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ECFC Members click here to read the full article.

ECFC Members click here to read the full article.

ECFC members click here to read the full article.

ECFC members click here to read the full article.

ECFC Members Click here to read the full article.

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In late October, the tri agencies (Department of Labor (DOL), Treasury, and Health and Human Services (HHS)) published a much-anticipated proposed regulation regarding health reimbursement arrangements (HRAs). The HRA proposed regulation is a product of an Executive Order issued by President Trump to the agencies to issue guidance making HRAs more flexible.

HHS, DOL and IRS (the "Agencies") jointly issued a final rule on August 3, 2018 (83 Fed. Reg. 38212,8/3/18) that expands the availability of short-term, limited-duration health insurance (“STLDI”).  The final rule updates and finalizes effective

Background.  STLDI was intended to be designed to provide temporary coverage for individuals transitioning between health insurance policies.  Short-term insurance coverage often provides some protection to those who enroll by paying a percentage of hospital and doctor bills after the policyholder meets the specified deductible.  It is not required to meet ACA standards.

In October 2016, the Agencies issued a final rule that restricted the maximum term of a STLDI policy to less than three months.  It historically was limited to a maximum term of less than twelve (12) months. In response, certain stakeholders expressed concerns that this limit could cause harm to some consumers, limit consumer options, and ultimately have little positive impact on insurance risk pools.

Because it is exempt from the definition of individual health insurance coverage under the ACA, it is not subject to the ACA's individual market requirements that apply to individual health insurance plans (e.g., the mandate to cover Essential Health Benefits, the prohibition on imposing pre-existing condition exclusions or limitations, etc.). As a result it generally is cheaper than ACA compliant insurance.

Final Rule.  The following are highlights from the final rule:

• Compliance with the ACA's Individual Mandate.  The proposed rule confirms that STDLI  health insurance coverage is not considered to provide Minimum Essential Coverage under the ACA.  Therefore, a consumer whose health insurance coverage during the 2018 tax year is through a short-term policy may be subject to the ACA's Individual Mandate Penalty (which requires nearly all Americans to be insured or pay a penalty).  However, this will not be an issue after 2018 because Congress, as part of the tax overhaul bill passed at the end of 2017, has effectively eliminated the individual mandate starting in 2019 by eliminating any penalties for failure to have Minimum Essential Coverage. 

• Extension of the Maximum Permissible Coverage Period.  The Final Regulations amend the definition of renewals and extensions to allow for a period of coverage of no longer than thirty-six consecutive months in total.  As a result, insurers could begin to offer any coverage period of less than twelve months, including any extensions that may be elected by a policyholder, up to a total of thirty six consecutive months.  Thus, the Final Regulations permit renewals and extensions with the same carrier for a period of up to thirty-six months in total.  As with the current regulations, this insurance may not be renewed after the maximum period of coverage.  However, the preamble to the final regulations specifically provides that an individual may utilize short-term limited-duration insurance for more than thirty-six months so long as no one carrier provides coverage for longer than a consecutive thirty-six month period in total.

• Notice requirements. The final rule revises the notice that must be provided with enrollment materials for STDLI.  Specifically, the final rule requires the use of one of two revised notice versions, depending on whether the coverage start date is before January 1, 2019 or January 1, 2019 and later.  The key changes are a requirement to provide additional warnings about gaps in coverage that may occur if an individual is only covered under STDLI, and the elimination of the need to print the Notice Requirements in all capital letters.  Starting in 2019, when the ACA's individual mandate penalty is reduced to zero, certain language contained in any 2018 version of the notice will no longer apply.  Both the 2018 and 2019 versions of the notice are intended to notify consumers that STDLI policies are not required to comply with certain federal health insurance mandates, principally those contained in the ACA.

However, ERISA provides that the states retain jurisdiction to separately regulate health insurance. Given that authority, a number of states now permit STLDI to be used for the period provided in the new federal regulations. However, some already have adopted their own rules to limit the period of coverage to less than three (3) months or some other period that is shorter than the new Federal rule allows.

In addition, a law suit, Association for Community Affiliated Plans, et al. v. United States Department of Treasury et al., No. 1:18-cv-02133, (D.D.C. Sep. 14, 2018), was filed on Friday, September 14, 2018, to stop and effectively nullify the Final regulation.  The lawsuit argued that the final rule would create a loophole that would create a parallel insurance market place that would consist of plans that are not subject to ACA’s consumer protection rules; it is contrary to law; and it is arbitrary and capricious.  

Background

Ms. Tombul laid the foundation for “what’s an eligible medical expense” by presenting a short refresher course. It included references to key tax court cases such as Havey, which established factors to be considered in determining whether an expense is for medical care. One of these is the “but for” test, which considers whether the expense have been incurred “but for” the medical condition. In discussing this test, Ms. Tombul referenced the Jacobs case. Although Mr. Jacobs’ doctor recommended a divorce, there were no medical expenses involved and the divorce would have occurred anyway, so the related expenses, such as attorney’s fees, were not considered deductible for income tax purposes.

However, expenses were considered medical care in other cases brought before the tax court. One case involved a woman who would call an “aura cleanser” and receive aura cleansing over the phone. Those expenses were ultimately considered to be for medical care because the woman had a sincere belief that the purpose of obtaining the services was to treat a medical condition and that the cleansing did, in fact, make her feel better.

Eligible Medical Expenses

Travel and medical expenses generally go hand in hand. The mileage for going to see a local doctor or dentist is considered to be for medical care. However, medical tourism is a bit trickier. Traveling out of the country specifically for medical care may be eligible if there is no element of pleasure during the trip. But lodging outside the United States generally will not be eligible because the treatment must be provided by a physician, and for this purpose, “physician” is defined as someone licensed as a physician in one of the 50 states or Washington DC.

Ms. Tombul also discussed acupuncture. She said that acupuncture is not considered an eligible medical expense if undertaken for one’s general health and not to treat a specific medical condition.

“Socializing toys” (toy pots and pans) prescribed by doctor for a child with a mental health condition gave Ms. Tombul some pause. She said that generally, this expense would have to pass the “but for” test. For example, did the child have similar toys in the past? If so, then the new, prescribed toys were not purchased only for the medical condition, because the child had similar toys prior to the prescription.

Heart rate monitors were also discussed. While there are free apps that tell a person what their heart rate is or should be, there are also more complex apps that coordinate and transfer information to and from a separate medical device for those whose medical condition requires continual monitoring. If the app is part of a device that also has non-medical purposes, the eligible medical expense would be the excess cost for the Fitbit with the heart rate monitor.

Regarding genetic testing, Ms. Tombul said that these expenses would be eligible if the test determines a person’s chance of disease or disability.

She also said that special food such as special formula for an infant who cannot take regular formula is not an eligible expense. She explained that both products were food and provided nutritional value, thus making any food substitute an ineligible expense.

Eligible Expense Regulation Project

In the works for quite some time has been a project to update IRS regulations that define eligible medical expenses. The project was started in 2008 and has yet to be completed due to other priorities. It is also no longer listed in the IRS Priority Guidance Plan. Subregulatory guidance may be another option for issuing guidance on eligible medical expenses, so stay tuned.

Ms. Tombul also showed a Food and Drug Administration (FDA) video (see https://www.fda.gov/Drugs/ResourcesForYou/HealthProfessionals/ucm553114.htm ) explaining the difference between a drug and a cosmetic. The video pointed out that for FDA purposes, some items are both. Examples include toothpaste with fluoride, deodorant with anti-perspirant, sunscreen, and dandruff shampoo. These products all have a medication component.

She pointed out that the FDA and the IRS have different purposes. The FDA is looking at whether the item has to comply with the more stringent disclosure rules that apply to drugs, while the IRS is looking at whether an expense is for medical care or general good health.

Similarly, the lone state of New Jersey is the only state in the United States that currently does not allow employee to pay for benefits on a pre-tax basis for purposes of state tax. 

Background – Puerto Rico

Puerto Rico is a Commonwealth of the United States, with a constitution and a government system very similar to that governing the states.  Puerto Rico falls under the jurisdiction of most federal laws, but with regard to taxation, significant differences exist because Puerto Rico has its own Internal Revenue Code (the “PR Code”) and its own Treasury (the Hacienda). Residents of Puerto Rico pay taxes to the Hacienda, but do not pay income tax to the United States Treasury on income earned in Puerto Rico.

Cafeteria Plans in Puerto Rico

There is some debate as to the viability of cafeteria plans under the PR Code. The Puerto Rico statute that regulates cafeteria plans contains the following provisions:

·       Excludes amounts used to acquire “qualified benefits” from the gross income of cafeteria plan participants, with exceptions for highly compensated participants. 13 L.P.R.A. § 30016(a) (PR Code § 1032.06(a)).

·       A “qualified benefit” is defined as the cost or value of any benefit not includable in gross income by reason of an express provision of 13 L.P.R.A. § 30102(a)(2) (PR Code § 1032.06(a)(2)). It does not include premiums paid for long-term care benefits.

·       Defines a “cafeteria plan” as a written plan approved by the Secretary under which (i) all participants are employees and (ii) participants may choose among two or more benefits consisting of cash and qualified benefits.

·       It excludes deferred compensation plans and plans established by the Puerto Rico government, and sets limits for group health and accident plans. 13 L.P.R.A. § 30016(g) (PR Code § 1032.06(g)).

·       It may not be discriminatory. 13 L.P.R.A. § 30016(e) (PR Code § 1032.06(e)).

The Puerto Rico’s Labor Transformation and Flexibility Act, HB 453, was approved and became immediately effective (although not yet codified) on January 25, 2017.  It amends the PR Code and aims to qualify Puerto Rico cafeteria plans under the US Internal Revenue Code (“US Code”).  Specifically, HB 453 proposed to add the following to the PR Code’s list of qualified benefits: health and dental plans; HSAs; dependent care assistance programs; long-term disability benefits; accident insurance (including AD&D); adoption assistance; and “any other qualified benefit” authorized under US Code section 125.

However, even with the passage of HB 453, there has been some debate as to whether Puerto Rico plans would qualify under US Code section 125 because employee contributions made with pre-tax contributions and employee-purchased paid vacation days are treated as cash under the PR Code.  Further, PR Treasury Circular Letter No. 04-07 provides that the PR Code does not authorize employee pre-tax contributions for the purchase of “qualified benefits” under a PR Code cafeteria plan.  Finally, there is uncertainty regarding the exclusion from the definition of wages for FICA tax purposes because the FICA tax exemption on employee contributions to a US Code Section 125 cafeteria plan may not necessarily apply to a PR Code cafeteria plan.  Finally, although PR Code Section 1032.06 provides for cafeteria plans in Puerto Rico, such plans require qualification by the Hacienda.  Because the Hacienda has not yet issued any regulations, in practice, we understand that no employers have established cafeteria plans yet in Puerto Rico.

New Jersey

New Jersey is the only state in the United States that does not recognize cafeteria plan.  Thus, with respect to state tax, employees cannot contribute on a pre-tax basis through a cafeteria plan, and the following amounts must be withheld from any cafeteria plan contributions for New Jersey tax purposes:

·       Employees

o   Income tax – must be withheld during the year

o   Unemployment tax – must be withheld during the year (includes unemployment insurance, disability insurance, family leave insurance, and workforce development taxes)

·       Employers

o   Unemployment tax – must be paid during the year (includes unemployment insurance, disability insurance, and workforce development taxes)

Under N.J.S.A. 54A:6-24 and Technical Bulletin TB-39(R) issued 3-3-03, New Jersey does have a very limited exception to this rule, under which the value of a cafeteria plan benefit  may be excluded if all of the following criteria are met (note that a typical cafeteria plan would not satisfy the second or third criteria):

1. The value is excludible for federal income tax purposes and the plan meets the requirements of I.R.C. Section 125

2. The option to receive cash, instead of a federally-excludable cafeteria plan benefit, is conditioned on the employee having a similar benefit from another source

3. The cafeteria plan benefit is not provided pursuant to a salary reduction agreement or an agreement to forgo increases in compensation, including (but not limited to) agreements commonly known as flexible spending accounts (FSAs) or premium conversion options; and

4. The employee elects to receive the cafeteria plan benefit, instead of cash.

Conclusion

Attempting to offer a cafeteria plan in either Puerto Rico or New Jersey is more complicated than it may seem at first glance.  Employers and Third Party Administrators should carefully review any arrangements that purport to satisfy the applicable rules pertaining to cafeteria plans.  It would be prudent to seek confirmation from regulators and/or outside counsel before concluding that such arrangements will accomplish the desired tax savings.

Health savings accounts (HSAs) provide a tax-favored means for individuals to save and pay for medical expenses not covered by insurance. In order to contribute to an HSA, the individual must be enrolled in a specially defined type of plan called a high deductible health plan (HDHP) and have no other health plan coverage (other than certain limited types of permitted coverage such as vision, dental, accident, specified disease, and certain fixed indemnity coverage).  While the premium for the HDHP may be only slightly lower than the premiums for health plans with a lower deductible, the tax savings from the HSA is what generally makes these arrangements attractive.  HSAs were first available starting in 2004. Since then, as traditional health coverage premiums have continued to increase, interest in these types of consumer driven health plans has increased. Survey data indicates that in 2017, 43.7% of persons under age 65 with private health insurance were enrolled in an HDHP, including 18.2% who were enrolled in an HDHP with an HSA.[1]  House passage of proposed HSA improvement legislation (the “HSA Bills”) in July could resolve many potential compliance issues and make HSA/HDHP arrangements even more accessible and easier to use.

This article provides a brief overview of HSAs and addresses key legislative developments based on the HSA Bills.

1. What is an HSA?

An HSA is a tax-favored account that is established through a bank or other qualified financial institution.   Often, insurance companies that offer high deductible health plans that are compatible with HSAs partner with financial institutions that serve as custodians for HSAs.  Similar to an individual retirement arrangement (IRA), HSAs are owned by the individual account holder. This means that (unlike health FSAs) any unspent funds remain in the account and accumulate from year to year, with earnings based on how the HSA is invested.  Because HSAs are owned by individual account holders, they are also portable (that is, they remain the property of the individual even if the individual changes employers or retires).  Also similar to an IRA, upon death, the HSA may be transferred to a beneficiary. 

2.  How are HSAs taxed?  The Triple Tax Trifecta

Contributions made to an HSA by eligible individuals are deductible for federal (and most state) income tax purposes (regardless of whether the individual itemizes deductions).  Employer contributions (including pre-tax salary reductions) are excludable from employees’ incomes and are not subject to payroll (e.g., FICA) taxes. 

Income on amounts held in an HSA accumulates on a tax-free basis until withdrawn from the account.

Distributions from an HSA for qualified medical expenses are tax free. In order to qualify, these expenses must not be reimbursed from another source and must be incurred after the HSA is established.  The requirement that an expense be incurred after the HSA has been established has caused some administrative difficulty related to the timing of the HSA establishment that would be addressed by the proposed HSA Bills.  Non-qualifying distributions are includible in income and are also subject to an additional 20% excise tax penalty.  The additional 20% tax does not apply to distributions made after the individual account owner reaches age 65, becomes disabled, or dies.  Thus, for such individuals, if the HSA is not needed for medical expenses, it may be used to supplement retirement income. 

