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.

Open Enrollment – Will States See the Silver Lining?

With all of the debate and squabbling about health care costs, there has been a general recognition that individuals who don’t qualify for a subsidy under the ACA have been hard hit by premium increases over the past years. In fact, CMS data released earlier this year indicated that non-subsidized enrollees saw a 20 percent decline in enrollment while subsidized enrollees declined by three (3) percent. Premium increases were considered to be a major factor accounting for the drop in enrollment.

In an effort to make coverage more affordable for individuals who pay the full price of coverage, CMS is encouraging states to take action. CMS issued a recent letter encouraging states to allow individual market plans that are not on the exchange to price their plans without “the silver load” for CSRs. The letter also encourages state where a load was placed on all exchange plans due to CSRs to also offer unloaded plans.

A bit of background explains what the letter is referencing by “the silver load.”

The Affordable Care Act (ACA) categorizes health insurance by “metal” levels ranging from bronze to platinum. There is also a catastrophic plan. Silver plans are the level used to determine premium assistance such as advanced premium tax credits (APTC) and cost-sharing reductions (CSRs).

CSRs were intended to make coverage more affordable.  HealthCare.gov defines CSR as “a discount that lowers the amount you have to pay for deductibles, copayments, and coinsurance.” Depending on income, a person enrolling in coverage could qualify for the extra help provided by CSRs.

But, questions arose regarding the CSR payments. At issue was that funds for CSRs were not appropriated by Congress. Lawsuits and political rhetoric ensued. As a result, CSR payments from the federal government were stopped in 2017.

Without federal funds to make up the extra CSR amounts, premiums would have to increase as the ACA required that insurance plans sold on the marketplace include CSR payments. A number of state regulators calculated that since CSRs were applicable for silver plans, any increase due to the lack of federal funding for CSRs should only be “loaded” in premiums for those plans. And, much of the increase would be offset by commensurate increases in APTCs.

This was a workable solution for marketplace buyers. Individuals who didn’t qualify for a subsidy or those who purchased coverage outside of the marketplace didn’t fare as well. These unsubsidized buyers experienced larger than expected premium increases.

And, that’s where the CMS letter comes into play. The ACA requires that plans have the same cost on and off the exchange. The letter encourages states to allow issuers to “offer and market plans that are available exclusively off-Exchange that do not include the CSR load that are “similar, but not identical” to a plan on the exchange.

Whether states will embrace this flexibility and whether insurers will file plans to take advantage of it remains to be seen.

A Dozen Things to know about the Final Association Health Plan Rule

With publication of the final rule, the Trump administration has breathed new life into an old concept – the association health plan. While the new rule offers a few twists, whether association plans take off may rely on actions taken by the states. Already a number of states have initiated legal action in an attempt to block the rule.

In the meantime, states are reviewing the federal rule in relation to state law and rules on association plans. Some states are less receptive to AHPs than others. One example is a letter written by Pennsylvania’s insurance commissioner which challenges a number of provisions in the final rule. That letter can be found here.

And, the jury is still out on whether any insurers or AHP sponsors will embrace this new flexibility. Already some organizations that had shown early interest in AHPs have decided they will not act at this time. Still others are expressing interest.

Here are a dozen items of interest in the final rule:

  1. Applicability dates depend on the plan
    1. September 1, 2018 all fully-insured associations new or existing
    2. January 1, 2019 AHPs in existence on or before publication of final rule
    3. April 1, 2019 all others may establish a self-insured AHP.
  2. An association must have at least one substantial business purpose other than the offering of health coverage or employee benefits to members. The offer of coverage may be the primary purpose.
  3. Commonality of interest may be:
    1. Same trade, industry, line of business or profession
    2. Have a principal place of business within a region that doesn’t exceed the boundaries of the same state or same metropolitan area
    3. Metropolitan area which may include more than one state.
  4. An eligible participant includes employees of a current employer member of association and former employees who became entitled to coverage under the association’s plan and beneficiaries.
  5. Working owners can be considered employees; AHPs have a responsibility to verify a person is a working owner.
  6. As a part of the criteria to determine “working owner” status, the hours-worked average is 20 hours per week or 80 hours per month. Hours may be aggregated across jobs or contracts to accommodate workers in the gig economy.
  7. Health insurers cannot sponsor an AHP, in general. Insurers may provide administrative services.
  8. A provider or healthcare organization cannot sponsor an AHP.
  9. AHPs are not subject to the ACA’s Essential Health Benefits (EHBs) but must provide coverage for certain recommended preventive services without cost-sharing.
  10. Generally, for compliance purposes, whether an AHP is considered a small or large group is based on the number of employees employed in the aggregate during the preceding calendar year by the employer members of the association. More clarity on whether COBRA or other laws related to employer size is yet to be determined.
  11. AHPs cannot discriminate based on health status; other factors are permitted such as industry-type and geography. Age and gender may also be permissible rating factors. Rating flexibility may be constrained by state law.
  12. States continue to have authority to regulate both insured and self-insured AHPs.

