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THE EXAM ?

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Health and Accident Benefits

Section 4

Health Insurance Plans• Traditional health insurance

– Fee for service arrangement• HMO – Health Management Organizations• POS – Point of Service• PPO – Preferred Provider Organizations• Tax Treatment of Contributions

Summary Comparison ofHSAs – FSAs – HRAs - MSAs

Provision (Archer) MSAHealth Savings Accounts (HSA)

Health Reimbursement Arrangements

(HRAs)

Health Care Flexible Spending Accounts (FSAs)

Overview An MSA is a tax-exempt trust or custodial account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan.

A tax-exempt trust or custodial account created to pay for the qualified medical expenses of the account holder and his or her spouse or dependents.

An employer funded account that reimburses employees for qualified medical care expenses.

An employer-sponsored benefit program under which employees received reimbursement for qualified medical expenses.

Who is eligible to set up an account?

Self-employed persons and businesses with 50 or fewer employees.

Individuals and families covered only under a qualified high-deductible health insurance plan. Certain “excepted” plans are permissible (e.g. dental, vision).

An employee whose employer offers an HRA.

An employee whose employer offers a health care FSA option.


ProvisionMedical Savings

AccountMSA

Health Savings Accounts (HSA)


(HRAs)


What are the requirements for the corresponding health plan?

Qualified high-deductible health plan insurance:

For 2011 self only deductible of $2,050-$3,050 with an out-of-pocket maximum of not more than $4,100;

Family deductible must be between $4,100-$6,150 with an out-of-pocket maximum of not more than $7,500.

Qualified high-deductible health insurance:

For 2011 self-only deductible must be at least $1,200 with an out-of-pocket maximum of not more than $5,950; family deductible must be at least $2,400 with an out-4of-pocket maximum of not more than $11,900.1

Plan can provide first-dollar coverage of preventive care.

No health plan requirements.

No health plan requirements.

1Amounts to increase by CPI-U.


Provision MSAHealth Savings Accounts (HSA)


(HRAs)


Do the uniform coverage and 12-month election rules apply to the account?

Employee and employer, but both cannot contribute in the same year.

No. Not for the HRA. Applies to high deductible health coverage funded by salary reduction by the employee.

Yes.

Who may contribute to the Account?

Individual: 65% of DeductibleFamily: 75% of DeductibleContributions to an MSA can be made in cash in a lump sum at the beginning of the year.

Employer or employee or both. Generally will be the account holder (including salary reduction) or the employer or both.

Solely the employer. The account holder, employer or both. Usually funded by employees, who choose to salary reduce a certain amount of their pay in an FSA account.




(HRAs)


What are the limits on contributions?

Individual = 65% of deductiblesFamily = 75% of deductible

Up to 100 percent of the deductible amount of the accompanying high-deductible health insurance policy. The max for 2011 is $3,050 for self only coverage and $6,150 for family coverage.

.

No federal income tax law limits. Employers typically set limits, usually equal to or less than the amount of the deductible of employees’ health plan.

No limits under federal income tax law. Employers typically set limits. Salary Reductions capped at $2,500 starting in 2013.




(HRAs)


What are qualified medical expenses?

Qualified medical care described under Section 213 of the tax code.

Qualified medical expenses as defined in Section 213(d) of the Internal Revenue Code, e.g., amounts paid for doctors’ fees, prescription medicines, and necessary medical services not paid for by insurance.

HSA funds generally cannot be used to pay health insurance premiums; however, there are certain exceptions. See below (“When can funds be used to pay health insurance premiums?”).

Qualified medical expenses as defined in Section 213(d) of the Internal Revenue Code, including health insurance premiums.

Unreimbursed qualified medical expenses as defined in Section 213(d) of the Internal Revenue Code, except (in general) for health insurance premiums: e.g., amounts paid for doctors’ fees, prescription medicines, and necessary medical services not paid for by insurance.Health FSA funds generally cannot be used to pay health insurance premiums.




(HRAs)


What are the claim substantiation and adjudication requirements?

Claim substantiation is required.

Claim substantiation by a third party is not required: however the individual HSA owner must maintain the records substantiating their claims.

Plan is self-adjudicated by account owner submitting only eligible claims or reporting the taxable distribution.






