On September 13, 2013, the U.S. Department of Labor (DOL) issued Technical Release 2013-03, Application of Market Reform and Other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain Other Employer Healthcare Arrangements, and the Internal Revenue Service (IRS) issued Notice 2013-54 (of the same name), providing complex guidance for tax-favored health plans under the Affordable Care Act (ACA) effective January 1, 2014.
On the following page is a comparison of key features for 2014 for these common arrangements, followed by an overview of the mechanics for each program.
Under a Health FSA, at the beginning of the plan year, employees elect to contribute pre-tax dollars for anticipated out-of-pocket medical expenses, such as health insurance deductibles, co-pays, prescriptions, and dental and vision care expenses. Contributions are deducted from the employee’s gross wages, thereby decreasing the employee's taxable compensation. As employees incur their qualified medical expenses, they are reimbursed from their flexible spending account, up to the total amount elected for the plan year.
A “grace period'' of up to 2 ½ months after the close of the plan year may be offered by the Health FSA plan to allow employees to use up their account balance for qualifying medical expenses. Remaining unused balances are forfeited. New for 2013, plan sponsors can amend their Health FSA to permit carryovers up to $500 of unused account balances. However, a Health FSA cannot have both a carryover and a grace period.
Under an HRA, an employer makes contributions to an employee’s account. Unlike the Health FSA, an employee is not allowed to make contributions to an HRA. Employer contributions are tax-free benefits for the employee. The HRA balance can be used to reimburse qualified medical care expenses incurred by the employee, spouse, dependents and any children (under age 27 as of the end of the taxable year). The remaining account balance at the end of the year can be carried forward to reimburse expenses incurred in future year(s). Effective January 1, 2014, an HRA must be integrated with group health coverage. This rule prevents employers from using HRAs for reimbursement of individual policies, either through the Health Care Exchanges or on the individual market. This rule extends to Premium Reimbursement Accounts (PRAs), which are another form of an HRA as clarified under the new guidance from the DOL and IRS. A PRA is an arrangement used by an employer to directly pay or to reimburse an employee for some or all of their individual health insurance premiums (no longer an option for 2014).
Under an HSA, the account holder must be covered under a qualifying high-deductible health plan. For employees who receive employer-sponsored health insurance, the employer must offer an HSA-qualified plan with a deductible of at least $1,250 for individual-only coverage and $2,500 for family coverage for 2014. Annual out-of-pocket expenses for 2014 are limited to $6,350 for individual-only and $12,700 for family coverage. The HSA account holder is restricted from coverage under another major medical insurance health insurance policy. Employer and employee contributions are allowed for HSAs. Employer contributions are tax deductible for income tax purposes and are not taxable to the employee. Employee contributions are tax deductible by the individual. Similar to the Health FSA and HRA, reimbursements for qualified medical expenses are tax-free. Withdrawals from the account for nonqualified medical expenses are allowed, but they are generally subject to a 20% penalty. Unused account balances are carried over to the following year. HSA accounts belong to the individual account holder and are portable when the individual leaves the employer or work force.
If the new health care reform is giving your brain a workout, you are not alone! Both employers and employees struggle with managing health care benefits, expenses and options. Taking advantage of the health plan option that works for you can lead to valuable benefits and tax savings, a win-win for the employer and employee.
Michelle L. McCann, CPA, is a partner in Lindquist LLP's San Ramon office. She is primarily responsible for overseeing quality control for preparation of exempt organization and employee benefit plan returns, including Forms 5500, 990, LM-2 and 199. Michelle also provides QuickBooks training and support for the firm's clients. Contact Michelle at email@example.com.
Qualified medical expenses are defined under Code §213(d)