A one page overview of the AHP rule is here.

NAHU members can register for our member exclusive Compliance Corner webinar on August 16, 2018 – Are Association Health Plans the Cure?  

HSAs Pose Compliance Concerns

Health Savings Accounts (HSAs) were created in 2003 according to the U.S. Department of the Treasury. Since that time, there haven’t been significant changes to them, especially significant legislative changes. Legislation is now pending in Congress to give HSAs a “refresh” that would bring HSAs more in line with today’s consumer needs.

On June 5, NAHU joined with more than 20 other organizations in a letter to Congressional leaders to make the case for the legislative “refresh.” The letter calls for “doable” reforms including:

  • Greater flexibility to offer first-dollar coverage of health services at an onsite employee clinic and retail health clinic
  • Clarifying that “excepted benefits,” which are non-major medical benefits like telehealth and second opinion services, do not jeopardize a beneficiary’s eligibility to contribute to an HSA;
  • Correcting the definition of “dependents” to include adult children, domestic partners, and non-traditional dependents
  • Greater flexibility to offer first-dollar coverage of services and medications for chronic disease prevention
  • Streamlining conversion from a Medical Savings Account (MSA), Flexible Spending Arrangement (FSA), or Health Reimbursement Arrangement (HRA) to an HSA
  • Permitting the use of HSA dollars toward wellness benefits, including exercise and other expenses associated with the sole purpose of participating in physical activity
  • Clarifying that direct primary care arrangements are not insurance and may be offered alongside an HSA
  • Permitting an employee to contribute to an HSA even if his or her spouse has a health Flexible Spending Account.

HSAs represent one of the more frequent topics of inquiry received through NAHU’s Compliance Corner. A recent question to Compliance Corner illustrates the complexity of HSAs since the rules for HSAs don’t always reflect current benefit practices or current benefit law.

The questioner noted that the Affordable Care Act (ACA) requires that plans that offer coverage for dependent children must make coverage available to age 26. But, the tax law governing HSAs only allows a “tax dependent” to qualify for medical expenses to be reimbursed from a parent’s HSA. A “tax dependent” is a dependent who is not yet 19 or, if a student not yet 24 at the end of the tax year. There is also a provision that addresses dependents who are permanently and totally disabled.

As a result, a situation can arise where a person is a dependent for benefit purposes but not for HSA purposes. Fortunately, as long as the dependent is covered by the family qualified high deductible health plan (HDHP) the adult child can establish their own HSA.

A good introduction to HSA rules can be found in the IRS HSA course for volunteers who assist taxpayers. It can be found here.

The Treasury Department has a resource center for HSAs. It can be found here.

IRS Publication 969 is a resource that addresses HSAs and tax questions in detail.

CMS Releases Reminders on Broker Use of Personally Identifiable Information (PII)

CMS released another slide deck to help brokers understand and comply with Marketplace Requirements. The newest deck is titled “Part II: Marketplace Privacy & Security Requirements for Agents and Brokers.” The slide deck addresses the use and protection of Personally Identifiable Information (PII). This latest information updates materials and guidance published last September.

PII is defined as “information that can be used to distinguish or trace an individual’s identity, either alone or when combined with other information that is linked or linkable to a specific individual.”  Examples of PII include everyday information; a person’s name, their address, email address, date of birth and Social Security number.

A broker must make available a Privacy Notice Statement prior to obtaining a person’s PII. The statement must be provided electronically or prominently displayed on a public-facing website. The statement should be on any paper form used to request or gather PII.

While CMS doesn’t provide a model Privacy Notice Statement, the slide deck provides some basic language for a statement. The statement is meant to inform applicants about any uses or disclosures of the information that will be collected. The statement does not require a signature by the consumer.

Proper security control to protect consumer PII is a responsibility of those collecting the data. This includes physical safeguards to the data as well as operational and administrative steps to protect the privacy of the information. Any submission of PII electronically must be done in a secure manner such as encryption.

Many of the suggested steps to secure PII should already be familiar to brokers who are accustomed to handling Private Health Information (PHI).

The CMS slide deck can be reviewed here.

