2. HSAs – Interaction with Cafeteria Plans, HRAs and COBRA
Peter Antonie Compliance Communications Specialist Employee Benefits Corporation
The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

3. HSAs – Interaction with Cafeteria Plans, HRAs and COBRA Webinar
HSAs can be included in a Cafeteria Plan
HSAs need to be documented in the Cafeteria Plan
Transition issues need to be addressed prior to implementing an HDHP with HSAs
Interaction of HSAs at the participant level can lead to compliance issues
We can answer your questions about how HSAs interact with Cafeteria Plans, HRAs or COBRA

4. Today’s Agenda Quick Review of HSAs HSAs in a Cafeteria Plan
Documenting employer and employee contributions
Limited or Post Deductible Health Care FSA
Transition issues when HSAs are added to an existing cafeteria plan
Cafeteria plan participant issues
Designing an HRA to accommodate HSAs
HRA participant issues
Transition issues affected by COBRA
Common compliance issues

5. Quick Review HSAs authorized under IRS Code § 223
Account established in the individual’s name – not the employer’s
Owned by the account holder
Portable with the individual – not tied to employer
Not a group health plan – not subject to COBRA, FMLA, HIPAA, ERISA, etc.
Eligible to make or receive HSA contributions
Not another individual’s tax dependent
Not entitled to (enrolled in) Medicare
Covered by a qualified High Deductible Health Plan (HDHP)
Not covered by any disqualifying coverage

6. Quick Review HSA Contributions
By individual or family member as tax deduction at year-end (post-tax)
Is a $ for $ adjustment to gross income
By individual as pre-tax deduction in cafeteria plan
Is a $ for $ adjustment to gross pay
By employer (employer’s contribution reduces the maximum the individual can contribute)

7. HDHP & HSA Limits* * minimum = deductible, maximum = out-of-pocket
2012 min/max
Single $1,200/$6,050
Family $2,400/$12,100
2012 contribution limit
Single $3,100
Family $6,250
2013 min/max
Single $1,250/$6,250
Family $2,500/$12,500
2013 contribution limit
Single $3,250
Family $6,450

8. HSAs in a Cafeteria Plan
IRS Code § 223 prompted amendment of § 125 to allow HSAs in Cafeteria Plans
Must adopt or amend the Cafeteria Plan for pre-tax HSA contributions through the premium only component
same as documenting pre-tax medical or dental
Pre-tax contributions are an election
Are considered “premiums” for medical care
Regulation allows for prospective changes (no event needed – Final Proposed Treasury Regulation )
Any employer contributions to HSAs are noted in the employer contribution section

9. Adoption Agreement or Amendment

10. HSAs Documented as Premiums

11. HSA Contributions Through a Cafeteria Plan
Employee contributions are a pre-tax election
Employee’s elected amount can be changed any pay period, prospectively (no permitted election change event necessary)
Annual maximum contribution amounts include employee and employer contributions
$3,100/single; $6,250/family (2012)
$3,250/single; $6,450/family (2013)

12. HSA Contributions Through a Cafeteria Plan
Any employer HSA contributions are through the cafeteria plan if employees can make pre-tax contributions (Treasury Regulation § G-5)
Employer contributions reduce the amount an individual can contribute
HSA contributions (employer and employee) are taken into account when §125 Contributions & Benefits and Key Employee 25% Concentration nondiscrimination tests are performed

13. Adoption Agreement or Amendment

15. HSA Contributions through a Cafeteria Plan
§125 Nondiscrimination Testing
HSA contributions (employer & employee) treated as premiums
HSAs are taken into account when performing the §125 Contributions & Benefits test* and Key Employee 25% Concentration test
Failing either or both tests means the HCEs or Key employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs)
*The C&B Availability test fails if HCEs receive contributions and some eligible employees get no contribution

16. HSA Contributions through a Cafeteria Plan
Employer reports employee pre-tax and any employer HSA contributions on W-2, in box 12 with code W
Employer responsible to monitor that*:
Employee is enrolled in HDHP coverage offered by employer
Employee has no disqualifying coverage offered by employer
Employee is eligible for $1,000 catch-up contribution
* Not responsible to monitor another employer’s plan or spousal coverage

17. HSA Contributions Through a Cafeteria Plan
Employee is responsible to monitor that*:
Employee is an eligible individual
Employee is not covered by any disqualifying coverage
Employee does not over-contribute
Employee only seeks HSA distributions for qualified medical care expenses
* Reported through IRS Forms 8889 and 5329

