Compliance Recap May 2017

Make sure to stay up-to-date with the most recent rules and regulations from May regarding healthcare legislation thanks to our partners at United Benefit Advisors (UBA).

May was an active month in the employee benefits world. On May 4, 2017, the U.S. House of Representatives passed a bill titled the “American Health Care Act of 2017” (AHCA) to repeal and replace the Patient Protection and Affordable Care Act (ACA).

The Internal Revenue Service (IRS) released its Employer Shared Responsibility affordability percentage indexed for 2018. The U.S. Citizenship and Immigration Services (USCIS) issued redesigned permanent resident cards and employment authorization documents. The USCIS also issued a warning about phone scams targeting immigrants. The Occupational Safety and Health Administration (OSHA) announced that it will delay electronic submission of injury and illness records.

The IRS released dollar limits for health savings accounts (HSAs) and high-deductible health plans (HDHPs) for 2018. The IRS released guidance confirming that health flexible spending arrangements (health FSAs) cannot reimburse Medicare premiums. The IRS also released a memo regarding tax treatment of benefits paid under an arrangement that combines a self-funded fixed indemnity heath plan and wellness program.

The Centers for Medicare & Medicaid Services (CMS) announced that it will end the Federally Facilitated SHOP Exchange (FF-SHOP) at the end of 2017. The U.S. Department of Labor (DOL) issued an advisory opinion on an employee welfare benefit plan maintained by an association of employers. The U.S. Supreme Court declined to take an opt-out arrangement case, leaving intact a lower court’s decision that opt-out payments must be included in overtime calculations under the Fair Labor Standards Act (FLSA).

UBA Updates

UBA released three new advisors in May: • House Passes AHCA Bill in

  • House Passes AHCA Bill in First Step to Repeal and Replace the ACA
  • Frequently Asked Questions About Employees’ Reduction in Hours
  • What Qualifying Events Trigger COBRA?

The House Passes AHCA Bill in First Step to Repeal and Replace the ACA

On May 4, 2017, the U.S. House of Representatives passed House Resolution 1628, a reconciliation bill aimed at "repealing and replacing" the ACA. The AHCA will now be sent to the Senate for debate, where amendments can be made, prior to the Senate voting on the bill.

It is widely anticipated that in its current state the AHCA is unlikely to pass the Senate. Employers should continue to monitor the text of the bill and should refrain from implementing any changes to group health plans in response to the current version of the AHCA.

IRS Releases Employer Shared Responsibility Affordability Percentage Indexed for 2018

The Internal Revenue Service (IRS) released its Revenue Procedure 2017-36 that sets the required contribution percentage to determine whether employer-sponsored health coverage is affordable at 9.56 percent for calendar year 2018.

USCIS Issues Redesigned Green Cards and Employment Authorization Documents

The U.S. Citizenship and Immigration Services (USCIS) began issuing the new Permanent Resident Cards (also known as Green Cards) on May 1, 2017. The new cards incorporate enhanced graphics and fraud-resistant security features. These new cards are also part of an ongoing effort between USCIS, U.S. Customs and Border Protection, and U.S. Immigration and Customs Enforcement to enhance document security and deter counterfeiting and fraud.

The new Green Cards and Employment Authorization Documents (EADs):

  • Display the individual’s photos on both sides • Show a unique graphic image and color palette:
    • Green Cards will have an image of the Statue of Liberty and a predominately green palette
    • EAD cards will have an image of a bald eagle and a predominately red palette
  • Have embedded holographic images
  • No longer display the individual’s signature

Also, Green Cards will no longer have an optical stripe on the back.

Some Green Cards and EADs issued after May 1, 2017, may still display the existing design format as USCIS will continue using existing card stock until current supplies are depleted. For more information about the Green Card application process, please visit

USCIS Issues a Warning on Phone Scam Targeting U.S. Immigrants

U.S. immigrants have been targeted by a phone scam that appears as if it is from the Canadian government’s Immigration, Refugees, and Citizenship Canada (IRCC) call center (1-888-242-2100). Recipients of these calls are advised to hang up immediately and check their status by:

  • Making an InfoPass appointment at, or
  • Using myUSCIS to find up-to-date information about their application, or
  • Calling the USCIS National Customer Service Center at 1-800-375-5283.

Scam email or phone calls should be reported to the Federal Trade Commission at Suspicious emails may be forwarded to the USCIS webmaster at The USCIS will review the emails received and share them with law enforcement agencies as appropriate. Visit the Avoid Scams Initiative at for more information on common scams and other important tips.

OSHA Proposes to Delay Electronic Submission of Injury and Illness Records

In 2016, the Occupational Safety and Health Administration (OSHA) announced that certain high-risk employers of 20 or more employees and employers with 250 or more employees must electronically file Form 300A for workplace illnesses and injuries that occurred in calendar year 2016.

OSHA recently posted a notice on its website stating that “OSHA is not accepting electronic submission of injury and illness logs at this time and intends to propose extending the July 1, 2017 date by which certain employers are required to submit the information from their completed 2016 form 300A electronically.” It should be noted that the requirement to keep records has not changed; only the method in which they are submitted is under scrutiny.

IRS Releases 2018 Amounts for HSAs 

The IRS released Revenue Procedure 2017-37 that sets the dollar limits for health savings accounts (HSAs) and high-deductible health plans (HDHPs) for 2018. For

For calendar year 2018, the annual contribution limit for an individual with self-only coverage under an HDHP is $3,450, and the annual contribution limit for an individual with family coverage under an HDHP is $6,900. For

For calendar year 2018, a “high deductible health plan” is defined as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,650 for self-only coverage or $13,300 for family coverage.

IRS Releases Information Letter to Confirm that FSAs Cannot Reimburse Medicare Premiums

The IRS released its Information Letter Number 2017-0004 to confirmed that a health flexible spending arrangement (health FSAs) cannot reimburse Medicare premium expenses. The IRS cited its Publication 969 which states that an FSA cannot reimburse health insurance premium payments. Because Medicare premiums are premiums for other health coverage, Medicare premiums are not FSA-reimbursable expenses.

IRS Releases Memo Regarding Tax Treatment of Benefits Paid by Self-Funded Health Plans

On May 12, 2017, the IRS released a Memorandum to address the taxability of benefits paid under an arrangement that combines a self-funded fixed indemnity heath plan and wellness program. The IRS specifically refutes the claim that these arrangements provide nontaxable cash payments to employees and employment tax savings for the employer and employees.

The IRS concluded that benefits paid under a such an employer-provided self-funded health plan should be included in an employee’s income and wages if the average amounts received by the employee for participating in a health-related activity predictably exceed the employee’s after-tax contributions.

CMS Plans to End SHOP Exchange

On May 15, 2017, the Centers for Medicare & Medicaid Services (CMS) announced that it will issue rules to essentially end the Federally Facilitated SHOP Exchange (FF-SHOP) at the end of 2017.

Under the rules that CMS intends to propose, will continue to make FF-SHOP participation eligibility decisions for small employers regarding the Small Business Health Care Tax Credit, but the FF-SHOP will stop handling SHOP functions, such as processing premium payments or handling employer or employee enrollment, for SHOP plans taking effect on or after on January 1, 2018. CMS intends to allow employers to directly enroll with insurers offering SHOP plans or through FF-SHOPregistered brokers or agents.

DOL Issues Advisory Opinion on Employee Welfare Benefit Plan Sponsored by a Group of Employers

On May 16, 2017, the Department of Labor (DOL) issued its Advisory Opinion to address whether a membership-based organization could fall within ERISA’s definition of “group or association of employers” who sponsor an ERISA employee welfare benefit plan.

Based on the facts presented to the DOL, the DOL concluded that the organization’s membership is comprised of employers engaged in the same industry and that the employers have a genuine organizational relationship unrelated to the health plan through their membership in the organization. The DOL determined, based on the proposed arrangement’s facts, that the participating member employers would be a bona fide group or association of employers under ERISA and that the health plan would be an ERISA employee welfare benefit plan.

U.S. Supreme Court Declines to Take Opt-Out Arrangement FLSA Case

Last year in court case Flores v. City of San Gabriel, the 9th Circuit Court of Appeals (which covers several western states including Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) determined that when an employer pays cash to an employee for opting out of its health plan, the payment must be considered part of the employee’s “regular rate of pay” under the Fair Labor Standards Act (FLSA). This means that the adjusted rate of pay must be used in calculating compensation for overtime hours.

The City of San Gabriel appealed the 9th Circuit’s decision to the U.S. Supreme Court. On May 15, 2017, the Supreme Court declined to take the case, essentially leaving the decision intact.

Practically speaking, if an employer is in one of the states covered by the 9th Circuit and if the employer calculates compensation for overtime hours, then it should consider this additional FLSA aspect to offering cash in lieu of benefits.

To download the full compliance alert click Here.

The Facts on the GOP Health Care Bill

Do you know all the facts behind the American Health Care Act (AHCA)? Check out this article by Fact Check and find out about all the details behind the GOP new health care legislation.

House Republicans released their replacement plan for the Affordable Care Act on March 6. How does the GOP’s American Health Care Act differ from the ACA? We look at the major provisions of the amended version of the bill, as of May 4. (The legislation passed the House on May 4 and now goes to the Senate for consideration.)

Is there a requirement to have insurance or pay a tax?

No. For all months after Dec. 31, 2015, the bill eliminates the tax penalties that the ACA imposes on nonexempt individuals for not having health insurance, as well as employers with 50 or more full-time workers who do not offer health insurance to their employees. (To be clear, unless this bill becomes law quickly, those filing their 2016 tax returns will still be subject to the penalty.)

Are insurance companies required to offer coverage regardless of preexisting conditions?

Yes, but there’s a penalty for not having continuous coverage. Under both the ACA and the GOP bill, insurers can’t deny coverage to anyone based on health status. Under the GOP bill, they are required, however, to charge 30 percent higher premiums for one year, regardless of health status, to those entering the individual market who didn’t have continuous coverage, which is defined as a lapse of coverage of 63 days or more over the previous 12 months.

