Health, Accident & Retirement

Nancy E. Parkinson, CPP Health, Accident & Retirement

Content coverage: • Health Insurance • Traditional Health Insurance Plans • Health Maintenance Organizations (HMOs) • Preferred Provider Organizations (PPOs) • Sick Pay • STD • LTD • 3rd Party Sick Pay • Worker’s Compensation Insurance • FMLA • Retirement and Deferred Compensation Plans

Health & Accident Insurance Contribution- Tax Treatment Non-Taxable Contributions • Contributions made by an employer • Contributions made under a Section 125 Cafeteria Plan • If employer reduces salary and then reimburses premium to employee, then the premium is taxable to the employee • Premiums must be for Employee, Spouse, Dependents (on 1040) • For purposes of this provision dependent status will continue to apply to a person who is receiving more than ½ his/her support from the taxpayer even if their earnings more than the annual exemption. • Coverage for “adult children” (under age 27 by end of taxable year) – married or unmarried. Plan cannot define “dependent” for purposes of eligibility other than relationship between child & participant. No coverage for grandchildren allowed

Health & Accident Insurance Contribution- Tax Treatment Cont. • Domestic/Life Partners • Premiums for life partners are federal taxable unless recognized as a spouse under state law. • If the employee’s domestic partner is of the same sex as the employee, the partner does not qualify as the employee’s spouse for federal tax purposes regardless of the state law. • The partner may qualify as a dependent if partner receives more that ½ support from employee, lives with employee, and the relationship does not violate local law.

Health & Accident Insurance Contribution- Tax Treatment Cont. • Change in definition of “Medical Expenses” • Applies for purposes of direct reimbursement of employee expenses or indirect reimbursements through FSAs, HRAs, and Archer MSAs. • Only costs of medicines prescribed by a doctor and insulin are eligible. Change only affects over-the-counter medicines unless doctor prescribes with a written prescription – for tax years beginning 2011

Health & Accident Insurance Contribution- Tax Treatment Cont. • Taxes Involved • Federal Income Tax • Employment Taxes • Social Security • Medicare • FUTA Exclusion from Social Security , Medicare & FUTA must: • Based on one of the following • Plan is written • Referred to in employment contract • Employees contribute to the plan • Employer contributions are made to a separate fund • Employer is required to contribute

Employer-paid physical exams – NOT excluded from income as a working condition fringe benefit, but IS excluded from income as an employer-paid medical care expense Benefits received directly or indirectly reimbursing the employee for medical expenses incurred are not included in employee’s income Any reimbursements in excess of actual expenses are taxable income to the employee Payments for loss of limb or disfigurement as part of AD&D are not included in income (payments must not be related to time lost from work). • Health & Accident Insurance Contribution- Tax Treatment Cont.

Health Insurance – Nondiscrimination Requirements • Patient Protection and Affordable Care Act – effective for plan years beginning on or after September 23, 2010 • If insurance is provided through third party insurance company there is no nondiscrimination requirement. • If employer is self-insured (reimbursing employees’ medical expenses from its own funds), employer may not discriminate in favor of highly compensated employees in either benefits or eligibility. • IRS Code Section 105(h)

Non Discriminatory Plan • Self-insured plan must benefit: • At least 70% of all employees • At least 80% of employees eligible to participate in the plan (IF at least 70% of all employees are eligible to participate) • A classification of employees that the Secretary of the Treasury finds not to be discriminatory • If all benefits provided to highly compensated employees are provided for all other participating employees

Discriminatory Plan • Amounts paid to highly compensated employees must be included in taxable income • Highly Compensated employees: • 5 highest-paid officers • Owner of more than 10% of employer’s stock • Top-paid 25% of employees Although discriminatory reimbursements are taxable to the highly compensated employees receiving them, they are not subject to federal income tax withholding or employment taxes.

