The

TAX PROFESSIONAL’S

GUIDE TO HEALTH CARE

REFORM

Ensure Your Clients Make the Right Tax Decisions

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INTRODUCTION

The Affordable Care Act (ACA) requires CPAs, tax advisors and accountants to be experts on the key provisions of health care reform. As a result, tax advisers will now be the "go-to" for all health insurance decisions.

The primary shift in the role of the tax professional will center on assisting business clients in determining:

1. The size of the business based on Full-Time Equivalent Employees (FTEs) vs. annual revenue, and

2. The amount of tax credits and subsidies available and whether or not that outweighs the tax penalties and costs of offering qualified group health insurance.

For example, tax professionals are going to be required to help clients consider whether it will be more valuable for them to go to a state exchange or a private insurer based on how many FTEs they have.

CPAs, accountants, and tax advisors should utilize this e-book to understand the key tax-related provisions of health care reform.

Note: Guide revised July 5, 2013 to reflect the delay in ACA Employer Mandate and Reporting provisions from 2014 to 2015

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KEY PROVISIONS

OF THE ACA

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Overview of the Key Provisions of Health Reform

The Patient Protection and Affordable Care Act (ACA) is a piece of legislation with many provisions phasing from 2012 to 2015. Below, we have provided a brief outline of the key provisions taking effect over the next 3 years.

Key Provisions of the Affordable Care Act That Take Effect in 2012 Medicare hospital value-based purchasing program Increase in physician quality reporting requirements in Medicare Additional Medicare pilot programs on alternative payment

methodologies, (e.g. accountable care organizations) Increased requirements for hospitals to maintain not-for-profit status Fees from insured (including self-insured) plans transferred to the Patient-Centered Outcomes

Research Trust Fund

Key Provisions of the Affordable Care Act That Take Effect in 2013 Increase Medicare payroll tax by 0.9% on high-income earners Impose a 3.8% tax on net investment income of high-income individuals $500,000 cap on health insurers’ deduction for executive compensation Eliminate employer deduction for Medicare Part D subsidy FSA limitations Excise tax on medical device manufacturers and importers Medical expense deduction floor increases to 10% Nationwide bundled payment pilot begins in Medicare Increased Medicaid reimbursement for primary care Medicare physician comparison data available to the public Reductions in Medicare payments for select hospital readmissions Expanded coverage of preventive services by Medicaid

Key Provisions of the Affordable Care Act That Take Effect in 2014 Individual mandate Insurer reporting requirements New health insurance market reforms take effect State health insurance Exchanges established Premium tax credits and cost-sharing subsidies available to certain

individuals in Exchange insurance products Medicaid expansion to new populations (100% federal match to states for newly-eligible

populations through 2016) Annual fee on health insurers Medicare/Medicaid DSH payment cuts begin Independent Payment Advisory Board (IPAB) issues first report to Congress if Medicare

spending exceeds growth target

Key Provisions of the Affordable Care Act That Take Effect in 2015 Employer mandate – delayed to 2015 (as of July 2, 2013) Employer reporting requirements – delayed to 2015 (as of July 2, 2013)

2013

2014

2012

2015

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STATE HEALTH

EXCHANGES

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State Health Insurance Exchanges

The biggest buzzword of the decade in the employee health benefits market is "Health Insurance Exchange." Starting January 1st, 2014, the Affordable Care Act (ACA) requires every state to create health insurance exchanges for businesses, employees, and individuals. If a state fails to set up the exchanges in time, the federal government will step in. So, what exactly is a health insurance exchange?

At a Basic Level, a Health Insurance Exchange is Simple

Webster defines an exchange as a place where things or services are exchanged, such as a store or shop specializing in merchandise usually of a particular type.

Today's health insurance exchanges typically include the following components:

A choice of two or more health insurance options Advice and recommendation on what health insurance options best fit your needs Automated billing for the chosen health insurance plan premium(s) On-going support for the chosen health insurance plan(s)

Understanding How a Specific Health Insurance Exchange Works

Health insurance exchanges come in many different shapes and sizes. To understand how a particular health insurance exchange (such as the exchanges required by ACA in 2014) works, you must answer the following questions about the particular exchange:

1. Is the health insurance exchange Public or Private? 2. Is the health insurance exchange Individual Market

Based or Group Market Based? 3. Who is eligible to participate in the health

insurance exchange? 4. What products are available in the health insurance

exchange? 5. What is unique about the health insurance exchange?

Let's walk through (and answer) the above questions from the perspective of the new health care reform exchanges. This will give you the tools to analyze and understand any health insurance exchange you come across.

ex·change \iks-chānj: A Store or Shop

Specializing in Health Insurance Merchandise

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1. Is the health insurance exchange Public or Private?

This is pretty straightforward:

A private health insurance exchange is a health insurance exchange run by a private company. A public health insurance exchange is a health insurance exchange run by a government (or

government-contracted) entity.

Since the ACA requires states to create the exchanges in 2014, those exchanges will be considered public health insurance exchanges.

2. Is the health insurance exchange Individual Market Based or Group Market Based?

In general, there are two core health insurance exchange models:

1. Group Market Health Insurance Exchange – An exchange that sells “group” health insurance to employees of employers. This is traditionally referred to as a "Cafeteria Plan."

2. Individual Market Health Insurance Exchange – An exchange that sells “individual” health insurance to individuals and families (that may be employees) in the individual health insurance market. This is traditionally referred to as "Individual Health Insurance Quoting."

The ACA requires states to create both a Group Market Health Insurance Exchange (called the "SHOP") and an Individual Market Health Insurance Exchange (called the "American Health Benefit Exchange") in 2014.

3. Who is eligible to participate in the health insurance exchange?

A health insurance exchange may have specific eligibility rules outlining who can participate in the exchange. For example, an exchange might limit eligibility to only specific individuals or businesses based on:

An individual's household income An individual's employer A business's size (i.e. number of employees) A business's ability to meet minimum employer contribution requirements A business's ability to meet minimum employee participation requirements Etc.

Initially, the SHOP exchange limits eligibility to only businesses with up to 100 employees.

Similarly, the American Health Benefit Exchange limits eligibility to only individuals who are U.S. citizens and legal immigrants who are not incarcerated.

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4. What products are available in the health insurance exchange?

A health insurance exchange may offer a variety of insurance products from a variety of providers. There is no minimum or maximum requirement. For example, a health insurance exchange might offer:

1. Different Medical Plans from Multiple Carriers

2. Different Medical Plan Designs from a Single Carrier

Both the SHOP Exchange and the American Health Benefit Exchange will provide multiple major medical carriers with multiple plan design options (so, both #1 and #2).

5. What is unique about the health insurance exchange?

A health insurance exchange may offer unique or "special" services to the businesses, employees, or individuals participating in the exchange. These unique offerings might include:

Exclusive product Special rates Tax advantages Etc.

Starting in 2014, small businesses can only access the small business healthcare tax credits through the public SHOP exchange.

Similarly, starting in 2014, massive tax subsidies will be available for individuals earning less than 400 percent of the federal poverty level. Individuals can only access the premium subsidies through the public American Health Benefit Exchange.

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HEALTH REFORM

TAX PENALTIES

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Business Health Insurance Mandate (Tax Penalty)

The Health Care Reform bill requires certain businesses to offer employees health insurance. Starting in 2015, businesses with more than 50 full-time equivalent employees will be required to either offer health care coverage or pay a tax penalty. So, how exactly do you calculate the business health insurance tax penalty?

The Business Health Insurance Tax Rule is NOT Simple:

Effective January 1st, 2015*, “applicable large employers” will be required to offer “minimum essential coverage” that is “affordable” to their employees. “Applicable large employers” who fail to offer “minimum essential coverage” that is “affordable” will be required to pay a “penalty” on their tax return.

Originally, this was set to take effect January 1, 2014. The Administration delayed the Employer Mandate and Employer Tax Penalty until 2015.

In order to calculate the business health insurance tax penalty, you must answer the following questions:

1. Are you an “applicable large employer”?

For purposes of the business health insurance tax penalty, a company is defined as an applicable large employer on a calendar year basis. For example, a company could be an applicable large employer in 2016, but not in 2015. If the company employed 50 or more full-time employees on average during the preceding calendar year, they are an applicable large employer for the current calendar year.