NAHU has developed a sample notice titled Personally Identifiable Information PII) Privacy Notice.  This notice in intended to be used as a template. It has not been approved by CMS. The template should not be used without review and revision that represents your practices and specific situation. NAHU believes any documents of this nature should be reviewed by legal counsel.

These recent slide decks likely reflect recent analyses by CMS that indicates that brokers play a significant role in Marketplace enrollments. The 2018 Trends Report shows the following:

  • For plan year 2018, 49,100 agents and brokers registered with Federal platform Exchanges, supporting 42 percent of overall enrollments.
  • The biggest concerns for agents and brokers are lack of competition in the individual market and availability of commissions from insurance carriers.
  • To date, CMS has implemented 93 percent of recommendations from agent and broker partners.
  • CMS increased efforts to leverage the capabilities of the private sector by expanding the role of health insurance agents and brokers who supported 3,660,668 health plan enrollments, 42 percent of plan year 2018 open enrollments on Federal platform Exchanges. In contrast, Navigators enrolled less than 1 percent of total enrollees.

The 2018 Trends Report can be reviewed here.

CMS Offers Compliance Tips to Brokers in Marketplace

In a newly released slide deck, CMS, the Centers for Medicare and Medicaid Services, offers tips to brokers who assist clients with Marketplace coverage. The slide deck is titled “Compliance with Marketplace Requirements: Considerations for Agents and Brokers.”

The guidance reflects concerns CMS has expressed regarding consumer complaints, including some about brokers. CMS is considering a program to advise individual brokers if they have received complaints or have reason to believe that a broker has not adhered to Marketplace rules. The program which is under review and has been described to NAHU would be advisory in nature and would not be reported to state regulators.

By instituting the best practices in the slide deck, brokers will head off the likelihood of some of the more egregious claims from consumers that they were enrolled in coverage without their knowledge. Chief among the best practices is the recording of consumer consent to help a person apply for financial help and enroll in a Marketplace plan.

Consumer consent is required to assist a consumer and should acknowledge “the functions and responsibilities” that a broker has in the Marketplace.

A record of consent should include:

  • Consumer’s name
  • Date of consent
  • Identification of any brokers to whom consent is given.

The advice notes that a signed Broker of Record form from a state or carrier satisfies the consumer consent requirement.

A broker who wishes to speak with the Marketplace Call Center regarding a consumer’s application or with questions specific to a consumer must provide a separate authorization. This authorization can be valid for one call or up to 365 days. A consumer has to be on the phone with the broker for the initial contact to provide the authorization.

The guidance also cautions that brokers should never use their or their firm’s email address on behalf of a consumer. Mailing addresses must also be that of the consumer. If a consumer does not have an email address the broker can assist the consumer in establishing a personal email account. Consumers may enroll without an email in some instances but will need an email address to access online notices or to make changes to their HealthCare.gov account.

Brokers are also cautioned that creation of a HealthCare.gov account is limited to consumers or their legal representatives. A broker can assist in creating the account but the consumer must enter their own information. Also, brokers cannot log in to HealthCare.gov using the consumer’s HealthCare.gov account.

The presentation includes contact information for brokers to report suspected fraudulent activity. Examples of fraud and abuse identified by CMS include:

  • A client reports they have been contacted by an individual seeking his personal and financial information
  • A client, or colleague, submits false documentation to the Marketplace
  • An agent or broker is enrolling consumers without their consent
  • An agent or broker is assisting consumers without a valid health license or without completing Marketplace registration
  • A registered agent or broker with a valid health license is assisting consumers but is not licensed in the state where the consumer lives
  • An agent or broker has disclosed a consumer’s personally identifiable information
  • Unauthorized changes were made to the client’s online application
  • A consumer or insurance company is suspected of providing false or misleading information to the Marketplace.

The slide deck can be found here.

IRS Insight on Letter 227 – Hint: It’s in Reply to Letter 226J

Those lucky employers who have already received a 226J letter from the IRS have a Letter 227 to look forward to! The Letter 227 is the acknowledgement letter Applicable Large Employers (ALEs) receive following their response to the Letter 226J.

The Letter 226J provides a preliminary calculation of the amount that an ALE may owe as a result of employer shared responsibility (ESR) penalties. So far Letters 226J have been issued reflecting tax year 2015. The Compliance Cornered Blog post on Letter 226J can be found here.

In recent guidance, the IRS notes that Letters 227 are meant to close ESR penalty inquiries or provide next steps regarding penalties. There are five (5) different 227 letters.

