| In this edition: |
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IRS Offers Additional Details Related to an FSA |
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Recent Repeal of Deductible Restrictions for Small Group Plans |
| IRS Offers Additional Details Related to an FSA |
| On March 28, 2014, the IRS released two legal memoranda that provide additional details for a health flexible spending arrangement (FSA). Memorandum 201413005 explains how a health FSA carryover affects the eligibility for a health savings account (HSA), and Memorandum 201413006 focuses on correction procedures for improper health FSA payments. |
| Please note: The IRS memoranda provide IRS insight for FSA carryover issues that have yet to be explained in formal guidance, and while these details may be useful to employers that are investigating plan options, the IRS notes that the advice summarized in the memoranda may not be used or cited as precedent. |
| Background |
| Last year, the IRS released Notice 2013-71, which permits (but does not require) employers to amend their health FSA plans so their participants may carry over up to $500 of unused funds to be used for qualified medical expenses incurred in a following plan year. For additional carryover details and guidance for updating plan amendments, please see our Compliance Update issued in November 2013. |
| HSA Eligibility |
| Memorandum 201413005 addresses several issues concerning a health FSA carryover and its effect on HSA eligibility. The memo confirms that a participant enrolled in a general-purpose FSA, including coverage in an FSA resulting only from a carryover balance, cannot contribute funds to an HSA. This ineligibility also applies to the entire FSA plan year, even if the remaining FSA carryover balance is depleted before the plan year ends. |
| If a carryover feature is included in the general-purpose health FSA plan, an employer has options available to preserve employees’ HSA eligibility for the following plan year. |
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Option 1: Allow participants with a general-purpose health FSA to elect and enroll in a limited-purpose FSA — an FSA plan that is compatible with an HSA — for the following plan year. Those participants can carry over unused funds (up to the maximum limit) to a limited-purpose FSA; however, the carryover cannot be applied to another non-health FSA or another cafeteria plan benefit. |
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Option 2: Automatically enroll participants in a limited-purpose FSA if those participants enroll in a qualifying high deductible health plan (HDHP) and have a carryover balance in a general-purpose health FSA. |
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Option 3: Allow individuals to waive or decline a health FSA carryover prior to the beginning of the next plan year to become eligible for HSA enrollment. |
| Please note: If participants’ funds remaining in a general-purpose health FSA are transferred to a limited-purpose FSA, uniform coverage rules may apply during the run-out period for the general-purpose FSA, and during that time frame, unused general-purpose FSA funds may reimburse claims submitted for eligible expenses incurred during the previous plan year. |
| Correction Procedures for Improper Health FSA Payments |
| Memorandum 201413006 addresses correction procedures for improper health FSA payments by using the same IRS guidelines for unsubstantiated debit card purchases under a cafeteria plan. The participant’s FSA debit card must be deactivated until the unsubstantiated card transactions are resolved using one of these correction procedures: |
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The participant repays the FSA plan. |
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The unresolved amount is withheld from the employee's pay. |
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Unsubstantiated card purchases are offset with manual claims. |
| The IRS memo clearly states that employers may apply the three procedures above in any order; the order just needs to be followed consistently. In addition, recovering overpayments should take place during the same plan year as the improper card purchases. If the employer tries all of these recovery methods but does not recover the overpaid amount from each participant, then the employer may treat those amounts as indebtedness and report the overpayments as taxable income on each employee’s Form W-2. The forgiveness of indebtedness should be used only as an exception and not a routine process. |
| CONEXIS will continue to monitor health FSA carryover guidance, and we will send additional Compliance Updates as needed. |
| Recent Repeal of Deductible Restrictions for Small Group Plans |
| On April 1, 2014, President Barack Obama signed the Protecting Access to Medicare Act of 2014, which primarily focuses on Medicare reimbursements to doctors but also contains an important provision related to the Affordable Care Act (ACA) for small group market employer health plans. Prior to this recent legislation, Section 1302(c)(2) of the ACA had limited deductible amounts offered by small employer plans to $2,000 for individuals and $4,000 for families. However, Section 213 of the law now eliminates deductible limits imposed under the ACA for the small group health plans. |
| The new law is effective immediately and is also retroactive to when the ACA was first enacted in 2010. This change allows more flexibility for plan designs and, to help cover higher deductibles, the inclusion of account-based plans such as health savings accounts (HSAs), health reimbursement arrangements (HRAs), and flexible spending arrangements (FSAs) that are often coupled with high deductible health plans (HDHPs). |
| Small group health plans must still provide "minimum value" — the percentage of the total allowed costs of benefits paid by the plan is no less than 60 percent. Also unaffected are the annual maximum spending limits set by the ACA for out-of-pocket expenses such as deductibles, co-insurance, co-payments, or similar charges for essential health benefits. |
| For additional details, please see the full text of the Protecting Access to Medicare Act of 2014. |
| Please note: CONEXIS strongly encourages employers with small group health plans to consult with appropriate legal counsel for benefits and welfare plans before making any decisions concerning a change to your plan. |