A company is NOT an applicable large employer if the company:

1. Employed less than 50 full-time employees on average during the previous calendar year, or 2. Employed more than 50 full-time employees no more than 120 days during the previous

calendar year due to a seasonal workforce.

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Calculating the number of full-time employees.

Generally, a full-time employee is an employee who is employed on average at least 30 hours of service per week in a given month. However, for purposes of determining whether a company is an applicable employer, the company must include all full-time employees plus the full-time equivalent of its part-time employees.

To calculate the full-time equivalent of part-time employees, a company should add the number of hours worked by part-time employees and divide the total by 120.

The sum of the full-time employees and the full-time equivalent of the part-time employees is the number used to determine whether a company is an applicable large employer.

Simple translation: If you have less than 50 employees, you are not an applicable large employer. If you have 50 or more employees, you probably are an applicable large employer.

2. What qualifies as “minimum essential coverage”?

For purposes of the business health insurance tax penalty, minimum essential coverage is the minimum amount of health insurance coverage an applicable large employer must make available to avoid paying the maximum penalty (see #3, below).

In order to avoid paying the maximum penalty, the employer must offer each employee the ability to enroll in minimum essential coverage through an eligible employer-sponsored plan, which is:

1. Any plan or coverage offered in the small or large group market within a State (including small business exchanges),

2. Coverage under a grandfathered health plan, or 3. A qualified governmental plan.

3. What is the penalty if I do not offer “minimum essential coverage”?

An applicable large employer who does not offer minimum essential coverage may not have to pay a penalty.

The employer only pays a penalty if at least one employee enrolls in a health insurance exchange and also qualifies for premium subsidies and/or other tax credits from the federal government.

If at least one employee receives federal subsidies due to purchase of health insurance through an exchange in a given month, the employer must pay a monthly penalty based on the number of full-time employees employed during that month.

IMPORTANT: When calculating the amount of the penalty, the employer receives a credit of 30 full-time employees. (For example, a company with 50 full-time employees only has to consider 20 employees for purposes of the penalty).

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The annual per employee penalty is $2,000.

To get the monthly per employee penalty, you simply divide the annual penalty by 12.

To calculate the total monthly penalty, you multiply the # of full-time employees employed during the month minus 30 by the monthly per employee penalty.

Example.

In February, ABC Manufacturing employs 60 full-time employees and does not offer minimum essential coverage. In February, at least one employee purchases health insurance through the exchange and receives premium subsidies from the federal government.

The annual per employee penalty is $2,000.

The monthly per employee penalty is $2,000*(1/12).

For purposes of this calculation, we only need to consider 30 full-time employees due to the 30-employee credit.

The total monthly penalty is equal to 30*2,000*(1/12) which is $5,000.

4. What is the penalty if I do offer “minimum essential coverage,” but it is not “affordable” for some of my employees?

An applicable large employer that offers minimum essential coverage to its full-time employees may still be required to pay a penalty if the coverage is not “affordable” for one or more employees.

An employer’s coverage is considered unaffordable for any full-time employees who, in a given month, enroll in a health plan offered through an Exchange and are eligible to receive federal premium subsidies (or cost-sharing subsidies). An employee is only eligible for premium subsidies through the exchange if their required contribution for their employer’s plan is greater than 9.5%.

If one or more full-time employees receive federal subsidies due to purchase of health insurance through an exchange in a given month, the employer must pay a monthly penalty based on the number of full-time employees who receive federal subsidies.

The annual per employee penalty for not offering affordable coverage is $3,000.

To get the monthly per employee penalty, you simply divide the annual penalty by 12.

To calculate the total monthly penalty, you multiply the number of full-time employees who receive premium subsidies (or cost-sharing subsidies) by the monthly per employee penalty.

The penalty is capped at a maximum of $2,000 per full-time employee per year (minus the 30 employee credit).

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Example.

In February, ABC Manufacturing employs 60 full-time employees and does offer minimum essential coverage. In February, three (3) employees purchase health insurance through an exchange and receive premium subsidies from the federal government. Thus, the coverage is unaffordable for three (3) employees for the month of February.

The annual per employee penalty is $3,000.

The monthly per employee penalty is $3,000*(1/12).

For purposes of this calculation, we only need to consider the 3 full-time employees who are receiving federal subsidies.

The total monthly penalty is equal to 3*3,000*(1/12) which is $750.

The Individual Mandate (Tax Penalty)

The Health Care Reform bill requires certain individuals to purchase health insurance, else pay a tax penalty:

Effective January 1st, 2014, "applicable individuals" will be required to maintain "minimum essential coverage" for themselves and their dependents. "Applicable individuals" who fail to maintain "minimum essential coverage" will be required to pay a "penalty" on their tax return.

You are probably are wondering....

1. Who are "applicable individuals"? 2. What is "minimum essential

coverage"? 3. How much is the "penalty"?

Let’s answer those questions here.

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1) Who are "applicable individuals" for the Individual Mandate?

A person is defined as an applicable individual on a monthly basis. For example, you could be an applicable individual in January, but not in February. A person is an applicable individual, unless one of the following circumstances applies:

1. The person has been approved for a religious exemption under Section 1311(d)(4)(H) of the Patient Protection and Affordable Care Act (PPACA)

2. The person is a member of a health care sharing ministry 3. The person is not a citizen or national of the United States or an alien lawfully present in the

United States 4. The person is incarcerated without any pending disposition of charges

Simple translation: A U.S. citizen is an applicable individual unless he or she is religiously exempt, a member of a health care sharing ministry, or in jail.

2) What is "minimum essential coverage" for the Individual Mandate?

Minimum essential coverage is the minimum amount of health insurance coverage an applicable individual must purchase to avoid paying the penalty (see #3, below).

The following plans qualify as minimum essential coverage:

1. Coverage under government sponsored programs (e.g. Medicare and Medicaid) 2. Coverage under an employer-sponsored group health plan offered in the small or large group

market within a State 3. Coverage under a plan offered in the individual market within a State 4. Coverage under a grandfathered health plan 5. Coverage under a State risk pool as recognized by the Secretary of Health and Human Services

(HHS)

The following plans do not qualify as minimum essential coverage:

1. Coverage only for accident, or disability income insurance, or any combination thereof 2. Limited scope dental or vision benefits 3. Benefits for long-term care, nursing home care, home health care, community-based care, or any

combination thereof 4. Coverage for on-site medical clinics 5. Coverage only for a specified disease or illness 6. Hospital indemnity or other fixed indemnity insurance 7. Other similar insurance coverage, specified in regulations, under which benefits for medical care

are secondary or incidental to other insurance benefits

Simple translation: "If you have individual health insurance, employer-sponsored group health insurance, or if you participate in a State risk pool, Medicare or Medicaid, then you have minimum essential coverage.

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3) How much is the "penalty" for the Individual Mandate?

If an applicable individual does not maintain minimum essential coverage for one or more months during a tax year, they must pay a penalty.

The size of the penalty is phased-in over three years:

o In 2014, the penalty will be $95 per person up to a maximum of three times that amount for a family ($285)* or 1% of household income if greater

o In 2015, the penalty will be $325 per person up to a maximum of three times that amount for a family ($975)* or 2% of household income if greater

o In 2016, the penalty will be $695 per person per year up to a maximum of three times that amount for a family ($2,085)* or 2.5% of household income if greater

*Note: If you claim dependents, you are responsible for making sure they have minimum essential coverage.

Each year, the penalty is capped at an amount equal to the national average premium for bronze level health plans offered through state exchanges.

An applicable individual can be exempted from the penalty calculation for a month if during the month:

1. The individual has income below the filing threshold determined by the Secretary of the HHS. 2. The individual's cost to purchase health insurance exceeds 8% of gross income 3. The individual is a member of an Indian tribe. 4. The secretary of HHS determines the individual qualifies for a hardship that made him/her

incapable of obtaining health insurance.

Simple translation: The amount of the penalty depends on a number of factors including your income, the size of your household, and your access to affordable health insurance.

In most cases, it will make most economic sense to purchase health insurance vs. paying the penalty.

Who is Exempt from the Individual Mandate?

