Monthly Archives: June 2018
Tuesday, June 19, 2018

Employers who offer high deductible health insurance plans to their employees typically also offer Health Savings Accounts (“HSAs”). HSAs allow employees to pay for uninsured medical expenses with pre-tax dollars and are set-up under Internal Revenue Code Section 223. HSAs are subject to annual contribution limits—single individuals may contribute up to $3,450 for 2018, families may contribute up to $6,900 for 2018, and individuals over the age of 55 may contribute an extra “catch-up contribution.” In most years, determining an employee’s maximum allowable contribution to an HSA is straightforward—an employee is either covered by a high deductible health plan or not, their spouse or dependent(s) are either covered by a high deductible health plan or not, and the employee is either at least age 55 or younger. However, in the year that an individual turns 65, determining the maximum allowable HSA contribution can become tricky. Read on to learn more about this complicated issue!

Background

HSAs may only be used by “eligible individuals,” as defined in Internal Revenue Code Section 223(c)(1). To qualify as an eligible individual, an individual must be enrolled in a high deductible health insurance plan. In addition, to be an “eligible individual,” an individual may not be enrolled in any other health plan, including Medicare. Eligibility to contribute to an HSA is determined on a month-to-month basis, so if an individual enrolls in any other non-high deductible health plan, that individual ceases being an eligible individual for the HSA in that month and for the remaining months of the year.  Note, they do not lose eligibility retroactively for months preceding their enrollment.

The Problem

The rules for HSA eligibility frequently create problems for employees with HSAs in the year that they turn 65 and start taking Social Security benefits. This is because when an individual who is 65 commences Social Security benefits, that individual is automatically enrolled in Medicare Part A. In fact, there is no way to “opt out” of being enrolled in Medicare Part A — and once an employee or spouse is enrolled in Medicare Part A, they are no longer eligible to make contributions to an HSA.

To complicate the contribution calculation, in the year an employee turns age 65 and commences Social Security benefits, enrollment in Medicare Part A will apply retroactively up to six (6) months. If someone commences Social Security benefits within six months of turning 65, they receive Medicare Part A coverage beginning in the month they turn 65. If an individual commences Social Security benefits more than six months after turning 65 the individual is enrolled in Medicare Part A retroactively six months prior to their application.

The Solution

Because enrollment in Medicare Part A makes an individual ineligible to contribute to an HSA, the year an individual is enrolled in Medicare they must pro-rate their HSA contribution. The individual prorates the HSA contribution based on how many months of the year they are an “eligible individual.” The two examples below demonstrate the pro-rating calculation:

Example 1

Joe turned 65 in January, 2017 and elected to contribute the maximum amount for a single employee to his HSA account for the year. Joe retired in September (9 months after he turned 65), and commenced Social Security benefits at that time.  When he commenced Social Security benefits in September, Joe was automatically enrolled in Medicare Part A. Because Joe was enrolled in Medicare more than 6 months after he turned 65, he received Medicare Part A coverage six (6) months retroactively, to April. This means that Joe was only an eligible individual for HSA purposes for 3 months out of the year (January – March). Consequently, Joe must pro-rate his HSA contribution for 2017 based on how long he was an eligible individual. Based on these facts, for 2017, Joe may contribute the sum of the following amounts:

  • 3/12 x the Maximum Single Contribution; and
  • 3/12 x the Catch Up Contribution

If during 2017 Joe contributed a greater amount to his HSA than the amount calculated above, he has until the due date of his federal tax return, with extensions, to remove the excess amount without penalty. For tax purposes, the “excess amount” includes the excess contributions and any interest earned on those excess contributions. Joe should contact either his HSA provider or his employer to remove the excess amounts from the HSA. Finally, Joe should include any excess amounts as income on his tax return.

If Joe contributes a greater amount to his HSA than the amount calculated above and he does not remove the excess amount by the time he files his taxes, Joe will be required to pay income tax plus a 6% penalty tax on the excess amount in his HSA. Joe will be required to pay the 6% penalty tax on the excess amount each year until he removes the amount (including interest) from his HSA.

