The IRS has addressed many aspects of tax treatment for qualified transportation benefits provided by employers. The information letter focuses on the use of smartcards, transit passes and qualified parking, in addition to the tax treatment of such passes and parking that employers provide by crediting employee’s smartcards.

By definition:

A “transit pass” is any pass, token, farecard, voucher, or similar item (including an item exchangeable for fare media) that entitles a person to transportation on mass transit facilities [Code § 132(f)(5)(A)].

“Qualified parking,” is parking that is located on or near the employer’s business premises or on or near a location from which the employee commutes to work via mass transit or commuter highway vehicle [Code § 132(f)(5)(C)].

Click here to read more.

Health Reform Changes Effective in 2010

• Small Employer Tax Credit
  Effective for taxable years beginning on or after January 1, 2010, small employers with 25 or less “full time equivalent” employees and average annual wages of $50K or less are eligible for a tax credit equal to a portion of the employer’s cost to provide health insurance.  The credit begins to phase out for employers with more than 10 full-time equivalent employees and/or annual wages of more than $25K.
  
• Definition of “Dependent” for Tax Free Health Coverage to Include Children Under 27
  Children under the age of 27 (including natural, adopted, step, and eligible foster children) can now be covered as “dependents” on their parents’ health insurance policies, regardless of whether they otherwise qualify as dependents for income tax purposes. However, take note that this provision affects tax free health coverage only, and if the child is eligible for insurance coverage through his own employer but chooses not to elect, then he is NOT eligible to be covered as a dependent on parent plans. Furthermore, the new definition DOES NOT change the definition of “dependent” for income tax purposes, meaning it does NOT affect the vast majority of FSA plans (which reimburse qualified expenses only if incurred by a tax dependent). This provision can, however, affect your FSA plan if participant accounts are at least partially employer-funded; contact us for more information.
  
• Retiree Insurance
  By June 21, 2010, the Department of Health and Human Services will establish a retiree reinsurance program that will reimburse eligible employer-based plans for 80% of eligible claims between $15,000 and $90,000 for retirees and their covered dependents who are 55 or older (and not eligible for Medicare). Both fully-insured and self-insured plans are eligible for the program. All plans must apply in accordance with HHS procedures and all reimbursements must be used to lower the cost of the plan. The application process will be similar to that of the Medicare Part D subsidy and HHS has said applications will be available in June.
  
• High-Risk Pools
  By June 21, 2010, HHS will establish a high-risk pool for those who cannot otherwise obtain coverage due to a preexisting condition. The pool is set to be terminated in 2014, but until that date, group health plans must reimburse the high-risk pool for medical expenses incurred by the pool for individuals found to have been offered financial incentives to disenroll from the group health plan.

Health Reform Changes Effective in 2011

• Limitation on Over-the-Counter Reimbursements
  Beginning January 1, 2011, over-the-counter medicines or drugs will not be eligible for reimbursement under FSA, HRA or HSA plans without a prescription (regardless of whether a prescription is required to purchase the item). Examples of such medicines would be pain relievers or OTC allergy medications. This does not apply to other eligible items other than “medicines” such as bandages or contact solution.
  
• HSA Excise Tax
  As of January 1, 2011, the excise tax for nonqualified distributions from HSAs will go from 10% to 20%.
  
• Safe Harbor for “Simple” Cafeteria Plans
  Employers with 100 or fewer employees during either of the preceding two years (provided it is a full year) will now have a safe harbor from the normal applicable nondiscrimination rules for cafeteria plans (and plans such as group term life insurance, self-insured medical and dependent care assistance benefits) provided certain requirements are met.
  
• W-2 Reporting
  Beginning with 2011 calendar year plans, employers must begin to report the value of employer-provided health coverage on each employee’s W-2. (The first W-2 affected will be the W-2 sent no later than January 31, 2012).

Health Reform Changes Effective in 2012

• Comparative Effectiveness Research (CER) Fee
  For plan years ending after September 30, 2012, insurers of fully-insured plans and self-insured plans will be charge a fee equal to $2 ($1 in case of policy/plan years ending in fiscal year 2013.) The fee is for funding CER.

Health Reform Changes Effective in 2013

• FSA Salary Reductions
  Tax years beginning on or after January 1, 2013 will see a limit on health FSA reductions limited to $2,500 per year. The cap is not applicable to employer contributions but the limit is indexed for inflation based on the consumer price index in 2014.
  
• Retiree Medical Expense Deduction Eliminated
  Beginning January 1, 2013, the tax deduction permitted for the Medicare Retiree Part D subsidy is eliminated.
  
• Increased Medicare Taxes
  Beginning in 2013, there is a 0.9% increase in Medicare taxes for those earning over $200K or $250K for joint filers.
  
• Limit on Compensation Deduction
  Effective for taxable years beginning after December 31, 2012, the deduction for compensation for workers who provide services to a “covered health insurance provider”  is limited to $500K per year. For years beginning after 2012, a “covered health insurance provider” is a health insurance issuer with 25% or more of their gross premiums received from providing minimum essential coverage.
  
• Exchange Reporting
  As of March 1, 2013, employers must provide notice to employees of the existence of the exchange, how to qualify for a subsidy, and the fact that the employee will lose the employer’s contributions for health coverage if he/she enrolls in the exchange.
  
