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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 changed the current medical mileage reimburseable rate to $0.19 per mile. For each mile driven as part of a certifiable medical necessity, claimants are now allowed reimbursement of $0.19 per mile.

Click here to read the IRS ruling detailing this change.

On February 18, 2000 and on January 26, 2007, the Internal Revenue Service (IRS) issued Private Letter Rulings (PLR) 200007025 and 200704017 respectively. The issue before the IRS was whether the partnership’s self-insured medical plan was an arrangement having the effect of accident or health insurance.

As a general rule, partners are treated as self-employed rather than as employees for income tax purposes. In addition, under IRC Section 1372, S corporation shareholders who own more than 2% of the stock are treated the same as partners of a partnership for fringe benefit purposes.

In PLR 200704017, the IRS ruled that a self-employed individual may deduct premium payments to a self-funded health plan, and is not required to include reimbursements from the plan in gross income. According to the IRS, they reached this conclusion because the health plan had the characteristics of insurance. The major point made by the ruling was that the self-funded plan adequately shifted risk among plan participants. The ruling states that the risk shifting will occur when an insurer agrees to protect the insured against an economic loss in exchange for the payment of a premium by the insured. 

Based on the specific facts presented, the IRS ruled that partners can deduct premium payments to their partnership’s group health plan and exclude benefit payments from their gross income as long as the plan has the effect of accident or health insurance. 

Under IRC 104(a)(3) payments of medical expenses should be excludable from income as long as they are treated as received through accident or health insurance or an arrangement having the effect of accident or health insurance (and that is not merely a reimbursement arrangement). Under IRC 162(1) premium payments made by individual partners for coverage under the Plan will be deductible by them, subject to limitations of that provision. 

In PLR 200007025, the IRS also ruled that a self-employed individual may deduct premium payments to a self-funded health plan, and is not required to include reimbursements from the plan in gross income.

In PLR 200007025, the IRS noted that “the language “or through an arrangement having the effect of accident or health insurance)” in section 104(a)(3), was added to the Code by section 311 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), 1996-43 I.R.B. 7, effective for taxable years beginning after December 31, 1996.  HIPAA Section 311 also increased the amount of the deduction under section 162(I)(1)(A) of the Code. The legislative history of section 311 “Increase in Deduction for Health Insurance Costs of Self-Employed Individuals”, states that under present law, self-employed individuals are entitled to deduct 30 percent of the amount paid for health insurance for the self-employed individual and the individual’s spouse and dependents. The 30 percent deduction is available in the case of self-insurance as well as commercial insurance”. In order for the exclusion to apply, the arrangements must be insurance and there must be adequate risk shifting, i.e., insurance must shift the risk of economic loss from the insured to the insurance program and must distribute the risk of loss among the participants.

These rulings are significant because partners are not “employees,” and thus they are not eligible for the IRC 105(b) gross income exclusion of medical expense reimbursements or the IRC 106(a) gross income exclusion for employer-provided health coverage. Also unlike employees, partners may not pay group health insurance premiums on a pre-tax basis through IRC 125 cafeteria plans.

Although a Private Letter Ruling (PLR) applies only to the party to whom it is addressed, a PLR provides an indication of how the IRS interprets certain issues. 

For copies of the Private Letter Rulings, click on the links below:

http://66.77.65.231/pub/irs-wd/0007025.pdf

http://www.irs.gov/pub/irs-wd/0704017.pdf

IRS priority guidance list for fiscal year 2007-2008 which began July 1, 2007 was published on August 13, 2007.

Highlights include:

• Guidance on automatic enrollment as added by the Pension Protection Act of  2006.
• Guidance on Form 5500 reporting as a result of the Pension Protection Act of 2006.
• Guidance on issues on Health Savings Accounts (HSAs).
• Guidance on welfare benefit funds.
• Guidance on deductions for contributions to a welfare benefit fund.
• Final regulations under section 3121 regarding the definition of salary reduction agreement.
• Proposed regulation under section 4980G regarding calculation of the applicable premium for COBRA continuation coverage.
• Final regulations under section 4980G on comparable HSA contributions. Proposed regulations were published on June 1, 2007.