However, an amendment proposed in late April allows states to obtain a waiver that would enable insurers to charge more to people with preexisting conditions who do not maintain continuous coverage. Such policyholders could be charged higher premiums based on health status for one year. After that, provided there wasn’t another 63-day gap, the policyholder would get a new, less expensive premium that was not based on health status. This change would begin in 2019, or 2018 for those enrolling during special enrollment periods.

States with such a waiver would also have to have either a “risk mitigation program,” such as a high-risk pool, or participate in a new Federal Invisible Risk Sharing Program, as a House summary of the amendment says. Beyond those programs, another amendment to the bill would provide $8 billion in federal money over five years to financially aid those with preexisting conditions who find themselves facing higher premiums in waiver states.

For more on this waiver program, see our May 4 article, “The Preexisting Conditions Debate.”

What happens to the expansion of Medicaid?

It will be phased out.

Prior to the ACA, Medicaid was available to groups including qualified low-income families, pregnant women, children and the disabled. The ACA expanded eligibility to all individuals under age 65 who earn up to 138 percent of the federal poverty level (about $16,643 a year for an individual), but only in states that opted for the expansion. Thirty-one states and the District of Columbia have opted in to the expansion, which includes enhanced federal funding, so far. More than 11 million newly eligible adults had enrolled in Medicaid through March 2016, according to an analysis by the Kaiser Family Foundation of data from the Centers for Medicare & Medicaid Services.

Under the Republican health care plan, no new enrollment can occur under this Medicaid expansion, with enhanced federal funds, after Dec. 31, 2019. States that haven’t already opted in to the expansion by March 1, 2017, can’t get the ACA’s enhanced federal funding for the expansion-eligible population.

To be clear, the bill doesn’t eliminate the Medicaid expansion coverage for those who are enrolled prior to 2020 in the current expansion states. But if those enrollees have a break in coverage for more than one month after Dec. 31, 2019, they won’t be able to re-enroll (unless a state wanted to cover the additional cost itself).

The Republican plan includes another notable change to Medicaid. It would cap the amount of federal funding that states can receive per Medicaid enrollee, with varying amounts for each category of enrollee, such as children, and the blind and disabled. Currently, the federal government guarantees matching funds to states for qualifying Medicaid expenses, regardless of cost. Under the GOP bill, states have the option of receiving a block grant, rather than the per-capita amounts, for traditional adult enrollees and children – not the elderly or disabled. States also have the option of instituting work requirements for able-bodied adults, but not pregnant women.

Are insurers required to cover certain benefits?

The latest version of the bill requires insurers to provide 10 essential health benefits mandated by the ACA, unless a state obtains a waiver to set its own benefit requirements. The ACA’s essential health benefits required insurance companies to cover 10 health services: ambulatory, emergency, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative services and devices, laboratory services, preventive care and chronic disease management, and pediatric services including dental and vision.

Beginning in 2020, states could set their own essential health benefits by obtaining a waiver.

At that point, state requirements could vary, as they did before the ACA was enacted. For instance, a 2009 report from the Council for Affordable Health Insurance, a group representing insurance companies, said 47 states had a mandate for emergency service benefits, while 23 mandated maternity care and only three mandated prescription drug coverage.

State Medicaid plans would not have to meet the essential health benefits requirement after Dec. 31, 2019.

Are there subsidies to help individuals buy insurance? How do they differ from the Affordable Care Act?

There are two forms of financial assistance under the ACA: premium tax credits (which would change under the GOP plan) and cost-sharing to lower out-of-pocket costs (which would be eliminated).

Let’s look at the premium tax credits first. They would be available to individuals who buy their own coverage on the individual, or nongroup, market. But instead of a sliding scale based on income, as under the ACA, the Republican plan’s tax credits are based on age, with older Americans getting more. (The plan, however, allows insurers to charge older Americans up to five times more than younger people, as we will explain later.)

The ACA tax credits also take into account the local cost of insurance, varying the amount of the credit in order to put a cap on the amount an individual or family would have to spend for their premiums. The Republican plan doesn’t do that. (See this explanation from the nonpartisan Kaiser Family Foundation for more on how the ACA tax credits are currently calculated.)

There are income limits under the GOP bill. Those earning under $75,000, or $150,000 for a married couple, in modified adjusted gross income, get the same, fixed amounts for their age groups — starting at $2,000 a year for those under age 30, increasing in $500 increments per decade in age, up to $4,000 a year for those 60 and older. The tax credits are capped at $14,000 per family, using the five oldest family members to calculate the amount. This new structure would begin in 2020, with modifications in 2018 and 2019 to give more to younger people and less to older people.

For those earning above those income thresholds, the tax credit is reduced by 10 percent of the amount earned above the threshold. For instance, an individual age 60 or older earning $100,000 a year would get a tax credit of $1,500 ($4,000 minus 10 percent of $25,000).

That hypothetical 60-year-old gets $0 in tax credits under the ACA. But if our 60-year-old earns $30,000 a year, she would likely get more under the ACA than the GOP plan: In Franklin County, Ohio, for instance, the tax credit would be $6,550 under the ACA in 2020 and $4,000 under the Republican plan. (This interactive map from the KFF shows the difference in tax credits under the health care plans.)

As for the cost-sharing subsidies available now under the ACA — which can lower out-of-pocket costs for copays and other expenses for those earning between 100 percent and 250 percent of the federal poverty level  — those would be eliminated in 2020. However, the GOP bill sets up a Patient and State Stability Fund, with $100 billion in funding over nine years with state matching requirements, that can be used for various purposes, including lowering out-of-pocket costs of a state’s residents. An additional $30 billion was added to this fund for other programs: $15 billion would be used to set up the Federal Invisible Risk Sharing Program, another reinsurance program, and $15 billion is set aside specifically for maternity and mental health coverage.

Small-business tax credits would end in 2020. The health insurance marketplaces stay, but the tax credits can be used for plans sold outside of those marketplaces. And the different levels of plans (bronze, silver, etc.) based on actuarial value (the percentage of costs covered) are eliminated; anyone can buy a catastrophic plan, not just those under 30 as is the case with the ACA.

What does the bill do regarding health savings accounts?

It increases the contribution limits for tax-exempt HSAs, from $3,400 for individuals and $6,750 for families now to $6,550 and $13,100, respectively. It allows individuals to use HSA money for over-the-counter drugs, something the ACA had limited to only over-the-counter drugs for which individuals had obtained a prescription.

There were so-called winners and losers in the individual market under the ACA. How would that change under this bill?

Both the current law and the Republican proposal primarily impact the individual market, where 7 percent of the U.S. population buys its own health insurance. As we’ve written many times, how the ACA affected someone in this market depended on their individual circumstances — and the same goes for the House Republicans’ plan. In general, because the ACA said that insurers could no longer vary premiums based on health status and limited the variation based on age, older and sicker individuals could have paid less than they had before, while younger and healthier individuals could have paid more.

The GOP plan allows a wider variation in pricing based on age: Insurers can charge older individuals up to five times as much as younger people, and states can change that ratio. Under the ACA, the ratio was 3:1. So, younger individuals may see lower premiums under this bill, while older individuals could see higher premiums.

Older Americans do get higher tax credits than younger Americans under the Republican plan, but whether that amounts to more or less generous tax credits than under the ACA depends on other individual circumstances, including income and local insurance pricing. Those with low incomes could do worse under the GOP plan, while those who earned too much to qualify for tax credits under the ACA (an individual making more than $48,240) would get tax credits.

We would encourage readers to use the Kaiser Family Foundation’s interactive map to see how tax credits may change, depending on various circumstances. “Generally, people who are older, lower-income, or live in high-premium areas (like Alaska and Arizona) receive larger tax credits under the ACA than they would under the American Health Care Act replacement,” KFF says. “Conversely, some people who are younger, higher-income, or live in low-premium areas (like Massachusetts, New Hampshire, and Washington) may receive larger assistance under the replacement plan.”

A few weeks after the bill was introduced, House Republicans, through an amendment, made a change to a tax provision to create placeholder funding that the Senate could use to boost tax credits for older Americans, as we explain in the next answer.

Also, some individuals with preexisting conditions could see higher premiums under the legislation, if they don’t maintain continuous coverage and live in states that received waivers for pricing some plans based on health status.

Which ACA taxes go away under the GOP plan?

Many of the ACA taxes would be eliminated.

As we said, the bill eliminates all fines on individuals for not having insurance and large employers for not offering insurance. Also, beginning in 2017, for high-income taxpayers, the bill eliminates the 3.8 percent tax on certain net investment income. The 0.9 percent additional Medicare tax on earnings above a threshold stays in place until 2023. The bill repeals the 2.3 percent tax on the sale price of certain medical devices in 2017 and the 10 percent tax on indoor tanning services (effective June 30, 2017). It also gets rid of the annual fees on entities, according to the IRS, “in the business of providing health insurance for United States health risks,” as well as fees on “each covered entity engaged in the business of manufacturing or importing branded prescription drugs.”

It reduces the tax on distributions from health savings accounts (HSAs) not used for qualified medical expenses from 20 percent to 10 percent and the tax on such distributions from Archer medical savings accounts (MSAs) from 20 percent to 15 percent. It lowers the threshold for receiving a tax deduction for medical expenses from 10 percent to 5.8 percent of adjusted gross income. (Originally, the bill lowered the threshold to 7.5 percent, but House Republicans changed that to create some flexibility for potential funding changes the Senate could make. A congressional aide told us that the change is expected to provide $85 billion in spending over 10 years that the Senate could use to boost the tax credit or provide other support for Americans in the 50-64 age bracket.)

And from 2020 through 2025, the bill suspends the so-called “Cadillac tax,” a 40 percent excise tax on high-cost insurance plans offered by employers.

Will young adults under the age of 26 still be able to remain on their parents’ plans?

Yes. The bill does not affect this provision of the ACA.

How does the bill treat abortion? 