3.  Who can establish an HSA?

In order to contribute to an HSA, the individual must be covered by an HDHP and no other health plan, other than certain limited types of coverage.  Currently, individuals who are enrolled in Medicare (including Medicare Part A) are not entitled to contribute to an HSA. This is another limitation that would be addressed by the HSA Bills.

4. What is an HDHP?

An HDHP is a health plan that does not pay any benefits (other than for certain preventive care) before the deductible is met.  The individual is responsible for 100% of covered medical expenses (other than permitted preventive care) until the HDHP’s deductible is met.  The HSA Bills would open the door to certain limited benefits for onsite and retail clinic care, direct primary care, chronic care expenses, and certain fitness and exercise-related expenses.

An HDHP must also satisfy dollar limits on the deductible and maximum out-of-pocket (OOP) expenses, as summarized in the following table.  These dollar limits are adjusted annually for cost-of-living changes.  Applying the OOP limit looks a little complicated, because there are two different limits that apply:  one under the definition of an HDHP for HSA purposes, and the other under the Affordable Care Act (ACA) that applies generally to medical plans. As a general rule, the HDHP need merely comply with whichever limit is the most restrictive. 

High Deductible Health Plan Limits

Here are a couple of additional points to keep in mind on the definition of an HDHP: 

·       Separate deductibles for individuals in a family under an HDHP:   Some family health plans have separate deductibles for each individual as well as an overall deductible for the entire family.  Under this type of plan, if the deductible is met for any individual family member, then the plan pays benefits for that individual, even if the higher family deductible is not met. For this type of plan to qualify as an HDHP, both the family deductible and the (so-called “embedded”) individual deductible must be at least the minimum family deductible. 

o   For example, suppose in 2018 a family health plan has an overall deductible of $4,000, but pays benefits for any particular individual subject to a deductible of $2,000.  This plan does not qualify as a HDHP.  The individual deductible would need to be at least $2,700.

·       Interaction of HDHP OOP limit and ACA OOP limit:  HDHPs are subject to both the HDHP OOP maximum and the ACA OOP maximum that applies generally to health plans.  The limits, unfortunately, are not the same and apply in somewhat different ways.  Under federal agency rules, the ACA individual OOP maximum must be applied separately to each individual under a family plan.  The interaction of these two rules means that HDHPs must comply with the lower of the two limits.

o   Example:  Suppose in 2018 a family health plan has an OOP limit of $13,300.  This plan satisfies the OOP max for a HDHP.  However, in order to satisfy the ACA rules, the plan must also have a separate OOP limit for each individual of no more than $7,350. 

5. What types of coverage in addition to the HDHP are permitted?

HDHPs are intended to make individuals more aware of and involved in their health care decisions by ensuring that the individual has “skin in the game” for medical expenses before the deductible is met. Thus, in general, individuals may not have health coverage in addition to an HDHP and also qualify for an HSA. The HSA helps to fill the gap by providing a tax-favored means of saving for medical expenses not covered by the HDHP.

A limited exception applies, however, for certain types of permitted insurance and permitted coverage.  Under this exception, individuals can have certain types of coverage and still be eligible to contribute to an HSA. Permitted insurance and coverage currently includes:

·       Accident and disability coverage

·       Insurance coverage for a specified disease (e.g., cancer) or illness (sometimes called “critical illness” coverage)

·       Hospital indemnity insurance coverage that pays a fixed amount per day (or other period) of hospitalization

·       Dental and vision care

·       Long-term care

The HSA Bills would open the door to individuals with bronze and catastrophic plan coverage, coverage that provides a limited amount of specified expenses before the deductible applies (e.g., $250 individual and $500 family), certain limited benefits for onsite and retail clinic care, direct primary care, and certain fitness and exercise-related expenses.

6.  What are the HSA contribution rules? 

The maximum permitted HSA contribution varies based on whether the coverage is self-only or family coverage, and is subject to adjustment for inflation. 

HSA Annual Contribution Limits

The HSA Bills would increase these amounts so that contributions could be made potentially all the way up to the employee’s out-of-pocket exposure. 

Individuals age 55 and older and not enrolled in Medicare may make an additional $1,000 contribution each year. This amount is not indexed for inflation.  Spouses who are both eligible to contribute to an HSA cannot make this additional contribution to the same account. Each spouse needs to have a separate account in order for both spouses 55 or older to make the additional $1,000 contribution.   The HSA Bills would simplify this by allowing the additional contribution to go into either spouse’s HSA.

Both employers and employees may contribute to an HSA.   Total combined contributions cannot exceed the maximum contribution limit. 

Employer contributions may be subject to nondiscrimination rules that require the employer to make “comparable contributions” for comparable participating employees in the HDHP.    In practice, these comparable contribution requirements seldom apply, as most employers take advantage of an exception to these requirements that applies where employees are allowed to make salary reduction contributions through a cafeteria plan.

7. What medical expenses can be paid tax-free from an HSA?

In general, qualifying medical expenses for HSA purposes are out of pocket medical expenses incurred after the HSA is established.  For HSA purposes, medical expenses are defined in the same way that medical expenses are defined under the federal tax laws for purposes of the itemized deduction for medical expenses (without regard to the adjusted gross income limitation on deductible medical expenses).[3]  Under this definition, medical expenses include the cost of diagnosis, cure, mitigation, treatment or prevention of disease and the cost for treatments affecting any structure or function of the body.  Thus, for example, qualified medical expenses include amounts paid to medical care providers before the deductible under the HDHP is met and for any co-payments or co-insurance after the deductible is met.  Qualified medical expenses also include medical expenses that are not covered by the HDHP, such as vision or dental benefits (if not covered).  There is no complete list of qualifying medical expenses; however, the IRS has provided a listing of common expenses in IRS Publication 502.

Individuals can receive tax-free distributions for qualifying medical expenses, even if they are no longer eligible to contribute to an HSA.  Qualifying medical expenses also include expenses incurred by the HSA owner’s spouse and dependents. 

There are also some important limitations on medical expenses that can be paid tax-free from an HSA:

·       Insurance premiums, including for the HDHP, do not qualify for tax-free treatment, unless the premiums are for: 

o   Long-term care insurance,

o   COBRA continuation coverage,

o   Health coverage while receiving unemployment compensation under federal or state law,

o   Medicare or other health coverage for an individual age 65 or older (other than premiums for a Medicare supplemental or Medigap policy).

·       Medicines that can be legally purchased without a prescription (over-the-counter medicines) cannot be reimbursed from an HSA unless the individual gets a prescription for the medicine.  Insulin may be paid for by an HSA without a prescription. The HSA Bills would allow OTC medicines to be an eligible medical expense without a prescription.

·       The medical expenses must be incurred after the HSA is established.  Medical expenses incurred before the HSA was established don’t count, even if the individual was HSA eligible when the expense was incurred.  As a result of this limitation, HSA eligible individuals may want to establish their HSA as soon as possible. The requirement that an expense be incurred after the HSA has been established has caused some administratively difficulty related to the timing of the HSA establishment that would be addressed by the proposed HSA Bills.

8.  Are HSAs subject to ERISA?

Whether an HSA is subject to ERISA depends on the level of involvement of the employer. The Department of Labor (DOL) has issued guidance that employers may follow so that their HSAs are not subject to ERISA.  Most employers structure their HSA program in accordance with the DOL guidance in order to avoid triggering ERISA application to the HSA.  Note that a group HDHP offered by the employer is likely to be a group health plan subject to ERISA even though the corresponding HSA may not be. 

Under DOL guidance, an HSA will generally not be subject to ERISA if the following six requirements are satisfied: 

·       Establishment of the HSA is completely voluntary on the part of the employee.

·       The employer does not limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the federal tax laws.

·       The employer does not impose conditions on utilization of HSA funds beyond those permitted under the federal tax laws.

·       The employer does not make or influence the investment decisions with respect to funds contributed to an HSA.

·       The employer does not represent that the HSAs are an employee welfare benefit plan established or maintained by the employer.

·       The employer does not receive any payment or compensation in connection with an HSA.

Conclusion:  An HDHP coupled with an HSA program may be an attractive choice for many employers and employees.  Surveys indicate that such arrangements are becoming more popular as HDHP coverage becomes more predominant.  Stay tuned for future articles as we provide an update of new HSA developments.

Legislation in the House.

On July 25, 2018, the House of Representatives passed two bills supported by ECFC which contain many provisions favorable to health savings accounts (HSAs), flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs):   the “Restoring Access to Medication and Modernizing Health Savings Accounts Act of 2018” (H.R., 6199) and the “Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act of 2018.” (H.R. 6311).  Another article in this issue of the Flex Reporter will detail the provisions of these bills.

The House was also to consider H.R. 3798, the Save American Workers Act of 2017, which would change several provisions of the Affordable Care Act (ACA). Most important to ECFC members is that this bill would further delay the implementation of the ACA’s excise tax on high cost employer health plans (often referred to as the “Cadillac Tax”) by another year, so that the tax will not become effective until 2023.  The bill was scheduled to be taken up by the House during the second week in September, but Hurricane Florence caused the House to adjourn for a few days so that a vote could not be taken.  As of the date of this article, the House has not yet taken up this legislation, but when the legislation is brought before the full House, it will undoubtedly pass.  Given that this bill amends the ACA in a way that Republicans like, it is certain that the bill will come before the House before the mid-term elections to give Republican members something to talk about in their reelection campaigns.

Prospects in the Senate.

There are no plans for the Senate to take up the House-passed bills before the mid-term elections.  This is not troubling, as one reason the House is passing bills now to send to the Senate is so that these bills can be considered as part of the mix of must-pass year-end legislation.  It is unlikely that these bills could be passed on a stand-alone basis, since the effective threshold for passing legislation is 60 votes and Democrats are unlikely to vote with Republicans just before mid-term elections that may give them majority status in 2019.  Consequently, proponents of these bills will try to get them included in any last-minute must-pass packages of legislation coming before the Senate where the 60-vote threshold will be easier to meet.  In a positive light, the retirement of long-time HSA champion Sen. Orrin Hatch may lead Senate leadership to include some HSA provisions in an end-of-year bill as a tribute to Senator Hatch, particularly those HSA provisions that passed the House in July.  ECFC will continue our efforts to have the Senate address all these bills when ECFC members fly-in to Washington in late September.

Mid-Term Elections.

There are many theories about how the mid-term elections will turn out.  Some say that the mid-term elections will be a referendum on President Trump, and, depending on what you think about the polling data, you can conclude about whether Republicans will maintain control or Democrats will win a majority.  The current polling data for the House of Representatives indicates that Democrats may take control of the House.  Knowing that, Republicans are trying to energize their base by pointing out that if the Democrats take control of the House that they will likely impede President Trump’s agenda and may even try to impeach the President.  Similarly, Democrats are activating their base in a similar manner, saying Democrats in control of the House will provide an effective check on the Trump Administration.   (Efforts by President Trump, his lawyers and allies in Congress to impede or stop the Mueller investigation provide more reasons why Democrats will be energized in this election.)  From my reading of polling data and discussions with Washington insiders on both sides of the aisle, I’m thinking that the Democrats have a strong likelihood of taking control of the House of Representatives.

The Senate is more difficult to call. Remember that Republicans have only a one vote majority in the Senate.  However, Senate Democrats have more seats to defend than Republicans and a number of those seats are in states that President Trump carried in the general election, such as West Virginia, Missouri and Montana.  However, recent polling has indicated that Democrats may have a chance to win a majority in the Senate.  The current fight over the confirmation of Judge Kavanaugh to the Supreme Court, including allegations of sexual misconduct when Kavanagh was in high school, may also change the dynamics of the Senate races with it being difficult to judge what the fallout will be as the nomination progresses in the Senate.

What does this mean for ECFC’s legislative agenda, particularly if the Democrats gain control of one or both Houses of Congress?  I think that ECFC is well positioned whatever happens in November.  ECFC’s advocacy efforts in Congress have focused on how consumer directed health accounts are a middle-class benefit and not only for the rich, and these efforts have paid off in both Democrat and Republican offices.  There is bipartisan support for FSAs and HSAs.  Most importantly, there is clear bipartisan support for eliminating the Cadillac Tax.  Furthermore, if control flips due to the November midterm elections, there may be added impetus for Congress to pull together a large end-of-year bill while Republicans still control the process.  ECFC’s efforts will be to make sure that our issues are included in that end-of-year legislative package.

When I was Benefits Tax Counsel at the Treasury Department from 2001 to 2005, I was well aware of the employee benefits community’s requests for detailed guidance on all issues relating to retirement and health benefit plans.  (John Hickman and Christine Keller were regular visitors to my office, particularly when the legislation establishing health savings accounts was enacted.)  Administrators of retirement and health benefit plans want to know the rules, so they can administer complaint plans.  Things haven’t changed since then, but now in my current role as ECFC’s Legislative and Technical Director I’m one of the people pestering the current Benefits Tax Counsel, Rob Neis, for more guidance.

Not everyone likes or wants guidance from federal regulators.  One of President Trump’s early executive orders was to reduce the amount of regulations issued by the government, and the business community applauded this action.  Recently, there has been a change in the way tax regulations are to be issued.  Most federal regulations must be reviewed by the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget (OMB) to perform a cost-benefit analysis of the regulation.  Most regulations issued by the Treasury Department and the Internal Revenue Service were carved out of this ORIA review and were instead reviewed by the Treasury Department’s Office of Tax Policy.  Treasury’s Office of Tax Policy is very well versed in the issues surrounding retirement and health benefit plans which meant that the review went smoothly.  The new review process requires that all Treasury Department and IRS regulations be reviewed by OIRA.  OIRA must complete its review within 45 days of submission of the regulation.  There is a process for expedited review within 10 days if the Secretary of the Treasury after consultation with the OIRA Administrator designates a regulation for expedited review.

This change in the review process means an additional level of review of regulations issued by the Treasury Department and the IRS.  This will likely slow down the pace of issuing regulations.  While many in the business community will applaud less regulation, administrators of benefit plans, such as ECFC members, will not be as pleased with this new process.  This may mean that it will take more time for regulations to be issued by the Treasury Department and IRS – something ECFC members may not appreciate.

Inflation Adjustment Factors Reduced By 2017 Tax Reform Legislation.  One of the many provisions in the tax reform bill enacted on December 22, 2017 as part of “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, Pub. L. 115-97, 131 Stat. 2504 (often referred to as the “Tax Cuts and Jobs Act”) was a provision which modified the manner in which inflation adjustments are to be calculated for various dollar limitations under the Internal Revenue Code.  The impact of that modification was to reduce the rate used to determine these inflation adjustments, effectively reducing these increases in 2018 and future years.

How the HSA Maximum Deduction Limit Was Impacted by the Tax Reform Inflation Adjustment Changes.  The maximum deductible HSA contribution amount is one of the dollar limitations affected by this change.  The Internal Revenue Service is required under Code Section 223(g)(1) to announce the annual inflation adjustments for HSAs by June 1 of the preceding calendar year.  The annual limitations for 2018 were announced in Revenue Procedure 2017-37 on May 4, 2017 (prior to the enactment of the Tax Cuts and Jobs Act), with the annual limitation on deductible contributions to an HSA set at $3,450 for an individual with self-only coverage under a high deductible health plan and $6,900 for an individual with family coverage.  After the enactment of the Tax Cuts and Jobs Act, the IRS released updated inflation adjustment calculations on March 2, 2018 in Revenue Procedure 2018-18.  The updated inflation adjustment factors resulted in the annual limitation on deductible contributions for an individual with family coverage being reduced by $50 to $6,850.  The annual limitation on HSA contributions for an individual with self-only coverage remained the same for 2018 after application of the Tax Cuts and Jobs Act’s updated inflation adjustment calculations.