The Individual Mandate requires most individuals to purchase health insurance, or else pay a penalty on their tax return each year. In 2012, the Supreme Court found Health Care Reform's "Individual Mandate" to be constitutional because the PENALTY is really a TAX. The intention of the individual penalty is to reduce the "Free Riding" effect in the health

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insurance market (a free rider is someone who is healthy and does not purchase health insurance until they need it).

According to the bill, here are 5 groups who are exempted from paying the tax (without actually purchasing "minimum essential coverage"):

1. Individuals who apply for a religious exemption -- If you claim that your religion does not allow you to purchase health insurance, you may be able to receive a religious exemption.

2. Members of Indian Tribes -- Members of Indian tribes are not subject to the penalty. Here's a WikiAnswers thread about how to join an Indian Tribe.

3. Members of Health Care Sharing Ministries -- Some associations cost $99-$135 per member per month.

4. Non-U.S. citizens -- If you are not a U.S. citizen, you don't have to pay the penalty.

5. Individuals in Jail -- Individuals can avoid paying the penalty while they’re in jail.

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HEALTH REFORM

TAX CREDITS &

SUBSIDIES

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Individual Health Insurance Premium Subsidies in State Health Exchanges

The Patient Protection and Affordable Care Act (PPACA) includes provisions to lower individual health insurance premiums for Americans with household incomes below 400% of the federal poverty line, or FPL (that’s the majority of Americans)..

What types of tax subsidies does PPACA provide to people buying coverage in the public exchange?

New rules give states the option of extending coverage in Medicaid to most people with incomes under 133% of poverty. For households with higher incomes (up to 400% of poverty), PPACA provides tax subsidies that reduce premium costs. The premium tax subsidies will begin in 2014.

Who is eligible for premium tax subsidies?

Households with income between 100% and 400% of FPL who purchase coverage through a state (individual) health insurance exchange are eligible for a premium tax subsidy to reduce the cost of coverage. In states without expanded Medicaid coverage, people with incomes less than 100% of poverty will not be eligible for exchange subsidies, while those with incomes at or above the FPL will be.

Households offered coverage through an employer are also not eligible for premium tax subsidies unless the employer plan does not have an actuarial value of at least 60% (i.e. the employer does not offer “qualified” coverage) or unless a household’s share of the premium for their employer’s group health insurance plan exceeds 9.5% of income (i.e. the employer does not offer “affordable” coverage).

What are the amounts of the premium tax subsidies available in the individual health insurance exchange?

The amount of the premium tax subsidy a household will receive is based on the premium for the second lowest cost “silver plan” in the individual state health insurance exchange. The silver plan provides the essential benefits and has an actuarial value of 70%.

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The amount of the tax subsidy varies with income such that the premium a household would have to pay for the second lowest cost silver plan is capped as a percentage of their income (adjusted for household size), as follows:

Income Level Premium as a Percent of Income

Min Income (% of FPL)

Max Income (% of FPL)

Min Premium Cap (% of Income)

Max Premium Cap (% of Income)

0% 133% 0% 2%

133% 150% 3% 4%

150% 200% 4% 6.3%

200% 250% 6.3% 8.05%

250% 300% 8.05% 9.5%

300% 400% 9.5% 9.5%

Note: The Federal Poverty Level (FPL) was $11,170 for an individual and $23,050 for a family of four through early 2012.

For a single person, here are the actual income levels and actual premiums based on the 2012 FPL:

Min Income (annual)

Max Income (annual)

Min Premium Cap (monthly)

Max Premium Cap (monthly)

$11,170.00 $14,856.10 $0.00 $24.76

$14,856.10 $16,755.00 $37.14 $55.85

$16,755.00 $22,340.00 $55.85 $117.29

$22,340.00 $27,925.00 $117.29 $187.33

$27,925.00 $33,510.00 $187.33 $265.29

$33,510.00 $44,680.00 $265.29 $353.72

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For a family of 4, here are the actual income levels and actual premiums based on the 2012 FPL:

Min Income (annual)

Max Income (annual)

Min Premium Cap (monthly)

Max Premium Cap (monthly)

$23,050.00 $30,656.50 $0.00 $51.09

$30,656.50 $34,575.00 $76.64 $115.25

$34,575.00 $46,100.00 $115.25 $242.03

$46,100.00 $57,625.00 $242.03 $386.57

$57,625.00 $69,150.00 $386.57 $547.44

$69,150.00 $92,200.00 $547.44 $729.92

Note: A person or household who wants to purchase a plan that is more expensive (than the second lowest cost silver plan) would have to pay the full difference between the cost of the second lowest cost silver plan and the plan that they wish to purchase.

Example - Steve, a 45-Year-Old Single Adult

Steve is 45 years old and has an annual income that is 250% of the FPL ($27,925 in 2012). Let’s assume the cost of the second lowest cost silver plan in Steve's state individual health insurance exchange is $5,733 per year (or $477.75 per month). Since Steve is purchasing coverage in the individual health insurance exchange, Steve would not be required to pay more than 8.05% of income, or $2,248 per year (that’s $187.33 per month), to enroll in the second lowest cost silver plan. The tax subsidy available to Steve would be $3,485 ($5,733 premium minus the $2,248 cap on what Steve is required to pay).

How will premium subsidies be provided?

Premium tax subsidies will be both refundable and advanceable. A refundable tax subsidy is one that is available to a person even if he or she has no tax liability. An advanceable tax subsidy allows a person to receive assistance at the time they purchase insurance (i.e. in advance) rather than waiting to be reimbursed after they file their annual income tax return.

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What does this mean for businesses?

Experts argue these massive premium subsidies available on the individual market provide a similarly massive incentive for businesses to drop employer-sponsored coverage and switch to defined contribution health benefits (HRAs).

Beginning in 2014, massive tax subsidies will be available to help individuals buy individual health insurance coverage through the new state-based public exchanges. Tax subsidies will be available, beginning in 2014, for individuals who enroll in silver plans through an exchange. This subsidy caps the cost of an individual’s health insurance at 2% - 9.5% of their household income if their household income is less than 400% above the federal poverty line (that’s ~$90,000 per year for a family of 4 in 2012).

If an employee’s employer doesn’t offer a “qualified” and “affordable” company-sponsored group health plan, the employee gets a federal subsidy automatically applied to the cost of their individual health insurance policy. Large employers are charged $3,000 per year for each employee who receives the subsidy, up to a maximum of $2,000 per year for all employees. Employers with less than 50 employees are not charged anything if their employees receive the federal subsidy.

Tax Subsidies on Individual Health Insurance will Cause Businesses to Drop Coverage

Due to these massive tax subsidies on the individual market, virtually every employer with less than 50 employees will switch from group coverage to simply giving employees tax-free allowances via HRAs to purchase their own individual health insurance policy. And, most large employers will follow suit once they realize how large of a subsidy their employees receive if the employer doesn’t offer group coverage. These examples should explain why:

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Example 1 – Family of 4 with $90,000 annual income

Example 2 – Family of 4 with $45,000 annual income

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Example 3 – Single Person with $40,000 annual income

Example 4 – Single Person with $25,000 annual income

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Notes about the calculations

For these calculations, we used the Kaiser Subsidy Calculator. The premiums are illustrative examples in 2014 dollars derived from estimates of average premiums from the Congressional Budget Office. For a 40-year-old single adult, the premium for a silver plan is assumed to be $4,500 for a plan with a 70% actuarial value.

Premium subsidies are based on a silver plan (with an actuarial value of 70%); so all premiums shown are for silver coverage. People may be able to pay a lower premium for less comprehensive coverage (i.e., a bronze plan, with an actuarial value of 60%). The tables showing results by age and income also reflect premiums for silver coverage, though the minimum insurance that people would be required to obtain would be bronze coverage.

The proposal also makes available a catastrophic policy for young adults and those exempted from the requirement to obtain insurance that is less comprehensive and has a lower premium than other coverage. It is not reflected in the calculator.

The actual premium calculated is adjusted for family type and for age (within the three to one limit specified in the proposal). Subsidized people can enroll in more expensive plans, but must pay the full difference in the premium.

Small Business Health Insurance Tax Credits

The Health Care Reform Bill created a new tax credit for eligible small companies who provide health care to their employees.