(HRAs)


When can funds be used to pay health insurance premiums?

1. While receiving unemployment benefits

2. While receiving COBRA benefits.

1. While receiving unemployment benefits

2. While receiving COBRA continuation benefits

Funds can be used to pay for premium under:1. The employee’s

health plan

2. A spouse’s health plan

3. The employer’s retiree health plan

4. COBRA continuation

coverage.

Health care FSAs can not be used to pay insurance premiums of any kind.




(HRAs)


Can funds be used to pay for long-term care coverage?

Yes, premiums for qualified long-term care insurance are reimbursable up to the dollar limits specified in IRC 213(d).

Yes, premiums for qualified long-term care insurance are reimbursable up to the dollar limits specified in IRC 213(d).

Yes, premiums for long-term care insurance are reimbursable.

No, the Internal Revenue Service code specifically excludes long term care insurance as a qualified benefit under a cafeteria plan; so long term care insurance premiums are not reimbursable under an FSA.




(HRAs)


Are withdrawals for non-medical expenses allowed?

Yes, but doing so will trigger a 15% tax penalty.

Yes, but distributions not used exclusively to pay “qualified medical expenses” are included as income and are subject to a 10% additional tax. At the death of the individual the ownership of the account can be transferred to the spouse – otherwise the HSA ceases to be an HSA and is included in the gross income of the beneficiary or the individual’s estate.

No. No.




(HRAs)Health Care

Flexible Spending Accounts (FSAs)

Can an employer or trustee limit reimbursements?

No. Employee owns the account.

No. Yes. The plan may define covered expenses.

Yes. The plan may define covered expenses.

What is the tax treatment of contributions?

Employee contributions are deductible in computing adjusted gross income and are deductible whether or not the individual itemizes deductions.Employer Contributions are excludable from gross income, are not subject to withholding for income tax, and are not subject to other employment taxes.Earnings: Earnings on amounts in an MSA are not taxable prior to distribution from the MSA.

Employee contributions are tax deductible. Employer contributions are excludable from gross income and not subject to employment taxes (e.g., FICA).

Employer contributions are generally excludable from employee’s gross income.

Employees pay no federal, Social Security or (in most states) state taxes on FSA contributions.

Employers pay no FICA tax on FSA contributions.




(HRAs)


Can funds be carried over from one year to the next?

Yes. Funds may be carried over indefinitely during a participant’s lifetime.

Upon a participant’s death, an HSA may be passed on to a surviving spouse without federal tax liability.

Yes. Funds may be carried over indefinitely during a participant’s lifetime.

Upon a participant’s death, an HSA may be passed on to a surviving spouse without federal tax liability.

Yes. Unused amounts in an HRA may be carried over, subject to any limits set by the employer).

*Yes for an additional 3 months following the end of the plan year.

Are accounts portable?

Yes. The account is owned by the employees. Employee continues to have access to the account when they leave or change jobs.

Yes. The account is owned by the employees. Employee continues to have access to the account when they leave or change jobs.

Yes, but only at discretion of the employer.

No. Unused FSA balances are forfeited to the employer if the employee leaves or changes jobs.

*New Ruling




(HRAs)Health Care

Flexible Spending Accounts (FSAs)

Does interest accrue on funds deposited in the account?

Yes. Yes. Interest accrues tax free.

There is no requirement that interest accrue but employers have discretion to credit interest to the HRA accounts.

No. Interest is not accrued.

Do 105(h) nondiscrimination rules apply?

No. “Comparable” contributions required. Employer contributions must be the same for all employees who are “eligible individuals.” However, if employee contributions to an HSA are made through a Section 125 cafeteria plan, employer contributions are subject to the Section 125 nondiscrimination rules, not the comparability rules

Yes, if self-funded. Yes.

Long Term Care Insurance

• Generally treated as accident and health insurance contracts– Amounts received are excluded from income– Per Diem Payments

• Capped at $300 per day(2011).

COBRA Health Insurance Continuation(Consolidated Omnibus Reconciliation Act of 1985)

• Employers: 20 or more employees• Purpose: To allow qualified beneficiaries the opportunity

to elect continued group health for specified periods of time under specified qualifying events

• Qualifying Event– Death of the covered employee;– The covered employee’s termination of employment (for

reasons other than gross misconduct) or reduction in hours worked;

– Divorce or separation of the covered employee;– Entitlement of the covered employee to Medicare benefits

(upon enrolling in the program);– A dependent child losing that status; and– Bankruptcy proceedings that cause a retired covered

employee or the employee’s dependents to lose coverage.