Relief from the Treasury Department and IRS.  After hearing from the HSA community (including ECFC), the Department of the Treasury and the IRS determined that implementation of the $50 reduction would impose numerous unanticipated administrative and financial burdens.  They issued Revenue Procedure 2018-28 on April 26, 2018 to provide relief from the reduction of the annual limitation on deductible HSA contributions and guidance on various administrative issues connected with the updated contribution limit.  With the Revenue Procedure:

1. Taxpayers may continue to treat the 2018 limitation for HSA contributions for individuals with family coverage as $6,900 as initially announced in Revenue Procedure 2017-37, rather than $6,850 (the limitation that reflected the Tax Cuts and Jobs Act’s updated inflation adjustment factors as announced in Revenue Procedure 2018-18).
2. A taxpayer who had made HSA contributions in excess of $6,850 and received a distribution of the amount of the contribution in excess of $6,850 and the earnings thereupon may treat that distribution as a mistake of fact and recontribute that distribution to the HSA by April 15, 2019.  The distribution would not be included in the taxpayer’s income nor subject to the 20 percent additional tax under Code Section 223(f)(4), nor would the repayment be subject to the excise tax on excess contributions under Code Section 4973(a)(5).  The repayment is not required to be reported on IRS Form 1099-SA or IRS Form 8889 and is not required to be reported as an additional HSA contribution.  An HSA trustee or custodian is permitted, but is not not required to allow taxpayers to repay mistaken distributions. It’s my opinion that it will be highly unlikely that an HSA trustee or custodian that distributed the $50 excess contribution prior to the April 26, 2018 release of the relief provided by Revenue Procedure 2018-27 will refuse to accept a repayment of those amounts and by their refusal to accept the repayment subject the taxpayers to additional tax.  It would be bad customer relations to have rushed out a corrective distribution that was shortly thereafter determined to be unnecessary, and to then refuse to allow a correction of that hasty corrective distribution.
3. If contributions are made to an HSA by an employer or by the employee pursuant to a cafeteria plan election, the employer could treat the maximum contribution limit as $6,900 and no corrective distributions need be made.
4. If contributions are made to an HSA by an employer or by the employee pursuant to a cafeteria plan election in an amount in excess of $6,850 and a distribution is made in 2018, the distribution must be used to pay for qualified medical expenses.  No portion of that distribution can be considered a return of an excess contribution of amounts in excess of $6,850 – the limit reflecting the Tax Cuts and Jobs Act’s updated inflation adjustment factors as set out in Revenue Procedure 2018-18.

 

Takeaways from this Exercise.  First off, this shows that when a tax law change results in an unanticipated tax increase or compliance nightmare, the affected community should let the Treasury Department know about it and suggest ways in which the unanticipated result could be alleviated.  The HSA community did that with many letters going to the Treasury Department asking for relief.  Secondly, speed in addressing tax law changes may not always be best course of action when there are unanticipated changes in the tax law.  While alerting taxpayers of the issue is advisable, determine what the latest time that a correction can be made.  Trade associations like ECFC can tell you whether relief is anticipated before a correction is needed, so that you may not have to take corrective action.  In this instance, a correction was not required until the filing date of the 2018 income tax returns in 2019, so there was ample time to make corrections if the Treasury Department was not willing to step in and provide the relief it did.

Priority Guidance Plan

Mr. LaGarde spoke about the priority guidance plan that runs from July 1 to June 30 of each year. There are 29 new projects. Some items have already been published, while other items are new or remain on the list from previous years. He invites the public to comment on what IRS and Treasury should focus on and what guidance is most important.

Tax Cuts and Jobs Act

 Next, Mr. LaGarde mentioned the Tax Cuts and Jobs Act (TCJA) and how this law provides that no employer deductions are allowed for any qualified transportation fringe provided by the employer. Publication 15-B clarifies that this includes benefits provided through an employer reimbursement or through pre-tax compensation reduction arrangements.

Presidential Executive Order

 Mr. LaGarde also discussed the October 12, 2017 Executive Order promoting health care choice in competition across the U.S. Three areas are identified: association health plans, short-term limited-duration insurance, and health reimbursement arrangements (HRAs). Proposed regulations have been published on association health plans (January 5, 2018) and short-term limited-duration insurance (February 21, 2018). The agencies are still working on proposed regulations regarding HRAs, although IRS Notice 2017-67 (regarding QSEHRAs) was issued last year.

Recently Published Guidance

 In closing, Mr. LaGarde mentioned two recently published guidance items. IRS Notice 2018-12 clarifies that a health plan providing benefits for male sterilization or male contraceptives, without a deductible or with a deductible below the minimum for an HSA-qualified high-deductible health plan (HDHP), is not a qualified HDHP for HSA purposes because these benefits do not qualify as preventive care. Transition relief is provided for periods before 2020. Revenue Procedure 2018-18 reduced the 2018 HSA contribution limit for those with family coverage from $6,900 to $6,850. Treasury has received comments that there are challenges as a result of the change and suggesting alternatives. Note: As discussed in Bill Sweetnam’s article in this edition of the Flex Reporter, On April 26, 2018, Revenue Procedure 2018-27 was issued which restored this limit to $6,900.

Notice 2018-12

Mr. Knopf expounded on Notice 2018-12, released March 5, 2018, which addresses male sterilization benefits and HSA eligibility. He noted by way of background that to contribute to an HSA, an individual must be covered by an HDHP, which is a plan that does not provide any health benefits other than preventive care before a minimum deductible has been met. For 2018, that deductible is $1,350 for self-only coverage and $2,700 for other than self-only coverage. However, a number of states have insurance laws mandating first-dollar coverage of male contraceptives or vasectomies. In addition, some plans may have provided these benefits assuming they were preventive care. The Affordable Care Act (ACA) requires certain preventive care benefits, including contraception for women, but those requirements do not include male contraception.

Notice 2018-12 clarifies that benefits for male sterilization or contraception are not preventive care for purposes of the HSA rules. However, IRS and Treasury recognize there are state laws requiring this coverage and that HSAs would be impossible for individuals in those states, so the Notice provides transition relief for periods before 2020.

Mr. Knopf added that existing guidance has focused on safe harbors—i.e., statements that specific types of care will qualify as preventive. In fact, the only actual standard in any guidance is that the treatment of an existing condition is not preventive. For this reason, the Notice also asks for comments about what appropriate standards might be. Further guidance might explain how to determine whether something is preventive care. He also cautioned the audience about policies that look like HDHPs, but on closer inspection there is first-dollar coverage for one or more benefits (e.g., certain prescription drugs may be provided for free).

Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)

Mr. Knopf’s last topics was IRS Notice 2017-67, which provides comprehensive guidance on the rules for QSEHRAs. These arrangements allow employers with fewer than 50 full-time and full-time equivalent employees in the prior year to provide tax-favored funds to employees for health care. The employer may not offer any other employer-provided group health plan, which includes another HRA, a health FSA, or excepted benefits (e.g., vision or dental coverage). Offering other employer-provided group health plans will disqualify an employer from providing a QSEHRA.

Employers may not provide QSEHRAs to former employees or retirees. Offering medical coverage to retirees (e.g., a retiree-only HRA) does not disqualify an employer from offering a QSEHRA to current employees; however, employers may not offer a group health plan to employees of one employer in a controlled group and a QSEHRA to employees of another employer in that controlled group.

In order to provide reimbursement for medical expenses, the employee must have minimum essential coverage (MEC) through separate health coverage. (While a QSEHRA can be used to pay for premiums for an individual policy that is MEC, using the QSEHRA as a sole source of health coverage is not allowed.) Substantiation must be required from the employee that they have MEC before the QSEHRA can provide any funds to the employee. Family members must also have MEC in order to receive reimbursements. Then, with each request for reimbursement, employees must attest that MEC continues. Attestations may take place at the time of reimbursement or the employer may allow employees to substantiate by a specific date.

As with an HRA, carryovers of unused amount are allowed. Although QSEHRAs must be provided on the same terms to all employees, the carryover does not fail to satisfy the same terms requirement. (If some employees have a carryover and the next year they have $1,000 because of the carryover while others have $500, that’s okay.) However, the carryover may not increase the amount available to an employee if the carryover plus the QSEHRA limit for the following year exceeds the statutory limit. Family members’ expenses may be covered by the QSEHRA. Family members include spouses, dependents and children to age 26. QSEHRAs cannot reimburse expenses of non-tax dependent domestic partners.

QSEHRAs may not be funded by salary reductions. Even though the QSEHRA may not cover the entire health insurance premium, a pre-tax salary reduction program cannot be put in place to enable employees to pay the remainder of the premium with pre-tax dollars. That would be an employer payment plan.

Medical Expenses

Ms. Tombul spoke about eligible medical expenses by first confirming that IRS has had draft regulations since 2008 and have yet to move forward with them. They are working on them, however there are competing priorities with tax reform and limited staffing, so the regulations have been taken off the published guidance list. Nothing is likely to be issued this year.

Ms. Tombul started off with an overview of the basic rules for how to determine what are eligible medical expenses under IRC Section 213(d). She noted that the standard for prevention under IRC Section 213 is a proximate relationship test—i.e., what is the risk that the disease will occur if the prevention measure is not taken. This is a very limited standard and differs from the standard under the HSA rules, so it may be easier for an expense to qualify as diagnosis, cure, mitigation, or treatment, or for the purpose of affecting a structure or function of the body. The IRS is looking at adjusting the current standard.

Ms. Tombul also noted that reimbursements are permitted for transportation that is primarily for and essential to medical care, including lodging (up to $50 per night) if the care is provided by a physician in a licensed hospital and there is no significant element of personal pleasure in the travel. Relevant factors include the individual’s motive or purpose, the origin of the expense, doctor’s recommendation, and whether the treatment directly bears on the physical condition? Was the treatment proximate in time to the onset of the recurrence of the disease? She also reviewed the “but for” test and commented that IRS may want to provide a list of items that are deemed medical expenses but appear to fall outside the current published rules, or perhaps a more general list of qualifying items.

She also discussed specific expenses, including the expenses of a pregnancy surrogate, in utero surgery for an unborn baby, sunscreen, insect repellent, and condoms. Regarding condoms, Ms. Tombul said she did not think they affected a structure or function of the body, and did not diagnose, mitigate, treat, or prevent anything other than another person’s pregnancy, unless the individual’s spouse had a sexually transmitted disease. This position is more restrictive than prior informal comments from IRS officials.  She also acknowledged that guidance is needed regarding what is a medicine or drug. With no guidance, it is best to take a cautious approach, although if “drug facts” appear on the label, the item is probably a medicine or drug. Regarding lactation services and supplies, Ms. Tombul commented that breast pumps and bottles to collect the milk are considered medical expenses, but extra bottles to store the milk would be considered food storage expenses that could not be reimbursed.Regarding telemedicine, she noted that there is no proximity requirement for medical appointments, so a medical appointment that does not take place in person should qualify. She also said that a sports physical should qualify as medical care because any kind of physical is a diagnosis. The same analysis applies to blood tests, breathalyzers, and oximeters, which measure substances in the blood and body. Devices to treat sleep apnea would also qualify as medical care.

Additional Issues

In response to a question from the audience about correcting HSA mistakes, Mr. Knopf said that expenses that are mistakenly paid before the HDHP deductible is met should not be included in income immediately. Instead, an attempt should first be made to get the money back from the HSA holder and then, the expense should be treated like any other business debt. And when asked when we might see IRS activity on the cafeteria plan regulations, he remarked that it’s always good to have a new set of proposed regulations every 20 years or so.

AARP Litigation

 On May 17, 2016, the EEOC published final rules under the ADA and Title II of GINA regarding the application of those laws to employer-sponsored wellness programs.  The final rules address the extent to which an employer can offer an incentive for an employee’s or spouse’s completion of a health screening (e.g., biometric screening or a health risk assessment that includes disability-related inquiries) as part of a voluntary wellness program.  Generally, these rules allow employers to provide an incentive for completing a health screening of up to 30% of the premium for employee-only coverage.

On October 24, 2016, the American Association of Retired Persons (AARP) filed suit against the EEOC seeking to block the implementation of the ADA/GINA final wellness program rules.  The AARP argued that the level of permitted incentives under those rules is too high for the program to be “voluntary” under the ADA and GINA and that the EEOC failed to adequately explain and support its decision regarding the appropriate incentive level.  In a decision issued on August 22, 2017, the United States District Court for the District of Columbia granted the AARP’s motion for summary judgment, concluding that the EEOC failed to provide a reasoned explanation of why 30% was the appropriate percentage to apply when determining whether a wellness program that offers incentives is voluntary under the ADA and GINA.  According to the court, “this would likely be a different case if the administrative record had contained support for and an explanation of the agency’s decision, given the deference courts must give in this context.  But, ‘deference’ does not mean that courts act as a rubber stamp for agency policies.”  The court considered setting aside the rules, but decided that it was not appropriate to do so during the middle of the year because of the disruption that it would cause to employers and employees who had relied on the rules when designing their programs and deciding whether to participate in order to earn the incentive.  Instead, the court elected to leave the rules in place but remand them to the EEOC for further consideration, which could include rewriting the rules or providing additional justification for the permitted level of incentives.On September 21, 2017, the EEOC filed a status report with the court indicating that it expected to issue new proposed rules by August 2018 and final rules by October 2019, and that it anticipated that employers would have until 2021 to comply with the new rules.  Displeased with the slow timetable proposed by the EEOC and in response to a motion filed by the AARP, the court revisited the issue of the appropriate remedy for the deficiencies in the wellness program rules.

“If left to its own devices, then, EEOC will not have a new rule ready to take effect for over three years – not what the Court envisioned when it assumed that the Commission could address its errors ‘in a timely manner.’ . . . But an agency process that will not generate applicable rules until 2021 is unacceptable.  Therefore, EEOC is strongly encouraged to move up its deadline for issuing the notice of proposed rulemaking, and to engage in any other measures necessary to ensure that its new rules can be applied well before the current estimate of sometime in 2021.”

Given these concerns, by order dated December 20, 2017, the court elected instead to set aside the challenged portions of the rules effective January 1, 2019.

On March 30, 2018, the EEOC filed another status report with court.  In that report, the EEOC states that it is considering a number of policy choices, but there are no current plans to issue new proposed regulations (despite its earlier statement that proposed regulations would be issued by August 2018).  The EEOC indicates that it may issue proposed regulations in the future or may leave the current regulations in place (with the incentive section vacated by the court’s order).  The EEOC also notes that it is still awaiting confirmation of several key EEOC appointments, including Janet Dhillon, President Trump’s nominee to head the EEOC, suggesting that the EEOC may not take any action until the confirmation process is complete.  In short, the EEOC makes no attempt to reassure the court that it is working diligently to resolve the issues related to the wellness program rules.

Employer Wellness Program Planning for 2019

Employers who are trying to plan their wellness program strategy for 2019 are caught in what appears to be a stand-off between the EEOC and the court.