It puts a one-year freeze on funding to states for payments to a “prohibited entity,” defined as one that, among other criteria, provides abortions other than those due to rape, incest or danger to the life of the mother. This would include funding to Planned Parenthood under Medicaid, which is most of the organization’s government funding. Under current law, Planned Parenthood can’t use federal money for abortions, except those in cases of rape, incest or risk to the mother’s life.

Also under the GOP plan, tax credits can’t be used to purchase insurance that covers abortion beyond those three exceptions. Health insurance companies would still be able to offer “separate coverage” for expanded coverage of abortions, which individuals could then purchase on their own.

How many people will have insurance under the plan, as compared with the ACA?

The nonpartisan Congressional Budget Office estimated that the legislation, as passed by the House, would lead to 14 million fewer people having insurance in 2018 and 23 million fewer insured in 2026, compared with current law under the ACA.
How much will the bill cost, as compared with the ACA?

CBO estimated that the legislation passed by the House would reduce federal deficits by $119 billion over the next decade, 2017-2026. It would reduce revenues by $992 billion, mostly by repealing the ACA’s taxes and fees, and reduce spending by $1.11 trillion for a net savings of $119 billion, according to CBO.

See the original article Here.


Robertson L., Gore D., Schipani V.  (2017 May 24). The facts on the GOP health care bill [Web blog post]. Retrieved from address

GOP Health Care Bill Would Cut About $765 Billion In Taxes Over 10 Years

The passing of the American Health Care Act means there will be a new taxes associated with healthcare. Find out in this article by Scott Horsley and see how this change in legislation will impact you.

The health care bill passed by the House on Thursday is a win for the wealthy, in terms of taxes.

While the Affordable Care Act raised taxes on the rich to subsidize health insurance for the poor, the repeal-and-replace bill passed by House Republicans would redistribute hundreds of billions of dollars in the opposite direction. It would deliver a sizable tax cut to the rich, while reducing government subsidies for Medicaid recipients and those buying coverage on the individual market.

Tax hikes reversed

The Affordable Care Act, also known as Obamacare, is funded in part through higher taxes on the rich, including a 3.8 percent tax on investment income and a 0.9 percent payroll tax. Both of these taxes apply only to people earning more than $200,000 (or couples making more than $250,000). The GOP replacement bill would eliminate these taxes, although the latest version leaves the payroll tax in place through 2023.

The House bill would also repeal the tax penalty for those who fail to buy insurance as well as various taxes on insurance companies, drug companies and medical device makers. The GOP bill also delays the so-called "Cadillac tax" on high-end insurance policies from 2020 to 2025.

All told, the bill would cut taxes by about $765 billion over the next decade.

The lion's share of the tax savings would go to the wealthy and very wealthy. According to the Tax Policy Center, the top 20 percent of earners would receive 64 percent of the savings and the top 1 percent of earners (those making more than $772,000 in 2022) would receive 40 percent of the savings.

Help for the poor reduced

Over time, the GOP bill would limit the federal contribution to Medicaid, while shifting control of the program to states. Depending on what happens to costs, states may be forced to provide skimpier coverage, reduce their Medicaid rolls, or both. The Congressional Budget Office estimated that an earlier version of the bill would leave about 14 million fewer people covered by Medicaid by 2026. (The House voted on the current bill without an updated CBO report.)

CBO also anticipated fewer people would buy insurance through the individual market. With no tax penalty for going without coverage, some people would voluntarily stop buying insurance. Others would find coverage prohibitively expensive, as a result of changing rules governing insurance pricing and subsidies.

The GOP bill would allow insurance companies to charge older customers up to five times more than younger customers — up from a maximum 3-to-1 ratio under the current health law. The maximum subsidy for older customers in the GOP plan, however, is only twice what is offered to the young.

The bill also allows insurance companies to offer more bare-bones policies. As a result, young, healthy people could find more affordable coverage options. But older, sicker people would likely have to pay more.

In addition, because the subsidies offered in the Republican plan don't vary with local insurance prices the way subsidies do in Obamacare, residents of high-cost, rural areas would also suffer. That could include a large number of Trump voters.

See the original article Here.


Horsley (2017 May 4). GOP health care bill would cut about $765 billion in taxes over 10 years [Web blog post]. Retrieved from address

Section 105(h) Nondiscrimination Testing

Under Internal Revenue Code Section 105(h), a self-insured medical reimbursement plan must pass two nondiscrimination tests. Failure to pass either test means that the favorable tax treatment for highly compensated individuals who participate in the plan will be lost. The Section 105(h) rules only affect whether reimbursement (including payments to health care providers) under a self-insured plan is taxable.

When Section 105(h) was enacted, its nondiscrimination testing applied solely to self-insured plans. Under the Patient Protection and Affordable Care Act (ACA), Section 105(h) also applies to fully-insured, non-grandfathered plans. However, in late 2010, the government delayed enforcement of Section 105(h) against fully-insured, non-grandfathered plans until the first plan year beginning after regulations are issued. To date, no regulations have been issued so there is currently no penalty for noncompliance.

Practically speaking, if a plan treats all employees the same, then it is unlikely that the plan will fail Section 105(h) nondiscrimination testing.

What Is a Self-Insured Medical Reimbursement Plan?

Section 105(h) applies to a “self-insured medical reimbursement plan,” which is an employer plan to reimburse employees for medical care expenses listed under Code Section 213(d) for which reimbursement is not provided under a policy of accident or health insurance.

Common self-insured medical reimbursement plans are self-funded major medical plans, health reimbursement arrangements (HRAs), and medical expense reimbursement plans (MERPs). Many employers who sponsor an insured plan may also have a self-insured plan; that self-insured plan is subject to the Section 105 non-discrimination rules. For example, many employers offer a fully insured major medical plan that is integrated with an HRA to reimburse expenses incurred before a participant meets the plan deductible.

What If the Self-Insured Medical Reimbursement Plan Is Offered Under a Cafeteria Plan?

A self-insured medical reimbursement plan (self-insured plan) can be offered outside of a cafeteria plan or under a cafeteria plan. Section 105(h) nondiscrimination testing applies in both cases.

Regardless of grandfathered status, if the self-insured plan is offered under a cafeteria plan and allows employees to pay premiums on a pre-tax basis, then the plan is still subject to the Section 125

nondiscrimination rules. The cafeteria plan rules affect whether contributions are taxable; if contributions are taxable, then the Section 105(h) rules do not apply.

What Is the Purpose of Nondiscrimination Testing?

Congress permits self-insured medical reimbursement plans to provide tax-free benefits. However, Congress wanted employers to provide these tax-free benefits to their regular employees, not just to their executives. Nondiscrimination testing is designed to encourage employers to provide benefits to their employees in a way that does not discriminate in favor of employees who are highly paid or high ranking.

If a plan fails the nondiscrimination testing, the regular employees will not lose the tax benefits of the self-insured medical reimbursement plan and the plan will not be invalidated. However, highly paid or high ranking employees may be adversely affected if the plan fails testing.

What Are the Two Nondiscrimination Tests?

The two nondiscrimination tests are the Eligibility Test and Benefits Test.

The Eligibility Test answers the basic question of whether there are enough regular employees benefitting from the plan. Section 105(h) provides three ways of passing the Eligibility Test:

  1. The 70% Test – 70 percent or more of all employees benefit under the plan.
  2. The 70% / 80% Test – At least 70% of employees are eligible under the plan and at least 80% or more of those eligible employees participate in the plan.
  3. The Nondiscriminatory Classification Test – Employees qualify for the plan under a classification set up by the employer that is found by the IRS not to be discriminatory in favor of highly compensated individuals.

The Benefits Test answers the basic question of whether all participants are eligible for the same benefits.

Definition of Terms in the Nondiscrimination Tests

A highly compensated individual (HCI) is an individual who is:

  • One of the five highest-paid officers
  • A shareholder who owns more than 10 percent of the value of stock of the employer’s stock
  • Among the highest-paid 25 percent of all employees (other than excludable employees who are not participants)

Under Section 105(h), an employee’s compensation level is determined based on the employee’s compensation for the plan year. Fiscal year plans may determine employee compensation based on the calendar year ending within the plan year. Only current year compensation may be used to determine compensation levels.

For shareholder stock ownership, Section 318 constructive ownership rules apply. Per the attribution rules, a spouse is deemed to own the interest held by the other spouse. Also, an employee is deemed to own the ownership interest of the employee’s parents, children, and grandchildren. Further, a person with an option to buy stock is considered to own the stock subject to that option and a shareholder who owns 50 percent of more of a corporation is deemed to own a proportionate share of stock owned by the corporation.

Section 105(h) also defines excludable employees. The following employees may be excluded from the highest-paid 25 percent of all employees, unless they are eligible to participate in the plan:

  • Employees who have less than three years of service
  • Employees who are not 25 years old
  • Part-time employees (defined as customary weekly employment of less than 35 hours) or seasonal employees (defined as customary annual employment of less than 9 months)
  • Collectively bargained employees
  • Nonresident aliens who receive no earned income from U.S. sources

Exclusions should be applied uniformly. Employees in excludable categories should not be excluded during testing if the employees are eligible under the plan.

How Are the Tests Applied?

The Eligibility Test

All three of the alternative eligibility tests discuss who benefits under the plan. Although the Eligibility Test’s name implies that it looks at eligibility, the more cautious interpretation is that an employee must have elected coverage or have been provided with free coverage by plan design for the employee to benefit under the plan. For purposes of Section 105(h), an employee benefits from the plan when the employee actually participates in the plan.

A self-insured plan must pass one of the following three tests to pass the Eligibility Test:

  1. 70% Test: A self-insured plan passes the Eligibility Test if 70 percent or more of all employees participate in the plan.
  2. 70% / 80% Test: A self-insured plan passes the Eligibility Test if at least 70 percent of employees are eligible under the plan and at least 80 percent or more of those eligible employees participate in the plan.
  3. Nondiscriminatory Classification Test: A self-insured plan passes the Eligibility Test if it demonstrates that the plan benefits employees who qualify under a classification set up by the employer and found by the IRS not to be discriminatory in favor of highly compensated individuals.