For the complete list, click here.

This notice provides guidance on rollovers from Health Flexible Spending Arrangements (FSAs)  and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs) under the amendments to the Internal Revenue Code by section 302 of the Health Opportunity Patient Empowerment Act of 2006 (HOPE) included in the Tax Relief and Health Care Act of 2006, enacted on December 20, 2006. This guidance also provides transitional relief for rollovers completed before March 15, 2007.

The permanent guidance on rollovers from FSAs and HRAs to HSAs is effective beginning December 20, 2006 through December 31, 2011.

Under HOPE the new rules provide, in limited circumstances, certain amounts in a health FSA or HRA to be rolled over into an HAS (qualified HSA distribution).  Under the new rules all of the following conditions must be satisfied in order to receive favorable tax treatment on the rollover amount:

By plan year end -

• The plan must be amended
• The employee must elect the rollover
• The year-end balance must be frozen

The funds must be transferred by the employer within two and a half months after the end of the plan year and result in a zero balance in the health FSA or HRA.

Under the transitional relief for amounts remaining at the end of the 2006 plan year, however,

• There is no requirement to freeze the year-end balance in the health FSA or HRA and
• The amendment, election, and transfer must be completed by March 15, 2007.  

The permanent rule for individual with a zero balance in their general purpose health FSA on the last day of the plan year is – the individual does not fail to be an eligible individual as of the first day of the immediately following health FSA plan year because of coverage during a health FSA grace period.

Before implementing the FSA rollovers, consider some of these more complicated administration issues that Notice 2007-22 has created:

• The employer must amend the health FSA or HRA written plan document and SPD prior to allowing the rollovers. 
  
•  Even if qualified HSA distribution reduces the balance of an FSA or HRA to zero, the health FSA or HRA coverage does not end.  Therefore, if employee has a general purpose FSA and requests a mid-year rollover that zeros out the account balance, the employee is still not eligible for an HSA until the end of the plan year.
  
• An employee who begins HDHP coverage after the first day of the month is not an eligible individual until the first day of the next month.  Thus, if an employee begins HDHP coverage after the first day of the month, any qualified HSA distributions on behalf of the individual made before the first day of the next month is included in the employees income and subject to an additional 10 percent tax.
  
• If an employee elects to rollover any health FSA balance at the end of the plan year to an HSA, then the employee cannot submit any additional claims after end of plan year, regardless of when the underlying expense was incurred, nor can any claims be paid after the end of the plan year, even if they were incurred and submitted before the rollover of funds from the FSA to HSA.

Example:  Employer Y has a calendar year general purpose health FSA with a grace period ending on March 15, 2008.  Employer Y offers the employees the option of electing a HDHP coverage for the plan year beginning January 1, 2008.

Before January 1, 2008, Employer Y amends the health FSA to allow for qualified HSA distributions.  The amended plan allows an employee electing HDHP coverage to also elect to have any health FSA balance at year-end, determined on a cash basis, contributed directly to an HSA trustee for the employee.  For this purpose, the year-end balance is the balance of the health FSA without regard to any expenses incurred but not paid.  Under the amendment, if any employee elects the qualified HSA distribution, the employee cannot submit any additional claims after December 31, 2007, regardless of when the underlying expense was incurred, nor are any claims paid after December 31, 2007 even if submitted prior to December 31, 2007.

The notice contains many examples of the permanent and transitional guidance and how to apply the rules.

For a complete copy of the notice, click here.

President Bush signed the Health Opportunity Patient Empowerment Act of 2006 on December 20, 2006. The law, part of the Tax Relief and Health Care Act of 2006, provides new opportunities for health savings account (HSA) participants' to build their funds.