 It is clear from the EEOC’s most recent status report that employers are unlikely to receive new proposed rules or any other guidance from the EEOC regarding wellness program incentives before the end of the year.  Even if new proposed rules were to be issued, it is almost certain that they would not be finalized before the court’s order takes effect January 1, 2019.  The court may respond to the EEOC’s March status report, but there is no reason to believe that the court will withdraw its order vacating the rules or delay the effective date of the order.  As a result, employers who are planning for 2019 must do so with the assumption that a portion of the final rules dealing with the use of wellness program incentives under the ADA and GINA will not be in effect at the beginning of next year.

If no additional guidance is issued, in 2019, employers must still comply with portions of the wellness program rules.  The court’s order struck only the portion of the wellness program rules that address the employer’s ability to provide incentives or inducements to an employee or an employee’s spouse under the ADA and GINA for completing health screenings.  This means that employers must continue to comply with the portions of the wellness program rules that were not impacted by the court’s order.  For example, the employer must still comply with the ADA and GINA notice and/or consent requirements.

Because the court’s order set aside the portion of the wellness program rules dealing with incentives, we return in part to the legal landscape that existed before the rules were first proposed.  At that time, it was generally accepted that under the ADA employers could offer some type of incentive for completing a health screening or asking disability related inquires (such as in a health risk assessment), but the amount of the permitted incentive was unclear.  With regard to GINA, it was less clear that an employer could offer an incentive to an employee for the spouse’s completion of a health risk assessment or health screening because the EEOC had indicated its view that spouse’s medical information was considered to be genetic information as to the employee.  In the past, the EEOC took the lead in challenging what it viewed as non-compliant wellness program incentives.  Going forward, that is not likely to happen if the incentive complies with the wellness program rules because the EEOC would be challenging its own guidance.  Employers have several options:

• Use the full 30% incentive.  Employers could elect to use the full 30% incentive notwithstanding the court’s order.  Employers who adopt this approach may be challenged although arguments can be made as to why this amount would not render the program involuntary or is otherwise permitted.  This challenge is not likely to come from the EEOC as long as the incentive complies with the wellness program rules, but instead from an individual employee or class of employees.  There are a handful of court decisions on these issues, but only one that addressed the issue directly (Seff v. Broward County).  In that case, the court indicated that the wellness program incentive was voluntary under the ADA, based on the bona fide benefit plan exception. 
• Use an incentive that is lower than 30%.  Employers could elect to use an incentive that is based on a lower percentage (e.g., 10% or 20%).  In court filings, the AARP and the court acknowledge that some level of incentive may be permitted without violating the ADA or GINA.  The risk of challenge is less with a lower percentage.  At the same time, it is important to note that the court did not indicate that the 30% incentive level was per se incorrect under the ADA and GINA, just that the EEOC failed to provide adequate evidence that the 30% level was the correct level.
• Eliminate the incentive.  Employers who want to avoid any risk on this issue could elect to limit the use of incentives with respect to health screenings (which include associated lab tests, biometric screenings and physicals) and disability related inquiries.  Employers could continue to use incentives that reward employees or spouses who do not use tobacco (as long as blood tests are not used to determine tobacco use) or participate in certain health activities, like wellness educational programs and fitness challenges.  These incentives would have to comply with other applicable laws, including the HIPAA nondiscrimination wellness program rules.  This may not be an appealing option for employers who view the results of a health screening as the motivator for participating in these other activities.

Employers who elect to continue to offer an incentive (regardless of the amount) that is potentially subject to the ADA and or GINA must still comply with the non-incentive portions of the ADA and GINA final regulations (e.g., the notice and/or consent rules).  Further employers who offer an incentive that is potentially subject to the ADA will want to make certain that they have structured their wellness program documents to take advantage of the argument that the incentive is permitted under the ADA safe harbor for bona fide health plans.  In the event the incentive is challenged, this will provide another avenue for the employer to argue that the program does not violate the ADA.  In addition, given the uncertainty that exists with respect to the use of incentives, employers should make certain to that any employee communications describing the incentive reserve the right to change or terminate an incentive (even after it is earned).

The proposed regulation’s expanded definition of “employer,” could pave the way for more employer groups to satisfy the definition of bona fide association.  But that only addresses the federal regulatory tier.  A MEWA, including a health plan sponsored by a “bona fide” association (i.e., an AHP), must still wrestle with the various laws of the states in which it operates to determine if it must comply and, if necessary, does it comply with the applicable state laws.  

The proposed regulations are a necessary first step to actually increasing the number of single ERISA plans sponsored by “bona fide” associations that cover its employer members. But it will take state “cooperation” to make more bona fide association health plans a reality.  In many situations, to accommodate AHPs as defined in the proposed regulation, state statutes and/or state agency rules will require change. Just as states have historically varied widely with respect to regulating MEWAs, they probably will vary widely with respect to their cooperative efforts.
 
Conclusion
So what do we do now?  We wait until final regulation is issued.  The final regulation may differ significantly from the proposed regulation with respect to key provisions.  As noted above, a large volume of comments were submitted.  In the meantime, be cautious regarding new schemes, even if they purport to follow the proposed regulation.  The final regulation will likely be different, and possibly in significant ways.  Unlike other proposed regulation situations, this proposed regulation does not include a statement that it can be relied upon in the interim.  Also, be cautious about programs that have existed for a while.  Just because they exist or are related to a reputable group of employers does not necessarily mean they are compliant with the requirements as they exist today.  And programs that are complaint under today’s standards may be negatively impacted by the final regulation. We also will have to look carefully at any transition rules.

The Mental Health Parity and Addiction Equity Act (MHPAEA) amended ERISA, the Internal Revenue Code, and the Public Health Service Act to require most group health plans to satisfy certain requirements with respect to financial and treatment limitations.  These requirements are generally designed to ensure parity between medical/surgical and mental health and substance use disorder benefits—and in some cases, to ensure better treatment for mental health and substance use benefits. Since the enactment of the MHPAEA, the DOL has issued final regulations and numerous FAQs to assist stakeholders with MHPAEA compliance.  Then, in 2016, Congress passed the 21st Century CURES Act, which—among other things—amplified certain notice and disclosure requirements in the MHPAEA, clarified that eating disorders are mental health conditions, and required the Department of Labor to solicit feedback and provide compliance tools for stakeholders. 

Now, the DOL has issued three additional; items designed to assist stakeholders with compliance:

• An MPHAEA Enforcement Overview;
• A proposed FAQ (comments are due by June 22); and
• An MHPAEA self-compliance tool.

These three very helpful items couldn’t come at a better time, as DOL audit activity continues at a high level (as evidenced by the enforcement overview) and the litigation trend seems to be increasing.  The rules are very complicated and stakeholders continue to struggle to make sense of it all, despite all of the guidance. This article addresses the key points of the most recent guidance identified above, but we encourage stakeholders to become familiar with all of the guidance to help mitigate the ever increasing risk associated with the MHPAEA.

Enforcement Overview¹

The enforcement overview provides stunning statistics regarding DOL activity with respect to the MHPAEA that underscore the need to become intimately familiar with the MHPAEA rules.  The DOL notes that it closed 347 investigations in 2017 and out of those, 187 involved plans subject to MHPAEA—each of which was reviewed for MHPAEA compliance.  Of those 187 MHPAEA compliance reviews, the DOL found 92 violations.    The message: if your plan is subject to the MHPAEA and if you are audited, the DOL will review for MHPAEA compliance and there is good chance that a violation will be cited. 

The enforcement overview also proclaims the work the DOL is doing to pursue voluntary compliance. The DOL employs over 100 benefit advisors who provide education and compliance assistance. Those benefit advisors answered 127 public inquiries in 2017 related to MHPAEA.  The goal of the benefit advisor is to obtain compliance without referring such matters for investigation.

Proposed FAQ ²

The proposed FAQ focuses on two very important aspects of the MHPAEA:  non-quantitative treatment limitations and disclosure.   

Non-quantitative treatment limitations

The non-quantitative treatment limitation (“NQTL”) requirements of the MHPAEA have proven to be one of the most challenging aspects of MHPAEA compliance because they are not based on objective mathematical formulas like the financial and quantitative treatment limitation requirements.  The MHPAEA final regulations indicate that a group health plan (and a health insurance issuer) may not impose a NQTL with respect to mental health/substance use disorder benefits in any classification unless, under the terms of the plan—as written and in operation—any processes, strategies, evidentiary standards, or other factors used in applying the NQTL to mental health/substance use disorder benefits in the classification are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in applying the limitation to medical/surgical benefits in the same classification.  It has been quite the challenge to identify, first and foremost, what constitutes a NQTL. This FAQ and the prior FAQs issued by the DOL have gone a long way to help address that challenge.  In addition, it has been a challenge to determine whether the plan uses comparable standards and strategies, and whether they are applied more stringently to mental health/substance use benefits.  This proposed FAQ helps to clarify those issues to some extent. 

Highlights include:

• The FAQ clarifies that an exclusion of all benefits for a particular condition or disorder is not a NQTL for purposes of the MPHEA rules.  For example, a general exclusion under a plan for items and services to treat bipolar disorder, including prescription drugs, is not an NQTL even though the plan provides prescription drug benefits for medical/surgical benefits.
• When a plan covered services or treatments for eating disorders but excluded coverage for eating disorder services provided in an inpatient, out-of-network setting outside of a hospital (e.g., a residential treatment center), the plan violated the NQTL rules when the plan covered such treatments for medical/surgical conditions when there is physician authorization and determination that the treatment is medically appropriate based on clinical standards of care. 
• A plan’s terms indicate that claims for medical/surgical and mental health/substance use disorder benefits are denied as “experimental and investigative” when no professionally recognized treatment guidelines define clinically appropriate care for a condition and fewer than two randomized controlled trials are available to support the treatment’s use for that condition.  For example, autism satisfies the plan’s definition of mental health conditions.  In the past year the plan denied all autism related ABA therapy claims as experimental and investigative even though more than one professional recognized guideline existed and more than two randomized trials exist to support the use of ABA therapy to treat autism but approved any medical/surgical claim for benefits that meets the same criteria.  The plan violates the NQTL rules.
• The plan violates the NQTL rules when it sets dosage limits for buprenorphine, an opioid addiction treatment drug, that are less than the professionally-recognized treatment guidelines but sets dosage limits for all medical/surgical drugs at or above the professionally recognized guidelines.
• Where a plan requires a participant to have two unsuccessful attempts at outpatient substance use disorder treatment to be eligible for inpatient benefits but only requires one unsuccessful attempt at outpatient medical/surgical benefits, the plan violates the NQTL rules unless the plan can demonstrate that evidentiary standards or other factors were utilized comparably to develop and apply the differing step therapy requirements.
• A plan violated the NQTL rules where it paid the same reimbursement rates for approved physician and non-physician providers of medical/surgical benefits but paid a lower rate for non-physician providers of mental health/substance use disorder services than it paid physician providers of the same services.
• A plan violated the NQTL rules where it ensured that participants could schedule an appointment with a network provider within 15 days for non-urgent medical/surgical care but did not ensure the same with respect to network providers of mental health/substance use disorder care.
Disclosure The MHPAEA final regulations require plan administrators to disclose the criteria for medical necessity determinations with respect to mental health/substance use disorder benefits to any current or potential participant, beneficiary, or contracting provider upon request.  In accordance with ERISA Section 104(b), these documents must be provided within 30 days to avoid a penalty.  This FAQ reminds stakeholders that “instruments” governing the plan required to be disclosed under Section 104(b) of ERISA would include any information on medical necessity criteria for medical/surgical benefits, as well as the processes, strategies, evidentiary standards, and other factors used to apply an NQTL with respect to medical/surgical benefits and MH/SUD benefits under the plan.  This FAQ also provides a cite to a revised disclosure model form, which was required by the Cures Act, and indicates that OMB is requesting comments on the Form, which are due June 22, 2018.  You can find the revised form at https://www.reginfo.gov/public/do/PRAICList?ref_nbr=201706-1210-001.

Self-Compliance Tool ³

The DOL has also issued an updated self-compliance tool for MHPAEA compliance.  The tool asks a series of questions designed to help stakeholders determine whether the plan complies with the MHPAEA.  Below is a summary of helpful reminders and tips included in the tool:

• Medically assisted treatment for opioid disorder and treatments for eating disorders are subject to the MHPAEA;
• Plans may divide the outpatient classifications into two sub-classifications—office visits and other.  Sub-classifications for specialist office visits and general physician office visits are not permitted;
• A plan may divide benefits furnished on an in-network basis into sub-classifications that reflect network tiers (such as preferred provider and participating provider).
• The 2/3 substantially all test is based on payments expected to be paid for the plan year; running that test across a “book of business” is permitted only when the plan has insufficient data to do a reasonable projection of future claims.
• Plans should clearly define which benefits are treated as medical/surgical and which are mental health/substance use.
• Factors that may be included in any NQTL design include but are not limited to:
  • Excessive utilization;
  • Recent medical escalation;
  • Provider discretion in determining diagnosis;
  • Lack of clinical efficiency of treatment or service;
  • High variability in cost per episode per care;
  • Claim types with a high percentage of fraud.

All stakeholders should take the time to carefully review this self-compliance tool and apply it to the plans they sponsor or administer.


^{1.https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/mhpaea-enforcement-2017.pdf↩
2.https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-39-proposed.pdf↩
3.https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-guide-appendix-a-mhpaea.pdf↩}

However, first, I follow up the discussion from the September 2017 Flex Reporter of whether insect repellent is an allowable expense for prevention of disease.

Is There a Case for Bug Spray, Part II—What is a Disease?

In the September 2017 Flex Reporter, I analyzed the IRS position on what constitutes medical care as “prevention,” and suggested a new approach.  I also concluded that insect repellent, commonly called bug spray, along with sunscreen, should qualify as prevention even under the current narrow standard of “an individual has, has had, or has an imminent probability of developing” a disease.

I noted that sunscreen and bug spray have no personal use, nor should they be regarded as merely promoting general good health.  Their sole purpose is to prevent sunburn and insect bites.  Based on common experience, we know that if you don’t use sunscreen there is a very high (imminent) probability, practically a certainty, that you will develop the medical condition of sunburn.   Similarly, if you don’t use insect repellent, under certain conditions you are highly likely to get bitten and to suffer welts and itching, an adverse reaction in the body.

In the September article I did not elaborate further on what is a disease.  Neither §213 nor the regulations define “disease” but provide some guidance.  The statute disallows cosmetic surgery because it does not promote the proper function of the body.  The regulations provide that expenses for medical care must be for the purpose of preventing or alleviating a physical or mental defector illness.

The IRS has provided information on what constitutes a disease over the years, in bits and pieces, through formal and informal guidance.   It has long considered injuries and learning disabilities to be defects or illness, see, for example, PLR 9852015.  Rev. Rul. 2002-19, 2002-1 C.B. 778 concludes that obesity is a disease, based on information from the National Institutes of Health, the World Health Organization, and the FDA. Rev. Rul. 99-28, 1999-25 I.R.B. 6, holds that treatment for addiction to nicotine qualifies as medical care. Therefore, nicotine addiction must be a disease.

The one comprehensive discussion of what constitutes a disease is in O’Donnabhain v. Commissioner, 134 T.C. 34, although it represents the thinking of certain Tax Court judges and not the IRS.  The court was addressing whether gender identity disorder (GID) is a mental illness.  It determined that it is, based largely on two factors: (1) GID creates a significant impairment to normal functioning, and (2) it is listed as a disease in a “medical reference text,” in that case the Diagnostic and Statistical Manual of Mental Disorders (DSM-IV).