To determine whether a self-insured plan passes the Nondiscriminatory Classification Test, the IRS will look at the facts and circumstances of each case, applying the standards of Section 410(b)(1)(B) that apply to tax-preferred retirement plans. If an employer must rely on the Nondiscriminatory Classification Test to pass the Eligibility Test, then the employer should consult with its attorney or tax professional about running the nondiscriminatory classification test because it is complicated to apply.

then the employer should consult with its attorney or tax professional about running the nondiscriminatory classification test because it is complicated to apply.

Although Section 105(h) is not clear on the exact process for conducting the Nondiscriminatory Classification Test, the plan may rely on the Section 410(b) regulations’ current nondiscriminatory classification test. Under the test, a classification is not discriminatory if it satisfies either the Safe Harbor Percentage Test or the Facts and Circumstances Test.

Safe Harbor Percentage Test. To meet the Safe Harbor Percentage Test, a plan’s ratio percentage must be equal to or greater than the applicable safe harbor percentage. If the plan’s ratio percentage is 50 percent of more, then the plan passes the Safe Harbor Percentage Test. If the plan’s ratio percentage is less than 50 percent, the plan might pass if the ratio percentage exceeds the safe harbor percentage found in the IRS’ Nondiscriminatory Classification Table below.

The plan’s ratio percentage is determined by dividing the percentage of non-highly compensated individuals who benefit under the plan by the percentage of highly compensated individuals who benefit under the plan.

The plan’s non-highly compensated individuals concentration percentage is the percentage of all employees who are non-highly compensated individuals.

Nondiscriminatory Classification Table

Non-HCI Concentration Percentage Safe Harbor Percentage Unsafe Harbor Percentage Non-HCI Concentration Percentage Safe Harbor Percentage Unsafe Harbor Percentage
0-60 50.00 40.00 80 35.00 25.00
61 49.25 39.25 81 34.25 24.25
62 48.50 38.50 82 33.50 23.50
63 47.75 37.75 83 32.75 22.75
64 47.00 37.00 84 32.00 22.00
65 46.25 36.25 85 31.25 21.25
66 45.50 35.50 86 30.50 20.50
67 44.75 34.75 87 29.75 20.00
68 44.00 34.00 88 29.00 20.00
69 43.25 33.25 89 28.25 20.00
70 42.50 32.50 90 27.50 20.00
71 41.75 31.75 91 26.75 20.00
72 41.00 31.00 92 26.00 20.00
73 40.25 30.25 93 25.25 20.00
74 39.50 29.50 94 24.50 20.00
75 38.75 28.75 95 23.75 20.00
76 38.00 28.00 96 23.00 20.00
77 37.25 27.25 97 22.25 20.00
78 36.50 26.50 98 21.50 20.00
79 35.75 25.75 99 20.75 20.00

If the plan’s ratio percentage is equal or greater than the safe harbor percentage, then the plan’s employee classification meets the safe harbor and is nondiscriminatory.

Facts and Circumstances Test. If the plan fails the Safe Harbor Percentage Test, then the plan would apply the Facts and Circumstances Test. To pass the Facts and Circumstances Test, the plan’s ratio percentage must be greater than or equal to the corresponding unsafe harbor percentage in the chart above.

Also, the IRS must find the classification to be nondiscriminatory based on all the relevant facts and circumstances. No one single factor will be dispositive; here are some of the facts that the IRS will consider:

  • The underlying business reason for the classification.
  • The percentage of the employer’s employees benefiting under the plan.
  • Whether the number of employees benefitting under the plan in each salary range is representative of the number of employees in each salary range of the employer’s workforce.
  • The difference between the plan’s ratio percentage and the safe harbor percentage.

The Benefits Test

To pass the Benefits Test, all benefits provided to highly compensated individuals who are participating in the plan must be provided to all other participants. Also, all benefits available for highly compensated individuals’ dependents must also be available on the same basis for all non-highly compensated participants’ dependents.

Essentially, the Benefits Test requires a plan to have no facial discrimination and no discrimination in its operation.

To have no discriminatory benefits on its face, the plan must have the following features:

  • Required employee contributions must be identical for each benefit level.
  • The maximum benefit level cannot vary based on a participant’s age, years of service, or compensation.
  • All benefits provided for participants who are highly compensated individuals are provided for all other participants.
  • Disparate waiting periods cannot be imposed for highly compensated individuals and non-highly compensated participants.

To have no discriminatory benefits in operation, the plan must not discriminate in favor of highly compensated individuals in actual operation; this is a facts and circumstances determination that looks to see if “the duration of a particular benefit coincides with the period during which [a highly compensated individual] utilizes the benefit.”

When to Test

Section 105(h) and its regulations do not specify when nondiscrimination testing must be done. However, for highly compensated individuals to retain favorable tax treatment, the self-insured plan must satisfy the tests for a plan year.

As a best practice, the employer should test prior to the beginning of the plan year, several months before the end of the plan year, and after the close of the plan year. Testing before and during the plan year will allow the plan sponsor to potentially make election or plan design changes to correct testing problems. The nondiscrimination tests cannot be satisfied by corrections made after the end of the plan year. The employer should keep a record of its test results.

Consequences of Failing the Nondiscrimination Tests

If the plan fails the nondiscrimination tests, then highly compensated individuals’ excess reimbursements will be taxable. If the plan is discriminatory, then non-highly compensated individuals will not lose their tax benefits and the plan will not lose its status as a valid Section 105 plan.

Amounts that are excess reimbursement are includable in a highly compensated individual’s income; the excess reimbursement calculation varies based on whether the benefits were paid to highly compensated individuals due to either discriminatory coverage for failing to meet the Eligibility Test, or discriminatory benefits for failing to meet the Benefits Test.

If a self-insured plan fails to meet the Eligibility Test and provides discriminatory coverage, the amount of the excess reimbursement is calculated as:

Total amount of reimbursement to the highly compensated individual X Total benefits paid during the plan year for all highly compensated individuals = The dollar amount to be included in the highly compensated individual’s income
Total benefits paid during the plan year for all participants

If a self-insured plan fails to meet the Benefits Test and provides discriminatory benefits, the amount of the excess reimbursement is the amount reimbursed to that highly compensated individual for the discriminatory benefit.

If the benefit was only available to a highly compensated individual and not to other participants, then the total amount reimbursed to that highly compensated individual for that benefit will be included in that individual’s gross income.

If the benefit is available to non-highly compensated individuals but it is a lesser benefit, then the amount available to the highly compensated individual is offset by the amounts available to the non-highly compensated individuals.

A pro rata share of the discriminatory coverage or discriminatory benefit will be taxable when coverage is partially paid with employee after-tax contributions and partially paid with employer contributions.

If a self-insured plan fails to meet both the Eligibility Test and the Benefits Test, the excess reimbursement is calculated by first applying the Benefits Test. Then the amount of excess reimbursement under the Benefits Test is subtracted from the numerator and dominator when the Eligibility Test is calculated.

The regulations provide six excess reimbursement examples, found here in the Appendix to this Advisor.

Reporting Discriminatory Amounts

If a self-insured plan discriminates in favor of highly compensated individuals, the employer should include the excess reimbursement in the highly compensated individual’s gross income and report the income in Box 1 of Form W-2. The amounts should not be reported in Box 3 or Box 5 of Form W-2 because the amounts are not considered wages for FICA or FUTA withholding.

Plan Design Considerations

Plan sponsors should be cautious of plan designs that create separate plans for different employee groups or that do not cover all employees, create different eligibility requirements for different groups of employees, or base employer contributions or benefits on employees’ years of service or compensation level.

Appendix: Excess Reimbursement Examples

Example 1

Corporation M maintains a self-insured medical reimbursement plan which covers all employees. The plan provides the following maximum limits on the amount of benefits subject to reimbursement: $5,000 for officers and $1,000 for all other participants. During a plan year Employee A, one of the 5 highest paid officers, received reimbursements in the amount of $4,000. Because the amount of benefits provided for highly compensated individuals is not provided for all other participants, the plan benefits are discriminatory. Accordingly, Employee A received an excess reimbursement of $3,000 ($4,000−$1,000) which constitutes a benefit available to highly compensated individuals, but not to all other participants.

Example 2

Corporation N maintains a self-insured medical reimbursement plan which covers all employees. The plan provides a broad range of medical benefits subject to reimbursement for all participants. However, only the 5 highest paid officers are entitled to dental benefits. During the plan year Employee B, one of the 5 highest paid officers, received dental payments under the plan in the amount of $300. Because dental benefits are provided for highly compensated individuals, and not for all other participants, the plan discriminates as to benefits. Accordingly, Employee B received an excess reimbursement in the amount of $300.

Example 3

Corporation O maintains a self-insured medical reimbursement plan which discriminates as to eligibility by covering only the highest paid 40% of all employees. Benefits subject to reimbursement under the plan are the same for all participants. During a plan year Employee C, a highly compensated individual, received benefits in the amount of $1,000. The amount of excess reimbursement paid Employee C during the plan year will be calculated by multiplying the $1,000 by a fraction determined under subparagraph (3) [of 26 CFR 1.105-11].

Example 4

Corporation P maintains a self-insured medical reimbursement plan for its employees. Benefits subject to reimbursement under the plan are the same for all plan participants. However, the plan fails the eligibility tests of section 105(h)(3)(A) and thereby discriminates as to eligibility. During the 1980 plan year Employee D, a highly compensated individual, was hospitalized for surgery and incurred medical expenses of $4,500 which were reimbursed to D under the plan. During that plan year the Corporation P medical plan paid $50,000 in benefits under the plan, $30,000 of which constituted benefits paid to highly compensated individuals. The amount of excess reimbursement not excludable by D under section 105(b) is $2,700:

$4,500 x ($30,000 ¸ $50,000)

Example 5

Corporation Q maintains a self-insured medical reimbursement plan for its employees. The plan provides a broad range of medical benefits subject to reimbursement for participants. However, only the five highest paid officers are entitled to dental benefits. In addition, the plan fails the eligibility test of section 105(h)(3)(A) and thereby discriminates as to eligibility. During the calendar 1981 plan year, Employee E, a highly compensated individual, received dental benefits under the plan in the amount of $300, and no other employee received dental benefits. In addition, Employee E was hospitalized for surgery and incurred medical expenses, reimbursement for which was available to all participants, of $4,500 which were reimbursed to E under the plan. Because dental benefits are only provided for highly compensated individuals, Employee E received an excess reimbursement under paragraph (e)(2) above in the amount of $300. For the 1981 plan year, the Corporation Q medical plan paid $50,300 in total benefits under the plan, $30,300 of which constituted benefits paid to highly compensated individuals. In computing the fraction under paragraph (e)(3) [of 26 CFR 1.105-11], discriminatory benefits described in paragraph (e)(2) are not taken into account. Therefore, the amount of excess reimbursement not excludable to Employee E with respect to the $4,500 of medical expenses incurred is $2,700:

$4,500 x ($30,000 ¸ $50,000)

and the total amount of excess reimbursements includable in E's income for 1981 is $3,000.