COBRA Health Insurance Continuation (Continued)

• Duration of Continuation– Termination or reduction of work hours – 18 months– Absence due to military service – 24 months– Beneficiary is disabled – 29 months– Death, divorce, separation, loss of dependent child

status or two or more qualifying events – 36 months• Premium Requirement:

– 102% of health care premium rate. The 2% is allowance for additional administrative costs.

– Up to 150% of premium cost for qualified disabled dependents from the 18th up to the 36th month of coverage

• Coverage Election– The election period begins the day the previous coverage terminates– The election period lasts 60 days from that time (no longer)

Family and Medical Leave Act• Employers: 50 or more employees• Guarantees employees:

– 12 weeks of unpaid leave in a year.– Continuation of health benefits while on leave – employee

is responsible for premiums during leave (may be required to pay entire premium, not just EE portion

• Eligibility– Employed for at least 12 months (can be non-consecutive)– Has worked at least 1250 hours within previous 12 months– Expatriates are not covered – employees must work within

the United States or any of its territories and possessions.

Sick Pay• Essential purpose is to replace the wages of an

employee who cannot work because of an illness or injury.

• Sick Pay under a Separate Plan– Short Term Disability– Long Term Disability– Third party sick pay taxation requirements

• Permanent Disability Benefits• Difference between Sick Pay and Workers

Compensation

Cafeteria Plans• Provides a choice among taxable (cash) and nontaxable (qualified

benefits)• Qualified benefits include:

– Coverage under accident and health insurance plans• Medical, Dental, Vision, Etc.

– Coverage under dependent care assistance plans– Group term Life insurance– Qualified adoption assistance

• Funded by either Flex dollars or salary reductions• Nondiscrimination Testing

– Eligibility Testing– Contributions and Benefits Test– Concentration Test– Special Health Benefits Test

Tax treatment of Cafeteria Plans

• Employer contributions– Excluded from employee’s income– Not subject to federal income tax withholding

or employment taxes• Pre-tax contributions

– Excluded from employee’s income• Post-tax contributions

– Included in employee’s income, however, benefits received are not

Questions ?

RETIREMENT BENEFITS AND

DEFERRED COMPENSATION

PLANSSection 4

Retirement and Deferred Compensation Plans

• 401(a) - Qualified Pension & Profit Sharing Plans• 401(k) - Cash or Deferred Arrangements• 403(a) or 403(b) - Tax-Sheltered Annuities• 457 - Deferred Compensation Plans – Public Sector and

Tax-exempt groups• 501(c)(18)(D) - Employee Funded Plans• IRA - Individual Retirement Accounts• 408(k) – SEP - Simplified Employee Pensions• 408(p) – SIMPLE Plans - Savings Incentive Match Plans

for Employees of Small Employers• ESOP - Employee Stock Ownership Plans• Nonqualified Deferred Compensation Plans

Qualified Pension and Profit Sharing Plans (IRC 401(a))

•Defined Benefit Plan–5 Characteristics (4-85 2011)–Payroll Dept Responsibilities–Annual benefit limit = $195,000

•Defined Contribution Plan–Individual Accounts–Contribution by Employer–Contribution by Employee (but not always)–Annual Compensation Limit = $245,000–Annual Contribution Limit = $49,000

•Or 100% of Employee compensation

Plan Type

Annual Deferral Limit

Annual Catch up Limit

Annual Compensation Limit

Annual Contribution Limit

W-2 Box 12 Code

401(k) $16,500 $5,500 $245,000 $49,000 D

403(b) $16,500 $5,500 $245,000 $49,000 E

457 $16,500 $5,500 $245,000 G

501(c) $16,500 $5,500 $245,000 $49,000 H

IRA $1,000 Married $85,000Single $53,000

$5,000

408(k) $16,500 $5,500 $245,000 $49,000 F

408(p) $10,500 $2,500 $245,000 $49,000 S

ESOP $49,000

Amounts to remember

401(a) Pension Plans vs.Profit Sharing Plans

• Pension Plans– Benefit determined

when employee retires– Payable over

employee’s life span– Employers

contributions are not based on profit

– Defined benefit plan or defined contribution plan

• Profit Sharing Plans– Allows employees to

participate in company profits

– Discretionary contribution based on a selected formula by employer

– Defined contribution plan only

Cash or Deferred Arrangements (IRC 401(k))