So, "How Does the Small Employer Health Care Tax Credit Work?" Unfortunately, answering this question in layman's terms (i.e. non tax terms) has not been easy....

This credit is broken into two phases:

o Phase I -- tax years 2010 - 2013

o Phase II -- tax years 2014 and later

During Phase I, the credit is worth up to 35% of a company's health insurance costs (25% for non-profits). During Phase II, the credit is worth up to 50% of a company's health insurance costs (35% for non-profits).

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Let's break this question into the following five mini questions and walk through an example using ABC Manufacturing:

1. Does the company meet the size requirements to be eligible for the credit? 2. Does the company meet the average wage requirements to be eligible for the credit? 3. What type of coverage does the company need to offer to get the credit? 4. How much is the tax credit? 5. How does the company claim the credit?

1. Does the company meet the size requirements to be eligible for the credit?

To be eligible for the credit, the company must employ less than 25 full-time equivalent employees (FTEs) during the tax year.

To calculate the number of FTEs, the company should do the following, the company should first determine the number of full-time employees* (i.e. those working 40 or more hours per week).

Next, the company must determine the full-time equivalent of its part-time employees* (i.e. those working less than 40 hours per week) by:

1) Adding up all hours for which wages were paid to part-time employees* and

2) Divide that number by 2,080

The number of FTEs is equal to the company's full-time employees* plus full-time equivalent part-time employees* rounded to the lowest whole number.

Example. For the 2010 tax year, ABC Manufacturing pays 5 employees* wages for 40 hours per week (2,080 hours per year) each and 5 employees* wages for 20 hours per week (1,040 hours per year) each.

o The number of full-time employees* is 5

o The number of full-time equivalent part-time employees* is 2 (5*1,040/2,080 rounded to the lowest whole number)

ABC Manufacturing has 7 FTEs (5+2) and is eligible for the credit.

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2. Does the company meet the average wage requirements to be eligible for the credit?

If the company meets the size requirements, they must also pay average annual wages below $50,000. To calculate average annual wages, the company should:

1) Add up the total wages paid by the company to employees* during the tax year and

2) Divide that number by the number of FTEs

Example. For the 2010 tax year, ABC Manufacturing pays $196,000 in wages. ABC Manufacturing pays average annual wages of $28,000 ($196,000/7) and is eligible for the credit.

3. What type of coverage does the company need to offer to get the credit? If the company meets the size and annual wage requirements, then the employer must pay at least 50% of an employee's qualified health insurance through a qualified contribution arrangement to receive the credit. A qualified contribution arrangement is any employer contribution to an employee's health insurance except for contributions through employee salary reduction. During Phase I (tax years 2010 - 2013), qualified health insurance is defined as any health insurance policy that meets the IRS definition of health insurance coverage. During Phase II (tax years 2014 and on), qualified health insurance is defined as any health insurance policy offered by the employer through a SHOP Exchange that meets the IRS definition of health insurance coverage.

Example. For the 2010 tax year, ABC Manufacturing pays 60% of group health insurance premium for its employees*. ABC Manufacturing meets the coverage requirements for 2010 and may receive a tax credit.

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4. How much is the tax credit? For Phase I, the largest credit a company can receive is 35% (25% for tax-exempt companies) of the state's "average premium" set by HHS. If the company's contribution is less than the "average premium," then the company's maximum credit is equal to 35% of the company's contributions. Otherwise, it is equal to 35% of the "average premium" described above.

Once the company's maximum credit is determined, the amount of the credit is reduced based on the company's FTEs and average annual wages:

o If the company has more than 10 FTEs, the credit is reduced by an amount equal to the company's maximum credit multiplied by ((#FTEs - 10) / 15).

o If the company pays more than $25,000 in average annual wages, the credit is reduce by the company's maximum credit multiplied by ((average annual wages - $25,000) /$25,000)

Example. For the 2010 tax year, ABC Manufacturing pays $72,000 in health care premiums for its employees*. Assuming the "average premium" set by HHS is greater than $72,000, then the amount of the credit will be calculated as follows:

o The maximum credit is $25,200 (35% x $72,000)

o There is no credit reduction for FTEs because ABC Manufacturing has less than 10 FTEs

o The credit reduction for average annual wages is $3,024 ($25,200 x $3,000/$25,000)

Therefore, ABC Manufacturing receives a health care tax credit equal to $22,176 ($25,200 - $3,024)

For Phase II, the only difference is that the largest credit is increased to 50% of the "average premium" (35% for non-profits).

5. How does a company claim the credit? For tax-paying companies, the credit is claimed on the company's annual income tax return as a general business credit. If the company does not owe any income taxes in the current tax year, it cannot claim the credit. However, the credit can generally be carried back one year or carried forward up to 20 years. Also, the company’s tax deduction for health insurance costs will be reduced by the amount of the credit. For tax-exempt companies, the IRS will provide further information on how to claim the credit as a refundable credit.

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Example. For the 2010 tax year, ABC Manufacturing owes the IRS $10,000 in income taxes. ABC Manufacturing would receive a $10,000 health care tax credit in 2010, and the remaining amount of the credit ($12,176) would be carried forward to the next year.

“This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees... We urge small businesses and tax-exempt employers to look closely at this important tax break — which is already effective — to see if they qualify.”

-IRS Commissioner Doug Shulman.

Click here for some more company examples provided by the IRS.

*For purposes of this credit, the following types of workers are not included as "employees":

o Seasonal workers not included in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year

o A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit and are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

o Family members of business owners or partners, or members of a business owner or partner’s household, are also not considered an employee for purposes of the credit.

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A LOOK AHEAD:

BUSINESSES MAY

DROP COVERAGE

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Businesses to Drop Health Coverage, Consider Defined Contribution

In 2012, Deloitte released survey results that predict one in ten businesses in the US will drop health coverage for their employees over the next few years, and even more will in the future. Many of those businesses are expected to establish defined contribution health plans.

Why Businesses Offer Health Insurance Today

Today, more than 160 million Americans get their health care through an employer. The primary reason businesses offer health insurance is for recruiting and retention purposes. That is, health insurance is a valuable form of compensation because:

1. It is tax deductible to the business

2. Employees get the benefit 100% tax-free

3. Individual health insurance is not guaranteed-issue in most states

Tomorrow, that may no longer be the case.

Why Businesses Won't Offer Health Insurance Tomorrow

Starting in 2014, health reform will give Americans more options for buying coverage without the help of an employer via public health insurance exchanges. And, businesses can use Health Reimbursement Accounts, or HRAs to reimburse those health insurance premiums tax-free. Specifically:

1. HRA reimbursements will be tax deductible to the company

2. Employees will receive the HRA benefit 100% tax-free

3. Individual health insurance will be guaranteed-issue in all states

4. The kicker - Most individuals will be eligible for federal subsidies on individual health policies

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Studies Continue to Predict Businesses Will Drop Coverage

McKinsey & Co. found 30% of employers say they would "definitely or probably" stop offering health insurance after 2014.

The recent Deloitte survey included 560 randomly selected employers with 50 or more workers that were offering health benefits. In all, 9% of companies in the Deloitte study said they expected to stop offering insurance in the next one to three years, and 33% said they could decide to stop offering health coverage if:

1. The law requires them to provide more generous benefits than they do at the moment,

2. A tax on high-cost plans takes effect in 2018, or

3. They conclude that the cost of penalties (starting now in 2015) for not providing insurance could be less expensive than paying for benefits.

One popular idea is to introduce defined contribution plans that give workers a fixed amount of money, like a 401(k) for health benefits, to allow them to buy their own insurance via a health insurance exchange.

Interesting Stats from the Deloitte Survey

Here are some additional stats from the Deloitte survey:

Companies with less than 50 employees were not surveyed.

2% of companies with more than 1,000 workers said they were considering dropping coverage.

Companies with 50 to 100 workers were most likely to say they would drop coverage, with 13% of them saying they expected to do so in the next one to three years.

Among the largest companies, one in five said they had shifted to paying only a set amount (i.e. a "defined contribution") toward insurance.

The majority of employers said they would shift more of the costs of insurance onto their employees by raising co-pays, deductibles, and premiums.

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HRAS, DEFINED

CONTRIBUTION, &

HEALTH REFORM

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What is an HRA?