Example 6

(i) Corporation R maintains a calendar year self-insured medical reimbursement plan which covers all employees. The type of benefits subject to reimbursement under the plan include all medical care expenses as defined in section 213(e). The amount of reimbursement available to any employee for any calendar year is limited to 5 percent of the compensation paid to each employee during the calendar year. The amount of compensation and reimbursement paid to Employees A-F for the calendar year is as follows:

Employee Compensation Reimbursable amount paid
A $100,000 $5,000
B 25,000 1,250
C 15,000 750
D 10,000 500
E 10,000 500
F 8,000 400
Total $8,400


(ii) Because the amount of benefits subject to reimbursement under the plan is in proportion to employee compensation the plan discriminates as to benefits. In addition, Employees A and B are highly compensated individuals. The amount of excess reimbursement paid Employees A and B during the plan year will be determined under paragraph (e)(2) [of 26 CFR 1.105-11]. Because benefits in excess of $400 (Employee F's maximum benefit) are provided for highly compensated individuals and not for all other participants, Employees A and B received, respectively, an excess reimbursement of $4,600 and $850.

To download the full compliance alert click Here.

Compliance Recap April 2017

Make sure to stay up-to-date with the most recent rules and regulations from April regarding healthcare legislation thanks to our partners at United Benefit Advisors (UBA).

In April, government agencies ramped up their activities by issuing a final rule, updating guidance, and announcing increased Health Insurance Portability and Accountability Act of 1996 (HIPAA) enforcement.

The Internal Revenue Service (IRS) updated its webpage that summarizes employer shared responsibilities payments and their calculation. The Department of Health and Human Services (HHS) Centers for Medicare & Medicaid Services (CMS) released its ACA Market Stabilization Final Rule and its 2018 Medicare Part D Benefit Parameters. The Treasury Inspector General released its report on the IRS' processing of Forms 1094-C and 1095-C.

The IRS released an information letter on HSA ineligibility due to Medicare entitlement. HHS' Office of Civil Rights (OCR) released guidance on electronic protected health information (ePHI) attacks. The Department of Labor (DOL) released its annual report on self-insured group health plans. The Congressional Research Services updated its Patient Protection and Affordable Care Act (ACA) Resources for FAQs.

UBA Updates

UBA released two new advisors in April:

·         ACA Market Stabilization Final Rule

·         Section 105(h) Nondiscrimination Testing

IRS Updates Its Webpage on Employer Payments and Calculations

On April 6, 2017, the IRS updated its webpage on Types of Employer Payments and How They are Calculated. It provides a summary of the employer shared responsibility provisions, the penalties amounts adjusted for calendar year 2017, examples of employer liability, and description of the IRS' process for assessing and collecting the employer shared responsibility payment.

CMS Releases Its ACA Market Stabilization Final Rule

On April 18, 2017, CMS issued its final rule regarding ACA market stabilization. The regulations are effective on June 17, 2017.

The rule amends standards relating to special enrollment periods, guaranteed availability, and the timing of the annual open enrollment period in the individual market for the 2018 plan year, standards related to network adequacy and essential community providers for qualified health plans, and the rules around actuarial value requirements.

The changes primarily affect the individual market. However, to the extent that employers have fully-insured plans, some of the changes will affect those employers' plans because the changes affect standards that apply to issuers.

Read more about the final rule.

CMS Releases Its 2018 Medicare Part D Benefit Parameters

On April 3, 2017, the Centers for Medicare & Medicaid Services (CMS) released its Announcement of Calendar Year (CY) 2018 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter and Request for Information.

Most group health plan sponsors offering prescription drug coverage to Part D eligible individuals must disclose whether the plan is creditable or non-creditable. For coverage to be creditable, the coverage's actuarial value must equal or exceed the actuarial value of the standard Medicare prescription drug coverage. Practically speaking, coverage is creditable if it's at least as good as standard Medicare prescription drug coverage.

Group health plan sponsors will use the parameters below to determine whether their plans' prescription drug coverage is creditable for 2018:

Part D Benefit Parameters -- Standard Benefit 2017 2018
Deductible $400.00 $405.00
Initial Coverage Limit $3,700.00 $3,750.00
Out-of-Pocket Threshold $4,950.00 $5,000.00
Total Covered Part D Spending at Out-of-Pocket Threshold for Non-Applicable Beneficiaries $7,425.00 $7,508.75
Estimated Total Covered Part D Spending for Applicable Beneficiaries $8,071.16 $8,417.60
Minimum Cost-Sharing in Catastrophic Coverage Portion of the Benefit    
    Generic $3.30 $3.35
    Other $8.25 $8.35

Treasury Inspector General Releases Report on IRS' Processing of Forms 1094-C and 1095-C

On April 7, 2017, the U.S. Department of the Treasury Inspector General released its Affordable Care Act: Efforts to Implement the Employer Shared Responsibility Provision that describes the results of its audit of the IRS' preparations for ensuring compliance with the Employer Shared Responsibility Provisions and its related information reporting requirements.

The Inspector General determined that some of the IRS' processes and procedures do not function as intended. As a result, the IRS has been unable to accurately and completely identify noncompliant employers who are potentially subject to the employer shared responsibility payment, unable to process paper information returns timely and accurately, and unable to identify validation errors correctly. Further, the IRS' implementation of a post-filing compliance validation system is being delayed until May 2017.

IRS Releases Information Letter on HSA Ineligibility Due to Medicare Entitlement

The IRS issued Letter 2017-0003 that explains the consequences of health savings account (HSA) ineligibility due to Medicare entitlement. Under the facts, an employee retired and enrolled in Medicare Parts A and B. Later, the employee resumed working and enrolled in the employer's health plan and was provided with an HSA.

The IRS determined that the employee never had a valid HSA because the employee's Medicare enrollment disqualified him from establishing an HSA. Per the IRS, the employee must withdraw the funds from his account and include them in his income; the withdrawal is not subject to a fine.

HHS OCR Releases Guidance About Man-in-the-Middle Attacks on ePHI

The U.S. Department of Health and Human Services Office for Civil Rights (OCR) issued its Man-in-the Middle Attacks and "HTTPS Inspection Products"guidance. The OCR warns organizations that have implemented end-to-end connection security on their internet connections using Secure Hypertext Transport Protocol (HTTPS) about using HTTPS interception products to detect malware over an HTTPS connection because the HTTPS interception products may leave the organization vulnerable to man-in-the-middle (MITM) attacks. In an MITM attack, a third party intercepts internet communications between two parties; in some instances, the third party may modify the information or alter the communication by injecting malicious code.

OCR provides a partial list of products that may be affected. Also, OCR provides a method that organizations can use to determine if their HTTPS interception product properly validates certificates and prevents connections to sites using weak cryptography.

OCR emphasized that covered entities and business associates must consider the risks presented to the electronic protected health information (ePHI) transmitted over HTTPS. Further, OCR encouraged covered entities and business associates to review OCR's recommendations for valid encryption processes to ensure that ePHI is not unsecured and the U.S. Computer Emergency Readiness Team's recommendations on protecting internet communications and preventing MITM attacks.

DOL Releases Its Annual Report to Congress on Self-Insured Group Health Plans

The Department of Labor (DOL) released its Report to Congress - Annual Report on Self-Insured Group Health Plans. The report provides statistics on self-insured employee health benefit plans and financial status of employers that sponsor such plans. The report uses data from the Form 5500 that many self-insured health plans are required to file annually with the DOL.

Congressional Research Services Updates Its ACA Resources for FAQs

On April 3, 2017, the Congressional Research Service updated its Patient Protection and Affordable Care Act (ACA): Resources for Frequently Asked Questions. The report lists contacts for questions about employer-based coverage and sources on taxes, congressional efforts to repeal or amend the ACA, ACA agency audits and investigations, insurance coverage statistics, and legal issues.

Question of the Month

Q. Under what circumstances do HIPAA's breach notification requirements not apply when a breach of protected health information (PHI) occurs?

A. Generally, breach notification must be provided when a breach of unsecuredPHI is discovered. HHS provides only two methods of creating "secured PHI" that would not be subject to the notification requirements if there is a breach:

·         Encryption

·         Destruction

This means that if PHI/ePHI is encrypted or destroyed and a breach occurs, HIPAA's notification requirements are not triggered.

To download the full compliance recap click Here.

The 10 Biggest 401(k) Plan Misconceptions

Do you know everything you need to know about your 401(k)? Check out this great article from Employee Benefit News about the top 10 misconceptions people have about their 401(k)s by Robert C. Lawton.

Unfortunately for plan sponsors, 401(k) plan participants have some big misconceptions about their retirement plan.

Having worked as a 401(k) plan consultant for more than 30 years with some of the most prestigious companies in the world — including Apple, AT&T, IBM, John Deere, Northern Trust, Northwestern Mutual — I’m always surprised by the simple but significant 401(k) plan misconceptions many plan participants have. Following are the most common and noteworthy —all of which employers need to help employees address.