18. Flexible Spending Arrangements with HSAs
Can adopt a Limited Health Care FSA or Post Deductible Health Care FSA for employees who want to make HSA contributions and also have an FSA
Regular Health Care FSA is disqualifying coverage – makes individual ineligible to make or receive HSA contributions

19. Limited Health Care FSA
Recognized in IRS Notices &
Is not disqualifying coverage
Health Care FSA will disqualify an individual from being able to contribute to an HSA
Includes the spouse’s Health Care FSA
What can it cover?
Dental expenses
Vision expenses
Preventive Care expenses*
* Many cafeteria plans, including the BESTflex Plan, do not provide for this – too hard to administer

20. Limited Health Care FSA
If Limited Health Care FSA is to be offered, must adopt or amend Cafeteria Plan to include it
Follows all the same rules as a regular Health Care FSA
Uniform Coverage rule
Use-It-or-Lose-It (forfeiture) rule
Third party substantiation of expenses
Permitted election change events

21. Adoption Agreement or Amendment

22. Limited Health Care FSA Documentd

23. Post Deductible Health Care FSA
Recognized in IRS Notices &
Only dental or vision expenses eligible until minimum HDHP deductible is satisfied
All medical care expenses incurred after satisfying the minimum HDHP deductible are eligible expenses
Follows all the Health Care FSA rules
Often not offered to employers
No process in place to track deductibles
Participant must provide proof of satisfying HDHP deductible

24. Cafeteria Plan Transition Issues
Adoption of HDHP with HSAs creates transition issues for Health Care FSA participants
Year-end transition
Mid-year transition

25. Cafeteria Plan Transition Issues
Year-end adoption of HDHP with HSAs
If employer does not offer the Grace Period, all Health Care FSA participants can begin contributing to the HSAs at start of new plan year
IRS Notice
Any employer HSA contributions can only be made into HSA eligible employee accounts

26. Year-End Transition to HDHP with HSAs (cont.)
If employer does offer the Grace Period*
Participants that have a $0 Health Care FSA balance on last day of plan year can begin contributing to the HSA on first day of new plan year
Participants with a Health Care FSA balance at year end must wait until end of run-out period to begin making contributions to the HSA (1st of the month following end of Grace Period)
Employer can amend the current plan to remove Grace Period prior to year end and all participants can make HSA contributions starting with new year
* IRS Notice

27. Year-End Transition to HDHP with HSAs (cont.)
Additional option*
Convert all Health Care FSAs to Limited or Post Deductible Health Care FSAs during the grace period
Cannot be a choice to participants
Challenges for those who do not have dental or vision expenses – could result in forfeitures
Requires amendment to delete the Health Care FSA and convert to Limited or Post Deductible Health Care FSA
* IRS Notice

28. Cafeteria Plan Transition Issues
Mid-Year adoption of HDHP with HSAs
Example: Employer offers a calendar year Cafeteria Plan but the health insurance renews on August 1.
Employer currently offers an HMO but will offer an HDHP on August 1 with an HSA
Employer has many employees enrolled in the Health Care FSA
Adoption of HDHP is a Coverage Change – does not permit Health Care FSA participants to revoke or amend their elections (Treasury Regulation (f))
What are the employer’s options?

29. Mid-Year Adoption of HDHP with HSAs
Informal IRS guidance March 2005
Option 1:
Convert all participants to a Limited or Post Deductible Health Care FSA on August 1
Unilateral employer action, not participant choice
Expenses incurred after August 1 can only be reimbursed for dental or vision care
Participants may forfeit money if they do not have enough dental or vision care needs
All employees can start making HSA contributions August 1

30. Mid-Year Adoption of HDHP with HSAs (cont.)
Do not convert Health Care FSA
Participants who are enrolled in the Health Care FSA cannot immediately contribute to the HSA
Cannot revoke Health Care FSA since change to HDHP is a Coverage Change
May begin contributing on January 1 if their account balance is $0 or the Grace Period is not present
If the Grace Period is present and there is an account balance, the participant can begin contributing to an HSA on April 1 of the next plan year (1st of the month following Run Out period)