I think a couple of useful rules of thumb result from this background:  (1) a disease may be thought of as a mental or physical dysfunction regardless of the cause, and (2) a condition that is identified in the DSM or the equivalent International Statistical Classification of Diseases (ICD-10) is a disease.

Accordingly, it should go without saying that what sunscreen and bug spray prevent are diseases.  Failure to use sunscreen results in the imminent probability of developing sunburn. Failure to use insect repellent results in the imminent probability of being bitten and suffering welts, itching, and other adverse reactions.  These conditions are certainly dysfunctions of the body.

Additionally, sunburn and insect bites are both listed in ICD-10 (2018 ICD-10-CM Diagnosis Code L55.9, sunburn, unspecified; 2018 ICD-10-CM Diagnosis Code W57.XXXA, bitten or stung by nonvenomous insect and other nonvenomous arthropods).  Accordingly, sunscreen and bug spray should qualify as medical care that prevents disease.

Medical Care Basics

 Definition—What You Need and Don’t Need

The categories of medical care that a TPA is most likely to see are expenses that are:

1. Primarily for diagnosing, curing, mitigating, treating, or preventing physical or mental disease (or an injury), or affecting a structure or function of the body;
2. Transportation primarily for and essential to obtaining medical care; and
3. Long-term care services, which assist an incapacitated individual to perform the activities of daily living such as eating, dressing, and walking.

Additionally, the medical care must be provided to the participant, spouse, or dependent, and the expense must be proximately related to actual medical care (the medical care may not be speculative or conditional, or to occur in the distant future).

Imposed on these basic requirements are certain disqualifications.  The expense may not be for a cosmetic procedure or product (one that improves appearance and does not meaningfully promote the proper functioning of the body, unless there is a deformity resulting from a disfiguring illness or injury).  The expense may not be for something that is illegal under any applicable law.  And if the expense is for a drug (whatever that is) the participant must have a prescription from an authorized health care practitioner.

What is often confusing for participants, and even occasionally a benefits professional, is what is not required for an expense to qualify as medical care, especially compared to the requirements of health insurance or programs such as Medicare.  The expense does not have to be any of the following.

1. Medically necessary.  This is the term I most hear inappropriately applied in evaluating whether an expense is medical care under §213.  Medical necessity is a concept insurance companies use to limit claims.  Under the tax law, if the primary purpose is to diagnose, treat, etc., disease, the product or procedure does not have to be “medically necessary.”  The exception to this rule is transportation expenses, which must be “essential” to medical care.
2. The least expensive alternative.
3. Medically effective or accepted by conventional medicine.  Thus, experimental treatments, alternative treatments, unconventional treatments, even treatments that are highly unlikely to have any effect, may be reimbursed if the primary purpose is to treat, etc., a disease.  The example I often cite is the Tax Court case allowing a medical deduction for Navajo sings to treat cancer.  A product also does not have to be approved by the FDA, unless lack of FDA approval makes it illegal.
4. Delivered by conventional means.  Telemedicine, on line consultations, high tech devices, etc., are not automatically disqualified because they are innovative.
5. Provided or recommended by an MD or even a licensed health professional—see, Navajo sings—unless the expense is for a drug.
6. Ordinarily covered by insurance.  Coverage by health insurance policies or Medicare is based on policies and concerns that do not correspond to the §213 rules.

The IRS illustrated some of these principles in Rev. Rul. 2007-72, 2007-2 C.B. 1154, which deals with an expensive full body scan as diagnosis.  The ruling holds that the full body scan qualifies as medical care, stating:

In Situation 2, the amount B pays for the full-body scan is for diagnosis and qualifies as an expense for medical care even though Bis not experiencing symptoms of illness and has not obtained a physician’s recommendation before undergoing the procedure. The procedure serves no non-medical function and the expense is not disallowed because of the high cost or possible existence of less expensive alternatives.

Note, however, that the ruling specifically observes that the full-body scan “serves no non-medical function.”  In dealing with items or services that may or may not be used primarily for medical purposes, some of the circumstances that are not required as a general matter may be helpful, as discussed in the next section.

Distinguishing Medical from Personal Expenses

 The requirement in §213 that expenses must be “primarily for” diagnosis, treatment, etc., comes into play when dealing with products or services that may be medical or non-medical, so-called dual-purpose items.  These items and services are often inherently personal, such as travel (a vacation), air conditioning, or a high tech device like a smart watch or tablet.  In other cases, products or services that may be thought to promote the proper function of the body or prevent disease (exercise-related expenses, dietary supplements) are considered to merely promote general good health rather than diagnosing, treating, etc., a specific disease.  Promoting general good health is treated as personal and not medical.

For an expense for a personal use item to be reimbursable, the participant’s primary purpose must be to treat, cure, mitigate, diagnose, or prevent a disease or illness or to affect a structure or function of the body.  The IRS applies the objective Havey factors (from the Havey case) to evaluate what is a participant’s primary purpose.

1. Has a doctor or other medical professional determined that the participant (or a family member) has a disease or illness?
2. Has a medical professional recommended the item or service to treat, mitigate, etc., the medical condition?
3. Is the item or service medically effective?
4. What is the proximity in time between the diagnosis of the medical condition and the purchase of the item or service?
5. Are there less expensive alternatives?

Note that some of these factors are among those that are not inherently required for an expense to be for medical care.  However, they are relevant for distinguishing medical from personal expenses.

If the Havey factors indicate that a participant’s primary purpose is medical, the participant still must establish that she would not have purchased the item or service if the participant or family member did not have a medical condition (the ”but for” test of the Jacobs case).  In other words, if the participant would have incurred the expense without the medical condition, the expense does not qualify for reimbursement.

Thus, if an individual who has a medical condition that a hot tub (or massage therapy, or exercise) would mitigate, he can’t treat the expense as medical unless he would not have paid it in the absence of the medical condition.  If he already has a hot tub or gym membership, or regularly has massage therapy for general health, he fails the but for test.  If an individual buys a smart watch with a blood pressure monitoring function, he is not entitled to reimbursement unless he can overcome the substantial hurdle of establishing that he would not have bought the watch otherwise.

The primary purpose and but for tests are used to distinguish medical from personal on a case by case, individual by individual, basis.  What is this particular participant’s primary purpose for incurring this expense?  Thus, even items that are used for a medical purpose 99.9% of the time could be personal for a particular individual, for example someone who buys bandages or crutches for a Halloween costume or a wheelchair to use as a prop in a play.

Note: With the advent of debit cards, it is necessary to designate products that are treated as always medical, even though there is always the possibility that someone may buy one of these products for another, off-the-wall, purpose.   When I was with the IRS I signed an information letter (Information Letter 2009-0209) that attempted to express this idea:

Items that have no purpose other than to treat a disease, illness, or mental or physical defect may qualify as medical care. Thus, treatments for acne, incontinence, arthritis, constipation, colds and sinus problems, dehydration, and indigestion, and support braces and shoe inserts for injured or weakened body parts, most likely will qualify as medical care under § 213(d). Products that have no purpose but to treat existing skin conditions (in contrast to preventing the development of the condition), such as eczema treatments, also should qualify as medical care. Wheelchair cushions may be considered a necessary accessory to the wheelchair.

It would be useful if the upcoming regulations include a safe harbor or de minimis rule that disregards the possibility of insignificant non-medical use of essentially medical products

Allocating Reimbursement to Medical and Personal Use

If a participant has both medical and personal purposes, it nonetheless may be permissible to reimburse part or even all of the expense.

Personal use is minor and incidental—full reimbursement

If the personal use is minor and incidental, reimbursing the entire amount may be appropriate.   The classic example of this situation, which is in the regulations, is the value of meals and lodging (especially meals) while in a hospital or nursing home, which are disregarded.  I also put “enhanced” condoms (which I was asked about more than once as a government representative at conferences) in this category.  (In other words, disregard the “enhanced” feature of the condoms.  After all, it’s not necessary to choose the least expensive alternative!)

Medical purpose is the only purpose—full reimbursement

Similarly, if the medical purpose is the only purpose for a particular participant, we might consider that any personal benefit is incidental and reimburse the entire amount.  The but for test helps determine that the medical purpose is the only purpose.  A good example of this situation is massage therapy.  The participant develops a medical condition, the doctor recommends a massage to mitigate the condition, the participant makes an immediate appointment for a massage, the participant has never before gotten a massage.  It is not necessary to allocate reimbursement because massage therapy also has personal benefits.

An interesting Tax Court case applied this reasoning in the case of a swimming pool.  All the circumstances pointed to the fact that the taxpayer installed a swimming pool only for medical reasons.   He installed the pool only after developing a medical condition, he built only the basic pool necessary for the medical use, and he used it only for therapy.  The taxpayer was able to deduct the entire cost of the pool.

Other examples of items in this category (have a personal benefit but participant’s purpose may be entirely medical):  service animals, gym memberships, dance lessons, hot tubs, travel.

Primary purpose is personal not medical—no reimbursement

 In this category I would put items that are overwhelmingly personal but may have a minor medical function, for example the smart watch that happens to take blood pressure.  It’s likely that the participant’s primary purpose in buying a smart watch is personal and the blood pressure feature is incidental.  In that case, I would reimburse nothing.

Participant flunks the but for test—no reimbursement

No reimbursement should be made if the participant would have paid the expense even in the absence of the medical condition.  These situations often involve items or activities that the participant already has or does.  The fact that a participant develops a medical condition that would be helped by something he already has or engages in does not turn it into medical care.  Thus, the massage therapy would not qualify if the participant regularly got massages for general health.   I particularly like the Tax Court case involving the long-time golf-playing taxpayer who developed emphysema, for which his doctor recommended light exercise.   The fact that he now had a medical condition that might be helped by the light exercise he got from golfing did not transform his golf expenses into medical expenses.  Most of the swimming pool Tax Court cases are losses for the taxpayers for this reason.  Of course, this issue also could arise when the participant already has a medical condition when purchasing something, for example if he has high blood pressure when he purchases a smart watch but doesn’t really buy it for its blood pressure function.

Dual purpose items, personal use item with medical features—allocate

Often a participant will purchase an item for personal use but will choose a particular item because of its medical features.  A classic example of this situation is the automobile with handicapped controls.   A school with special programs for autistic or learning-disabled children is another good example.  Shoes and mattresses are more modest items in this category.  In these cases, the cost must be allocated between personal and medical.

An allocation also may be appropriate if a participant has substantial medical and personal purposes for an expense, or if medical and non-medical services are bundled into one amount.  Charges for continuing care facilities, which include medical care as well as living expenses, and patient advocacy services are examples of this type of expense.

Keep in mind that, to receive any reimbursement, a participant must have a substantial medical purpose for an expense, and the but-for test applies to the medical purpose.   Thus, if a substantial purpose for a participant buying a smart watch, rather than another kind of watch, is the blood pressure function, and she wouldn’t have bought that particular watch but for the blood pressure function, she may be reimbursed for an allocable part of the cost.

How much to allocate

 Any reasonable method may be used to allocate the cost of an item between medical and personal use.  The easiest and most common method is the excess cost of the item with a medical feature over the item (or a similar item) without the medical feature.  Another method is to compare the fair market value of items with and without the medical features, although this information may be more difficult to obtain.

In the case of services, an excess cost may be difficult to determine.  For example, a childbirth class may provide instruction that qualifies as medical care (preparing for birth) and other instruction that is personal (maintaining general health and wellbeing or infant care).   If all childbirth classes include non-medical as well as medical information, it will be difficult to compare childbirth classes with and without these features.  However, it may be possible to value the non-medical services separately if they are available separately.

The Burden Is on the Participant

 A last note is a reminder that the participant has the burden of establishing that he satisfies the primary purpose and but for tests, and how much of a dual-purpose expense is for medical care.  In the allocation situation, the participant must provide evidence of excess cost or separate value, and the items or services being compared must be substantially similar, except for the medical features.   It may be difficult to do this if similar items vary widely based on a large number of possible features.  For example, it may be difficult to compare identical or substantially similar mattresses with and without a medical feature.  If the participant is unable to establish the medical part of the cost, no reimbursement is required.

While substantiation for HSA expenses lies with the account holder; for FSAs and HRAs, third party substantiation is required. The IRS has put out substantial guidance on what constitutes third party substantiation for debit card transactions. However, many ECFC members continue to report frustration when taking over business from another Third Party Administrator (TPA) who may or may not substantiate transactions according to IRS issued guidance. We’ve all been there…in fact, at ECFC’s August Symposium, a special session called “Substantiation: Snares, Traps and Pitfalls” addressed the fact that some industry practitioners were not utilizing best practices and even used prohibited practices of claims substantiation. In that session, attendees were encouraged to network with the industry practitioners to understand where complaints originate and find out what they are actually doing in order to be able to best serve participants.

So instead of simply repeating the compliance requirements, let’s look at some real-life situations that have been reported by various ECFC members. Here are some of the top complaints we see that surface during an administrative takeover, why they are bad for your business, and proactive approaches to keep your practice running smoothly.

“You asked for a receipt and I have provided it. Not sure what the issue is. The receipt is from my chiropractor; what more do you need and why? What do you think I am buying?”

The flex plan is sponsored by the employer; and in most cases, the employer is the named plan administrator. Proper administrative procedures are outlined by the IRS and must be followed. All transactions from an FSA or HRA require third party adjudication. It’s not that TPAs are nosy – but for starters, the expenses have to be provided during the applicable plan year, be for an eligible participant, spouse, or dependent, and be for medical care. Explanation of benefits (EOB) statements are usually requested because they provide all the required information. This one form is typically available to participants from their insurance carrier’s website and usually provides everything needed to clear the card transaction.

Complaints abound when it comes to required documentation.  The prior TPA may never have requested documentation at all, or may not have required documentation that contained all of the required information such as the date of service, or perhaps it did not matter to the prior TPA that the date of service was in another plan year. Participants need to provide documentation.

A new client came on board and the benefits manager started to hear participant complaints about having to provide documentation for their debit card claims. Participants complained that it was their money and the TPA does not have a right to view their private medical information. The noise was so loud that we had to involve senior managers in multiple meetings with the client to discuss possible solutions. This employer did not have this kind of noise before changing to our administration. The client also asked us to stop quoting the regulations and that we must be wrong. They wanted it to go back to the way it was before it implemented services with us.

This is a tough one. First, if you can find out what TPA they came from, you may want to reach out to find out what processes they used that differ. Or, have the client explain to you differences in how you process card transactions. For example, were carrier files in place? Co-pay tables? Was the card perhaps restricted to Inventory Information Approval System (IIAS) merchants only?

If you find that contacting the previous TPA is not going to happen, or that the previous TPA was simply not requesting required documentation on card transactions, you have an uphill battle, but I’d suggest an in-person meeting where you can present all the auto-adjudication features you support, including any communication materials you’ve developed to improve the participant experience. At the same time, you can walk through the various IRS guidance that exists on appropriate debit card use.

“Just what do you think I was doing at the doctor? Why do I need to submit this? You make it such a pain to access my own money, I will not elect to use an FSA in the future.”