1. I only need to contribute up to the maximum company match

Many participants believe that their company is sending them a message on how much they should contribute. As a result, they only contribute up to the maximum matched contribution percentage. In most plans, that works out to be only 6% in employee contributions. Many studies have indicated that participants need to average at least 15% in contributions each year. To dispel this misperception, and motivate participants to contribute something closer to what they should, plan sponsors should consider stretching their matching contribution.

2. It’s OK to take a participant loan

I have had many participants tell me, “If this were a bad thing why would the company let me do it?” Account leakage via defaulted loans is one of the reasons why some participants never save enough for retirement. In addition, taking a participant loan is a horribleinvestment strategy. Plan participants should first explore taking a home equity loan, where the interest is tax deductible. Plan sponsors should consider curtailing or eliminating their loan provisions.

3. Rolling a 401(k) account into an IRA is a good idea

There are many investment advisers working hard to convince participants this is a good thing to do. However, higher fees, lack of free investment advice, use of higher-cost investment options, lack of availability of stable value and guaranteed fund investment options and many other factors make this a bad idea for most participants.

4. My 401(k) account is a good way to save for college, a first home, etc.

When 401(k) plans were first rolled out to employees decades ago, human resources staff helped persuade skeptical employees to contribute by saying the plans could be used for saving for many different things. They shouldn’t be. It is a bad idea to use a 401(k) plan to save for an initial down payment on a home or to finance a home. Similarly, a 401(k) plan is not the best place to save for a child’s education — 529 plans work much better. Try to eliminate the language in your communication materials that promotes your 401(k) plan as a place to do anything other than save for retirement.

5. I should stop making 401(k) contributions when the stock market crashes

This is a more prevalent feeling among plan participants than you might think. I have had many participants say to me, “Bob, why should I invest my money in the stock market when it is going down. I'm just going to lose money!” These are the same individuals who will be rushing into the stock market at market tops. This logic is important to unravel with participants and something plan sponsors should emphasize in their employee education sessions.

6. Actively trading my 401(k) account will help me maximize my account balance

Trying to time the market, or following newsletters or a trader's advice, is rarely a winning strategy. Consistently adhering to an asset allocation strategy that is appropriate to a participant's age and ability to bear risk is the best approach for most plan participants.

7. Indexing is always superior to active management

Although index investing ensures a low-cost portfolio, it doesn't guarantee superior performance or proper diversification. Access to commodity, real estate and international funds is often sacrificed by many pure indexing strategies. A blend of active and passive investments often proves to be the best investment strategy for plan participants.

8. Target date funds are not good investments

Most experts who say that target date funds are not good investments are not comparing them to a participant's allocations prior to investing in target date funds. Target date funds offer proper age-based diversification. Many participants, before investing in target date funds, may have invested in only one fund or a few funds that were inappropriate risk-wise for their age.

9. Money market funds are good investments

These funds have been guaranteed money losers for a number of years because they have not kept pace with inflation. Unless a participant is five years or less away from retirement or has difficulty taking on even a small amount of risk, these funds are below-average investments. As a result of the new money market fund rules, plan sponsors should offer guaranteed or stable value investment options instead.

10. I can contribute less because I will make my investments will work harder

Many participants have said to me, “Bob, I don’t have to contribute as much as others because I am going to make my investments do more of the work.” Most participants feel that the majority of their final account balance will come from earnings in their 401(k) account. However, studies have shown that the major determinant of how much participants end up with at retirement is the amount of contributions they make, not the amount of earnings. This is another misconception that plan sponsors should work hard to unwind in their employee education sessions.

Make sure you address all of these misconceptions in your next employee education sessions.

See the original article Here.


Lawton R. (2017 April 4). The 10 biggest 401(k) plan misconceptions[Web blog post]. Retrieved from address

Compliance Recap March 2017

Make sure to stay up-to-date with the most recent changes to the ACA, thanks to our partners at United Benefit Advisors (UBA).

In March, the employee benefits world watched as the House Speaker unveiled a proposal to replace parts of the Patient Protection and Affordable Care Act (ACA) with the American Health Care Act (AHCA). The AHCA bill was withdrawn from consideration by the full House on March 24 because it appeared that there would not be enough votes to pass the AHCA.

On March 13, 2017, the U.S. Senate approved Seema Verma as the new administrator of the Centers for Medicare & Medicaid Services (CMS), which spends more than a $1 trillion annually on health care programs.

The IRS updated its Q&As to address whether family members of an employee who declines employer-sponsored coverage would be eligible for a premium tax credit for Marketplace coverage. The IRS updated its Publication 969 regarding health savings accounts and other tax-favored health plans. The IRS released its Information Letter regarding the treatment of cafeteria plan forfeitures. The Department of Labor (DOL) released an advisory opinion on whether an association's administrative services program was an ERISA employee welfare benefit plan or a multiple employer welfare arrangement (MEWA).

UBA Updates

UBA released one new resource in March: Important News Regarding the Employer-Tax Exclusion for Health Insurance

UBA updated existing guidance:

IRS Updates Guidance on Premium Tax Credit Eligibility When Employer-Sponsored Health Plan Coverage is Offered to an Employee's Spouse and Children

The IRS updated its Questions and Answers on the Premium Tax Credit. Specifically, Q&A 15 addresses a situation in which an employer offers minimum value, affordable coverage to an employee, the employee's spouse, and the employee's children. The plan only allows the spouse and dependent to enroll if the employee enrolls. The employee declines to enroll.

The IRS determined that all three family members are not eligible for a premium tax credit for Marketplace coverage because they could have enrolled in the employer-sponsored coverage through the employee's coverage and the coverage would have been minimum value and affordable.

IRS Updates Its Publication 969

The Internal Revenue Service (IRS) updated its Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans for use in preparing 2016 tax returns. The publication describes HSAs, MSAs, FSAs, and HRAs, including eligibility requirements, contribution limits, and distribution information.

IRS Releases Information Letter

IRS released Information Letter Number 2016-0077, in which it explains how an employer may dispose of a flexible benefit plan's unused funds when an employer ceases business operations and terminates a plan and when a participant forfeits funds to an ongoing plan.

The plan documents will determine how an employer may dispose of unused funds when a cafeteria plan terminates. Unused funds will not revert to the U.S. Treasury.

The IRS explained that the Internal Revenue Code (IRC) Section 125 rules apply to funds forfeited by a participant in an ongoing plan. Per IRC Section 125, the participants' forfeited funds may be:

  • Retained by the employer maintaining the plan,
  • Used to defray plan expenses, or
  • Returned to current participants and allocated on a reasonable and uniform basis (but not based on claims experience).

Finally, the IRS explained that when an employee terminates employment, IRC Section 125 prohibits the plan from reimbursing health care expenses incurred after the employee terminates employment and no longer participates in the plan.

DOL Issues Advisory Opinion

On January 13, 2017, the Department of Labor (DOL) issued Advisory Opinion 2017-01A. The DOL determined that an association's administrative services program for its members' employee benefits plan is not an ERISA employee welfare benefit plan and not a multiple employer welfare arrangement (MEWA).

As background, the association is comprised of large employers that sponsor self-insured benefit plans through administrative services only (ASO) agreements with insurance companies. The association has a member-owned and member-funded cooperative that analyzes health care spending, utilization, and outcomes; however, the association does not and will not provide insurance services to its members; determine benefit levels, administer plans, benefits, or claims; facilitate payment of ASO fees to insurers; or file or process claims.

The DOL determined that the program is not an ERISA employee welfare benefit plan because it has no employee participants and it does not offer or provide benefits to employees or their dependents.

The DOL determined that the program is not a MEWA because it is not an arrangement established or maintained to provide welfare benefits to employees of two or more employers. Further, the DOL determined that the program does not operate as a MEWA because no component of the program underwrites or guarantees welfare benefits, provides welfare benefits through group insurance contracts covering more than one employer, pools welfare benefit risk among participating employers, or provides similar insurance or risk spreading functions.

Question of the Month

Q. What obligations does an employer have when it receives returned Form 1095-Bs marked as undeliverable by the U.S. postal service?

A. Under IRS guidance, the employer fulfills its responsibility to furnish the statement to an individual if it mails the statement to the recipient's last known permanent address (unless the recipient affirmatively consented to receive the statement in electronic format).

Practically speaking, the employer should keep the mailing which shows that the employer sent the statement to the recipient's last known permanent address and that the statement was returned undeliverable. That way, the employer has proof that it mailed the statement to the recipient's last known permanent address.

To download the full recap click Here.


How Affordable Care Act Repeal and Replace Plans Might Shift Health Insurance Tax Credits

Find out how your health insurance tax credits will be impacted with the repeal of the ACA in this great article by Kaiser Family Foundation.

An important part of the repeal and replacement discussions around the Affordable Care Act (ACA) will involve the type and amount of subsidies that people get to help them afford health insurance.  This is particularly important for lower and moderate income individuals who do not have access to coverage at work and must purchase coverage directly.

The ACA provides three types of financial assistance to help people afford health coverage: Medicaid expansion for those with incomes below 138% of poverty (the Supreme Court later ruled this to be at state option); refundable premium tax credits for people with incomes from 100% to 400% of the poverty level who purchase coverage through federal or state marketplaces; cost-sharing subsidies for people with incomes from 100% to 250% of poverty to provide lower deductibles and copays when purchasing silver plans in a marketplace.

This analysis focuses on alternative ways to provide premium assistance for people purchasing individual market coverage, explaining how they work, providing examples of how they’re calculated, and presenting estimates of how assistance overall would change for current ACA marketplace enrollees.  Issues relating to changing Medicaid or methods of subsidizing cost-sharing will be addressed in other analyses.

Premium Tax Credits Under the ACA and Current Replacement Proposals

The ACA and leading replacement proposals rely on refundable tax credits to help individual market enrollees pay for premiums, although the credit amounts are set quite differently.  The House Leadership proposal released on March 6, the American Health Care Act, proposes refundable tax credits which vary with age (with a phase-out for high-income enrollees) and grow annually with inflation.  The tax credits under the ACA vary with family income and the cost of insurance where people live, as well as age, and grow annually if premiums increase.