Example 2

Jack and Janet are married and both are enrolled in Jack’s employer’s high deductible health plan. Each year the couple contributes the maximum allowable family contribution to their HSA. In 2019, Janet turns age 65 and retires while Jack continues to work. Janet turns 65 in July and commences Social Security benefits in October. Because she applies for benefits within 6 months of turning 65, her Medicare Part A coverage applies retroactively to the month in which she turned 65, July. As a result, Janet is an eligible individual for purposes of making HSA contributions for only 6 months out of 2019 (January – June). Jack turns 65 in 2020 and has not yet commenced Social Security benefits, so he remains an eligible individual for HSA contributions for 2019. In 2019, because Janet was only an eligible individual for half of the year (January – June), to determine the appropriate amount to contribute to their HSA Jack and Janet should add up the following amounts:

  • 6/12 x the Maximum Allowable Family Contribution for 2019, for the months that both Jack and Janet were eligible individuals (January – June);
  • 6/12 x the Catch Up Contribution for 2019, for the months that Janet was an eligible individual (January – June);
  • 6/12 x the Maximum Allowable Single Contribution for 2019, for the months that Jack was an eligible individual and Janet was not (July – December); and
  • 1 x the Catch Up Contribution for 2019, because Jack was an eligible individual all year.

If at the end of 2019 Janet and Jack discover that they contributed more to their HSA than the amount calculated above, they may remove the excess contributions and any interest earned on the excess contributions by the due date of their federal tax return, with extensions, without penalty. Janet and Jack should contact their HSA provider or employer to remove the excess amounts from the HSA and include the excess amounts as income on their tax return.

Like Joe, if Jack and Janet contribute a greater amount than the amount calculated above to their HSA in 2019, and they fail to remove the excess amount by the time they file their taxes, Jack and Janet will be required to pay income tax plus a 6% penalty tax on the excess amount in their HSA. And, like Joe, until Jack and Janet remove the excess amount from their HSA, they will be required to pay a 6% penalty tax on the excess amount.

As illustrated above, especially when a spouse is contributing to the HSA and is enrolled in Medicare in a year different from the employee, these rules can become somewhat complicated. Reach out to the Bryan Cave Leighton Paisner LLP Employee Benefits team to learn more!

Wednesday, June 13, 2018

On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across state lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American people.”  One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”).  In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”).  The Department of Labor issued its proposed rule on January 5, 2018.

In Part 1 of this “Deep Dive” series, we examined the history of AHPs and the effects of the changes proposed by the Trump Administration by providing a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations, which include Affinity Arrangements, Group Insurance Arrangements and AHPs.  In Part 2 of this “Deep Dive” series, we compared plan features of the three types of arrangements under current law.  In Part 3 of this “Deep Dive” series, we examined the qualification requirements for AHPs under current law.  In this installment of the “Deep Dive” series, we will examine the qualification requirements for AHPs under the proposed rule, then explain why the new requirements, if enacted in their current form, would result in the polar opposite outcome from the intended result enunciated in the Executive Order.  Rather than facilitate the expansion of AHPs, the proposed rule would result in their decline and ultimate demise.

Proposed Qualification Requirements for AHPs

ERISA provides that an employee benefit plan may be maintained by an association of employers that effectively operates like a single employer.  Under the current statutory and regulatory scheme, to be a bona fide association of employers, the members of the association must:

  • have a commonality of interest unrelated to the provision of benefits;
  • exercise control over the benefit plan; and
  • consist of employers with at least one employee.

In addition, the association itself must

  • be a pre-existing organization; and
  • exist for a purpose other than providing health coverage to its members.

The proposed rule would retain some of the current AHP requirements and modify or eliminate other existing requirements, as follows:

  • The commonality of interest requirement would be significantly expanded to allow employers who are either in the same line of business or industry or in the same geographic area to join together for the purpose of providing health insurance to their employees. As a result, many more organizations would be permitted to sponsor association health plans than is the case under existing law.
  • The requirement that the AHP consist solely of employers with at least one employee would be eliminated. As a result, sole proprietors and other self-employed individuals would be allowed to participate in AHPs for their own benefit.
  • The requirement that the association be a pre-existing organization would be eliminated.
  • The requirement that the association exist for a purpose other than providing health coverage to its members would be eliminated.
  • The proposed rule would retain the requirement that the employer-members control the AHP and would also require that the AHP have a formal organizational structure with a governing body and bylaws (or similar indication of formality).