  1. Letter 227-J acknowledges receipt of a signed Form 14764. An ALE uses this form to indicate that it agrees with the penalty amount calculated by the IRS in Letter 226J. Payment of the amount calculated is submitted with Form 14764. No response is required for Letter 227-J after the case will be closed.
  2. Letter 227-K acknowledges receipt of information provided by the ALE and shows that the employer does not owe a penalty. This letter closes the case and does not require a response.
  3. Letter 227-L is used when the ESRP (Employer Shared Responsibility Payment) has been revised based on the information submitted by the employer. It includes an updated Form 14765 with revised calculations. The Form 14765 lists an ALE’s assessable full-time employees. An ALE receiving this letter can agree with the revised calculations or request a meeting to appeal the amount.
  4. Letter 227-M acknowledges the employer’s submission but shows that the ESRP did not change. The ALE can agree or request a meeting with the IRS.
  5. Letter 227-N reflects the decision reached following an appeals review. The letter will also close the case without further action by the employer.

A Letter 227 is not a bill demanding payment from the employer. Once the amount of the penalty has been assessed a CP220J which is a bill will be sent.

Letters 227-L and 227-M require a response. The due date for the response is noted in the letter.

The IRS web page explaining Letter 227 can be found here.

These new 227 letters – and the Letters 226J – underscore the complexity of the ACA’s Employer Shared Responsibility (ESR) reporting process. And, many of these letters would have been avoided had the called-for notification process to employers when an employee applied for subsidized coverage in the exchanges been fully implemented.

As a step toward reforming the ACA information reporting and Exchange verification process, the bipartisan Commonsense Reporting Act of 2017 (S 1908 and H.R. 3919) would provide individual consumers with much-needed safety nets, employers with relief from the burdensome reporting requirements and state and federally-facilitated Exchanges with an additional tool to verify tax credit and subsidy eligibility.
The National Association of Health Underwriters (NAHU) is part of a coalition, “Partnership for Employer-Sponsored Coverage (P4ESC),” supporting measures that would ease employer reporting and call for a prospective reporting system.

ACA Affordability Measure for 2019 Announced

The IRS published Revenue Procedure 2018-34 announcing the affordability percentage measure for plan years beginning after calendar year 2018. The new amount is 9.86%.

This new amount is an increase from the 2018 affordability percentage of 9.56%. Affordability was pegged at 9.69% in 2017.

Employers who are applicable large employers (ALEs) use the affordability percentage to ensure that employer-sponsored coverage is “affordable” and thereby avoid the ACA’s employer penalty. A simplified example of affordability is shown below:

Year       Affordability %   Annual W-2     Affordability      Max. Contribution

2017      9.69%                   $45,000               $4360.50               $363.38

2018      9.56%                   $45,000               $4302.00               $358.50

2019      9.86%                   $45,000               $4437.00               $369.75

The IRS Revenue Procedure announcing the 2019 affordability measure is here.

IRS Provides Limited Bare-Counties SHOP Relief

IRS Notice 2018-27 provides limited relief for employers who wished to utilize the small employer health insurance tax credit but there were no available plans in their county.

As a reminder, the tax credit is available for a two-consecutive tax year period. It was first available for tax years beginning after December 31, 2009. To qualify for the credit, eligible small employers had to offer coverage to employees through a SHOP exchange. Employers had to claim the credit using Form 8941. The credit was available to tax exempt organizations as well.

Transition relief was previously available for tax years 2014, 2015 and 2016 for some small employers where the employer’s principal business address was in a county in which no qualified health plans (QHPs) through the exchange were available. Notice 2018-27 builds on this prior relief for 2017 and 2018.

This latest relief is more limited than prior relief in that an eligible employer must have claimed the credit for all or part of a taxable year beginning after December 31, 2015. An employer may take the credit for any remaining credit period for health insurance coverage, if no SHOP coverage was available, provided that the coverage would have qualified for the credit under the rules applicable before January 1, 2014.

The relief does not extend availability of the credit beyond the two years of the credit’s availability.

Employers have to determine whether a county had coverage available through the SHOP. The notice advises that this information is available for 2017 here. Information on whether a particular county has SHOP coverage available for 2018 and beyond can be found by checking http://www.healthcare.gov/small-business .

The notice provides examples that illustrate which employers might qualify for the tax credit.

The notice also advises that Hawaii’s State Innovation Waiver prohibits employers in Hawaii from claiming the tax credit for plan years beginning in calendar years 2017-2021/

IRS Notice 2018-27 can be found here.

IRS information on the Small Business Health Care Tax Credit can be found here.