These various tax credit approaches can have quite different implications for different groups of individual market purchasers.  For example, the tax credits under the ACA are higher for people with lower incomes than for people with higher incomes, and no credit is provided for individuals with incomes over 400% of poverty.  The current replacement proposal, in contrast, is flat for incomes up to $75,000 for an individual and $150,000 for a married couple, and so would provide relatively more assistance to people with upper-middle incomes.  Similarly, the ACA tax credits are relatively higher in areas with higher premiums (like many rural areas), while the replacement proposal credits do not vary by location.  If premiums grow more rapidly than inflation over time (which they generally have), the replacement proposal tax credits will grow more slowly than those provided under the ACA.

What is a Tax Credit, and How is it Different from a Deduction?

A tax credit is an amount by which a taxpayer can reduce the amount they owe in federal income tax; for example, if a person had a federal tax bill of $2,500 and a tax credit of $1,000, their tax liability would be reduced to $1,500.  A refundable tax credit means that if the amount of the tax credit is greater than the amount of taxes owed, the taxpayer receives a refund of the difference; for example, if a person had a federal tax bill of $1000 and a tax credit of $1,500, they would receive a refund of $500.  Making the credit refundable is important if a goal is to assist lower-income families, many of whom may not owe federal income tax. An advanceable tax credit is made available at the time a premium payment is owed (which similarly benefits lower-income families so that they can receive the financial assistance upfront). The ACA and a number of replacement proposals allow for advance payment of credits.

A tax credit is different from a tax deduction.  A deduction reduces the amount of income that is taxed, while a credit reduces the amount of tax itself.  For example, if a person has taxable income of $30,000, a $500 deduction reduces the amount of taxable income to $29,500.  If the person’s marginal tax rate is 15%, the deduction reduces the person’s taxes by 15% of $500, or $75. Because people with lower incomes have lower marginal tax rates than people with higher incomes – and, typically don’t itemize their deductions – tax credits are generally more beneficial to lower income people than deductions.

The next section describes the differing tax credit approaches in more detail and draws out some of the implications for different types of purchasers.

How the Different Tax Credits Are Calculated

The ACA provides tax credits for individuals with family incomes from 100% to 400% of poverty ($11,880 to $47,520 for a single individual in 2017) if they are not eligible for employer-provided or public coverage and if they purchase individual market coverage in the federal or a state marketplace.  The tax credit amounts are calculated based on the family income of eligible individuals and the cost of coverage in the area where the live. More specifically, the ACA tax credit for an eligible individual is the difference between a specified percentage of his or her income (Table 1) and the premium of the second-lowest-cost silver plan (referred to as the benchmark premium) available in the area in which they live.  There is no tax credit available if the benchmark premium is less than the specified percentage of premium (which can occur for younger purchasers with relatively higher incomes) or if family income falls outside of the 100% to 400% of poverty range.  For families, the premiums for family members are added together (including up to 3 children) and compared to specified income percentages. ACA tax credits are made available in advance, based on income information provided to the marketplace, and reconciled based on actual income when a person files income taxes the following.

Take, for example, a person age 40 with income of $30,000, which is 253% of poverty.  At this income, the person’s specified percentage of income is 8.28% in 2017, which means that the person receives a tax credit if he or she has to pay more than 8.28% of income (or $2,485 annually) for the second-lowest-cost silver premium where he or she lives.  If we assume a premium of $4,328 (the national average benchmark premium for a person age 40 in 2017), the person’s tax credit would be the difference between the benchmark premium and the specified percentage of income, or $4,328 – $2,485 = $1,843 (or $154 per month).

The American Health Care Act takes a simpler approach and specifies the actual dollar amounts for a new refundable tax credit that could be used to purchase individual market coverage.  The amounts vary only with age up until an income of $75,000 for a single individual, at which point they begin to phase out. Tax credits range from $2,000 for people under age 30, to $2,500 for people ages 30 to 39, $3,000 for people age 40 to 49, $3,500 for people age 50 to 59, and $4,000 for people age 60 and over starting in 2020. Eligibility for the tax credit phases out starting at income above $75,000 for single individuals (the credit is reduced, but not below zero, by 10 cents for every dollar of income above this threshold, reaching zero at an income of $95,000 for single individuals up to age 29 or $115,000 for individuals age 60 and older). For joint filers, credits begin to phase out at an income of $150,000 (the tax credit is reduced to zero at an income of $190,000 for couples up to age 29; it is reduced to zero at income $230,000 for couples age 60 or older; and it is reduced to zero at income of $290,000 for couples claiming the maximum family credit amount). People who sign up for public programs such as Medicare, Medicaid, public employee health benefit programs, would not be eligible for a tax credit. The proposal further limits eligibility for tax credits to people who do not have an offer available for employer-provided health benefits.

Table 2 shows how projected ACA tax credits in 2020 compare to what would be provided under the American Health Care Act for people at various incomes, ages, and geographic areas. To show the ACA amounts in 2020, we inflated all 2017 premiums based on projections for direct purchase spending per enrollee from the National Health Expenditure Accounts. This method applies the same premium growth across all ages and geographic locations.  Note that the table does not include cost-sharing assistance under the ACA that lowers deductibles and copayments for low-income marketplace enrollees. For example, in 2016, people making between 100 – 150% of poverty enrolled in a silver plan on received cost-sharing assistance worth $1,440; those with incomes between 150 – 200% of poverty received $1,068 on average; and those with incomes between 200 – 250% of poverty received $144 on average.

Under the ACA in 2020, we project that a typical 40-year-old making $20,000 per year would be eligible for $4,143 in premium tax credits (not including the additional cost-sharing subsidies to lower his or her deductibles and copayments), while under the American Health Care Act, this person would be eligible $3,000. For context, we project that the average ACA premium for a 40-year-old in 2020 would be $5,101 annually (meaning the tax credit in the ACA would cover 81% of the total premium) for a benchmark silver plan with comprehensive benefits and reduced cost-sharing. A $3,000 tax credit for this same individual under the American Health Care Act would represent 59% of the average 40-year-old benchmark silver premium under the ACA.

Generally, the ACA has higher tax credit amounts than the replacement plan for lower-income people – especially for those who are older and live in higher-cost areas – and lower credits for those with higher incomes. Unlike the ACA, the replacement plan provides tax credits to people over 400% percent of the poverty level (phasing out around 900% of poverty for a single person), as well as to people current buying individual market coverage outside of the marketplaces (not included in this analysis).

While replacement plan tax credits vary by age – by a factor of 2 to 1 for older adults relative to younger ones – the variation is substantially less than under the ACA. The big differences in ACA tax credits at different ages is due to the fact that premiums for older adults can be three times the level of premiums for younger adults under the ACA, but all people at a given income level are expected to pay the same percentage of their income towards a benchmark plan. The tax credit fills in the difference, and this amount is much higher for older adults. These differences by age would be even further magnified under the American Health Care Act (which permits premiums to vary by a factor of 5 to 1 due to age). Before the ACA, premiums for older adults were typically four or five times the premiums charged to younger adults.

The tax credits in the ACA vary significantly with premium costs in an area (see Table 2 and Figure 2). At a given income level and age, people receive bigger tax credits in a higher premium area like Mobile, Alabama and smaller tax credits in a lower premium area like Reno, Nevada. Under the ACA in 2017, premiums in Mobile, Alabama and Reno, Nevada approximately represent the 75th and 25th percentile, respectively.

The disparities between the ACA tax credits and those in the American Health Care Act will therefore vary noticeably across the country. For more on geographic differences between the ACA and the replacement plan, see Tax Credits under the Affordable Care Act vs. the American Health Care Act: An Interactive Map.

The same general pattern can be seen for families as individuals, with lower-income families – and particularly lower-income families in higher-cost areas – receiving larger tax credits under the ACA, while middle-income families in lower-cost areas would receive larger tax credits under the American Health Care Act (Figure 3).

Figure 4 below shows how tax credits under the ACA differ from those in the American Health Care Act for a couple in their 60’s with no children. In this scenario, because premiums for older adults are higher and the ACA ties tax credits to the cost of premiums, a 60-year-old couple would receive larger tax credits under the ACA than the American Health Care Act at lower and middle incomes, but would receive a larger tax credit under the American Health Care Act at higher incomes.

Estimates of Tax Credits Under the ACA and the American Health Care Act Over Time

We estimated the average tax credits that current ACA marketplace enrollees are receiving under the ACA and what they would qualify for if the American Health Care Act were in place.

The average estimated tax credit received by ACA marketplace enrollees in 2017 is $3,617 on an annual basis, and that this amount will rise to $4,615 by 2020 based on projected growth rates from the Congressional Budget Office. This includes the 81% who receive premium subsidies as well as the 19% who do not.

We estimate – based on the age distribution of marketplace enrollees – that current enrollees would receive an average tax credit under the American Health Care Act of $2,957 in 2020, or 36% less than under the ACA (see Table 3 and Figure 3). While many people would receive lower tax credits under the Affordable Health Care Act, some would receive more assistance, notably the 19% of current marketplace enrollees who do not qualify for ACA subsidies.

While ACA tax credits grow as premiums increase over time, the tax credits in the American Health Care Act are indexed to inflation plus 1 percentage point. Based on CBO’s projections of ACA tax credit increases and inflation, the disparity between the average credits under the ACA and the two replacement plans would widen over time. The average tax credit current marketplace enrollees would receive under the American Health Care Act would be 41% lower than under the ACA in 2022 and 44% lower in 2027.


Like the ACA itself, the American Health Care Act includes refundable tax credits to help make premiums more affordable for people buying their own insurance. This might seem like an area where a replacement plan could preserve a key element of the ACA. However, the tax credits are, in fact, structured quite differently, with important implications for affordability and which groups may be winners or losers if the ACA is repealed and replaced.

For current marketplace enrollees, the American Health Care Act would provide substantially lower tax credits overall than the ACA on average. People who are lower income, older, or live in high premium areas would be particularly disadvantaged under the American Health Care Act. People with incomes over 400% of the poverty level – including those buying individual market insurance outside of the marketplaces – do not get any financial assistance under the ACA but many would receive tax credits under the replacement proposal.