HSA Provisions of the Act include:
A Provision repealing the annual plan limitation on the HSA contribution is effective for taxable years beginning after 12/31/06. Allowing HSA contributions up to the full statutory maximum without regard to the individual’s HDHP deductible amount. The maximum annual contribution that can be made to an HSA is $2,850 for self only coverage and $5,650 for family coverage for 2007. 

A Provision for one time rollover from Health FSA or HRA to HSA effective for taxable years beginning after 12/31/06. Employers can transfer funds from Flexible Spending Arrangements (FSAs) or Health Reimbursement Arrangements (HRAs) to an HSA. The one time rollover of Health FSA and/or HRA amounts (a Qualified HSA Distribution) is the balance in the FSA or HRA as of September 21, 2006, or if less, the balance as of the date of the transfer (Excluding incurred but noy yet reimbursed claims). The provision is limited to one distribution with respect to each Health FSA or HRA of the individual. The Qualified HSA Distribution is treated as a rollover contribution for HSA purposes; therefore, it does not decrease the amount that may be contributed to the HSA during the year.

If an individual does not remain an eligible individual for the 12 months following the month of the distribution, the transferred amount is included in income and subject to a 10 percent additional tax.

The rule only applies to participants who have an HRA or health FSA on September 21, 2006. 

A modified comparability rules applies with respect to the FSA or HRA rollover. If the employer allows any employee the ability to make contributions to the HSA from distributions from a health FSA or HRA, then all employees who are covered under a HDHP must be allowed to make such a distribution.

A Provision disregarding certain FSAs coverage is effective for taxable years beginning after 12/31/06. Coverage under a health FSA during the “grace period” immediately following the end of a plan year is disregarded when considering eligibility of the individual for an HSA, if the balance in the health FSA at the end of the plan year is zero or the entire remaining balance in the health FSA at the end of the plan year is contributed to an HSA.

However, participants whose plan year ending balance is greater than the Health FSA balance on September 21, 2006, and are therefore unable to rollover the entire balance to an HSA and who do not incur enough expenses prior to the end of the plan year equal to the ending balance will continue to be ineligible for an HSA until the end of the grace period. 

A Provision for earlier cost-of-living adjustments is effective for taxable years beginning after 2007. Cost of living adjustments will be determined as of the close of the 12-month period ending March 31 rather than August 31 and must be published no later than June 1st.

A Provision allowing contributions for months preceding the month that the taxpayer is eligible individual is effective for taxable years beginning after 12/31/06. Individuals who are eligible individuals anytime on or before the first day of December are treated as having been an eligible individual for every month during the taxable year for purposes of computing the amount that may be contributed to the HSA. If an individual becomes ineligible during the testing period beginning with the last month of the taxable year in which they first became eligible and ending on the last day of the 12th month following such month (must remain eligible during the following calendar year), the amount of contributions attributed to months preceding the month in which the individual was an eligible individual will be includable in taxable income and an additional 10% tax applies. Taxable in year they become ineligible.

Example: Employee was eligible all for tax year 2007, then changes to an ineligible health plan on 1/1/08, but still has an HSA account. The employee enrolls in a qualified HDHP effective 2/1/08, they can contribute for all of 2008. Also the amount they can contribute for January of 2008 is based on the maximum allowed for the tier(single or family) that they were enrolled in for the month of December 2008.

Example: An employee is hired November 15, 2007 and has enrolled in HDHP family coverage effective December 1, 2007 and is therefore eligible for HSA on December 1, 2007. The employee will be allowed to contribute the maximum allowed for family coverage for the entire taxable year of $5,650.

Example: An employee is hired November 15, 2007 and has enrolled in HDHP family coverage effective December 1, 2007 and is therefore eligible for HSA on December 1, 2007. The employee will be allowed to contribute the maximum allowed for family coverage for the entire taxable year of $5,650. The employee becomes ineligible on 3/1/2008, therefore, the amount of $5179.13 (the total contributed for the first 11 months of 2007 prior to the month they first became eligible ($5650./12*11)) becomes taxable and is subject to the 10% additional tax. 