The New Nondiscrimination Requirement – A Death Sentence for AHPs

While the provisions of the proposed rule discussed above would relax the existing requirements associated with forming an AHP, a new requirement added by the proposed rule would result in a virtual death knell for most existing AHPs and significantly inhibit the formation of new AHPs.

In a significant and unwarranted departure from current law, the proposed rule prohibits AHPs from varying premiums across groups of employers except in very narrow circumstances.  However, commercial insurance carriers would not be so limited except to the extent of state and federal community rating requirements applicable to small groups.  If the proposed rule were issued in its current form, AHPs would be forced to quote basically the same rates for all member employers, and commercial carriers would quote unhealthy large employer groups at higher rates than healthy groups, ultimately resulting in adverse selection in the AHP market.  Large employer groups with higher-than-average claims would have a financial incentive to join AHPs, and healthier-than-average-groups with lower costs would inevitably choose to purchase health insurance from commercial carriers.  This dynamic would result in AHPs enrolling, on average, more costly groups than commercial carriers in the non-AHP market.  As a result, AHPs would then be required to increase premiums across the board, diminishing the ability to attract even moderately healthy groups, resulting in further market segmentation and destabilizing the AHP marketplace.

The DOL states in the preamble to the proposed rule that its purpose is to encourage the establishment and growth of AHPs and to expand access of employers and their employees to more affordable health coverage by relaxing the regulatory requirements applicable to AHPs.  It is anticipated that the final AHP rule will be issued soon.  Given the avowed purposed of the rule, we expect the DOL to significantly modify, if not eliminate, the nondiscrimination requirement so that this purpose may be achieved.

Tuesday, June 5, 2018

Last year when the IRS announced that the initial remedial amendment period for 403(b) plans will end March 31, 2020, the natural reaction to this very important (but rather remote) deadline was to immediately put it on the to-do list, somewhere near the bottom, where it has been languishing ever since.  If this describes your reaction, you are certainly not alone.

We think it is a good time to move this to the front burner and take some action.  As you may recall, 403(b) plan sponsors were required to adopt a written plan document for existing 403(b) plans on or before December 31, 2009.  At the time, there were no pre-approved 403(b) plans and no determination letter program was available for 403(b) plan sponsors to gain assurance that the document satisfied the requirements of section 403(b) and applicable regulations.  In order to provide a system of reliance for 403(b) plans, the IRS announced the commencement of a 403(b) pre-approved plan program and, on March 31, 2017, it issued the first opinion letters and advisory letters for prototype and volume submitter plan documents under the program. If a plan sponsor retroactively adopts a pre-approved plan by the last day of the remedial amendment period, it will automatically be deemed to have corrected any form defects in the plan document it previously adopted and will be considered to be in compliance with applicable plan document requirements back to January 1, 2010.

Instead of adopting a pre-approved plan document, a plan sponsor could amend an individually designed plan to correct any form defects prior to the end of the remedial amendment period.  Unfortunately, last year the IRS decided not to move forward with its original intention to establish a determination letter program for individually designed 403(b) plans.  As a result, at this time, adoption of a pre-approved plan document is the only way to obtain assurance from the IRS that a 403(b) plan document is compliant.

Action Steps for Plan Sponsors

  • If your plan was established or restated in the last year, confirm whether or not your current document is a pre-approved prototype or volume submitter plan with an opinion or advisory letter. If so, it is likely that no further action is required.
  • If the current plan document does not have an opinion or advisory letter, consider adopting, prior to the end of the remedial amendment period, a pre-approved plan document retroactively to January 1, 2010 or, if later, the plan’s effective date.
  • The IRS has posted a list of pre-approved prototype and volume submitter plan sponsors on its website. If your plan’s current provider is on the list, it may be simplest to adopt that provider’s pre-approved plan; however, consider contacting several providers to obtain additional information prior to making a decision.
  • Be sure to adopt the pre-approved plan document prior to the end of the remedial amendment period.
  • If the plan is individually designed and it is not feasible to restate the plan on a pre-approved plan document, consider having legal counsel review the plan document to determine if any amendments should be adopted to correct a form defect prior to the end of the remedial amendment period.
  • As always, consider working with your legal counsel to assess the status of the plan and consider your options prior to taking action.