The underlying details of health reform proposals, such as the size and structure of health insurance tax credits, matter crucially in determining who benefits and who is disadvantaged

See the original article Here.


Cox C., Claxton G., Levitt L. (2017 March 10). How affordable care act repeal and replace plans might shift health insurance tax credits [Web blog post]. Retrieved from address

How are your retirement health care savings stacking up?

Are you properly investing in your health saving account? Take a look at the this article from Benefits Pro about the importance of saving money for your healthcare by Reese Feuerman.

For all ages, it's imperative to balance near-term and long-term savings goals, but the makeup of those savings goals has changed dramatically over the past 10 years.

With the continued rise in health care costs, and increased cost sharing between employers and employees, more employees and employers have been migrating to consumer-driven health care (CDH) to provide lower-cost alternatives.

With the increased adoption in these plans for employee cost savings purposes, employers have likewise realized similar cost savings to their bottom line. But what role does CDH play in the long term?

Republicans trying to find a way to repeal the ACA are turning to health savings accounts -- new ones, called...

The Greatest Generation was able to rely on their pensions, Social Security, Medicaid, and the like as a means to support them in retirement for both medical and living expenses. However, as the Baby Boomers continue their journey towards retirement, reliance upon future proof retirement funds are fading into the sunset for coming generations. According to a 2015 study from the Government Accountability Office (GAO), 29% of American’s 55 and older do not have money set aside in a pension plan or alternative retirement plan.

To make matters worse, some experts are forecasting Social Security funding will be depleted by 2034, leaving even more retirees potentially without a plan. As such, Generation X and beyond must look for more creatives measures for savings to make up the difference.

In 1978, 401(k) plans were introduced to provide the workforce with a secondary means for retirement savings while also providing significant tax benefits. However, even when actively funded, with rising health care costs and a depleted Social Security system—the solution this workforce has paid into for their entire career—will not be enough.

According to Healthview Services, the average retiree couple will spend $288,000 for just health care expenses during retirement. This sum could easily consume one-third of total retiree savings. This is a contributing factor to the rise and rapid adoption of tax-advantage health accounts to supplement retirement savings. Introduced to the market in 2003, Health Savings Accounts (HSA) have provided employees with an option to set aside pre-tax funds to either cover current year health care expenses, like the familiar Flexible Spending Account (FSA), or carry over the funds year-over-year to pay for medical expenses later or during retirement. The pretax money employees are able to set aside in these accounts to cover health care expenses, will over time, be on par with retirement savings contributions, such as a 401(k) and 403(b), because of increasing costs and triple-tax savings.

It is important for consumers to understand these retirement options and how they could be leveraged for greater financial wealth. As a result, the Health Care Stack, an analysis authored by ConnectYourCare, acts as a life savings model and illustrates the amount of pretax money consumers can contribute for both their lifestyle and health expenses in retirement.

For illustrative purposes, according to current IRS guidelines, the average American under the age of 50 could set aside up to $24,750 each year pre-tax for retirement to cover their health care and living expenses. In this example, if a worker in his or her 30s starts to set aside the maximum contributions (based on IRS guidelines) for HSA contributions, assuming a rate of return of 3%, they would have $330,000 saved in their HSA to cover health care expenses once they reach the retirement age of 65. This number could be even greater if President Trump’s administration passes any number of proposed bills to increase the HSA contribution limits to match the maximum out-of-pocket expenses included in high deductible health plans. This allocation would not only cover average medical expenses, but also provide a triple-tax advantage for consumers from now through retirement.

In addition to the long-term retirement goals, the yearly pre-tax savings may be even greater if notional accounts are factored in, with approved IRS limits of a $2,600 per year maximum for Flexible Spending Accounts, $5,000 per year maximum for Dependent Care FSA, and $6,120 per year maximum for commuter plans. This equals $38,470 (or $44,820 if HSA contributions increase) of pre-tax contributions that consumers could save by offsetting the tax burden and could invest towards retirement.

For those consumers over the age of 50, the savings potential is even greater as they can contribute to a post retirement catch-up for their 401K plans equaling a total of $24,000, plus they may take advantage of the $6,750 HSA savings, as well as the additional $1,000 catch up. If certain proposed bills are passed, the increase could be $38,100 a year that they could set aside, in pre-tax assets, for retirement.

Not only will an individual’s expenses be covered, but there are other benefits brought forth by proper planning, including the potential to reach ones retirement savings goals early. Let’s say that after meeting with a licensed financial investor it was determined that an individual needed $1.8 million in order to retire, and according to national averages, close to $288,000 to cover health care costs.

Given the proper investment strategy around contributions to both retirement and  HSA plans, an individual could - theoretically -save enough to meet their retirement investment needs by the age of 60 for both lifestyle and health care expense coverage, if they started making careful investments in their 20s (assuming the worker is making $50,000 per year with a 3% annual increase).

In comparison, under current proposals, which include the increased HSA limits, retirement savings could be achieved even earlier with the coverage threshold being at 57 for the average worker. This is a tremendous opportunity to transform retirement investment programs for all American workers who would otherwise be left on their own. Talk about the American dream!

While there is not a one-size fits all strategy, it is important for everyone to understand their options and see how these pretax accounts outlined in the Health Care Stack play an important consideration in ones future retirement planning.

Taking the time now to fully understand tax-favored benefit accounts will provide him or her with the appropriate coverage to enjoy life well into their golden years. Retirement is just around the corner, are you ready?

See the original article Here.


Feuerman (2017 March 02). How are your retirement health care savings stacking up?[Web blog post]. Retrieved from address

Cafeteria Plans: Qualifying Events and Changing Employee Elections

Have any questions about cafeteria plans and how they work? Check out this great article from our partner, United Benefit Advisors (UBA) about which events qualify and what changes can happen to any employee's cafeteria plan by Danielle Capilla

Cafeteria plans, or plans governed by IRS Code Section 125, allow employers to help employees pay for expenses such as health insurance with pre-tax dollars. Employees are given a choice between a taxable benefit (cash) and two or more specified pre-tax qualified benefits, for example, health insurance. Employees are given the opportunity to select the benefits they want, just like an individual standing in the cafeteria line at lunch.

Only certain benefits can be offered through a cafeteria plan:

  • Coverage under an accident or health plan (which can include traditional health insurance, health maintenance organizations (HMOs), self-insured medical reimbursement plans, dental, vision, and more);
  • Dependent care assistance benefits or DCAPs
  • Group term life insurance
  • Paid time off, which allows employees the opportunity to buy or sell paid time off days
  • 401(k) contributions
  • Adoption assistance benefits
  • Health savings accounts or HSAs under IRS Code Section 223

Some employers want to offer other benefits through a cafeteria plan, but this is prohibited. Benefits that you cannot offer through a cafeteria plan include scholarships, group term life insurance for non-employees, transportation and other fringe benefits, long-term care, and health reimbursement arrangements (unless very specific rules are met by providing one in conjunction with a high deductible health plan). Benefits that defer compensation are also prohibited under cafeteria plan rules.

Cafeteria plans as a whole are not subject to ERISA, but all or some of the underlying benefits or components under the plan can be. The Patient Protection and Affordable Care Act (ACA) has also affected aspects of cafeteria plan administration.

Employees are allowed to choose the benefits they want by making elections. Only the employee can make elections, but they can make choices that cover other individuals such as spouses or dependents. Employees must be considered eligible by the plan to make elections. Elections, with an exception for new hires, must be prospective. Cafeteria plan selections are considered irrevocable and cannot be changed during the plan year, unless a permitted change in status occurs. There is an exception for mandatory two-year elections relating to dental or vision plans that meet certain requirements.

Plans may allow participants to change elections based on the following changes in status:

  • Change in marital status
  • Change in the number of dependents
  • Change in employment status
  • A dependent satisfying or ceasing to satisfy dependent eligibility requirements
  • Change in residence
  • Commencement or termination of adoption proceedings

Plans may also allow participants to change elections based on the following changes that are not a change in status but nonetheless can trigger an election change:

  • Significant cost changes
  • Significant curtailment (or reduction) of coverage
  • Addition or improvement of benefit package option
  • Change in coverage of spouse or dependent under another employer plan
  • Loss of certain other health coverage (such as government provided coverage, such as Medicaid)
  • Changes in 401(k) contributions (employees are free to change their 401(k) contributions whenever they wish, in accordance with the administrator’s change process)
  • HIPAA special enrollment rights (contains requirements for HIPAA subject plans)
  • COBRA qualifying event
  • Judgment, decrees, or orders
  • Entitlement to Medicare or Medicaid
  • Family Medical Leave Act (FMLA) leave
  • Pre-tax health savings account (HSA) contributions (employees are free to change their HSA contributions whenever they wish, in accordance with the their payroll/accounting department process)
  • Reduction of hours (new under the ACA)
  • Exchange/Marketplace enrollment (new under the ACA)

Together, the change in status events and other recognized changes are considered “permitted election change events.”

Common changes that do not constitute a permitted election change event are: a provider leaving a network (unless, based on very narrow circumstances, it resulted in a significant reduction of coverage), a legal separation (unless the separation leads to a loss of eligibility under the plan), commencement of a domestic partner relationship, or a change in financial condition.

There are some events not in the regulations that could allow an individual to make a mid-year election change, such as a mistake by the employer or employee, or needing to change elections in order to pass nondiscrimination tests. To make a change due to a mistake, there must be clear and convincing evidence that the mistake has been made. For instance, an individual might accidentally sign up for family coverage when they are single with no children, or an employer might withhold $100 dollars per pay period for a flexible spending arrangement (FSA) when the individual elected to withhold $50.

Plans are permitted to make automatic payroll election increases or decreases for insignificant amounts in the middle of the plan year, so long as automatic election language is in the plan documents. An “insignificant” amount is considered one percent or less.

Plans should consider which change in status events to allow, how to track change in status requests, and the time limit to impose on employees who wish to make an election.

See the original article Here.


Capilla D. (2017 February 07). Cafeteria plans: qualifying events and changing employee elections  [Web blog post].