Note: None of this should be taken as legal or tax advice.
The easiest way to offer health benefits today is via a
health reimbursement arrangement (HRA). With the right HRA Software, employers can now record tax-free health care reimbursements via their existing payroll service (e.g. Paychex, ADP, Quickbooks, etc.). When reimbursing employees tax-free via payroll, it is important to understand the difference between a payroll deduction and a payroll reimbursement.
What is a payroll deduction?
A payroll deduction is the removal of dollars from an employee paycheck.
What is a payroll reimbursement?
A payroll reimbursement is the addition of dollars to an employee paycheck.
How does a payroll reimbursement differ from a payroll deduction?
When an employer reimburses an employee through an HRA, employee gross salaries are not affected. An employer simply adds the dollars that have been approved for employees' qualified medical expenses (e.g. insurance premiums, doctor visits, etc.) to the employee's paycheck using a non-taxable line-item. This concept is often referred to as a "tax-free addition" or "negative deduction" on the paycheck.
What obligations does an employer have to report payroll reimbursements?
IRS Notice 2012-9 clarified that an employer is not required to report payroll reimbursements made through an HRA.
Note: None of this should be taken as legal or tax advice.
Now that 2012 has become reality, figuring out employee health benefits can be a daunting task for both employers and employees.
With looming changes from health care reform and increased cost-shifting to employees,
defined contribution health benefits have emerged as the health benefit program of the future. According to leading experts,
2012 promises to be a huge year for defined contribution health benefits. That means any employer or employee considering health benefits in 2012 needs to consider the following.
In a
recent survey, McKinsey & Company spoke to a number of employers regarding major trends they see for 2012 and beyond. The following is a summary of those trends to help employers plan their health benefits strategy:
1) Cost-shifting brings companies closer to defined contribution health benefits
2) Health care reform encourages defined contribution health benefits
Health care reform, coupled with rising costs, has employers of all sizes concerned. According to McKinsey & Company, up to 60% of educated employers plan to "definitely" or "probably" pursue alternatives to offering health insurance such as:
- Dropping employer-sponsored coverage,
- Offering employee health benefits using a defined contribution model, or
- Offering health benefits only to certain employees.
Many carriers have added defined contribution health benefit programs to their product offerings, confirmation that defined contribution has become an increasingly important component of health benefit programs.
3) Technology and education are a big part of defined contribution health benefits
One of the primary changes to the health benefits landscape is the move toward more electronic communication, which means that employees will be required to educate themselves and enroll in their own health insurance plans.
Private health exchanges and individual health insurance quoting/enrollment technology are expected to be a large component of defined contribution health benefits.
With
less than 25% of small businesses expected to offer group health insurance by 2014, have you explored all possible alternatives?
Note: None of this should be taken as legal or tax advice. Aetna
recently announced that it will be providing individual health insurance options to more than 200,000 self-employed members of
NaseCare.
Many self-employed individuals are unaware that their individual health insurance premiums may be paid for with tax-free dollars.
Note: None of this should be taken as legal or tax advice.
If passed, the bill, effective January 1, 2013, would amend the Internal Revenue Code to allow unused amounts contributed to flexible spending arrangements to be paid back to the participants as taxable income after the close of a plan year. Currently, such unspent amounts must be forfeited by the employee due to the "use-it-or-lose-it rule".
What do you think?
Read below for the current text of
"H.R. 1004: Medical FSA Improvement Act of 2011".
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SECTION 1. SHORT TITLE.
This Act may be cited as the ‘Medical FSA Improvement Act of 2011’.
SEC. 2. ADDITION OF TAXABLE DISTRIBUTIONS.
(a) Treatment of Amounts Expended for Medical Care- Section 105 of the Internal Revenue Code of 1986 (relating to amounts received under accident and health plans) is amended by inserting at the end the following new subsection:
‘(k) Amounts Paid Under Medical Flexible Spending Arrangements-
‘(1) APPLICATION OF SUBSECTION (b) AND SECTION 106- For purposes of subsection (b) and section 106, a plan shall not fail to be treated as flexible spending arrangement solely because such plan, in addition to reimbursing expenses incurred for medical care (as defined in subsection (b)) during the plan year, distributes for the plan year all or a portion of the employee’s balance.
‘(2) LIMITATION- Paragraph (1) shall apply only in the case that the balance under such arrangement for a plan year is distributed after the close of the plan year to which the balance relates and not later than the end of the 7th month following the close of such plan year.
‘(3) TAX TREATMENT OF DISTRIBUTION- Any distribution to which paragraph (1) applies shall be treated as remuneration of the employee for employment for the taxable year in which it is distributed.
‘(4) FLEXIBLE SPENDING ARRANGEMENT- The term ‘flexible spending arrangement’ means a benefit program within the meaning of section 106(c)(2) (relating to long-term care benefits).’.
(b) Additional Deferred Compensation Exception- Paragraph (2) of section 125(d) of such Code (relating to deferred compensation under a cafeteria plan) is amended by inserting at the end the following new subparagraph:
‘(E) EXCEPTION FOR CERTAIN FLEXIBLE SPENDING ARRANGEMENTS- Subparagraph (A) shall not apply to a flexible spending arrangement (within the meaning of section 106(c)(2)) as a result of amounts being distributed to the covered employee in accordance with section 105(k).’.
(c) Conforming Amendment- Section 409A(d)(1) of such Code is amended by striking ‘and’ at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ‘, and’, and by adding at the end the following:
‘(C) a flexible spending arrangement which is subject to section 105(k).’.
(d) Effective Date- The amendments made by this section shall apply to plan years beginning after December 31, 2012.
(e) Transition Rules- In the case of plan years that begin before the date of the enactment of this Act, in implementing the amendments made by this section a flexible spending arrangement may allow an individual to make a new election or to revise an existing election under such arrangement so long as such new or revised election is made within 90 days after the date of the enactment of this Act.
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Click here to track the bill on GovTrack.
Note: This should not be taken as tax or legal advice. Recently, the state of Georgia passed a bill that explicitly exempts
Health Reimbursement Arrangements (HRAs) and individual health insurance policies from the state's small group health insurance regulations.
According to
Georgia Insurance Code Section 33-51-7:
§ 33-51-7. Health reimbursement arrangement only
(a) The Commissioner shall be authorized to allow health reimbursement arrangement only plans that encourage employer financial support of health insurance or health related expenses recognized under the rules of the federal Internal Revenue Service to be approved for sale in connection with or packaged with individual health insurance policies otherwise approved by the Commissioner.
(b) Health reimbursement arrangement only plans that are not sold in connection with or packaged with individual health insurance policies shall not be considered insurance under this title.
(c) Individual insurance policies offered or funded through health reimbursement arrangements shall not be considered employer sponsored or group coverage for purposes of this title, and nothing in this Code section shall be interpreted to require an insurer to offer an individual health insurance policy for sale in connection with or packaged with a health reimbursement arrangement or to accept premiums from health reimbursement arrangement plans for individual health insurance policies.
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Individual policies reimbursed by
ZaneHRA meet the requirements of Section 33-51-7 because:
- ZaneHRA is a health reimbursement arrangement only plan;
- ZaneHRA is not sold in connection with or packaged with specific individual health insurance policies; and
- The employer/employees do not treat specific individual health insurance plans as a part of an employer-sponsored plan or program.
