IRS Liberalizes Section 125 Election Change Menu for Non-Calendar Year Plans to Allow “Transition Relief” for Participants to Drop Coverage and Elect Coverage Through an Exchange
November 1, 2013 at 11:28 am | Posted in Affordable Care Act, Cafeteria Plans, Compliance, Federal Laws, Flexible Spending Accounts, Health Care, Health Insurance Exchanges, Health Insurance Marketplace, IRS, Medical, PPACA, Regulations | Leave a commentTags: "PPACA", ACA, Affordable Care Act, Cafeteria Plan, health care reform, health insurance, Health Insurance Exchange, Health policy, Insurance, internal revenue service, IRS, Obamacare, Patient Protection and Affordable Care Act
The IRS has announced that it will allow, subject to an employer’s amendment of its non-calendar year cafeteria plan, the decision of an employee to change his/her Section 125 Cafeteria Plan health care election to drop coverage from his/her employer and obtain coverage through a health insurance exchange created under the Affordable Care Act.
According to the IRS: “An employer may amend its § 125 cafeteria plan to allow an employee who elected to salary reduce through the § 125 cafeteria plan to pay for accident and health plan coverage under the § 125 cafeteria plan with a non-calendar plan year beginning in 2013 to prospectively revoke or change his or her election with respect to the accident and health plan once, during a limited period (for example, the first month of 2014 only rather than the entire plan year) without regard to whether the employee experienced a change in status event described in Treas. Reg. § 1.125–4.”
IRS Issues Guidance on Flexible Spending Arrangements for Plan Years Starting After December 31, 2012
June 5, 2012 at 2:34 pm | Posted in Cafeteria Plans, Flexible Spending Accounts, PPACA | Leave a commentTags: "PPACA", Cafeteria Plan, FSA, IRS
This week the Internal Revenue service (“IRS”) issued guidance on Flexible Spending Arrangements (“FSA”) regarding, among other things, when to implement the $2,500 FSA cap legislated under the Patient Protection Affordable Care Act (“PPACA”). The guidance was necessary because of confusion over the FSA reference in PPACA which implemented the $2,500 cap for a “taxable year” which, of course, does not always align with a plan year.
The IRS advised that:
*The $2,500 limit on health FSA salary reduction contributions in a cafeteria plan applies on a plan year basis and is effective for plan years beginning after December 31, 2012.
- If a cafeteria plan has a short plan year (that is, fewer than 12 months) that begins after 2012, the $2,500 limit must be prorated based on the number of months in that short plan year.
- The $2,500 limit applies on an employee by employee basis. Thus two employees who are married can each elect to make salary contributions up to $2,500 each.
- The $2,500 limit is exclusive of any non-elective flex credit contributions an employer may wish to make to an employee’s health FSA. Accordingly, an employee’s $2,500 health FSA salary contribution limit can be supplemented by, for example, a $1,000 non-elective flex credit to the FSA extended by the employer.
- The $2,500 limit does not apply to FSA dependent care or adoption care contributions, health savings accounts, or health reimbursement arrangements.
- If a plan provides for a grace period (which can be no longer than two months and 15 days) for a plan year, unused salary reductions contributions to the health FSA for the plan year that are carried over into the grace period do not count against the $2,500 limit applicable to the subsequent plan year. The employee may use amounts remaining from the previous plan year to pay for expenses incurred for certain qualified expenses during the grace period.
- Finally, the IRS invited comments by August 17th on modifying or abolishing the health FSA “use it or lose” rule.
A copy of the complete IRS announcement is here: http://www.irs.gov/pub/irs-drop/n-12-40.pdf
Reminder: Amendment Regarding OTC Drug Reimbursement Restriction Needed for Cafeteria Plans Before July 1st
June 16, 2011 at 1:54 pm | Posted in Archer Medical Savings Account, Cafeteria Plans, Flexible Spending Accounts, Health Reimbursement Account | Leave a commentTags: Cafeteria Plan, FSA, HRA, HSA, IRS, MSA, OTC Drug Reimbursement
a. IRS Notice 2010-59
In September 2010 the IRS announced changes in the scope of allowable tax qualified prescription drug purchases. The announcement was driven by the March 2010 federal health care legislation that changed the rules for the reimbursement of over the counter (“OTC”) drugs. Prior to the enactment of the legislation, employee reimbursements or expenses for OTC purchases allowed under a Flexible Spending Account (“FSA”), a Health Reimbursement Account (“HRA”) or an Archer Medical Savings Account (“MSA”) were not counted as part of an employee’s gross income. The legislation provides, however, that beginning after December 31, 2010, expenses incurred under the above health care accounts for medicine or a drug shall be treated as a reimbursement for medical expenses only if it is a prescribed drug or the drug is insulin. An OTC drug purchase can still be a reimbursable event but only if there is a prescription that directs its purchase or it is a purchase of insulin. Conversely, OTC drugs purchased, without a prescription through December 31, 2010 may still be reimbursed tax free at any time pursuant to the terms of the employer’s plan.
The purchase of medical supplies and diagnostic devices (crutches, eye glasses, blood sugar test kits) are still recognized as a tax qualified expense and are not impacted by the IRS announcement.
The IRS also announced that it would allow retroactive amendments of cafeteria plans to allow for the new restriction if done no later than June 30th.
A complete copy of the notice can be accessed by clicking the following link: www.irs.gov/pub/irs-drop/n-10-59.pdf
b. The Price of Non Compliance
The IRS Notice is unequivocal that payments made from an HSA or Archer MSA for any medicine or drug that does not satisfy the prescription requirement above, will be treated as a nonqualified medical expense which will be included in an individual’s gross income and generally subject to a 20% additional tax.
c. How Do I Retroactively Amend My Cafeteria Plan?
If you have not amended your plan yet, you should do so now. You can amend, in writing, your cafeteria plan at any time during the year. Typically amendments are prospective from the date of the amendment but the IRS has allowed for a retroactive effect in this situation. Review your plan to determine who, i.e. the Board of Directors, the Plan Sponsor or a Plan Administrator, has the authority to approve the amendment. If your FSA or HRA is part of an ERISA plan, caution suggests issuing a summary of material modification to plan participants no later than 60 days after adoption of the amendment since the new plan restriction is reducing the scope of tax free drug purchases allowable under the plan.
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