May 13, 2008
Recent Developments Regarding HSAs, Cafeteria Plans, and Retiree Medical Benefits
HEALTH SAVINGS ACCOUNTS
Three recent developments have occurred regarding HSAs:
- Final regulations were issued regarding failure to establish an HSA and advance employer contributions;
- Legislation has been proposed to require claims substantiation; and
- 2009 indexed amounts have been issued.
Final regulations addressing the failure to establish an HSA and advance employer contributions. The IRS has issued final regulations (Treas. Reg. § 54.4980G-4, Q/As 14–15 – http://edocket.access.gpo.gov/2008/pdf/E8-8214.pdf) on two issues related to the comparable contribution rules. The issues addressed by the final regulations include: (1) an employer’s obligations under the comparable contribution rules with respect to employees that do not establish an HSA by December 31st of any year; and (2) whether an employer may, under the comparable contribution rules, accelerate its contribution to a particular employee in certain circumstances.
Important Note: Because they relate to the comparable contribution rules, these final regulations do not apply to employer contributions made through a cafeteria plan. Employer contributions are deemed to be made through a cafeteria plan if employees are allowed to make their own contributions to their HSAs on a pre-tax basis through the cafeteria plan.
The final regulations are applicable to employer contributions made for calendar years beginning on or after January 1, 2009. However, employers may rely upon them immediately.
Employees Who Fail to Establish HSAs. Under the final regulations, an employer will satisfy the comparable contribution rules with respect to employees who are eligible for HSA contributions and who fail to establish an HSA (or who have established an HSA but fail to notify the employer) by the end of the year if:
- The employer notifies such employees by January 15th of the following year that if the employee establishes an HSA and notifies the employer of that fact by the end of February, the employee will receive a comparable contribution. This notice must be written, but may be provided electronically, and the regulations contain sample language that may be used in the notice.
- With respect to employees that establish an HSA and notify the employer of that fact by the end of February, the employer makes a comparable contribution, plus interest, for such employees by April 15th.
Advance Employee Contributions. Under the final regulations, an employer does not violate the comparable contribution requirements by reason of advancing or accelerating all or part of the employer’s HSA contributions (which would otherwise be made over the course of the entire year) if certain conditions are satisfied. Such accelerated contributions are allowed if:
- The employee has incurred qualified medical expenses during the year exceeding the employer’s cumulative HSA contributions for that year;
- The accelerated contributions are available on an equal and uniform basis to all eligible employees throughout the year; and
- The employer establishes reasonable, uniform methods and requirements for acceleration of contributions, including methods and requirements for determining the amount of medical expenses incurred by employees.
In general, no interest is required to be contributed to any employee’s HSA as a result of the accelerated contributions.
Action Items. If an employer’s HSA contributions are subject to the comparable contribution rules, then certain actions are required to ensure compliance with these final regulations.
- Employers must develop and provide the notice described in the final regulations regarding notification to employees who fail to establish an HSA, or fail to notify the employer an HSA has been established, by the end of the year. Employers will be required to provide such notices with respect to contributions made in 2009 (i.e., by January 15th of 2010).
- Under these final regulations, employers may, but are not required, to make accelerated HSA contributions. If the employer does make such contributions, it must adopt and implement policies and procedures regarding the accelerated contributions.
If you need assistance drafting the notice required by the final regulations and/or preparing policies and procedures regarding accelerated HSA contributions, please contact us.
WATCH OUT! Proposed legislation requiring substantiation. The U.S. House of Representatives recently passed the Taxpayer Assistance and Simplification Act (H.R. 5719). One provision of the legislation would impose new claims substantiation requirements with respect to HSA withdraws. Under the legislation, an HSA owner would be required to provide the HSA trustee or custodian with substantiation that he/she has incurred a qualified medical expense before making a withdrawal. Withdrawals not properly substantiated would be includible in income and subject to a 10% penalty upon distribution.
If it becomes law, the legislation would have a significant impact on the administration and cost of providing HSAs. As a result, there is significant opposition to the legislation. The outcome of the legislation in U.S. Senate is uncertain. We will continue to monitor the legislation and provide follow up alerts if there is further activity with respect to the legislation.
2009 indexed amounts. Today the IRS issued the various indexed amounts that will apply to HSAs and high deductible health plans (HDHP) for 2009. In general, all of the indexed amounts will increase as follows:
- Maximum contributions will increase to $3,000 for individuals with single HDHP coverage and to $5,950 for individuals with family HDHP coverage.
- Catch up contribution limit will increase to $1,000.
- Maximum annual out-of-pocket amounts will increase to $5,800 for single HDHP coverage and to $11,600 for family HDHP coverage.
- Minimum deductibles will increase to $1,150 for single HDHP coverage and to $2,300 for family HDHP coverage.
CAFETERIA PLANS
Proposed cafeteria plan regulations issued in August, 2007, are scheduled to become effective for plan years beginning on or after January 1, 2009, following the publication of final regulations. It is our understanding the IRS has received a large number of comments regarding the proposed regulations and we anticipate a number of changes to the proposed regulations before they are released as final regulations.
At a recent conference, IRS officials stated if the final regulations are not released prior to June 30, 2008, the effective date of the regulations will be delayed to give plan sponsors sufficient time to implement any changes required by the final regulations.
We will be monitoring the release of the final regulations and will issue a follow up alert upon their release informing you of whether the effective date has changed.
RETIREE MEDICAL BENEFITS
We have previously issued alerts regarding the ability to coordinate retiree benefits with Medicare under the Age Discrimination in Employment Act. Recently, the U.S. Supreme Court cleared the way for the implementation of EEOC rules expressly allowing employers to reduce or eliminate benefits for retirees who are Medicare eligible. The Supreme Court refused to hear the appeal of the AARP of a lower court’s decision allowing the EEOC to implement the regulations.
Caution: Although EEOC rules allow an employer to eliminate health benefits for Medicare eligible retirees, Minnesota law applicable to governmental employers requires such employers (e.g., school districts, cities, counties) to offer retiree continuation coverage indefinitely. The law allows such employers to change (i.e., reduce) the coverage provided to post-65 retirees, but does not allow the employer to eliminate the coverage.
Action Item. If you were waiting to make changes to your retiree health plan in light of the AARP case, you can now implement changes to your plan to coordinate it with Medicare. If you need assistance designing your retiree health plans, or if you have questions regarding retiree coverage under Minnesota law, please contact us
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.