W-2 Reporting of employer-sponsored health coverage • Patient Protection and Affordable Care Act • Requires employers to report the total cost of employer-sponsored health coverage on employees Forms W-2. Applies to Forms W-2 for 2012 for first time. • For informational purposes only • To inform employees of the cost of their health care coverage • Does NOT cause excludable employer-sponsored health care coverage to become taxable • Aggregate reportable employer cost reported on W-2 in box 12, code DD • No reporting on Form W-3 • Reporting exceptions for 2012 W-2’s: • If employer filed less than 250 W-2’s for preceding calendar year • If employee terms and requests a W-2 before end of calendar year

W-2 Reporting of employer-sponsored health coverage • Definitions to know (pages 4-12 thru 4-18) • Aggregate Cost – total cost of coverage under all applicable employer-sponsored coverage provided to employee • Applicable employer-sponsored coverage – coverage under any group health plan made available to employee by employer that is excludable from employee’s gross income – see exceptions (p. 4-12 & 4-13) • Group health plans – A plan of, or contributed to by, an employer or employee organization to provide health care to employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families • Aggregate reportable cost – Includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of pre-tax or after-tax contributions

W-2 Reporting of employer-sponsored health coverage • Definitions to know (continued) • Not included in the aggregate reportable cost – • Archer medical savings account • Health savings account • Multiemployer plan (IE: amounts contributed to a union plan) • Health reimbursement arrangement • Health flexible spending arrangement • Dental or vision plan (if plan is offered under a separate policy, certificate, or contract of insurance) • Cost of coverage under hospital indemnity or other fixed indemnity insurance (UNLESS employee purchases policy on a pre-tax basis under a Section 125 plan OR employer makes any contribution to the cost of coverage that is excludable • Self-insured plan not subject to COBRA • Plan primarily for the military • Excess reimbursements • Coverage provided under an EAP, wellness program, or on-site medical clinic

W-2 Reporting of employer-sponsored health coverage • Definitions to know (continued) • Methods of calculating the cost of coverage – • COBRA applicable premium method • Premium charged method • Modified COBRA premium method • Composite rate • Employer provides some benefits that are employer-sponsored coverage and others that are not • Cost changes during the year • Employee begins, changes, or terminates coverage during the year • Adjustments for events after end of calendar year • Coverage period that includes December 31st and continues into the subsequent calendar year • Transition relief

Medical Savings Accounts (Archer MSA) • Established by Health Insurance Portability and Accountability Act (HIPA) of 1996 • Small Employers (no more than 50 employees). • Eligibility can continue for all employees until the year after the employer has 200 employees. At that point only employees currently enrolled can continue to contribute • Employee must be covered only by high deductible health insurance plan. • For 2012 annual deductible • $2,100 – $3,150 for individual • $4,200 - $6,300 for family • Maximum out-of-pocket expenses can be no more than • $4,200 for individual coverage • $7,650 for family coverage • Cannot be part of Cafeteria Plan

Medical Savings Accounts (Archer MSA) Cont. • Contributions can be made by employer or employee (not both) • Employee contributions are deductible from income on personal tax return. • Subject to federal income tax withholding and employment taxes. • Employer contributions are excludable from income. MSA Contribution Limitations • Employee deduction cannot exceed employee’s compensation • Deduction or Contribution is limited to: • 65% of the plan deductible for individual coverage • 75% of the plan deductible for family coverage. • Employer contributions must be the same amount for each employee - either dollar amount or percentage of applicable deductible • Employer contributions in excess are included in income.

Medical Savings Accounts (Archer MSA) Cont. • Cannot be part of a Cafeteria Plan • Distributions from MSAs are excluded from income if they are for medical expenses incurred by employee or his/her dependents • Covered medical expenses don’t include premiums for insurance (other than long-term care), for health care under COBRA, or for health care coverage while receiving unemployment insurance benefits • Person for whom expenses are incurred must be covered only by high deductible health plan • Distributions of earnings included in income are • subject to an additional 20% tax • unless made after age 65, disability, or death • MSA Trustee or Custodian is not required to determine use of distributions; this is the responsibility of the account holder