• Electronic Transaction Standards
  Plans must implement electronic transaction standards and certify compliance to HHS. The timing of these standards varies and we will alert you prior to the necessary implementation dates.

Health Reform Changes Effective in 2014

• Creation of State-based Insurance Exchanges
  Effective January 1, 2014, state-based insurance exchanges are created. Employers with less than 100 employers may participate. States may limit small employers to those with 50 or fewer employers if they choose, prior to 2016. As of 2017, states may allow employers of any size to participate.
  
• Individual Coverage Mandate
  As of January 1, 2014, most individuals are required to maintain “minimum essential coverage” or pay a penalty.
  
• Employer Responsibility Requirements
  As of January 1, 2014, an annual fee will be imposed on health insurance providers.

Health Reform Changes Effective in 2018

• High Cost Plan Tax (Cadillac Plans)
  As of 2018, the value of coverage in excess of certain thresholds is subject to a 40% excise tax.

The Departments of Health and Human Services, Labor and Treasury have issued interim final rules on extending health insurance coverage for adult children up to age 26. The regulations apply to health coverage for plan years beginning on or after Sept. 23, 2010. Under the Patient Protection and Affordable Care Act, employee benefit plans and health insurers that offer dependent coverage to children must now make the coverage available to adult children up to age 26.

Click here to read Notice 2010-38.

Click here for a series of FAQs.

Click here for a fact sheet.

These changes have several implications for users of the mySourceCard and HSAToday Card. Because OTC medicines are no longer eligible for reimbursement without a prescription, they will not be listed in the IIAS eligible item list and therefore cannot be purchased with the card at IIAS merchants. In the case of a prescription OTC purchase, participants will need to submit those with a claim form and be reimbursed. For a summary of the changes, click here (see page 59, section 9003.) 

To read IRS Publication 502 which defines a qualified medical expense, click here.

The IRS announced that under the Affordable Care Act, health coverage provided for an employee’s children under 27 years old is now generally tax-free to the employee, effective March 30, 2010. These changes allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010 and forward if the children are already covered under the employer’s plan or are added to the employer’s plan at any time.

This replaces the lower age limits that applied under previous law, as well as the requirement that a child generally qualifies as a dependent for tax purposes.

Click here to read IRS Notice 2010-38.

A number of changes pertaining to FSAs, HRAs and HSAs, resulting from the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Tax Credit Reconciliation Act of 2010 are going into effect in 2011.

Over-the-Counter medicines will no longer be reimbursable from a FSA, HRA, or HSA after Jan. 1, 2011 without a doctor’s prescription. The Jan. 1, 2011 date refers to the tax year not the plan year. If the plan year is not a calendar year and straddles 2010 and 2011, the plan must discontinue reimbursement for over-the-counter medicines purchased Jan. 1, 2011 or after.

Non-qualified distributions made after Dec. 31, 2010 from a HSA will be subject to a 20% excise tax, as well as income tax. That is an increase from the current 10% excise tax.

Cafeteria Plans sponsored by Employers with 100 or fewer employees during either 2009 or 2010 will have a safe harbor from nondiscrimination rules for tax years beginning Jan. 1, 2011, provided certain requirements are met such as (a) all non-excludable employees are eligible to participate and (b) certain minimum contribution requirements are met.

The Reconciliation Bill, HR 4872, signed after the Patient Protection and Affordable Care Act, expands the definition of a dependent for tax free health coverage (cafeteria plan) purposes under Code Section 105(b).

If the dependent is a child (son, daughter, step child, or foster child) of the taxpayer/covered member and will not reach the age of 27 during the year then he may remain covered under his parent(s) plan and his coverage for health care including insurance, FSA, and HRA coverage is not taxable. Also, student status is irrelevant.

The dependent definition expansion is effective immediately, but not mandatory. In other words, a plan may adopt a more restrictive definition of a covered dependent. All DataPath template documents for FSA and HRA plans refer to Code Section 105(b) when defining a dependent for coverage purposes. Therefore, no change is needed to incorporate the expanded dependent definition into your existing plans. However, if the documents have been modified to refer to dependents as defined in Code Section 152 only, then the expanded definition does not apply.

You can see the reference to Code Section 105(b) in Section 1.10 of the FSA Plan Document (FSA Plan Document v6_122005.doc); Q-2 in the FSA SPD (FSA Summary Plan Description v6_032009_schip.doc); Section 1.02 in the HRA Plan Document (hra_plan_doc_rev_3_2009.doc) which refers to the HRA SPD (HRA_SPD_rev_4_2009_schip_card.doc) Section 1.12.

The IRS released the 2009-2010 Priority Guidance Plan for the projects to be completed from July 2009 through June 2010.

Click here for the full report.

The IRS has released the 2010 cost-of-living adjustments for a variety of tax benefit limits.

For 2010, the monthly limit on the amount that may be excluded from an employee's income for qualified parking benefits will be $230, which remains unchanged from the 2009 limit. The combined limit for transit passes and vanpooling expenses is also unchanged at $230 due to the American Recovery and Reinvestment Tax Act of 2009.

For more information, click here.

IRS priority guidance list for fiscal year 2008-2009 which began July 1, 2008 was published on September 10, 2008. 

Click here for the full report.