Indiana uses an HSA like account to encourage enrollees to behave more like consumers. The Personal Wellness Responsibility (POWER) account is the centerpiece of the Indiana Check-up law, which goes into effect on January 1, 2008. These are for individuals not eligible for Medicaid, but who earn up to $200 % of the Federal Poverty Level (FPL). Enrollees receive a $1,100 contribution to their account to be used for health care services and prescriptions. Unused balances are rolled over at the end of the year. 

A key aspect of the reform is the design of the health plan that will be offered to the newly covered adults. Utilizing the Health Savings Account model combined with comprehensive insurance coverage above the deductible, individuals would annually receive $500 of pre-deductible, free preventive care and have a $1,100 deductible.

The deductible is paid for through a POWER (Personal Wellness Responsibility) Account established in the individual's name. The account will contain the monthly contributions made by participants in addition to a State contribution for a combined total of $1,100 per adult, which covers the cost of the deductible. The State's contribution will vary according to a sliding scale based on a participant's financial ability to contribute to the account. The State will subsidize the account to ensure there is a total of $1,100 per adult in the account. Participants will contribute no more than 5 percent of their gross family income, and will not have any cost-sharing once the deductible is met. At the end of the year, the balance of the POWER account will roll-over to reduce the following year's required contribution, if the participant has received their age-, gender- and disease-specific preventative services. If they have not received these services, only their own pro-rated contribution to the POWER account will roll-over but the State's contribution will be returned to the State. This design is intended to create an incentive for recipients to utilize services in a cost-conscious manner.

Qualifying Participants will pay for a portion of the POWER accounts on a sliding scale based on income. The state will contribute the rest of the funds necessary to establish accounts of $1,100 per adult. If the funds in the accounts are depleted within a year, the commercial plans will kick in to provide continued coverage.

A Medicaid program in Florida has incorporated reverse HSAs to encourage healthy behaviors (e.g., smoking-cessation programs, weight management programs, routine preventive care).

Through the new program, enrollees begin the year with a zero balance in a health savings account, but can receive up to $125 a year, which can be used to pay for non-covered health expenses. 

Credits can be rolled over from year to year and balances can be used for up to three years after beneficiaries leave the Medicaid program. 

Rhode Island, Connecticut, and Missouri recently followed Massachusetts in enacting a requirement that certain employers establish cafeteria plans under Section 125 of the Internal Revenue Code. 

Rhode Island enacted its law on June 27, 2007. The requirement under the new law is that employers with an average of more than 25 employees for six consecutive months of the year must adopt a cafeteria plan to permit employees to purchase health insurance for them and their dependents with pre-tax salary reductions. Employers are not required to contribute to the cost of health insurance purchased through the cafeteria plan. The requirement applies whether or not the employer offers group health plan coverage to its employees.

Click here to read more of this post.

Adults age 19-29 years old, are one of the largest and fastest growing groups of the uninsured. Unless they are students, dependents typically lose eligibility on their parent’s insurance on their 19^th birthday.

In response, some states have changed the definition of dependents and extended it beyond the age of 18 for commercial insurance for students and non students. States control the definition of dependent coverage in the commercial insurance market, the state employee’s health insurance pool, and other public programs funded by state dollars.

Below is a list of State Initiatives:

Please remember the effect of the Working Families Tax Relief Act of 2004 (AFTRA) amended the definition of a dependent under Code 152. 

The bottom line is that the value of reimbursements made on behalf of a dependent through a health care spending account, and premiums paid by the employer (or the employee pre-tax) toward health coverage for dependents, will not be included in the employee’s gross income, so long as the dependent is deemed either a qualifying child or qualifying relative.

 For these purposes, in order to be a qualifying relative, the individual must meet all the elements of the definition except the gross income limitation. 

What is a Qualifying Child?

In the new dependent definition of qualifying child, the child must meet four conditions:

• Bears a “relationship” to the taxpayer (must be a child of the taxpayer, or a descendent of that child, or a brother, sister, stepbrother or stepsister of the taxpayer, or a descendent of such a sibling); AND
• Has the same principal place of abode as the taxpayer for more than one-half of the taxable year; AND
• Does not turn 19 by the close of the calendar year in which the taxable year of the taxpayer begins, or is a student who does not turn 24 as of the close of that calendar year; AND
• Has not provided over one-half of his or her own support.