Medical Savings Accounts (Archer MSA) Cont. • Reporting Requirements: • Employer Contributions • Box 12 R on W-2, code R • Plan trustees report on 5498-SA • Reported on employee’s personal tax return • Employee Deductions • Box 1, 3 and 5 on W-2 • Employee takes deduction on personal income tax return for amount contributed • Plan trustees report on 5498-SA • Distributions • Plan trustees report on 1099-SA

Long Term Care Insurance Treated as accident and health insurance under “Health Insurance Portability and Accountability Act of 1996” • Employer provided coverage is excluded from income • Benefits are excluded from income • If per diem – excludible limit is $310/day in 2012 (indexed for inflation) • Excess will be excluded to the extent of actual cost of care • Restrictions • Not subject to COBRA • Cannot be part of Cafeteria Plan • If part of flexible spending arrangement it is included in employee’s taxable income

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) • Requires health plan sponsors to provide employees and their beneficiaries with the opportunity to elect continued group health coverage for a given period should their coverage be lost due to “qualifying event” • Applies to employers with 20 or more employees (FTEs) on typical business day. • Coverage period generally is 18 to 36 months • Coverage same as provided to similarly situated beneficiaries who have not suffered the qualifying event. • Employees who purchased health care coverage under a cafeteria plan (including flexible spending) are eligible for COBRA continuation at level of coverage before event • Long Term Care Insurance is not included in COBRA

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Qualifying Events: • Death of covered employee – 36 months • Covered employee’s termination of employment or reduction in work hours (other than gross misconduct) – 18 months • If the reason for absence is employee’s military service – 24 months • If another qualifying event occurs (other than employer’s bankruptcy) period extends to 36 months. • Qualified beneficiary (employee or dependent) is disabled under Social Security Act during the first 60 days of continued coverage - 29 months • If another qualifying event during 29 months (other than employer bankruptcy) coverage extends to 36 months • Employer filed bankruptcy – life of retiree or retiree’s spouse

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Employer’s bankruptcy • Coverage is life of retiree or retiree’s spouse. • Once retiree dies – 36 months for retiree’s spouse and children from date of retiree’s death • Divorce or separation of covered employee • (date of divorce is the qualifying event) – 36 months • Dependent child losing that status – 36 months • Premium Requirements • Can be up to 102% of the group premium paid for similar coverage under the plan by the employer and employees. • The maximum premium increases to 150% for disabled qualified beneficiaries after the 18th month of continuation coverage. • Premium payment may not be required earlier than 45 days after the qualified beneficiary elects continuation of coverage

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Election and notice provisions • Election period must last at least 60 days from the date when coverage was terminated or the qualified beneficiary receives notice – which ever is later • Plan must provide written notice of COBRA continuation coverage within 90 days of when coverage begins • Employee or Employer must notify plan administrator of qualifying event, responsibility and timing depends on the event • Once aware of the qualifying event, plan administrator has 14 days to notify qualified beneficiaries of their rights

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • Penalties for Noncompliance • Employers subject to $100 per day penalty for each qualified beneficiary (maximum $200 per day per family affected by same qualifying event). • Penalty will not be imposed if failure is due to reasonable cause and is corrected within 30 days of discovery • Unintentional failures due to reasonable cause – maximum penalty is lesser of 10% of employer premiums for group health plans during preceding taxable year to $500,000

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont. • FMLA/COBRA Interaction • Date employee is to return to work at end of FMLA Leave (or date employee notifies employer he/she is not returning if before end of FMLA Leave) is qualifying date • Unpaid required premium while on FMLA Leave does not eliminate the employees right to COBRA continuation coverage

American Recovery and Reinvestment Act of 2009 (AARA) • Discounted COBRA Premiums & Subsidies • American Recovery and Reinvestment Act of 2009 (AARA) – provides employees who have involuntarily lost their job chance to pay for continued health insurance at a deep discount. “Assistance eligible individuals” pay 35% of COBRA continuation coverage premium • Assistance Eligible Individual defined as an employee who has involuntarily lost his/her job • The qualifying event must have occurred between Sept 1, 2008 and May 31, 2010 • Termination has to be involuntary and no caused by employee’s gross misconduct • Individual can be “assistance eligible” more than once! • Discounted premium is calculated on the amount employee would normally be required to pay for COBRA coverage