•Pre-Tax contributions that decrease Employee’s taxable income Employer can make deferrals without employee consent up to 3%

–Employee can then stop deferrals and receive cash or continue

•Non Discrimination testing•Contributions to all plans are included in determining limit•Early distribution penalty equal to 10% excise tax•Employee contributions not subject to Federal Income Tax•Contribution amounts are subject to Social Security and Medicare Tax

Tax Sheltered Annuities (IRC 403(B))

•Public Schools, Tax Exempt Charities, Religious, Educational Organizations•Requirements•Contribution limits EGTRRA•Employee contributions not subject to Federal Income Tax•Special provision for employees over 15 years of service•Additional information available – IRS Publication 571

Deferred Comp Plans for the Public Sector and Tax-Exempt Groups (IRC 457)

•Eligibility•No discrimination testing•EGTRRA Limits•Contributions placed in tax exempt trust for employees and beneficiaries•Distributions cannot be made before employee reaches 70 1/2 years old, separation of employment (retirement) or employee has unforeseeable emergency. •Employee contributions not subject to Federal Income Tax

Employee-Funded Plans (IRC 501(c)(18)(D))

•EGTRRA Limits•Employee contributions not subject to Federal Income Tax•Defined contribution plan•Solely funded by employee contributions•Maximum deferral limit is reduced by other CODAs maintained by the employer

Individual Retirement Accounts •EGTRRA Limits•After tax amount deductible based on participation in other plans•Deductibility based on Adjusted Gross Income •Employer contributions included in income, but not subject to FIT•Defined Benefit or Defined Contribution Plan•Usually direct deposit contributions – not payroll deductions•Can be SIMPLE plan•ROTH IRA

–Contributions not deductible–Not included in income if meet criteria–May contribute double amount of traditional IRA deductible amount

Simplified Employee Pensions (IRC 408(k)) (SEP)

•Employer’s who cannot provide traditional plans•Is an IRA•Employer must make contribution to plan on behalf of employee based on guidelines

–21 years of age–Worked for employer 3 out of last 5 years–Earned at least $500 in 2008

•Salary reduction agreements limited to EGTRRA•Employees can elect a salary reduction agreement if plan was setup before 1997.

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE)

IRC 408(p)•Small Business Job Protection Act of 1996•Must allow eligible employees to participate

–Employer with no qualified retirement plan and less than 100 employees–Received at least $5,000 in compensation during any 2 prior years–And expect to receive $5,000 in current year–EGTRRA Limits

•Fully vested at time of contribution•Non-Discrimination testing•EE’s must have 60 days before year begins to make changes to contribution•Not subject to Federal Income Tax

Stock Ownership Plans (ESOP) •Must meet 401(a) requirements

–Participation–Vesting–Non discrimination

•ESOP buys stock with employer contributions or borrowed / leveraged funds

–Stock bonus plan –Combined stock bonus and money purchase plan–Designed to invest primarily in employer’s stock

•Value changes based on stock •Not considered wages

Nonqualified Deferred Compensation Plans

• Compensation will be deferred until a later date• Funded vs. Unfunded

– Funded • Subject to taxation

– Unfunded• Not subject to taxation

• Cannot be any other type of deferral plan• American Jobs Creation Act of 2004

W -2 Reporting Requirements• MSA – Box 12 – Code R• HSA – Box 12 – Code W• Non-taxable Sick Pay – Box 12 – Code J• Dependent Child Care – $5000 - Box 10• Adoption Assist - $10,630 – Box 12 – Code T• 401(k) – Box 12 – Code D• 403(a) or 403(b) – Box 12 – Code E• 457 – Box 11 or Box 12 – Code G• 501(c) – Box 12 – Code H• 408(k) – Box 12 – Code F• 408(p) – Box 12 – 401(k) = Code D, IRA = Code S• 409(a) – Box 12 – Code Y or Z

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