A Health Reimbursement Arrangement, or HRA, is an IRS approved, employer-funded, tax advantaged employer health benefit plan that reimburses employees for out of pocket medical expenses and individual health insurance premiums. A health reimbursement arrangement is not health insurance. A health reimbursement arrangement allows the employer to make contributions to an employee's account and provide reimbursement for eligible expenses. A health reimbursement arrangement is an excellent way to supplement health insurance benefits and allow employees to pay for a wide range of medical expenses not covered by insurance. It is often referred to (incorrectly) as a health reimbursement account.

Health Reimbursement Arrangements are Notional

Health reimbursement arrangements are notional arrangements; no funds are expensed until reimbursements are paid. Through health reimbursement arrangements, employers reimburse employees directly only after the employees incur approved medical expenses.

Health Reimbursement Arrangements have no Annual Limits

Unlike a Health Savings Account (HSA), there is no limit to the amount of money an employer can contribute to an employee’s health reimbursement arrangement.

Health Reimbursement Arrangement Eligible Expenses

A health reimbursement arrangement may reimburse any expense considered to be a qualified medical expense under IRS Section 213 of the Code, including premiums for personal health insurance policies. Within IRS guidelines, employers may restrict the list of reimbursable expenses in any way they choose.

Health Reimbursement Arrangements Allow Annual Rollover

Health reimbursement arrangement balances may roll forward from year to year. Employers can design the program not to allow balances to rollover from one year to the next. However, limiting the rollover feature defeats a key health reimbursement arrangement advantage. Employers may allow employees to have access to their health reimbursement arrangement accounts after retirement. However, employers may not pay/distribute cash or other benefit balance to any employee.

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Health Reimbursement Arrangement Administration Reporting Features

HRA Administration reporting features make real-time monitoring of health reimbursement arrangement liabilities, reimbursements, and utilization easy. Employers can change plan benefits at any time or cancel the entire plan at any time. Further, health reimbursement arrangements allow employers to establish plan-year maximum reimbursements for any given category of expense (e.g., dental) and to establish a maximum balance that any participant class may hold at a time.

How to set up an HRA

The list of ways employers can use HRAs (or Health Reimbursement Arrangements) to improve benefits and lower health plan costs grows every day. HRAs are the future of employer-sponsored health insurance; they are one of the only employee-benefits vehicles allowed to reimburse premiums on individual health insurance and are therefore a critical part of any defined contribution health plan.

Five Ways to Use HRAs

1. Defined Contribution HRA. The HRA becomes the entire employer health benefits plan. Employees purchase their own individual health insurance, and seek reimbursement for the premium from the HRA 100% tax-free.

2. New-employee HRA. Provides health insurance coverage from first day of hire until employees become eligible for regular health benefits.

3. Retiree HRA. Provides an extended and less expensive alternative to COBRA health insurance, and can help older employees with early retirement.

4. High-deductible HRA. Encourages employees to choose high-deductible health insurance and incentivizes smart shopping (i.e., buying generics, medical shopping).

5. Supplemental HRA. Fills the gaps that some group and individual plans do not cover (e.g., accidents, maternity).

TIP: Whether your company has a traditional employer-sponsored (defined benefit) group health plan or a defined contribution health plan, HRA programs can save companies and their employees thousands each year—from the day they are first hired until years after they are retired. The new-employee HRA program alone may save employers with a group health plan $2,500 per single and $7,500 per family on every new person they hire.

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How HRAs Work

In the early 2000s, the IRS began allowing employers to establish HRAs to reimburse employees tax-free for certain medical expenses, including premiums paid for individual health insurance—similar to the way employers routinely reimburse employees for travel, meals, and other qualified business expenses. Employees incur medical expenses and then submit documentation for reimbursement in accordance with the rules of the specific HRA.

HRAs are sometimes called Section 105 plans after the IRS Code section that governs them. HRAs represent the future of employer-sponsored health benefits because they are so flexible and allow employers to reimburse employees for premiums on individual and short-term health insurance.

Basic Rules and Uses for HRAs Today

HRAs must be 100 percent funded by employers and cannot be funded by employees through salary reduction.

HRAs can be either “use it or lose it” or “use it or keep it”—whichever the employer chooses to offer for each HRA.

HRAs can generally be used to cover everything an FSA or HSA can cover (i.e. virtually all medical and pharmacy expenses) plus:

o Individual health insurance premiums o Medicare and long-term-care insurance premiums o Preventive care such as weight loss and smoking cessation o A wider list of medical expenses like over-the-counter medicines

TIP: The main reason employers use HRAs today is to get employees to accept changes to the group health plans (i.e., higher deductibles or exclusions for certain items) that result in significant reductions in the premium paid for employer-sponsored group health insurance.

How to Set Up an HRA

When it comes to funding employee medical expenses tax-free, HRAs offer the most flexibility in plan design.

The company can have an unlimited number of HRAs or one HRA for all HRA-type benefits. There is no legal entity to set up—to establish an HRA an employer writes a Plan Document and a Summary of Plan Description (SPD) that clearly states what employees are entitled to under the HRA.

TIP: An Employer does not need to spend thousands or more for a lawyer to write these documents. An HRA administrator should be able to provide the documents needed for a one-time setup fee of $1,000 or less.

Unlike an HSA, the IRS requires employees to submit written documentation for all eligible medical expenses before they are reimbursed from the HRA. However, because of HIPAA and other privacy

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concerns, virtually all companies use a third-party to handle verification of medical expenses and/or reimbursement to employees.

HRAs are the newest tool to improve the health of employees and save employers and employees money on health benefits. They are deliberately designed to be easy to use and flexible enough to allow innovation in health care.

5 Step Setup for a Defined Contribution HRA

Step 1 - The Employer sets employee eligibility requirements, decides what expenses are eligible for reimbursement, and determines the monthly or annual HRA contribution amounts. Step 2 - The Employer enrolls Employees into the plan and distributes IRS/ERISA/ACA required plan documents, SPDs, and notices to each eligible Employee. Step 3 - Each Employee chooses and pays for his or her own individual health insurance policy and submits proper documentation for reimbursement. Step 4 - A HIPAA-compliant claims processor reviews the reimbursement request and approves or rejects the request. Step 5 - If the request is approved, the Employer reimburses the Employee for the approved reimbursement up to the balance of each Employee’s HRA.

Optional: Additional HRAs may be included to vary the benefits by HRA employee classes.

Health Reimbursement Arrangement Rules

As 2014 approaches, more and more employers will begin offering Health Reimbursement Arrangements (HRAs) as employee health benefit programs. Employers must follow specific rules when offering an HRA to employees. Here's an overview of the most important health reimbursement arrangement rules.

HRA Plan Design Rules

HRAs are very flexible, allowing an employer to design the health reimbursement arrangement from scratch to meet the exact needs of the company and the employees. The employer makes the determination on what types of IRS-qualified health care expenses can be reimbursed through the HRA plan. An employer may decide to limit certain type of expenses by expense category, which includes the removal (or inclusion) of expenses such as dental, vision, and pharmacy and the placement of a cap on the dollars that may be used for each expense category. For example, some common plan designs include the following:

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1. Deductible HRA: HRAs designed to only reimburse medical expenses that apply to an underlying health plan's deductible.

2. All Medical Expense and Insurance Premium HRA: HRAs designed to reimburse all out-of-pocket medical expenses including health insurance premiums.

3. Limited-Purpose HRA: HRAs designed to cover specified expenses only (such as dental or vision).

HRA Rollover Rules

With an HRA, unused fund amounts may be carried over from year to year. Employers have full control over how the rollover is managed. For example, the employer determines whether all or only a portion of unused funds carries over to the next year. Similarly, the employer may determine that all fund balances reset to zero after the close of an HRA plan year.

HRA Substantiation Rules

HRA reimbursement requests must be substantiated. The most common documentation used for HRA substantiation is the EOB (Explanation of Benefits) statement provided by a health insurance company. If an EOB is not available, a copy of a receipt or bill identifying the date of service, amount of service, services rendered, recipient of service, and the provider of service is acceptable documentation.