American Recovery and Reinvestment Act of 2009 (AARA) Cont. • Assistance for the subsidy ends with first month beginning on or after the earlier of: • 15 months after 1st day of 1st month of eligibility • End of maximum required period of COBRA continuation coverage • Date the individual becomes eligible for Medicare benefits or health coverage under another group health plan (after end of any applicable waiting period) • Subsidy may be available beyond August 31, 2011 • Employee must notify plan upon eligibility for other coverage • Individual can appeal denial of subsidy

American Recovery and Reinvestment Act of 2009 (AARA) Cont. • Regular COBRA continuation notice must now also include: • Description of beneficiary’s right to premium reduction • Forms necessary to establish eligibility & apply for premium reduction • Contact information for group health plan administrator • Description of extended election period for individuals who had COBRA continuation coverage in effect on Feb 17, 2009 • If available, option to enroll in different coverage than what beneficiary was covered by (prior to the qualifying event) • Beneficiary’s obligation to notify plan of eligibility under another group health plan or Medicare and subsequent penalties for not providing such information • Employer can face penalties for not providing notices to eligible individuals

American Recovery and Reinvestment Act of 2009 (AARA) Cont. • Extension of eligibility period to February 28, 2010 and 9 months COBRA subsidy period extended to 15 months – Dept of Defense Appropriations Act, 2010, Temporary Extension Act of 2010 and Continuing Extension Act of 2010 • Employer can allow an assistance eligible individual to change coverage options. If allowed: • Premium must be no more than than premium paid by individual for coverage prior to termination of employment • Different coverage must also be offered to employers’ active employees • Coverage requirements: • Must include health care coverage • Cannot be a flexible spending arrangement • Cannot be for treatment at an on-site medical facility maintained by employer that consists primarily of first-aid services, prevention & wellness care, or similar care

American Recovery and Reinvestment Act of 2009 (AARA) Cont. • High earners may have to pay back subsidy as tax payment (if modified AGI exceeds $145,000 ($290,000 for joint filers) – employer does not make this determination but is made when filing Form 1040 • High earners can “opt out” of the COBRA subsidy • Employer is usually responsible for subsidizing COBRA discount and claiming reimbursement of that amount against its payroll taxes on Form 941

Health Reimbursement Arrangements (HRA) • Paid solely by employer (not salary reduction election or cafeteria plan) • Not limited by number of employees or only to employees who • have High Deductible health plans • Reimburses employee for medical care expenses (for employee, spouse, dependents and adult children until the year they reach age 27). • Reimbursements up to maximum dollar amount (unused portion carried forward to subsequent coverage periods). • Unused portion cannot be paid to employee at end of year (or at termination) • Reimbursements can be paid with debit and credit cards – substantiation procedures exist and must be met

Health Reimbursement Arrangements (HRA) Cont’d • Benefits under HRA: • Generally excluded from employee’s gross income • Qualifications for exclusion: • May only reimburse expenses for medical care as defined in IRC section 213(d) • Expenses must be substantiated • Expenses may not be for prior taxable year, incurred before date the HRA began, or before employee enrolled in HRA • If amount credited to a reimbursement arrangement is directly or indirectly based on amount forfeited under a Sect 125 flex plan, arrangement is treated as funded by salary reduction

Health Reimbursement Arrangements (HRA) Cont’d • Qualifications for exclusion • No right to receive cash or any benefit (other than reimbursement of medical care expenses) • If any person has such a right currently or in an future year, all distributions to all persons under HRA in current year are included in gross income (even amounts paid to reimburse medical care expenses). • Arrangements outside HRA that provide for adjustment of employee’s compensation will be considered in determining eligibility for exclusion • If bonus at retirement is related to HRA balance or severance is paid only to employees who have HRA balance, then all reimbursements for all participants are disqualified.

