An Overview of Medical Reimbursement Plan Options for Local Benefit Funds
Flexible Spending Accounts & Health Reimbursement Arrangements
Local benefit funds that offer reimbursement of medical and other employee expenses have several options in establishing their reimbursement programs. The options that are available to your particular benefit fund will depend upon the desired structure of the program and the source of contributions.
When determining the best option for your benefit fund, you should consult with qualified benefits counsel to ensure that you are meeting all applicable legal requirements. If your reimbursement program is already established, you should also consider consulting with qualified benefits counsel to make sure that you are meeting all currently applicable legal requirements.
Cafeteria Plans - Overview
Cafeteria Plans (sometimes referred to as “Flexible Benefit Plans”) are governed by Section 125 of the Internal Revenue Code. Flexible Benefits Plans include Flexible Spending Account Plans, which permit employees to pay for certain health-related and dependent care expenses on a pre-tax basis, and Premium Only Plans, which allow employees to pay for their share of employer-sponsored health-related insurance premiums on a pre-tax basis.
Cafeteria plans present a classic win-win situation for both employees and employers. They allow employees to reduce their taxable income (thereby reducing their income tax liability) by setting aside pre-tax funds to pay for specific expenses. In addition to contributions to Flexible Spending Plans being pre-tax, reimbursements to an employee from his or her Flexible Benefits Plan account are also tax-free (provided that certain documentation/claims substantiation requirements are met).
Employers benefit from realizing FICA savings (and possibly savings from other employer taxes as well) because of the reduction in employees’ taxable income. These tax savings typically permit the employer to pay a third-party administrator (TPA) and still net a substantial savings. TPA administrators generally do the administrative work related to Flexible Spending Plans, such as enrolling employees, processing payments and record keeping.
When a participant incurs an eligible expense, he or she “vouchers” the expense from the appropriate account. Following receipt of proof of expense for the amount claimed, a check will be issued to the participant. Provided the substantiation requirements are met, the reimbursement to the participant is not subject to any taxes. Health FSAs can also be linked with debit cards that directly authorize payments for covered expenses at the point-of-service.
Flexible Spending Accounts
A Health Flexible Spending Account (FSA) allows employees to set aside up to $2,550 pre-tax (in 2016) for the payment of out-of-pocket medical expenses. The $2,550 maximum may be increased by the IRS in future years. If the plan document so permits, unused amounts of up to $500 can roll over from year to year.
Otherwise, if the amounts are not used by the end of the plan’s grace period, (generally, no later than March 15), they are forfeited. Unused amounts that are rolled over from year-to-year or for the duration of a Health FSA’s grace period do not count against the amounts that can be contributed for the following plan year. As discussed above, an FSA is established through a “cafeteria plan” under Section 125 of the Internal Revenue Code (which must be established pursuant to a written cafeteria plan document).
Each employee who is eligible to participate in a Health FSA is entitled to elect up to the $2,550 limit, regardless of family size. This means that if an FSA is available to both spouses through their workplaces, each spouse is separately entitled to elect up to the $2,550 limit. Employers may also contribute to Health FSAs, up to certain limits.
As a result of the Affordable Care Act (ACA), Health FSAs must also meet certain requirements in order to be considered “excepted benefits” under the ACA. Specifically, effective January 1, 2014, a Health FSA can no longer be offered independently from an underlying ACA compliant group health plan. If you have concerns regarding whether your Health FSA is meeting ACA requirements, you should consult with qualified benefits counsel.
Dependent Care FSAs allow employees to set aside up to $5,000 pre-tax each year for dependent care expenses. The Dependent Care FSA maximum is set by statute and is not subject to inflation-related adjustments like the Health FSA. The maximum is generally $5,000 if the employee is married and filing jointly or if the employee is a single parent. The maximum is generally $2,500 if the employee is married but filing separately. However, both of these maximums could be subject to further adjustment based on the employee’s or their spouse’s earned income. Properly substantiated disbursements from a Dependent Care FSA are also exempt from taxation.
Health Reimbursement Arrangements
Health Reimbursement Arrangements (HRAs) are tax-advantaged, employer-funded medical reimbursement plans that help manage out-of-pocket health care costs. Generally, an IRS tax-exemption under either Section 501(c)(9) or 501(c)(5) of the Internal Revenue Code is also required to establish this type of benefit plan.
Like Health FSAs, HRAs are used to pay for qualified medical expenses for employees and their families. Unlike Health FSAs, HRAs are entirely employer-funded, and unused amounts in an HRA can be carried forward for reimbursements in future years. The amounts that an employer contributes to an HRA are excluded from employer payroll taxes and from the employee’s taxable income. The employee may be reimbursed for “qualified medical expenses” (generally as such term is defined in Section 213(d) of the Internal Revenue Code and IRS Publication 502). If certain requirements are met, amounts contributed to an HRA may also be retained by the employee into retirement.
HRAs are commonly used with high-deductible health plans and other consumer-driven health plans. As deductibles and co-payments increase to control the cost of health insurance premiums, HRAs can maintain employee benefits and help prevent increased out-of-pocket expenses. Employers may have both a Flexible Spending Plan and Health Reimbursement Arrangement in place.
The ACA also affected the requirements that are applicable to HRAs. In order to be exempt from the ACA’s requirements, HRAs must be “integrated” with underlying ACA compliant group health coverage. Further, all members of a family that are eligible to have their medical expenses reimbursed from an HRA must be covered under an underlying ACA-compliant employer-sponsored group health plan. Additional complicated requirements apply to HRAs under the ACA. If your local benefit fund sponsors an HRA, you should consult with qualified benefits counsel to ensure that all applicable legal requirements are being met.
Unreimbursed medical expenses that may qualify for reimbursement under HRAs include medical, dental, prescription drug, vision care, co-payments, and costs incurred by the employee, spouse or dependent that are not paid by insurance programs. Like FSAs, when a participant incurs an eligible medical expense, he or she “vouchers” that expense from the account. Following receipt or proof of expense for the amount claimed, a check is issued to the participant. HRA accounts can also be linked with debit cards that directly authorize payments for covered expenses at the point-of-service.
to view a chart on the Segal Consulting website
comparing key elements of Flexible Spending Accounts, Health Reimbursement Arrangements and Health Savings Accounts. Copyright ©2015 by The Segal Group, Inc. All rights reserved.
The NYSUT Member Benefits Trust has negotiated special discounted prices and services with third-party administrators P&A Administrative Services, Inc. and The Preferred Group to provide Health Reimbursement Arrangement and Flexible Benefit Plan endorsed services for the administration of these types of plans. The cost of these services is negotiable.
Please contact Member Benefits with any questions at 800-626-8101
weekdays from 9 a.m. to 5 p.m. (EST).
The Preferred Group Plans, Inc. and P & A Administrative Services, Inc. Health Reimbursement Arrangements are NYSUT Member Benefits Trust (Member Benefits)-endorsed programs. Member Benefits has an endorsement arrangement of $.20 per participant per month with an additional $.05 for each participant in an additional endorsed program with The Preferred Group Plans, Inc. and $.10 per participant per month with P & A Administrative Services, Inc.. All such payments to Member Benefits are used solely to defray the costs of administering its various programs and, where appropriate, to enhance them. Member Benefits acts as your advocate; please contact Member Benefits at 800-626-8101 if you experience a problem with any endorsed program.