HRA Reimbursement Rules

The reimbursable medical expenses should be outlined in the health reimbursement arrangement plan document. Acceptable expenses include medical, dental, vision, and pharmacy costs. Additional qualifying expenses include premiums for health insurance payments and expenses for long-term care.

HRA Participation Rules

Employers that offer health reimbursement arrangements must adhere to federal rules regarding HRA participation and eligibility. An employer cannot exclude employees from health reimbursement arrangements based upon personal characteristics (e.g. race, age, national origin, religion, or gender). The employer can base HRA eligibility on bona-fide job criteria such as hours worked per week, job classifications, and date of hire.

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HRA Funding Rules

The employer must fund all HRA contributions. An HRA cannot be tied to any reduction of employee compensation. There is no limit on the amount an employer may contribute to an HRA.

HRA Tax Rules

Distributions from an HRA may be made to current and former employees, spouses, and dependents of those employees.

Distributions for qualified medical expenses from an HRA are not included in the taxable income of employees. No federal income taxes or employment taxes are payable on HRA distributions.

HRA COBRA Rules

HRAs are subject to COBRA. Employees experiencing a qualified event should be given the opportunity for continued participation in the HRA offered by the employer. If an employee experiences a COBRA qualifying event and makes a COBRA election for the HRA, the employer determines the premium amount the employee must pay to continue participation.

HRA HIPAA Privacy Rules

An HRA plan is a self-funded health plan and is governed by HIPAA Privacy Rules. In order to administer an HRA, the entity processing employee claims receives protected health information (PHI) that is protected by HIPAA. Employers that offer a fully insured health plan and sponsor an HRA often overlook their HIPAA Privacy obligations and rely on the insurance carrier to comply with the HIPAA Privacy Rules. HRA compliance obligations, however, rest with the employer. Employers that do not comply can be subject to civil penalties of up to $100 per violation.

HRA FSA Coordination Rules

An employer may choose to offer a Flexible Spending Account (FSA) plan in conjunction with an HRA. In a situation where an incurred medical expense could be reimbursed from either the FSA or HRA, the employer or plan administrator must determine the "ordering rules" which determine which plan (FSA or HRA) the expense shall be reimbursed from first.

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Is a Defined Contribution Health Plan Right for Your Business?

Businesses across America are canceling traditional group health plans at a staggering rate. Many more businesses have never offered health insurance to begin with, due to high costs and minimum participation requirements. The vast majority of these organizations are looking to defined contribution healthcare plans as an affordable alternative.

By completing a Defined Contribution Readiness Worksheet, an employer will be better prepared to discuss moving to such a plan with a broker. Here are some key questions that every organization must answer in order to determine if they are ready for a defined contribution healthcare plan:

1. Does your organization have 1 or more employees? 2. Has your organization offered several plan options for employees in the past? 3. In past years, have you passed health care coverage expenses on to employees? 4. Is it important for you to maintain a consistent contribution amount and allow your employees the

option to buy up for the coverage they want? 5. Are you looking for a solution that can be more automated to facilitate employee choices?

If you answered “yes” to these questions, transitioning to a defined contribution may be a good fit for your business. Discuss your options with your broker, and make sure you include a talk with a defined contribution administrator who can show you how a defined contribution healthcare plan could work for you today – or what you can do today to get ready for a defined contribution solution.

HRA Claim Documentation Requirements

A common question we receive at Zane Benefits is "what are the minimum documentation requirements for HRA claims?" To receive tax-free reimbursement from an HRA, the IRS requires an HRA participant to submit documentation showing the following specific items:

1. Provider Name 2. Date of Service 3. Recipient of Service 4. Services Provided (CPT Codes, description of the service performed) 5. Amount Paid

1. Provider Name Must be Shown on the Documentation for an HRA Claim

Here is an example of Provider Name. The Provider Name is the name of the Clinic, Physician, Dentist, etc. providing the service.

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2. Date of Service Must Be Shown On the Documentation For an HRA Claim

Here is an example of Date of Service. The Date of Service is the date that the medical procedure took place. Often times, the payment date or the statement date are submitted in error. In order to verify that the procedure has already taken place and that it is not a duplicate claim, the Date of Service needs to be shown in the documentation.

3. Recipient of Service Must Be Shown On the Documentation For an HRA Claim Here is an example of Recipient of Service.

Recipient of Service is the name of the person who received the service being claimed. An HRA plan can only reimburse eligible employees and eligible qualified spouses and dependents, so HRA claims processors must verify exactly who received the procedure. If there are multiple persons listed on one invoice, a separate claim must be submitted for each person receiving service.

4. Services Provided Must Be Shown On the Documentation For an HRA Claim Here is an example of Service Provided.

Service Provided is the description of the medical procedure that was performed. The IRS has regulations on what medical services can be reimbursed. By requiring that the documentation list the serviced provided, the claims processors can verify that the expense is reimbursable by the HRA. Note:

Co-pay notation alone does not satisfy this requirement.

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5. Amount Must Be Shown On the Documentation For an HRA Claim

Here is an example of Amount.

Amount is the amount of the participant's responsibility and/or payment after insurance is applied. The IRS allows individuals to be reimbursed for the amount of the medical expense that is their responsibility.

Items to remember about HRA Documentation:

Documentation must include all 5 IRS requirements, in order to be approved and reimbursed through an HRA. *

If one piece of documentation does not satisfy all requirements, you can submit multiple forms of documentation.

One piece of documentation might require you to submit multiple HRA claims.

*Note: Not every provider receipt contains this information, so be sure to ask the provider for an invoice with these five IRS requirements.

Why HRA Administration Software is Essential

Many employers that self-administer an HRA often overlook important compliance obligations that put them at financial risk. Failure to comply with the minimum HRA administration requirements is common and can be costly. And, if an employer does take the extra steps to fully comply, the administrative cost will likely outweigh the HRA Benefits.

Here are the top three reasons employers should consider using HRA Software to self-administer an HRA:

1. Tax Savings/IRS Compliance 2. Federal Compliance 3. Ease-of-Use

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1. HRA Admin Software Creates Tax Savings

If an employer pays for employee's individual health insurance premiums without utilizing HRA admin software, such payments might need to be reported as taxable income to the employees.

Employees receive dollars 100% tax-free

The IRS requires HRA plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on their annual W-2.

HRA Admin Software (and its tax benefits) increases the ability of employers to recruit and retain good employees.

Employers deduct reimbursements as non-taxable business expense

An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.

2. Federal Compliance

The federal government has guidelines for employers who want to contribute to employee's IRS-qualified medical expenses. An IRS/ERISA/HIPAA-compliant defined contribution health plan will ensure compliance with federal law.

HIPAA Compliance

Using HRA software, employees submit claims for health insurance premiums and other medical expenses online, via fax, or mail. Once submitted, claims are processed and employers click a button periodically to reimburse employees via check, payroll addition, or direct deposit; all reimbursements go directly from the employer to the employee at the time and method chosen by the employer. All claims are kept HIPAA-protected and all receipts are stored digitally in compliance with HIPAA for 10 years as required by the IRS for company and personal audit purposes.

ERISA Compliance

Some companies might want to pay directly for an employee's individual health insurance plan without utilizing an ERISA and HIPAA-compliant defined contribution health plan, but doing so will put the employer out of compliance with federal regulations and increase the employer's (and employee's) tax liability.

There are two major reasons an employer should never pay for its employee's individual health insurance plan:

When an employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans do not meet minimum ERISA group plan requirements, the employer is out of compliance.

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Separately, an employer is not allowed to know the details of employees’ HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee's health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.

3. Ease of Use

HRA Administration software allows an employer to administer the benefits program in less than 5-minutes per month! The process is completely online and paperless.HRA administration software does not require a Third Party Administrator (TPA) to touch the employer's money. All reimbursements go directly from the employer to the employee at the time and method chosen by the employer (typically via payroll).

HRA Administration: 15 Features to Expect from Your Provider

The regulations governing Health Reimbursement Arrangements or HRAs are so flexible that there are literally hundreds of features you should consider when selecting an HRA software administration platform. See below for the top 15.

1. Employee HRA Allowances

Employers should be able give employees their HRA allowances monthly, annually, hourly (tied to payroll or wages), or at any time on an exception basis—with automatic monitoring of HIPAA and ERISA discrimination compliance rules. Deferred allowances should be possible for new hires, and suspended HRAs should be allowed for former employees that employers hope to re-hire on a seasonal basis.