Health Reimbursement Arrangements (HRA) Cont’d • Qualificationsfor exclusion (Cont) • Reimbursements can be to former employees and retirees up to the unused balance. • Employer may reduce maximum balance after retirement or termination for any administrative costs of continuing coverage. • Employer may or may not provide an increase in amount available after an employee retires or terminates employment. • If HRA allows payment of medical benefits to designated beneficiary other than the employee’s spouse or dependents payments are not excludable from income • Effective 8/14/06 (delayed until 2009 for HRA provisions created before 8/14/06)

Health Reimbursement Arrangements (HRA) Cont’d • HRAs and Cafeteria Plans • Employer contributions to an HRA may not be attributable to salary reductions or provided under a section 125 cafeteria plan to be excluded from taxable income • Look at all circumstances in determination • If salary reduction election for coverage period exceeds the actual cost of the accident or health plan coverage for that period, salary reduction is attributable to HRA – Look to COBRA rates for this. • If correlation exists between maximum reimbursement amount available and amount of salary reduction election for accident and health plan then reduction is attributable to HRA

Health Reimbursement Arrangements (HRA) Cont’d • HRAs and Flexible Spending Accounts (FSAs) • Amount credited to HRA must not be directly or indirectly based on amount forfeited under FSA • If medical expenses are reimbursable under HRA and FSA, • HRA must be exhausted before FSA • Before FSA plan year begins, the plan document can specify coverage • In no case can HRA and FSA reimburse the same medical care expenses.

Health Reimbursement Arrangements (HRA) Cont’d • Nondiscrimination rules applicable to HRAs • Section 105(h) same as for self-insured medical reimbursement plans • HRA is subject to COBRA • HRA must provide for continuation of maximum reimbursement with increase(s) at same time and same increment as similarly situated non-COBRA beneficiaries • Plan can provide for continued reimbursement regardless of election of continuation coverage (not mandatory) • No Reporting Requirement for HRA.

Health Savings Accounts (HSA) • Medicare Prescription Drug Improvement and Modernization Act of 2003 • Effective for Taxable years beginning after 12/31/03 • Tax-exempt trust or custodial account created exclusively to pay for qualified medical expenses of the account holder (employee) and his or her spouse and dependents. • Subject to rules similar to those for IRAs

Health Savings Accounts (HSA ) Cont’d • Qualifications for exclusion • Individuals must be only in high deductible health plan (HDHP) • Annual deductible for 2012 • at least $1,200 for individual coverage • out of pocket expense limits no more than $6,050 • $2,400 for family coverage • out of pocket no more than $12,100 for family coverage. • no amounts payable for medical expenses until family has incurred annual covered medical expenses in excess of minimum annual deductible • An HDHP can have a smaller deductible or none at all for preventive care.

Health Savings Accounts (HSA ) Cont’d • Qualifications for exclusion (cont’d) • The insurance can be a PPO or POS – in which case the annual out-of-pocket limit is determined by services within the network • Contributions • Contributions can be made by the employer and employee • All contributions are aggregated for purposes of maximum contribution limit. • Contributions to Archer MSAs reduce the limit available for HSA for tax exclusion • Any amount over the limit is includable in gross income • There is a 6% excise tax for excess individual and employer contributions in addition to all federal taxes

Health Savings Accounts (HSA ) Cont’d • Contributions (cont’d) • Maximum annual contribution is the lesser of • 100% of annual deductible or • Maximum deductible permitted same as Archer MSA • For 2012 maximum is • $3,100 for an individual • $6,250 for a family • Catch up is allowed for individuals at least 55 years old on the last day of the tax year. • For 2009 and beyond $1,000

Health Savings Accounts (HSA ) Cont’d • Contributions (cont’d) • No contributions can be made once the individual is eligible for Medicare (65 years old). • Amounts can be rolled over from an Archer MSA and IRA another HAS • Employer contributions must be the same for everyone with comparable coverage either at the same amount or percent of deductible • Comparability is applied separately to part-time workers (normally less than 30 hours per week). • Employers can make a one-time transfer of balance in employee’s HRA or FSA to an HSA. Maximum amount is lesser of HSA or FSA balance on date of transfer OR September 21, 2006. Transfer must be completed by January 1, 2012.