The definition of “qualifying child” makes two significant changes: it mandates that the child’s principal place of abode be with the taxpayer for more than one-half the taxable year, and it adds an age limitation. Thus, for example, an employee’s child who previously qualified as a tax code dependent under section 152 because of the amount of support the parent provided to the child may no longer qualify if the child exceeds the age limits. (Careful: In this case, however, the child may meet the definition of qualifying relative, and thus still be considered a dependent.)

What is a Qualifying Relative?

In the newly created dependent definition of qualifying relative, the relative must meet four tests:

• Bears a “relationship” to the taxpayer (or residency if no relationship); AND
• Gross income does not exceed, for 2005, $3,200; AND
• The taxpayer provides over one-half of the individual’s support; AND
• Is not a qualifying child of the taxpayer.

For purposes of the qualifying relative definition, a different definition of "relationship" was created. A person has a relationship to the taxpayer if he or she is a child of the taxpayer or a descendent of a child; a brother, sister, stepbrother, or stepsister; the father or mother, or ancestor of either; a stepfather or stepmother; a son or daughter of a brother or sister; a brother or sister of the father or mother; a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law; or, if not so related, an individual who has the same principal place of abode as the taxpayer and is a member of the taxpayer's household for the taxable year. 

What is the impact on employer-sponsored health plans?

IRC Section 105 generally excludes from an employee’s gross income employer-provided medical care reimbursements paid directly or indirectly to the employee for the medical care of the employee, the employee’s spouse and the employee’s dependents (as defined in IRC Section 152). WFTRA added an amendment to section 105 so that an individual’s status as a dependent under section 105 is determined without regard to the gross income limitation of the qualifying relative definition. In other words, individuals who make over $3,200 may still qualify as tax code dependents for section 105 purposes (so long as they meet the other elements of the definition).

IRC Section 106 provides that the gross income of an employee does not include employer-provided coverage under an accident or health plan. Thus, premiums and other amounts that an employer pays on behalf of an employee to an accident or health plan are not included in gross income (the same is true of premiums paid by an employee pre-tax through salary deduction). The extension of this benefit to contributions by the employer for coverage of spouses and dependents is outlined in IRS regulations explaining Section 106. Originally, WFTRA did not amend Section 106 when they amended Section 105. Thus, based only on WFTRA, qualifying relatives whose gross income exceeds the limit would not be deemed tax code dependents for section 106 purposes. However, the IRS issued guidance on and amended its regulations to conform the definition of dependent used for Section 106 to Section 105. So, the gross income limit will not be an issue for Section 106 purposes either.

Fully insured plans and HMO contracts. For those employers with fully insured/HMO plans, employers should consult with their carriers/ HMOs to be certain that the language they use tracks the language used by the carriers/HMOs. Employers or their carriers/HMOs can use a broader definition of dependent, but there are tax consequences to the employees whose dependents do not fall within the new IRC Section 152 definition. 

Regardless of the State requirements imposed on insurance carriers, employers cannot pre-tax employee contributions for benefits under a cafeteria plan for anyone not meeting the definition of a dependent under Code 152. If an individual (such as a child or domestic partner) does not meet the definition of dependent under section 152, the value of the benefits he or she receives will be imputed as income to the employee. The employee’s gross income for the year, as reflected in his or her W-2, will be higher and this higher amount will be subject to taxation.

State legislation on health reform is hot across the nation. More than 10 states have comprehensive health care reform bills or proposals under review, and it is expected that more states will follow. Several additional states have already established committees to study health reform.

Massachusetts and Vermont have passed laws in 2006 that achieve virtually universal coverage as well as address cost and quality of care. The Massachusetts program requires most people to have health insurance by July 2007. Vermont’s law, which includes access to subsidized or lower cost insurance, relies on voluntary participation.  

Many of the 2007 legislative bills and state commission’s proposals have similar components. 