2. HRA Claim Submission

Employees should be able to submit claims online, via fax, or mail to their Plan Supervisor, and immediately receive an email acknowledging their claim and providing an online link to monitor claim status. Medical receipts should be permanently available online for the convenience of employees desiring such access to copies of prescriptions, etc.

3. HRA Claim Processing

Claims should be processed within 24 hours and employees should be able to inquire about their claim via online chat, email, fax, mail or telephone. No claim should be rejected for improper submission

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without multiple contacts from their Plan Supervisor. All employee contact should leave clear audit trails and meet appropriate regulatory guidelines (e.g. IRS, HIPAA, ERISA, SAS 70).

4. HRA Claim Reimbursement

Employees should receive email notification when their claim is approved and again confirming when (and how) it is reimbursed. Reimbursement should be administrated individually or on a batch periodic basis via check, payroll addition, or direct deposit leaving a clear and permanently available audit trail.

5. HRA Employee Ledger

All employees should have access to an online ledger showing their current HRA balance, allowances, claims, and reimbursements including permanent storage of receipts, relevant tax information, and the ability to save or export their own medical information via the administration platform.

6. Integrated Electronic HRA Plan Documents, SPD, and Employee Signature

The HRA Plan Document and HRA SPD (Summary Plan Description) should be electronically created, readily accessible online, and signatures should be collected electronically. Employers should be able to administer a change to benefits for any specific Class of Employees at any time and the electronic documents should automatically change and, where required, new electronic signatures should be collected when the employee is next online.

7. HRA Classes of Employees

Employers should be able to instantly create online unlimited different Classes of Employees with each Class receiving different benefits by employee family status.

8. HRA Categories of Expenses

For each Class of Employees, employers should be able to specify different benefits (annual maximum, coinsurance, first dollar coverage, etc.) for each Category of Expense such as Doctor Visits, Pharmacy, Preventative Care, Maternity, and Dental etc.

9. HRA Employee Enrollment

Employers should be able to instantly enroll or remove employees in real-time on an individual or batch basis, with automatic printing of employee Welcome Kits and other appropriate plan administration information.

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10. HRA Plan Setup

Employers should be able to completely set up and/or change both their HRA plan and their Plan Documents simultaneously online.

11. HRA Reporting

Employers should be able to view all HRA Reimbursements by employee or by Class of Employees, and monitor in real-time de-identified Claim information for each Class of Employees by Category of Expense. Employees should be able to see 3-5 prior years of HRA expenses broken down by categories of expense.

12. HRA Tax Forms and Information

All information for required administration reporting (e.g. 5500 for employers with more than 100 employees) should be available online in real time, and non-eligible HRA participants (e.g. independent contractors, owners of Sub S companies) should receive appropriate 1099 information.

13. Personal Health Insurance Distribution

Employers using HRAs to administer pure defined contribution health plans (i.e. no group plan), or those using HRAs for less expensive dependent coverage, should have their HRA automatically provide their health insurer(s) a CRM (Customer Relationship Manager) to best serve their employees—including automatic notification to insurer(s) when an employee’s HRA plan status changes due to family additions, promotions, high claims, etc.

14. HRA HSA-Compatibility

Employees should be unilaterally allowed to make their HRA administration HSA-compatible by requesting a higher annual deductible for traditional medical expenses while still retaining “first dollar” coverage for health insurance premiums, dental, vision, preventative care, and result of accidents. Employees should be able to turn off this feature at any time during a plan year if they need funds and no longer plan to make an HSA contribution that year, and turn HSA-Compatibility back on for subsequent years.

15. HRA HIPAA and ERISA Compliance

The Employer should be automatically protected and the HRA administration made HIPAA Compliant through technology rather than the training of administrating employees. For example, employers should not be able to view HIPAA-protected employee information, and HRAs reimbursing for personal health policy premiums should automatically follow Department of Labor HIPAA and ERISA guidelines for employers allowing insurers access to their employees.

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The Summary of Benefits & Coverage (SBC) Requirement

Starting September 23, 2012, health insurance issuers and group health plans will be required to provide eligible participants with an easy-to-understand summary about a health plan’s benefits and coverage. The new regulation is intended to help individuals better understand their health insurance options.

Overview

Also known as the "four-page summary", the Summary of Benefits and Coverage (SBC) is a short document that is supposed to describe the benefits of health plans in layman's terms, relying heavily on "plain language" and charts reminiscent of the "nutrition facts" charts on the sides of cereal boxes and other foods. The purpose of the SBC is for beneficiaries to compare insurance coverage at a glance instead of wading through pages of legalese.

All insurance companies and group health plans (including HRAs, see below) will use the same standard SBC form to help consumers compare health plans. Eligible plan participants will have the right to receive the SBC when shopping for or enrolling in coverage or by requesting a copy from the issuer or group health plan.

What the Summary of Benefits and Coverage (SBC) Means for Individuals

The SBC is designed after the Nutrition Facts label required for packaged foods which helps consumers make healthy and informed decisions about their diet. The SBC’s standardized and easy to understand information about health plan benefits and coverage allows individuals to more easily make “apples to apples” comparisons among health insurance options. The measure brings more openness to the insurance marketplace for the more than 180 million Americans with private health coverage.

What the Summary of Benefits and Coverage (SBC) Means for Group Health Plans This provision applies to all health plans, whether offered through an employer or purchased directly from an insurance company, beginning September 23, 2012. All health plans must provide an SBC to eligible participants at important points in the enrollment process, such as upon initial enrollment and annual renewal. If a participant does not speak English, he or she may be entitled to receive the SBC and uniform glossary in his or her native language upon request.

How Summary of Benefits and Coverage (SBC) Affect HRAs

The purpose of this provision was to help people navigate their insurance plans, but HRAs have been swept into the mix via the statutory language. Thus, SBCs will be required for distribution with HRA plan enrollment information beginning on or after September 23, 2012.

An HRA is a group health plan, and thus HRAs are generally subject to the SBC requirements. A stand-alone HRA generally must satisfy the SBC requirements (though many of the limitations that apply under traditional fee-for-service or network plans do not apply under stand-alone HRAs).

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According to HHS guidance:

"To the extent a plan's terms that are required to be in the SBC template cannot reasonably be described in a manner consistent with the template and instructions, the plan or issuer must accurately describe the relevant plan terms while using its best efforts to do so in a manner that is still consistent with the instructions and template format as reasonably possible. Such situations may occur, for example, if a plan provides a different structure for provider network tiers or drug tiers than is contemplated by the template and these instructions, if a plan provides different benefits based on facility type (such as hospital inpatient versus non-hospital inpatient), in a case where the effects of a health FSA or an HRA are being described, or if a plan provides different cost sharing based on participation in a wellness program."

So, basically HRAs need use "best efforts" to make the SBC work for an HRA plan.

Small Business Owner Participation in HRAs

With health care reform taking full effect in 2014, health reimbursement arrangements and defined contribution health benefits are expected to become a mainstream employee benefit. A common question about HRAs for a small business is "Can an owner participate in an HRA?"

Employees and C-Corp Owners can Participate in an HRA

Current or former employees may participate in an HRA and receive reimbursements 100% tax-free. Owners of C-Corporations may also participate in an HRA. However, employees who are also non-C-Corp "Owners" (e.g. sole proprietors, partners, or S-Corp shareholders that own >2% of the company's shares) may use the HRA platform but may not receive the same amount of tax benefits as non-owners. If the company is an LLC, owner participation varies based on the way the LLC files taxes (i.e. if they file taxes as a partnership, S-Corp, or C-Corp).

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Sole proprietors, Partners, or S-Corp shareholders that own >2% of the company's shares can use the HRA Platform to Reimburse Medical Expenses

The non-C-Corp Owners specified above may receive reimbursement from their companies for medical expenses, and they may use the HRA platform to receive and track these reimbursements. However, reimbursements made to Owners must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) subject to federal income tax withholding. These reimbursements are exempt from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, similar to profits passed through to the owner. Further, the cost of the reimbursements is a deductible expense to the business, reducing the taxable income of the business and, thus, reducing the taxable income of the owners/partners (because these are flow-through tax entities).