This one may or may not be the fault of the previous TPA. We’ve all heard the same complaints…it’s a dental (or fill in the blank) expense—-of course it was for an eligible service. Although the previous administrator made it easy to use the debit card, if they didn’t obtain additional information on transactions that couldn’t be substantiated using IRS-approved methods, both the employer and employee are at considerable risk to pay taxes on ineligible flexible benefit reimbursements through the card and the employer may have to pay interest and penalties on untaxed wages as well. Remember that card transactions, unless they are IIAS transactions, must be substantiated using either carrier file matching, copay matching, or recurring transaction logic.

“If the card is smart enough to know where they are using it (i.e. Merchant Category Codes) why doesn’t the administrator know what the services are for, rather than asking for the participant to provide documentation?”

In fact, the debit card services TPAs provide are very sophisticated. When merchants load their product codes into the IIAS website, TPAs know with certainty that the participant purchased an eligible health care item that is an IRS eligible expense. About 89% of all debit card swipes are auto-adjudicated. Requests for receipts generally are for purchases at dental and vision offices. In fact, the Special Interest Group for IIAS Standards (SIGIS) is exploring expanding IIAS to vision services now.

Again, the best defense here is to suggest an in-person meeting where you can present all the auto-adjudication features you support, including any communication materials you’ve developed to improve the participant experience. Focus on dental and vision expenses and the need to determine exactly what was obtained (i.e., teeth whitening is largely cosmetic and Rayban sunglasses are awfully trendy, but neither is an eligible health care expense).

“HR was not pleased with the previous TPA, but participants liked the experience because they never had to submit claims. Participants seem to have no idea that documentation is necessary.”

Employers that are not comfortable with their TPA should ask questions and demand real answers to their questions until they receive them. Sometimes, as we also have all experienced, a client will push back on our explanation of IRS guidance “…the regulations are just proposed, after all…” TPAs and employers should review code sections, as well as IRS published rules, regulations, or other guidance that specifically answer their concerns about any issue with the administration of their plans.

Again, an in-depth meeting with the client may be useful here. Did they have carrier files in place that may have automatically paid any co-pays, deductibles and out-of-pocket costs from the FSA or HRA? It may be that there is a simple disconnect in how the plan was implemented….or, it could be that there was an inappropriate practice in place.

Participants may feel that substantiation of claims is too difficult and it has led to end of year issues with taxable items. Most flexible benefit plan years end in December. This is already a stressful time of year and having to produce receipts or having to find them often makes participants anxious.

Ensure that reminders go out as soon as it is determined that a card swipe needs a receipt. That could mean a text message immediately following the card swipe. The longer you wait to send the request for documentation, the less positive your participants’ experiences will be.

“I didn’t authorize you to turn my card off.”

Just after new clients are calmed down about the documentation requests, cards start to get deactivated because participants have not provided the proper receipts.  Clients want to know why all of these cards are now deactivated because they never had this issue with their prior TPA. Seems like the previous TPA did not deactivate the debit card when transactions were not properly substantiated. Now, you look like the “bad” guy.

There are many variations on this same theme. “My card was never shut off before….” is a common one. Let’s face it, this is the most common participant complaint. You know, “I’m going to die because my card won’t work for my $10 Rx copay for amoxicillin…” It’s possible that the prior TPA allowed a longer time frame during which a participant could provide the additional information needed to substantiate a claim. Or, perhaps carrier files were in place that increased auto-substantiation rates and eliminated many of the transactions needing further substantiation. Also, remember that recurring co-pays or copay matching (especially in the example of a $10 Rx copay) could account for a better card experience as well.

Is your administrative software capable and properly set up to take advantage of all the auto-substantiation methods permitted by the IRS? If needed, call your software vendor to discuss IRS Revenue Ruling 2003-43 to ensure compliance with approved auto-substantiation methods. Be sure and review the settings you have with your vendor. Some vendors erroneously auto adjudicate small claims and require a change order to eliminate auto-substantiation of de minimis transactions. You could unknowingly be running afoul of IRS guidance.

There may be no specific guidance on how long a transaction can be in a “need more information” status before the card is deactivated, but the first step outlined by the IRS is to deactivate the debit card when there is an improper transaction. Generally, TPAs do not use that as a first step; but after the employer and TPA have made “reasonable efforts to obtain substantiation,” the card should be deactivated.

The employer should then demand repayment of the improper payment, followed by withholding the amount from the participant’s pay - only to the full extent permitted under applicable law. Also, an offset approach can be used to substitute a “good” claim for the unsubstantiated claim.

The last step is to treat the payment as any other business indebtedness, which generally means including the amount as taxable wages on W-2.  However, this tactic is not to be used for every card swipe that requires collection – only when all other methods fail to produce a repayment to the plan.

“My reimbursement check is not for the full amount of my claim”

Participants submit their claim online (because their card is not active) and the reimbursement is used to offset the debit card claim they did not provide documentation for in the proper timeframe. OK, everybody stand back; this involves math. The fact is, this is the very scenario the IRS clarified at an ECFC conference. A participant has received, let’s say, $50 of merchandise with a healthcare debit card swipe at a 90% merchant. Because these are not sent as IIAS transactions, which assure that the items purchased are eligible health care items, they require additional documentation to be reviewed by the TPA. The swipe is never substantiated by the participant despite repeated requests for documentation, and is deemed to require repayment by the participant.

The TPA deactivates the debit card, requiring the participants to file subsequent requests for reimbursement the old-fashioned way, by submitting documentation and a claim. It’s absolutely permissible to offset the unsubstantiated transaction with a future claim. It’s like the TPA following the participant to the bank. The approved reimbursement for the new “good” claim is $100; however, the plan needs to be repaid for the $50 unsubstantiated card swipe.

The TPA could wait for the participant to send a check for $50, but it’s much easier for the participant and the plan to simply collect the money before the check even reaches the participant. Short story, the participant receives a check for $50 with the extra $50 being retained by the plan for the unsubstantiated card swipe.

TPA Takeover Woes

It is hard to defend proper substantiation practices when the client may have heard a different story from another TPA.  The client just wants the noise to go away, and in some cases may threaten to terminate your services because the noise is too loud.  It does not matter how many times you provide the information about regulations or stats on how many claims are auto adjudicated following the rules.  Last year, I dealt with a new client’s participant who had over 60 debit card claims that auto adjudicated, but then was asked for documentation on a dental expense. She filed a claim with her HR department and claimed we were harassing her for using her own money.

We definitely hear “I’ve never been asked for receipts for this type of thing before.” I think this happens most often when the expense is at a dentist or clinic. They assume that because it’s at a health provider office it should go through.

Another complaint surfaces when participants no longer are able to submit dependent care expenses ahead of time (before services are rendered) and get recurring reimbursements once deposits are received. We often hear that “other TPAs” allow submission of a claim that shows they pay weekly and then just reimburse them on a recurring basis. Remember that dependent care services cannot be reimbursed until the care has been rendered.

The best gift you can give to new administrative takeover clients is to discuss these issues openly prior to beginning administration. Explain what they will hear from their participants and your processes for substantiating card swipes – start to finish. No surprises. Be sure and understand any auto-adjudication processes they had in place at the previous TPA. Establishing co-pay tables or carrier files can go a long way towards minimizing the noise.

You might also point employers to their plan document. Plan documents should spell out the correct procedure for adjudicating debit card claims. When the process is incorporated into the plan document, the administrator – whether that is the employer or a TPA – has to follow the plan document’s terms.

Make sure participants receive the same, complete, information about their experiences. How about a flyer that contains the five biggest myths about healthcare debit cards? Beat them to the punch and let them know what to expect.

As members of an industry that polices itself, ECFC members should use this as an opportunity to review claims substantiation rules and their legal basis. There is no excuse for sloppy debit card administrative practices. And, if all else fails, maybe the next give-away at your client meeting could be your logo on some noise-cancelling earplugs.

HSA Contribution Limit

Unfortunately, on March 5, 2018, the IRS issued Revenue Ruling 2018-18, in which it lowered the 2018 maximum HSA contribution for individuals with family HDHP coverage by $50 – from $6,900 to $6,850.  Fortunately, the IRS did not change the 2018 contribution limit for individuals with individual HDHP coverage – that amount remains at $3,450 – or the HSA out-of-pocket maximum or minimum deductible thresholds.

Employees with family HDHP coverage who elected to contribute the full $6,900 amount for 2018 will need to decrease their elections to $6,850.  It appears permissible for employers to automatically do so for the employees.  This will not be without administrative burden and expense, however, as employers will generally want to notify employees of this action and payroll systems may need to be re-programed to reflect the new maximum limit.  We understand that Treasury/IRS is sympathetic to these concerns and is currently determining whether to provide transition relief.  If the employees’ elections are not reduced, both the employee and employer could be subject to penalties – the employee for contributing too much to his or her HSA and the employer for not withholding income or employment taxes on the $50 when it did not have a reasonable belief that such amounts were excludable from wages.

Employees who already contributed the full $6,900 prior to March 5, 2018 will need to withdraw the $50 excess contribution (including interest on the $50 excess contribution) as taxable income to avoid penalties.  This should simply be a matter of the employee notifying the custodian/trustee that he/she had an “excess contribution” and requesting distribution of the same.  The custodian/trustee will reflect the excess contribution and associated interest on the Form 1099-SA.   It does not appear that employers need to treat any excess $50 contribution that was made before March 5, 2018 as taxable wages for W-2 purposes because the employer presumably had a reasonable belief at the time of the contribution (prior to March 5) that the contribution was excludable from wages.  Further guidance from the IRS on this point would be helpful, including whether there is any relief from penalties in this situation.

Health FSA Contribution Limit

Revenue Ruling 2018-18 did not address the health FSA employee contribution limit.  It is unclear if the reason is because the IRS determined that Chained CPI-U does not impact the health FSA calculation enough to decrease the threshold or whether it will issue the health FSA thresholds separately from the HSA thresholds, like the IRS typically does each year.  We hope to hear from the IRS soon about whether or not health FSA limits will change for 2018, but for now the threshold remains at $2,650.

If the IRS does reduce the threshold, it could have even more of an administrative impact than the HSA contribution reduction because, due to the universal coverage rule, some employees may have already received reimbursements from their health FSA of the full $2,650 amount.  This means employers may need to collect a repayment from the employee, and if the employee does not repay the employer, the employer may need to treat the excess amount as taxable wages.  This becomes more difficult, however, where the employee is no longer employed by the employer.

Cadillac Tax Contribution Limit

Revenue Ruling 2018-18 did not address the Cadillac Tax dollar thresholds.  Because the Cadillac Tax does not go into effect until 2022, we do not expect to hear from the IRS on those thresholds any time soon.

Section 132(f) allows employers to offer qualified transportation fringe benefits to their employees in the form of qualified parking, transit passes, transportation in a commuter highway vehicle between an employee’s home and work location (“vanpooling”), and qualified bicycle commuting reimbursements.  The Act makes three key changes to the tax treatment of qualified transportation fringe benefits.

1. Loss of Employer Deduction for Qualified Transportation Fringe Benefits

Under the new law, employers are no longer allowed to take a deduction for qualified transportation fringe benefits provided to employees (other than qualified bicycle commuting reimbursements which are paid or incurred between 2018 and 2025).  The loss of the deduction applies to (1) employer-provided qualified transportation benefits, like paid parking, regardless of whether the benefit is paid directly or reimbursed by the employer, and (2) any qualified transportation benefit which is paid by the employee on a pre-tax basis through a salary reduction agreement.  Initially, some questioned whether this provision is intended to prevent an employer from taking a deduction for wages used by an employee to pay for qualified transportation benefits on a pre-tax basis.  The IRS confirmed that this is the intent in Publication 15B, Employer’s Tax Guide to Fringe Benefits (for use in 2018), which it released on March 6, 2018.

This provision does not apply to qualified bicycle commuting expenses which are paid or incurred after December 31, 2017 and prior to January 1, 2026.  This means that employers may still reimburse an employee’s qualified bicycle commuting expenses (up to the annual limit) and take a deduction for the amount of the benefit that is provided.

The Act does not impact the tax treatment for employees of qualified transportation fringe benefits provided by an employer (other than qualified bicycle commuting reimbursements, discussed below).  As a result, employers may still sponsor plans which provide qualified transportation fringe benefits (e.g., parking, transit and vanpooling benefits) to employees on a nontaxable basis.  While employers have lost the deduction for qualified transportation fringe benefits, the deduction is worth less now that the maximum corporate tax rate has been reduced by the Act to 21% for tax years beginning after December 31, 2017.  At the same time, the value of the income and employment tax exclusion for employees remains the same, and employers may still benefit from the FICA tax savings on amounts used by employees to pay for qualified transportation fringe benefits on a pre-tax basis.  In addition, some cities, like New York City, San Francisco and Washington, D.C., require employers to provide mass transit benefits to employees.  Given that, it is not expected that employers will terminate their pre-tax transportation fringe benefit plans solely as a result of the changes imposed by the Act.  However, we may see employers who in the past provided only employer-paid qualified transportation benefits (e.g., employers who paid directly or reimbursed the cost of qualified parking or transit passes) shift to a pre-tax arrangement starting in 2018.

Some states, like Washington and Maryland, provide tax incentives for employers to offer qualified transportation fringe benefits.  We may see other states enact similar legislation in an effort to offset the loss of the deduction and encourage employers to offer benefits that promote mass transit.

1. Employer-Provided Bicycle Commuting Reimbursements Now Taxable Income.

The Act treats an employer’s reimbursement of qualifying bicycle commuting expenses differently.  The new law suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income for tax years beginning after December 31, 2017, and before January 1, 2026.  This means that bicycle commuting expenses which are reimbursed by an employer are still deductible by the employer but are now considered taxable income to the employee.

Under Code Section 132(f), an employer may not deduct a qualified bicycle commuting reimbursement unless the expense is substantiated as a bicycle commuting expense.  Because these reimbursements are now a taxable benefit for purposes of federal income taxes, an employer could simply provide an additional $20 in monthly wages and receive the tax deduction for the additional wages.  In that situation, the impact on the employee would be the same from a federal income tax perspective, and the employer could avoid having to substantiate any expenses as qualified bicycle commuting expenses.  For that reason, some employers may shift to simply providing additional taxable wages which can then be used by the employee to pay for the benefit.

Some states may decide to retain the exclusion from employee income for reimbursement of qualifying bicycle commuting expenses by employers.  If this were to occur, the dollar value of the benefit would be includible for purposes of federal income taxes but for the particular state(s) it would be excludable from state income taxes.  In that situation, the employer could still adopt a plan that would allow employees to pay for bicycle commuting expenses on a post-tax basis in order to take advantage of any favorable tax treatment at the state or local level.  However, third party administrators may not find it feasible to administer this type of a program, because they would have to keep track of all of the state and local laws relating to bicycle commuting expenses in order to facilitate the reimbursement under those laws.  Many third party administrators base their administration on the requirements of federal law and will not be in a position to know what states or cities require with respect to reimbursement of bicycle commuting expenses.  This limitation may also drive employers to elect to pay the employee additional wages which can then be used to pay for the benefit on an after tax basis.

