complicated than one might think.

Most benefit experts advise against including independent contractors or other non-employees such as 1099 employees, non-employee directors or leased employees on employer’s benefit plans.

Here are three (3) reasons why this may be inadvisable:

  1. Treating an independent contractor like an employee may undermine an employer’s assertion that the individual is not an employee. The DOL and the IRS, as well as their state counterparts, have aggressive programs to uncover worker misclassification. By offering a non-employee employee benefits, an employer’s assertion to these regulators challenging whether an individual is really an employee is weakened. Moreover, if some non-employees gain benefits while others do not, an independent contractor excluded from a plan may sue for benefits exposing an employer to potential penalties.
  2. Covering individuals who are not employees on the health plan may result in creation of a multiple employer welfare arrangement or MEWA. The intent to create a MEWA is irrelevant. MEWAs have IRS reporting requirements such as a Form M-1. If the plan is self-funded there may be further complications with state laws that prohibit self-insured MEWAs
  3. Tax issues also come into play. For example, an independent contractor is not eligible for a Section 125 plan. Employer contributions to coverage may also be taxable.

Complicating this decision is that some insurance carriers will allow independent contractors to be included in an employer’s health plan. But, compliance is the employer’s responsibility, not the insurance carrier’s.

The best answer to whether non-employees can be offered coverage is that employers who wish to evaluate or pursue covering non-employees should consult their legal and benefit advisors.

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