Health Savings Accounts (HSA ) Cont’d • Contributions (cont’d) • Transfer from an IRA is permitted as a one-time contribution to an HSA – up to maximum deductible contribution limit at the time of the contribution • Transfers from an HRA, FSA, or IRA are treated as rollover contributions and are non taxable • EXCEPTION: If employee is not an eligible individual with coverage under an HDHP at any time during the prior 12 months beginning with the month of the HSA distribution; if employee cannot meet the requirements, distribution is included in gross income and employee is subject to additional tax equal to 10% of distribution unless reason for ineligibility is employee’s death or disability) • Transfer provision not applicable to SEP’s or SIMPLE retirement accounts

Health Savings Accounts (HSA ) Cont’d • HSA and HDHP can be included in a Cafeteria Plan • HSAs are not subject to COBRA continuation coverage • Employer can make larger contributions to non-highly compensated employees’ HSA’s beginning in 2007 • Calculating Comparable Contributions • Sect 4980G mandates use of calendar year for comparability testing purposes • Several ways to comply with testing requirements: • Pay-as-you-go basis • Look-back basis • Pre-funded basis • Impermissible Contribution Methods do exist!

Health Savings Accounts (HSA ) Cont’d • Penalty for not making comparable contributions to all employees’ HSA’s is an excise tax equal to 35% of all amounts employer contributed during the calendar year • Distributions • Excluded from gross income iffor qualified medical expenses of employee, spouse or dependents not covered by other insurance • If not used for qualified medical expenses included in gross income • subject to additional 10% tax unless • after death, • disability, • or the employee reaches 65 years old.

Health Savings Accounts (HSA ) Cont’d • Distributions • Qualified medical expenses • Generally health insurance premiums are not qualified except: • Qualified long term care insurance • COBRA health care continuation coverage • Health insurance premiums while the individual is receiving unemployment compensation benefits • Individual over 65 for Medicare premiums and employer share of premium for employer provided health insurance • Cannot use HSA funds to pay premiums for Medigap policies.

Health Savings Accounts (HSA ) Cont’d • Employers are not required to determine whether HSA distributions are used for qualified medical expenses. • Employee makes determinations and must maintain records to substantiate. • Employers can provide eligible individuals with debit, credit or stored-value cards – same guidance as under HRAs

Health Savings Accounts (HSA ) Cont’d • In 2004, IRS issued guidance clarifying how FSAs and HRAs interact with HSAs • Employee covered under DHDP and a health FSA or HRA that pays or reimburses medical expenses, not eligible to make contributions to an HSA • CAN make contributions to an HSA for period of time employee is covered under certain specified types of employer-provided plans that reimburse employee medical expenses • Limited purpose health FSA or HRA • Suspended HRA • Post-deductible health FSA or HRA • Retirement HRA

Health Savings Accounts (HSA ) Cont’d • Effect of FSA grace period on HSA eligibility • In 2005, IRS issued guidelines clarifying an employee participating in an FSA and covered by a grace period (for incurring medical expenses after the end of the plan year) is not eligible to contribute to an HSA until after the FIRST DAY of the FIRST MONTH following the end of the grace period. • Employer could adopt one of two options which will affect employees’ HSA eligibility during the cafeteria plan period • General purpose health FSA during grace period • Mandatory conversion from health FSA to HSA compatible health FSA for all participants

Health Savings Accounts (HSA ) Cont’d • W2 Reporting Requirements • Employer contributions and salary reductions contributions (pre-tax deductions) • Box 12 with Code “W” on W-2 • Employer contributions over limits • Box 1,3, and 5 on W-2 with taxes in boxes 2, 4, and 6 • Employee contributions not made by salary reduction • Box 1, 3, and 5 on W-2 • Employee can deduct up to the annual limit on personal tax return

Health, Accident & Retirement