31. Mid-Year Adoption of HDHP with HSAs (cont.)
Plan ahead
Run a short plan year in the Cafeteria Plan to make it match the health insurance plan year (e.g., 1/1 – 7/31)
Requires that employer anticipates change to HDHP with HSAs prior to cafeteria plan renewal on January 1 so amendment can be made for short plan year
Then, year end transition issues apply

32. Participant Scenarios
Scenarios assume participant has HDHP coverage with HSA contributions
Spouse’s employer implements
new health plan
Spouse acquires new job and benefits
Participant marries individual who has existing health coverage
Participant’s spouse loses job and health benefits

33. Participant scenarios (cont.)
Issues to consider:
Does participant have HDHP coverage after the event?
Does participant have any disqualifying coverage after the event?
What effect does the event have on the participant's future HSA contributions?

34. Designing an HRA to Accommodate HSAs
Underlying plan that HRA is linked to must itself be an HDHP
HRA cannot reimburse any deductible expenses until employee has had out-of-pocket expenses equal to or greater than the HDHP minimum deductible amounts
HRA may need to be amended by January 1 to assure minimum reimbursement threshold amounts comply with any inflationary increase in the HDHP deductible minimums

35. Designing an HRA to Accommodate HSAs
Example: employer’s HDHP deductible is $2,500/single, $5,000 per family aggregate; 100% reimbursed thereafter HRA design: Single plan: first $1,250* not paid, remaining $1,250 paid 100% Family plan: first $2,500* not paid, remaining $2,500 paid 100% *this accommodates the 2013 minimum HDHP out-of-pocket deductible expense

36. HRA Participant Issues
Participant’s employer has HDHP with HSA compatible HRA
As long as participant's spouse does not have disqualifying coverage* that includes the participant, the participant can make HSA contributions
*Non-HDHP medical plan, Health Care FSA or non-compatible HRA

37. Health Care FSA vs HRA vs HSA
Feature
Health Care FSA
EBC HRA
HSA
Contributions
Employer and employee
Employer
Maximum Contribution
Set by employer
Indexed annually
Tax status of ER contributions
Excludable from EE income
Same
Portability
None
Individual account
HDHP
Not required
Required
Non-Medical expenses
Not allowed
Subject to 20% penalty + tax

38. Health Care FSA vs HRA vs HSA (continued)
Feature
Health Care FSA
EBC HRA
HSA
Coverage Period
12 months
Plan determines
Does not apply
Uniform coverage rule
Applies
Substantiation requirements
Plan must substantiate
Individual substantiation
Reimbursement order
FSA pays last unless HRA document over rides
HRA pays first unless HRA document stipulates FSA
Cannot have FSA or HRA cover same expenses

39. Transition Issues Affected By COBRA
Qualified beneficiary (QB) eligibility for HSAs
Adoption of HDHP at renewal
Adoption of HDHP mid-year

40. Transition Issues Affected By COBRA
QB eligibility for HSAs
If COBRA coverage is HDHP, QB can make HSA contributions
If QB does not elect COBRA for HDHP coverage, cannot make HSA contributions unless covered by HDHP through another plan
Spouse’s HDHP coverage
Individual health plan HDHP coverage

41. Transition Issues Affected By COBRA
Adoption of HDHP at renewal
Requires new coverage information to QBs
Open enrollment for QBs if new insurer
Requires new premium rate information

42. Transition Issues Affected By COBRA
Adoption of HDHP mid-year
Change of coverage for active employees allows change in coverage for QBs
Change in premium for active employees allows change in applicable premium for QBs
An exception to the 12-month Determination Period rules
Open enrollment for QBs if new insurer
Requires new premium rate information

43. Common Compliance Issues For Employers
Not documenting pre-tax HSAs in the cafeteria plan
Not documenting employer’s contribution to HSAs in the cafeteria plan
Not performing due diligence on employee eligibility for HSA contributions
Not including HSAs in census report for nondiscrimination testing
Not adjusting (amending) the HRA reimbursement thresholds to accommodate new HDHP minimums
Not providing advance notice of HDHP adoption for COBRA QBs

44. Summary HSAs can be included in the cafeteria plan
HSAs need to be documented in the cafeteria plan
Transition issues need to be addressed prior to implementing an HDHP with HSAs
Interaction of HSAs at the participant level can lead to compliance issues

45. Questions? Thanks for Attending!!
Any questions can be addressed by or phone at your convenience Compliance Department
Thanks for Attending!!
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