IRS rules limit the deductibility of medical expenses for certain business owners. Using an online HRA software platform enables business owners to secure all income and payroll tax deductions to which they are legally entitled. Additionally, the online platform tracks expenses to provide information needed for federal and state income and payroll tax filings.

Note that sole proprietors and other self-employed individuals receive an above-the-line tax deduction for personal health insurance premiums. IRS Notice 2008-1clarified that S-Corp owners may only take the self-employed health insurance premium tax deduction (on Form 1040) if the S-Corp pays for or reimburses the owner for the premiums.

Form 5500 and HRAs

An HRA (Health Reimbursement Arrangement) is an ERISA plan. Thus, the employer must file a Form 5500 annually if the plan had 100 or more participants in the plan year.

The Form 5500 Series is an important compliance, research, and disclosure tool for the Department of Labor, a disclosure document for plan participants and beneficiaries, and a source of information and data for use by other Federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies. The Form 5500 Series is part of ERISA's overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards and that participants and beneficiaries, as well as regulators, are provided or have access to sufficient information to protect the rights and benefits of participants and beneficiaries under employee benefit plans.

It is important to file the Form 5500 by the due date. Failure to do so can result in fines of $1,100 plus per day the return is late.

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Tax on Medical Reimbursement Using HRAs

HRAs (Health Reimbursement Arrangements) are governed by Section 105 of the Internal Revenue Code. Here we will answer a few FAQ’s about HRAs when it comes to tax time.

Q. Who may contribute to a health reimbursement arrangement? A. Only employers may contribute to HRAs.

Q. What is the tax treatment of a health reimbursement arrangement for an employee?

A. All reimbursements are excluded from an employee’s gross income and wages subject to FICA (7.65%).

Q. What is the tax treatment of a health reimbursement arrangement for an employer?

A. Employers deduct reimbursements as a business expense and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).

HRAs and W-2 Annual Reporting

As part of the Affordable Care Act (ACA), employers are required to report the cost of health benefits coverage under an employer-sponsored group health plan. The IRS issued Notice 2012-9 confirming that employers are not required to include the cost of coverage under a Health Reimbursement Arrangement (HRA) on employee W-2s. If the only coverage provided to an employee is an HRA, the employer is not required to report any amount on the Form W-2 for that employee.

W-2 Reporting for HRAs is Optional in 2012

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According to Notice 2012-9, which, until further guidance, contains the requirements for tax-year 2012 and beyond, the IRS is granting permanent relief to employers that sponsor HRAs:

Q: Is the cost of coverage under a Health Reimbursement Arrangement (HRA) required to be included in the aggregate reportable cost reported on Form W-2?

A: No. An employer is not required to include the cost of coverage under an HRA in determining the aggregate reportable cost. If the only applicable employer-sponsored coverage provided to an employee is an HRA, the employer is not required to report any amount under §6051(a)(14) on the Form W-2 for that employee."

Chart: Form W-2 Informational Reporting of the Cost of Employer-Sponsored Group Health Plan Coverage

This chart below is based on IRS Notice 2012-9. Items listed as "optional" are designated as such based on transition relief provided by Notice 2012-9, and their “optional” status may be changed by future guidance. However, any such change will not be applicable until the tax year beginning at least six months after the date of issuance of such guidance.

Coverage Type Report on form

W-2

Do Not Report on Form W-2

Optional Reporting

Major medical X

Dental or vision plan not integrated into another medical or health plan

X

Dental or vision plan which gives the choice of declining or electing and paying an additional premium

X

Health Flexible Spending Arrangement (FSA) funded solely by salary-reduction amounts

X

Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefits

X

Health Reimbursement Arrangement (HRA) contributions

X

Health Savings Arrangement (HSA) contributions (employer or employee)

X

Archer Medical Savings Account (Archer MSA) contributions (employer or employee)

X

Hospital indemnity or specified illness (insured or self-funded), paid on after-tax basis

X

Hospital indemnity or specified illness (insured or self-funded), paid through salary reduction (pre-tax) or by employer

X

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Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverage

Required if employer charges a COBRA premium

Optional if employer does not charge a COBRA premium

On-site medical clinics providing applicable employer-sponsored healthcare coverage

Required if employer charges a COBRA premium

Optional if employer does not charge a COBRA premium

Wellness programs providing applicable employer-sponsored healthcare coverage

Required if employer charges a COBRA premium

Optional if employer does not charge a COBRA premium

Multi-employer plans X

Domestic partner coverage included in gross income X

Military plan provided by a governmental entity X

Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government

X

Self-funded plans not subject to Federal COBRA X

Accident or disability income X

Long-term care X

Liability insurance X

Supplemental liability insurance X

Workers' compensation X

Automobile medical payment insurance X

Credit-only insurance X

Excess reimbursement to highly compensated individual, included in gross income

X

Payment/reimbursement of health insurance premiums for 2% shareholder-employee, included in gross income

X

Other Situations Report Do Not Report

Optional

Employers required to file fewer than 250 Forms W-2 for the preceding calendar year

X

Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in writing, a Form W-2 before the end of that year

X

Forms W-2 provided by third-party sick-pay provider to employees of other employers

X

Chart Last Reviewed or Updated: 04-Aug-2012 / Source: irs.gov

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Form 720 Reporting Requirements for HRA Comparative Research Fees

Section 4376 of the Internal Revenue Code, as added by the Patient Protection and Affordable Care Act, imposes a temporary annual fee on a plan sponsor of an applicable self-insured health plan (including certain health reimbursement arrangement, or HRA, plans) for each plan year ending on or after October 1, 2012, and before October 1, 2019. On April 17th, 2011, the federal government issued

interim final regulations that outline how this fee applies to HRA plans.

Background on the HRA Research Fee

The Affordable Care Act includes a "research fee" HRA plan sponsors must pay on an annual basis. The fee is technically referred to as the Comparative Effectiveness Research (CER) fee. According to the bill, this fee will be used to fund governmental research -- ACA created the "Patient-Centered Outcomes Research Institute" to evaluate the relative effectiveness of various medical treatments and procedures.

The IRS issued proposed regulations on the comparative effectiveness research fees required by the Affordable Care Act (ACA). Certain HRA Plans are subject to the proposed research fee rules.

The IRS has determined an HRA falls under the "self-insured health plans" definition, since HRAs are technically Section 105 ERISA health plans funded by employers. At present, the fee is scheduled to become effective for plan years ending on or after October 1, 2012.

How the Temporary HRA Research Fee Works

According to the proposed rules, the types of HRA plans that must pay the fees are HRAs that are not integrated with another applicable self-funded medical plan with the same plan year.

The research fees go into effect for plan years ending on or after October 1, 2012 and before October 1, 2019. The fee will be adjusted each year, as follows:

Plan years ending October 1, 2012 – September 30, 2013: $1 multiplied by the average number of lives

Plan years ending October 1, 2013 – September 30, 2014: $2 multiplied by the average number of lives

Plan years ending October 1, 2014 and beyond: to be determined based on increases in the projected per capita amount of National Health Expenditures

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For HRAs that must comply, there is a special rule that you would only count one covered life for each employee. Thus, a family of four covered by an HRA would result in only a $1.00 fee ($1.00 x the employee-participant only).

Example: A 10 Employee HRA would Pay at $10 Annual Fee for plan ends between October 1, 2012 – September 30, 2013

Employers Must File Form 720 Annually to Report and Pay the Fees

HRA plans will only be required to report and pay fees annually via Form 720, due by July 31 each year. A good HRA Administrator will provide the plan sponsors with reporting to assist with participant counts.

It is important to note these are "proposed" regulations only, which means the IRS will be taking public comments before they become final. Written or electronic comments must be received by July 16, 2012.

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Zane Benefits is the online alternative to group health insurance for small and medium-sized businesses.

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DISCLAIMER The information provided herein by Zane Benefits is general in nature and should not be relied on for commercial decisions without conducting independent review and analysis and discussing alternatives with legal, accounting, and insurance advisors. Furthermore, health insurance regulations differ in each state; information provided does not apply to any specific U.S. state except where noted. See a licensed agent for detailed information on your state.www.zanebenefits.com

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