1. Tax Exempt Entities Must Pay UBIT on Qualified Transportation Fringe Benefits

The third key change is a provision in the Act which requires the unrelated business taxable income of a tax-exempt entity to be increased by the amount of any qualified transportation fringe benefit for which a deduction is disallowed under section 274 of the Tax Code.  This means that tax-exempt entities may have to pay an unrelated business income tax (UBIT) on any qualified transportation fringe benefit provided to employees for which employers are no longer permitted to take a deduction (e.g., qualified parking, transit passes and vanpooling).  To avoid the UBIT, some tax exempt-entities may elect to discontinue providing qualified transportation fringe benefits (as long as they are not in a state or city that requires employers to provide such benefits) or provide the benefit in the form of additional taxable wages.

Background.  Short-term, limited-duration insurance has historically been designed to provide temporary coverage for individuals transitioning between health insurance policies. Short-term limited duration insurance plans (colloquially referred to as “STLDI”) often provide limited protection to those who enroll by paying a percentage of hospital and doctor bills after the policyholder meets the specified deductible. Historically, the deductibles are high enough to limit effective coverage provided by STLDI and drive down its cost to the purchaser.  Before the definition of STLDI was modified in October 2016, the coverage was available for a term of less than twelve (12) months.

In October 2016 during the last Administration, the Agencies issued a final rule restricting the maximum term of a short-term limited-duration insurance policy to less than three (3) months. In response, certain stakeholders expressed concerns that this shortened time limit could cause harm to some consumers, limit consumer options, and ultimately have little positive impact on insurance risk pools.

Short-term, limited-duration health insurance coverage is exempt from the definition of individual health insurance coverage under the ACA.  Therefore, it is not subject to the ACA’s individual market requirements that apply to individual health insurance plans (e.g., the mandate to cover Essential Health Benefits, the prohibition on imposing pre-existing condition exclusions, etc.).

Executive Order and Proposed Rule:  On October 12, 2017, President Trump issued an Executive Order covering association health plans, short-term, limited duration insurance, and health reimbursement arrangements. This article only addresses short-term, limited- duration insurance.  The proposed rule confirms that short-term, limited-duration health insurance coverage is not considered to provide Minimum Essential Coverage under the ACA.  This will affect consumers in 2018 whose health insurance coverage is through a short-term policy as it is still expected to be subject to the ACA’s Individual Mandate Penalty.  However, this will not be an issue after December 31, 2018, as Congress has effectively eliminated the individual mandate as part of its tax overhaul bill. The order states that STLDI is exempt from the “onerous and expensive insurance mandates and regulations included in title I of the ACA. This can make it an appealing and affordable alternative to government-run exchanges for many people without coverage available to them through their workplaces.”[3]

The proposed rule would amend the definition of short-term, limited-duration insurance, allowing insurers to offer any coverage period of less than twelve (12) months after the original issue date, including any extensions that may be elected by a policyholder (that do not exceed the coverage period of less than 12 months).  As with the current regulations, this insurance could not be renewed after the maximum period of coverage.

The proposed rule would also revise the notice that must be provided with enrollment materials for short-term, limited-duration insurance. Specifically, the proposed rule would require the use of one of two revised notice versions, depending on whether the coverage start date is before January 1, 2019. Starting in 2019, when the ACA’s individual mandate penalty is reduced to zero, certain language contained in the first version of the notice would no longer apply.  Both versions of the notice are intended to notify consumers that short-term, limited-duration policies are not required to comply with certain federal health insurance mandates, principally those contained in the ACA.

The proposed rule comments that as premiums have escalated for ACA-compliant plans, affordable choices have dwindled in the individual market.  As a result, STLDI has become more attractive to some purchasers on account of affordability.

This article will only discuss a limited number of questions raised in the preamble to the proposed rule. The Agencies asked for comments on whether STLDI should be permitted to continue beyond twelve (12) months or at a minimum be subject to a simplified renewal process.[4]   These changes would make the coverage more attractive to younger and healthier participants. Therefore, the Agencies seek comments on how the availability of this extended coverage would affect the general medical insurance market-place and the cost to other purchasers.

Conclusion: The proposed rule presents the opportunity for increasing the population covered by medical insurance.  Hopefully, the Agencies responsible for finalizing the proposed regulations can find the appropriate balance between adequate coverage and expanding coverage.
  
[1]The article draws from a previous news alert issued by The Wagner Law Group.
  Seth Gaudreau, an Associate with The Wagner Law Group assisted with this article.
[2] Seth Gaudreau, an Associate with The Wagner Law Group assisted with this article.

[3] See Exec. Order No. 13813, 82 Fed. Reg. 48385 (October 17, 2017)

[4] 83 Fed. Reg. 7437 (February 21, 2018)

Summary of current structure.  The law governing AHPs—historically referred to as multiple employer welfare arrangements (MEWAs)—is extremely complex, and allows dual regulation under both federal and state law.

AHPs currently are subject to federal regulation by the DOL under ERISA, HHS under the PHSA, and IRS under the Code.  AHPs also are subject to state regulation by Departments of Insurance under governing state statutes.

This dual regulation arose in response to structural and financial issues with MEWAs in prior decades.  Congress exempted state MEWA regulation from ERISA’s broad preemption power in 1983, and allowed this expanded oversight to prevent recurrence of such problems.

The current administration desires to open up AHPs to more organizations by relaxing some of the existing restrictions and requirements.

Purpose of the proposed regulations.  The proposed regulations follow true to the Executive Order (covered in a previous Article) with significant detail and complexity.  The DOL states that the regulations are designed to:

• Expand the opportunities for employers to band together;
• Increase competition and flexibility;
• Allow AHPs to offer “less comprehensive benefits”;
• Assemble large, stable risk pools; and
• Reduce the number of uninsured.

To achieve these goals, the proposed regulations change the landscape in the following areas

Definition of bona fide association. Currently, the DOL and HHS both have multi-factor tests to meet the definition of a bona fide association plan.  If an AHP is a bona fide association plan, it may be deemed to be a single large group plan instead of an amalgamation of separate employer plans. Large group status allows an AHP to avoid numerous ACA requirements that apply in the small group market.

The administration believes the new rules will allow self-funded AHPs to offer small employers less comprehensive benefits that will increase competition and reduce costs.  The proposed regulations will expand the definition of bona fide association plan by modifying two key requirements in both the DOL and HHS tests:

• Commonality of interest.  Employers may band together if they are either in the same trade, industry, line of business, or profession; or have a principal place of business within a region that does not exceed the boundaries of a state or metropolitan area, even if the metropolitan area overlaps a state line (such as our home of Kansas City).
• Restrictions on sponsoring association.  The sponsoring association need not be a pre-existing organization or have a purpose other than providing insurance.

Organizational structure.  The AHP must be a separate legal entity.  The AHP must have an organizational structure, bylaws or other governing documents, and must be functionally controlled by its employer members.

Expand membership to “working owners.” In a significant change, the regulations provide that an AHP may offer coverage to both employees of employer members and “working owners.” The AHP may be comprised of any combination of common law employees and working owners.

This new category of “working owner” may include a sole proprietor or other self-employed individual, so long as such worker averages at least 30 hours of personal service per week or 120 hours per month, or has earned income from the business that at least equals the cost of coverage under the plan.

Nondiscrimination rules.  AHPs must continue to comply with the health plan nondiscrimination rules governing eligibility for benefits and premiums for coverage under HIPAA and the ACA.  In addition, the regulations propose to expand the limits on the ability of an AHP to rate employer members separately based on health factors, stating that such limits undermine the aim of having the AHP act in the interest of employers.

State regulation.  States may continue to regulate health insurance carriers and the policies they offer to AHPs.  Likewise, the DOL stated that it does not have the authority to exempt self-funded AHPs from state regulation.  Therefore, the dual regulation continues, and states may regulate self-funded AHPs with respect to matters such as reserves, contributions and other funding issues.

Tax Implications. The regulations do not relax any issues under the Code.  For example, many AHPs are formed as VEBAs.  The Code requirements of single line of business and geographic locale remain unaffected by the regulations.

Comment..  The DOL requested comment on several issues in the regulation.

While most of the Affordable Care Act continues to be effective, it is unlikely that President Trump and the Republican Congressional leadership will try to repeal and replace that law.  However, there seems to be interest in improving and expanding the use of HSAs.

Administration’s FY 2019 Budget Proposal.The Trump Administration’s budget proposal for the 2019 fiscal year included a proposal that would expand who is eligible to make contributions to an HSA.  Under current law, individuals enrolled in either Medicare Part A or Medicare Part B are not eligible to contribute to an HSA.  Under the Trump Administration’s proposal, individuals who are beneficiaries of Medicare would be eligible to make contributions to an HSA or an MSA.  While a budget proposal must be enacted into law by Congress, this does show that the Trump Administration is supportive of changes to the law which would expand the use of HSAs.  I understand that the Trump Administration is also reviewing whether there are regulatory changes that could improve or expand HSAs.

HSA Support in Congress.  One of the major advocates for HSAs in Congress is Senator Orrin Hatch (R-UT). He is the Chairman of the Senate Finance Committee, where any tax legislation impacting HSAs must originate.  Chairman Hatch is the author of the most comprehensive HSA proposal, the Health Savings Act of 2017 (S. 403), which was introduced in the Senate by Chairman Hatch on February 15, 2017 and is often referred to as the “Gold Standard” bill for HSAs.  (An identical bill (H.R. 1175) was introduced in the House of Representatives by Rep. Eric Paulsen (R-MN).)  Sen. Hatch has announced that he will be retiring at the end of 2018, so he will aggressively push for his HSA bill to be passed before his retirement. I have heard that he will push for HSA provisions to be included in the Omnibus spending bill to be considered later in March. 

Sen. Hatch’s bill would expand eligibility for HSAs by allowing certain individuals eligible for Medicare, Indian Health Service assistance, and TRICARE coverage, as well as members of health care sharing ministries, to be eligible to contribute to an HSA. The bill would reverse the change made under the ACA that required over-the-counter medicines to be prescribed in order to be considered qualified medical expenses that could be reimbursed from an HSA. The bill would also permit the purchase of health insurance from HSAs. The bill would address many issues arising from the interplay between HSAs and other defined contribution health accounts. 
Other members of Congress, particularly Republican members of Congress, continue to support HSAs and have also introduced legislation impacting HSAs.  Many of the issues addressed in Sen. Hatch’s bill are also addressed in these other introduced bills.  One issue included in legislation offered by Sen. Thune (R-SD) and Rep. Dianne Black (R-TN) that was not addressed in Sen. Hatch’s “Gold Standard” bill would permit high deductible health plans to provide chronic disease prevention services to plan enrollees prior to satisfying their plan deductible – thereby making HSAs a better option for those who suffer from chronic diseases. 

Cadillac Tax Remains an Issue.  In addition, members of Congress are concerned about the impact of the excise tax on high cost health plans (the Cadillac Tax) and, based on past voting, they would support repeal of this excise tax.  Although the excise tax’s effective date has now been delayed until 2022, many expect a continued effort to include a repeal of the tax in any legislative vehicle moving through Congress. 

Re:  Qualified Small Employer Health Reimbursement Arrangements under the 21st Century Cures Act

Dear Mr. Neis and Ms. Judson:

The recently enacted 21st Century Cures Act (the “Cures Act”) amended the Internal Revenue Code (the “Code”), the Employee Retirement Income Security Act of 1974 and the Public Health Service Act to establish a new type of health reimbursement arrangement for small employers, the Qualified Small Employer Health Reimbursement Arrangement (“QSEHRA”).  Since this new arrangement is effective as of the beginning of 2017, the Employers Council on Flexible Compensation (“ECFC”) requests that the Department of the Treasury and the Internal Revenue Service (collectively, the “Agencies”) provide guidance under the Code on certain urgent issues relating to this new arrangement as soon as possible.

ECFC is a membership organization dedicated to promoting and protecting the availability of benefit choices for working Americans through account-based benefit plans which provide benefits in areas such as health care, child care, and commuting.  ECFC’s members include employers who sponsor employee benefit plans, including flexible spending arrangements, health reimbursement arrangements and health savings accounts, as well as third party administrators, health plan providers, payers, providers, payment networks, processors, financial institutions, and accounting, consulting, and actuarial companies that design or administer employee benefit plans.  ECFC member companies assist in the administration of cafeteria plan and health benefits for over 33 million employees. 

Many ECFC member companies will administer these new QSEHRA or advise employers about the establishment of these arrangements.  Consequently, we believe that it is imperative that the Agencies provide guidance as soon as possible to assist employers in determining whether they should establish a QSEHRA and plan administrators in designing procedures for the administration of these arrangements.  This letter sets out the issues regarding QSEHRAs where our members believe that immediate guidance or further information by the Agencies is warranted in order for employers to offer a QSEHRA program to their employees.  Many of these issues have come to our attention as ECFC members review the statutory provisions and answer questions from small employers that currently sponsor similar arrangements that reimburse employees for health insurance purchased on the individual market and other qualified medical expenses or are considering sponsoring such arrangements.  Consequently, we request guidance on the following issues:

Employers Eligible to Offer a QSEHRA

Only “eligible employers” may offer a QSEHRA to its employees.  Code § 9831(d)(2) of the Code.  An eligible employer is an employer that is not an applicable large employer as defined in Code section 4980H(c)(2) and does not offer a group health plan to any of its employees.  Code § 9831(d)(3)(B).

• Group Health Coverage.  The term “group health plan” in Code section 9831(d)(3)(B)(ii) does not reference any other Code section as a definition of that term, so guidance is needed for employers to understand whether they are currently offering a disqualifying group health plan.  The term group health plan is defined in the Code, but when that term is used for other purposes in the Code, the definition is modified by the excepted benefit provisions.  We believe that, since the term “group health plan” is often modified by the excepted benefit provision, an employer that offers a plan that provides only excepted benefits would be eligible to offer a QSEHRA.

  A “group health plan” is defined extremely broadly in Code section 5000(b) as a plan of an employer to provide health care (directly or otherwise) to the employees, former employees or their families and a group health plan must comply with various requirements.  This broad definition is modified for certain purposes under the Code in that certain non-major medical ancillary and supplemental benefits (referred to as excepted benefits) are not subject to the ACA requirements for a group health plan.  Code §9832(c).  Excepted benefits include separate coverage for accident or disability insurance, workers’ compensation insurance, automobile medical payment insurance, and coverage for on-site medical clinics.  Code §9832(c)(1).  Also included as an excepted benefit if offered separately are limited scope dental or vision benefits and long-term care benefits.  Code §9832(c)(2).  In addition, coverage for a specified disease or illness or hospital indemnity or other fixed indemnity insurance will be considered excepted benefits if offered as an independent, non-coordinated benefit.  Code §9832(c)(3).

  Strict application of the Code Section 5000(b) definition for QSEHRAs would lead to perverse results.  By way of example, an employer that offered dental coverage or an EAP to employees would be unable to sponsor a QSEHRA.  We believe that Congress did not intend that coverage of excepted benefits would be considered group health coverage causing an employer to be unable to offer a QSEHRA to its employees.  The requirement that no employee had employer-provided health coverage was a means of ensuring that the employer did not offer major medical coverage to some employees through a group plan and let other high risk employees purchase their coverage on the individual market – thereby driving up costs of coverage on the individual market.  Coverage for excepted benefits poses no such risks.  We would appreciate guidance from the Agencies confirming a small employer that only offered coverage of excepted benefits would be considered an eligible employer that could offer a QSEHRA.

