The Patients’ Freedom to Choose Act was introduced in the House of Representatives today by Rep. Erik Paulsen (R-MN) and a companion bill was introduced in the Senate by Senator Kay Bailey Hutchison (R-TX). The bills (H.R. 5923/S. 3673) would repeal the $2,500 cap on FSAs and the restrictions placed on the use of FSA and HSA dollars for reimbursement of over-the-counter drugs included in the health reform law.

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 IRS released the 2011 inflation adjusted amounts for Health Savings Accounts. The amounts remain unchanged from 2010.

The annual contribution limits for 2011 are:

• Limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,050.
• Limitation on deductions for an individual with family coverage under a high deductible health plan is $6,150.

A "high deductible health plan" is defined as a health plan with an annual deductible that is not less than $1,200 for self-only coverage or $2,400 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts but not premiums) do not exceed $5,950 for self-only coverage or $11,900 for family coverage.

Click here to read Revenue Procedure 2010-22.

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.

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 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 published final regulations on the HSA comparability rules and how to report and pay excise taxes for failure to comply with comparability requirements or various group health plan mandates (including COBRA and HIPAA). You will find few differences between these final regulations and the proposed regulations issued in 2008. (These comparability provisions apply to employer contributions made for calendar years beginning on or after Jan. 1, 2010.)

The following are comments on excise tax reporting and the HSA comparability requirements.

Excise Tax Reporting. Persons can be liable for an excise tax for failure to meet the Code's requirements regarding

• COBRA
• HIPAA portability (including GINA mandates)
• Mental health parity, and
• Minimum hospital stays for newborns and mothers or Michelle's Law.

Individuals liable for an excise tax generally must file IRS Form 8928 and pay the tax by the due date for filing their federal income tax returns (without extensions). Take note of this provision eliminating extensions for filing the Form 8928 because it may be a surprise for companies routinely filing extensions.

A Form 8928 must be filed by employers liable for an excise tax for noncomparable HSA or Archer MSA contributions by the April 15th following the calendar year in which the noncomparable contributions were made. (Form 8928 has not been released yet, but a version has been released requesting comments.)

The excise tax reporting provisions apply to any Form 8928 due on or after Jan. 1, 2010.

HSA Comparability Requirements.

The final regulations reflect changes to the HSA comparability rules made by the Tax Relief and Health Care Act of 2008 (TRHCA). Some of the changes result in the following:

• The regulations clarify that comparable contributions are required for all non-HCEs who are within the same group and for all HCEs who are within the same group even if an employer may make larger annual HSA contributions for non-HCEs than for HCEs who are within the same group of comparable participating employees. (This is permitted under TRHCA).
• An employer may make a full year's worth of HSA contributions under TRHCA's full-contribution rule for mid-year eligible individuals, so long as contributions are made on an equal and uniform basis for all comparable mid-year eligible individuals.
• An employer can make a larger HSA contribution for employees in a higher tier of family HDHP coverage than to those in a lower tier even if the employees in the higher tier are all HCEs and the employees in the lower tier are all non-HCEs. (For instance, self-plus-two is a higher tier than self-plus-one.)
• An employer can offer qualified HSA distributions (i.e., direct rollovers to HSAs from health FSAs or HRAs) to any eligible employee covered under any HDHP if the employer offers qualified HSA distributions to all such employees. Alternatively, an employer may limit qualified HSA distributions to eligible employees covered under the employer's HDHP.

Click here to view copy of pertinent regulations. (Treas. Reg. Secs. 54.4980B-2, 54.4980D-1, 54.4980E-1, 54.4980G-1, 54.4980G-3, 54.4980G-4, 54.4980G-6, 54.4980G-7, 54.6011-2, 54.6061-1, 54.6071-1, 54.6091-1, and 54.6151-1, 74 Fed. Reg. 45994 (Sept. 8, 2009)

• An account holder’s interest in an HSA is subject to an IRS levy under Code Section 6331, and
  
• The account holder will be liable for the 10% additional excise tax on nonmedical HSA distribution unless (at the time of the levy), the holder was 65 years of age or holder or was disabled (as defined in Code Section 72(m)(7)).

Click here to read a copy of Chief Counsel Advice 200927019, 2009 WL 1894726 (May 1, 2009)].

The IRS has released Rev. Proc. 2009-29, which addresses the 2010 plan limits for High Deductible plans and Health Savings Accounts.

To read Rev. Proc. 2009-29, click here.