The Massachusetts Health Care Reform Act (the “Act”) mandates that individuals obtain health insurance coverage and in addition, requires that employers with 11 or more employees establish a compliant Section 125 Cafeteria Plan by July 1, 2007. The intent of the Cafeteria Plan requirement is to make it more affordable for employees to comply with the Law’s individual coverage mandate. Employers also benefit because of the payroll tax savings on employee’s salary reductions used to pay for insurance premiums. With the July 1, 2007 deadline fast approaching, on March 20th a new state agency, the Commonwealth Health insurance Connector, created by the Law issued emergency regulations on Cafeteria Plans. The regulations provide guidance to employers on determining coverage, requirements for a compliant plan, employee eligibility, and timing and filing requirements.

Internal Revenue Code 125 permits employees to make pre-tax contributions toward health insurance under so called Cafeteria Plans, which allow employees to choose between taxable benefits (e.g., cash compensation) and non-taxable benefits (e.g., health insurance) without being taxed if they choose the latter. 

The Act’s basic Cafeteria Plan requirement is that employers with more than 11 full-time employees in the Commonwealth of Massachusetts must adopt and maintain a Cafeteria Plan and file a copy of the plan with the Connector. The Act further requires small groups that choose to designate the Connector as their group health plan to establish a Cafeteria Plan to permit employees to get the benefit of pre-tax treatment for their health insurance premium payments.

The Cafeteria Plan requirement applies to all employers with 11 or more employees at locations within the Commonwealth of Massachusetts, regardless of whether the employer offers medical care insurance on an insured or self-insured basis, whether such insurance is purchased on an individual or group basis, or whether employees obtain insurance through the Commonwealth sponsored Connector Plan.

Employees that must be counted:

Employee means any individual employed by an employer at a Massachusetts location, whether or not the individual is a Massachusetts resident. To determine if the employer has 11 or more employees, the employer must total all payroll hours over a one-year period for all employees, including full-time, part-time, temporary and seasonal employees, and divide that total by 2,000.  If the number is greater than or equal to 11, then the employer is covered by the mandate and must establish and maintain a Cafeteria Plan. Payroll hours include all hours for which the employer paid wages, including regular time worked, holidays, vacation, paid leave and sick time, as well as time spent on short-term or long-term disability. While overtime should also be included, the maximum number of hours to be counted for an employee is 2,000. 

Whether an employer has 11 or more full-time employees is tested on the basis of a “determination period." The determination period for the initial determination of coverage is from April 1, 2006 to March 31, 2007. If the employer is covered for that period, then it must have a compliant Section 125 Cafeteria Plan in place by July 1, 2007. Subsequent determination periods are based on a fiscal year beginning each July 1st and ending the following June 30. Employers with 11 or more full-time equivalent employees during any subsequent determination period become subject to the Cafeteria Plan requirement on the following October 1.

The Connector regulations require that a compliant Cafeteria Plan must allow employees to pay for health insurance premiums through the plan and offer access to at least one medical care coverage option. The emergency regulations do not require that an employer contribute towards the medical insurance offered. Cafeteria Plans with only a Flexible Spending Account plan, or premium only plans that do not include access to any medical coverage will not satisfy the requirements for a plan contained in the emergency regulations.

Plans must also satisfy all the Internal Revenue Code requirements for Section 125 Cafeteria Plans.

Other mandates of the Act include the following employer penalties for failure to comply with the Act:

• Fair Share fee: Employers with 11 or more employees who do not offer coverage pay $295 per worker annually.
• Free Rider Surcharge: Non-providing employers(an employer of a state-funded employee) will also be subject to a Free Rider Surcharge between 10 % and 100% of the claim costs if more than 5 uninsured employees use free public health care or if any one uninsured employee uses free care more than three times a year. 

For more detailed information on the Massachusetts Health Care Reform Act and the Emergency Cafeteria Plan rules, click on the following links:

http://www.hcfama.org/act/

http://www.hcfama.org/act/mahealthreformlaw.asp

http://mass.gov/legis/laws/seslaw06/sl060058.htm

http://www.hcfama.org/act/documents/ACT!!%20fact%20sheet%2020061222.pdf

http://www.mass.gov/Qhic/docs/Emergency%20151F%20Reg_4%20clean.doc