Note: The amount an individual can contribute under this provision can be complicated. 

Example: suppose an individual had a non-HDHP self only coverage January 1, 2007 through April 30, 2007, then HDHP self only coverage May 1, 20007 through October 31, 2007. On November 1, 2007 the individual switched to HDHP family coverage for the remainder of the year. 

The individual’s HSA contributions for May through October 2007 likely will be based on the HDHP self only coverage maximum of $2,850 ($2,850/12*6=$1,425). The individual’s HSA contributions for November and December likely will be based on the HDHP family coverage maximum of $5,650 ($5,650/12*2=941.67). The individual’s contribution limitation for his or her January through April coverage is apparently based on the HDHP family maximum of $5,650 ($5,650/12*4=1883.32), even though the individual had self only coverage during that time period and then immediately switched into another self only coverage.

Also, note that the varying contribution amount can create administrative issues for the cafeteria plan administrators because the amount contributed can vary so often.

A Provision modifying comparability rules for non-highly compensated employees is effective for taxable years beginning after 12/31/06. Allows employers to make larger HSA contributions for non-highly compensated individuals than for highly compensated individuals. However, comparability rules apply for all non-highly compensated individuals.  

A Provision for one time rollover from IRAs to HSAs effective for taxable years beginning after 12/31/06. The new rules allow for a one-time contribution to an HSA of amounts distributed from an Individual Retirement Arrangement (IRA). The contribution must be made in a direct trustee-to-trustee transfer. The IRA transfer will not be included in income or subject to the early withdrawal additional tax. 

Unlike Health FSA/HRA transfers, the IRA transfer is not treated as a rollover contribution. Thus any amounts transferred from the IRA to the HSA during the year reduce the maximum amount that may otherwise be contributed to the HAS during the year. Only one transfer may be made during the lifetime of an individual. If an individual electing the one-time transfer does not remain an eligible individual for the 12 months following the month of the contribution, the transferred amount is included in income and subject to a 10 percent additional tax.

Note: Employers must amend the Cafeteria and Health Reimbursement Arrangement Plan Documents and SPDs to allow for rollovers from a Health FSA/HRA to the HSA prior to employees making such rollovers. 

 Further guidance is needed on:

·          Whether an employer has discretion over making Qualified HSA distributions available.

·          Must employers make HSA distributions available until January 1, 2012?

·          May employers force employees to make Qualified HSA distributions if the employer wishes to establish an HSA on behalf of the employee without the employee’s consent?

·          Are employee’s allow to make a mid year rollover from FSA to HSA or is it a prohibited transaction under the Cafeteria Plan rules?

Click here to print a copy of the HSAToday IRA/FSA/HRA Transfer Request Form.

IRS has released Notice 2004-16 on March 1, 2004.

Under Code 6041 persons making payments directly to health care providers are required to report miscellaneous compensation to the IRS, enabling it to reconcile information provided by the taxpayers on their income tax returns.  Consequently, health FSAs making payments directly to medical care providers of $600 or more in any calendar year are required to file Form 1099-MISC.  In 2003, Congress amended Code 6041 to provide that Form 1099-MISC reporting requirements do not apply to payments made from health FSAs and HRAs to medical service providers after December 31, 2002. 

Notice 2004-16 provides that certain information reporting requirements of Rev. Rul. 2003-43, 2003-21 I.R.B. 935, will not apply to payments made pursuant to flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs) prior to January 1, 2003. The 1099-MISC reporting requirement was not a problem for traditional health FSAs that reimburse participants after medical services were provided. 

The 1099-MISC reporting requirement had been a concern; however, for health FSA and HRAs that occasionally paid the medical service providers directly such as those that use electronic payment cards. This Notice effectively eliminates the 1099-MISC reporting requirements for traditional health FSAs or HRAs and those that use electronic payment cards, allowing such plans to make direct payment to providers.

To read IRS Notice 2004-16, click here.