• Applicable Large Employer Determination.  Only an employer that is not an applicable large employer as defined in Code section 4980H(c)(2) will be eligible to offer a QSEHRA to its employees.  The rules for determining whether an employer is an applicable large employer subject to the shared responsibility payment under Code section 4980H should be applicable in determining whether an employer is an applicable large employee that is not eligible to establish a QSEHRA and we request that the Agencies provide confirmation.  The coordination of the definition of applicable large employer for both application of the shared responsibility payment provisions and the ability to offer a QSEHRA is appropriate so that an employer that is not subject to the shared responsibility payment provisions would be eligible to offer a QSEHRA.  In addition, using the look-back rules in determining whether an employer is an applicable large employer would be helpful to employers in case they become an applicable large employer at some time during the year so that they may offer the QSEHRA through the full year.

Reimbursements from a QSEHRA

Reimbursements from a QSEHRA may only be made for eligible expenses for medical care (as defined in Code section 213(d)) for the eligible employee and the employee’s family members after an employee has provided proof of coverage.  Code § 9831(d)(2)(B)(ii).  The maximum amount of reimbursement permitted under a QSEHRA is $4,950 or $10,000 in the case of an arrangement that also provides for payments or reimbursement for family members of the employee.  Code §9831(d)(2)(B)(iii).  Reimbursements must be made on the same terms to all eligible employees of the eligible employer.  Code §9831(d)(2)(A)(ii).  The QSEHRA will be treated as providing reimbursements on the same terms to all employees if the benefit varies in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market based on (i) the age of the eligible employee or the employee’s family members if covered, or (ii) the number of family members covered.  Code §9831(d)(2)(C).  In addition, the reimbursement of qualified medical expenses will be excluded from an employee’s income only if the employee has minimum essential coverage (“MEC”) at the time the medical expense is incurred.  Code §106(g).

• Proof of Coverage.  The term “proof of coverage” is not defined in the statute.  We would like confirmation that reimbursement by the QSEHRA of medical insurance premiums of a policy that provided MEC would be considered proof of coverage for this purpose.  Further, if the reimbursement is for a qualified medical expense that is not a reimbursement of health insurance premiums and the QSEHRA already provided a reimbursement of medical insurance premiums during that month, we believe that no additional proof of coverage would be needed.  However, if the QSEHRA has not provided a reimbursement of medical insurance premiums (either because the employee does not choose to get reimbursement from the QSEHRA or because the QSEHRA does not provide for the reimbursement of medical insurance premiums) and the employee has medical coverage from another source (such as, individual insurance purchased without using the QSEHRA, spousal coverage or coverage under TRICARE or Medicare), guidance should confirm that attestation by the employee that he or she has coverage is sufficient proof to verify that the employee has coverage.  Self-attestation has been permitted by the Agencies in other circumstances, such as employee certification any expense paid through a health flexible spending arrangement has not been reimbursed and that the employee will not seek reimbursement from any other plan coverage.  Proposed Treas. Reg. §1.125-6(b)(3)(ii).
• Premium-Only Reimbursements.  We believe that a QSEHRA can limit reimbursements to only premiums for health insurance.  We would like confirmation that an employer could, in fact, offer a QSEHRA that limits reimbursements to premiums for health insurance.  Similarly, an employer can limit the types of qualified medical expenses that the QSEHRA would reimburse.  This would facilitate, for example, an arrangement that would allow the purchase of a qualified HDHP and preserve HSA eligibility for a QSEHRA participant.  We request guidance confirming that an employer could offer a QSEHRA that limited the types of reimbursements permissible.
• Employer Discretion in Plan Design.  Since the statute does not state how reimbursements under the QSEHRA must be made, the current rules applicable to HRAs should apply to QSEHRAs, and an employer should be able to design its plan to provide reimbursements in the manner that it desires as long as reimbursements are limited to qualified medical expenses under Code section 213(d) and the employee provides proof of coverage.  We request Agency guidance that would confirm this position.
• Variations in Reimbursement Amounts.  Variations in the amount that a QSEHRA will reimburse are permissible under the statute as long as the variation is in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market.  Given that the statute states that the maximum contribution is $4,950 for individual coverage and $10,000 for family coverage, we believe that a QSHRA that reimburses at the maximum for individual and family coverage should be considered as providing coverage under the same terms for all eligible employees regardless of the difference in price between a health policy with single coverage and one with family coverage.  We would like confirmation of our position in Agency guidance.  In addition, guidance from the Agencies is necessary in order for employers to understand how to determine whether a variation in reimbursements is permissible under the new law and what documentation would be required in order to support that determination. 
• Allowance for After-Tax Payroll Deductions to Supplement HRA Funds.  In some areas, the cost of individual medical insurance may far exceed the statutory amounts that can be paid or reimbursed under a QSEHRA.  In some cases, the QSEHRA will be established to reimburse the employee for the employees’ direct payment of insurance premiums.  In other cases, the employer may facilitate the premium payments through a “list bill” payroll deduction arrangement.  Such an arrangement may result in a premium discount for participating employees.  An employer’s involvement with after tax payroll deduction for any excess cost of a QSEHRA funded policy (i.e., amounts in excess of the statutory limits) should not cause the employer to become ineligible to offer a QSEHRA, and we request confirmation of that in guidance. 
• Taxation of Reimbursement.  The statute provides that the taxability of any reimbursement from a QSEHRA will depend on whether the employee has MEC at the time that the medical expense is incurred.  We contend that any reimbursement (within statutory limits) of health insurance premiums for insurance that provides MEC would automatically be excluded from the employee’s income without any further documentation.  In addition, any other qualified medical expenses incurred during the time the QSEHRA has provided reimbursement for health insurance premiums would automatically be excluded from the employee’s income without further documentation.  We believe that an employee can attest to the plan administrator that they have MEC and the plan administrator would not have to request or review any additional documentation.  As noted previously, the Agencies has accepted self-attestation in other circumstances regarding health plans and guidance should confirm that self-attestation is appropriate in this situation.  We request guidance confirming this interpretation.
• Reporting and Withholding on Taxable Reimbursements.  If it is determined that a reimbursement from the QSEHRA is not excluded from income because the employee does not have MEC in the month in which the medical expense was incurred, the reimbursement must be included in the employee’s income as supplemental wages.  It would be helpful if guidance would detail how these amounts should be reported and withheld upon.

Annual Notice to Employees

An employer funding a QSEHRA must provide a written notice to eligible employees that states (i) the amount of the benefit available under the QSEHRA for the year, (ii) that the employee should provide the information about the amount of the benefit to any health insurance exchange the employee applies to for subsidized coverage and (iii) a statement that if the employee does not have MEC for any month the employee may be subject to the individual mandate tax and reimbursements from the QSEHRA may be includible in gross income.  Code §4931(d)(4)(B).  This written notice must be given to an employee no later than 90 days prior to the beginning of the year of the arrangement or, if the employee is not eligible to participate as of the beginning of the year, on the date the employee first becomes eligible to participate in the QSEHRA. Code §4931(d)(4)(A).  Failure to provide this notice will result in a tax of $50 per employee per incident of failing to provide the notice.  Code §6652(o).

• Model Notice. The contents of this notice will be the same for all employers sponsoring a QSEHRA with the only difference being the amount of the benefit provided.  It would be helpful to employers establishing these plans for the Agencies to provide a model notice that will satisfy the requirements for the notice.
• Notice and Establishment of a New QSEHRA.  The statute states that a notice must be given to an on the date that the employee first becomes eligible to participate in the QSEHRA.  For an employer that establishes a new QSEHRA, it would follow that the notice to be given to employees no later than the first day that the QSEHRA is established. In the years after the QSEHRA is initially established, the notice would be given 90 days prior to the beginning of the plan year.  Confirmation of that interpretation would be helpful so that employers may make reimbursements from a QSEHRA as soon as possible after the QSHRA is established. 

ECFC appreciates this opportunity to alert the Agencies on issues of concern to those employers who will establish QSEHRA and for those organizations that will administer these plans.  If you have any questions and would like to discuss these issues in more detail, please feel free to contact me via e-mail at wsweetnam@ecfc.org or by telephone at 202-465-6397.

Sincerely,

William F. Sweetnam, Jr.
Legislative and Technical Director

Last year Donald Trump and Republicans running for Congress stated that they would repeal and replace “Obamacare.”  Donald Trump is now the President, Republicans maintained control of the House of Representatives and Senate and now they all must deliver on this important promise.  But campaigning on an issue and actually developing legislation are very different things.  The Trump campaign had very few specifics on what his replacement would be.  Although Congressional Republicans voted to repeal Obamacare may times over the past few years, they never had to actually craft legislation to provide a replacement.  Now comes the hard part of legislating.  This article will provide an overview of efforts to repeal and replace Obamacare which may give you an understanding on why this process is so difficult.

Repealing the Affordable Care Act

Complete repeal of the Affordable Care Act (the real name of the legislation that is referred to as Obamacare) is not as easy as it seems.  Many provisions of the ACA are popular with Americans, (such as the prohibition on denying or limiting coverage due to pre-existing conditions and letting children stay on their parent’s health insurance until they attain age 26), and eliminating those provisions would not be popular.  Another concern is the impact of repeal on the individual insurance market; there are concerns that insurance premiums will increase drastically if the mandate for purchasing insurance is lifted while the pre-existing condition prohibition remains in place.  And finally, the politics surrounding repeal means that Democrats will most likely oppose repeal legislation.  This means that in the Senate, Democrats can filibuster any repeal legislation since Republicans will not have 60 votes to overcome the filibuster.  To move any repeal legislation through the Senate, the legislation must be under budget reconciliation authority in order for the legislation to pass the Senate with a simple majority.  (Previous repeal legislation was passed under budget reconciliation authority.)  However, under the rules, a budget reconciliation bill can only have provisions that increase or decrease government spending (this would include increases or decreases in taxes), so not all of the provisions in the ACA could be repealed under a budget reconciliation bill. 

In the discussion about use of the budget reconciliation process to repeal the ACA, it is important to remember that most of the ACA was not passed using budget reconciliation.  The majority of the ACA was passed under regular order when the Democrats held 60 seats in the Senate and were able to overcome any threat of a Republican filibuster of the bill.  Part of the ACA was passed under budget reconciliation because the Democrats lost one seat in the Senate when, in the election to fill Senator Kennedy’s seat, Republican Scott Walker was elected so Senate Democrats could not overcome a filibuster attempt by Republicans.  Therefore, repealing all of the ACA will not be possible unless enough Senate Democrats cross over and vote for repeal—- something that is very hard to imagine.

Common Thread in Health Care Reform for Republicans

I don’t think that there is any Republican in Congress who doesn’t support Health Savings Accounts (HSAs).  If you remember, HSAs were enacted as part of the Medicare Modernization Act of 2003 which extended drug coverage under Medicare and, for many conservative Republicans, the HSA provisions were the only reason that they voted for a law that they thought was expanding government spending in the healthcare arena.  In the years since enactment of the HSA provisions, Republicans have been tinkering with the law to try to increase the number of people covered by HSAs.  The Trump campaign did not provide many details on how they would replace the ACA, but President Trump did say that HSAs would be part of the replacement. 

President Trump, in his first State of the Union Address touted replacement of the ACA and again mentioned HSAs.  The proposal for replacing the ACA advanced by Speaker of the House of Representatives Paul Ryan, entitled “The Better Way,” includes provisions that would increase the maximum contribution amount to HSAs to equal the maximum deductible and out-of-pocket expense limits and expand eligibility for HSAs.  In the Senate, Chairman of the Committee on Finance, Orrin Hatch, has introduced the Health Savings Act of 2017 (S. 403) that addresses numerous issues that many have been advocating for over the years.  This legislation will likely be in any health care reform legislation coming from the Senate.  A companion bill to Hatch’s bill was introduced in the House of Representatives by Rep. Eric Paulsen (H.R. 1175). 

Other bills have been introduced to increase the availability of HSAs and they are likely to be included in any health care reform discussion.  For example, Senator Rand Paul introduced legislation (S. 222) which would provide for unlimited contributions to HSAs while Senator Jeff Flake’s legislation (S. 28) would only increase the maximum contribution limit to $9,000 for single coverage and $18,000 for family coverage.  Taking a different tact, Senators Bill Cassidy and Susan Collins introduced legislation (S. 191) which would phase out HSAs under current law and replace them with “Roth HSAs” with the current tax credits available under PPACA to fund these new Roth HSAs. 

Prospects for Legislation

As of March 3, 2017, it has been reported that mark-up of health care reform legislation will be held on Thursday, March 9, 2017 in both the Ways and Means Committee and the Energy and Commerce Committee in the House of Representatives.  The text of the legislation to be marked up in the Committees has not yet been released, so we don’t know how the Committees will deal with the repeal of the ACA and what they will put forward as a replacement.  Usually, the Committee Chair will not release the text of a bill to be marked up without knowing that it will be approved by the Committee.  Consequently, I would anticipate that the March 9 mark-up date may be postponed as the Chairs of the Committee negotiate with Committee members to get the votes needed to pass the bill through Committee.  In addition, the Congressional Budget Office and the Joint Committee on Taxation need to score the bills to be marked up and that might delay the process.

While we don’t have a bill text, there was a draft of a “repeal and replace” bill leaked to Politico which posted it on February 24, 2017.  This leaked document had a draft date of February 10, 2017.  (A copy of this leaked draft bill was sent to the ECFC membership on February 24, 2017.)  Many of the provisions in this draft followed the principles set out in Speaker Ryan’s Better Way proposal.  Some provisions in the proposal are:

• The individual and employer mandates under ACA were eliminated
• Other ACA taxes were eliminated, including the excise tax on high cost health plans (commonly referred to as the “Cadillac Tax”); 
• Provisions to expand the use of HSAs, based on provisions in the Hatch/Paulsen Health Savings Act of 2017;
• Subsidies for insurance purchased on an exchange were eliminated and replaced with refundable tax credits available to all with the amount of the credit based on the individual’s age;
• Medicaid expansion was phased out, but states could continue to offer coverage under the Medicaid expansion with less funding from the federal government; and
• A cap on the employee tax exclusion for employer-provided health care was included which will help pay for the bill.  The dollar amount of the cap was not specified in the draft bill but it will be at the 90th percentile of current premiums.

A number of conservative Congressmen – including members of the House Freedom Caucus and the Republican Study Committee—have stated that they would not vote for this draft bill because it includes refundable tax credits which they consider to be another new entitlement program.  House leadership disavowed the leaked draft, although such a disavowal would seem to be suspect since the provisions in the draft were similar to Chairman Ryan’s Better Way proposal. In addition, President Trump in his first State of the Union Address appeared to be supportive of the principles in the Better Way proposal.  It will be interesting to see what the new Trump Administration will do to promote or change the legislation.  As of March 3, 2017, there is new draft legislation prepared but it has not yet been unveiled. As for now, we must wait to see what the final legislative product is that will go before the Committees.

Advocates of consumer directed health care will have a mixed reaction to the proposals in the leaked draft.  Expansions to HSAs will be welcome.  A cap on the tax exclusion for employer-provided health insurance could be as problematic to account-based health plans as the Cadillac Tax which will be repealed.  ECFC has been speaking with Congress and their staffs about the impact of cap on the tax exclusion suggesting that employee contributions to FSAs not be counted toward the cap.  Once the legislative process on health care reform starts, it will be a very busy time and ECFC hopes to have its membership’s voice heard in the debate.