The IRS recently announced the 2025 limits for Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs). HSA contribution and plan limits will increase to $4,300 for individual coverage and $8,550 for family coverage. Changes to these limits will take effect January 2025.
HSAs are tax-exempt accounts that help people save money for eligible medical expenses. To qualify for an HSA, the policyholder must be enrolled in an HSA-qualified high-deductible health plan, must not be covered by other non-HDHP health insurance or Medicare, and cannot be claimed as a dependent on a tax return.
Question: One of our employees would like to drop his DCAP election under our calendar-year cafeteria plan because a neighbor has offered to take care of his child at no cost. Can we allow this midyear election change?
Answer: Absolutely! However, there are specific conditions to consider. If your plan document has been drafted expansively, in line with IRS rules, midyear election changes due to changes in cost or coverage are permissible. Let’s break it down:
Broad Application of Rules:
The IRS rules apply broadly to DCAPs, allowing midyear election changes in various circumstances.
These circumstances include changes in care providers or adjustments in the cost of care.
Childcare Provider Switch:
A DCAP election change is permitted when a child transitions from a paid provider to free care (or no care, in the case of a “latchkey” child).
So, your employee’s situation aligns with this provision.
Other Allowable Changes:
Beyond provider switches, other scenarios also warrant a DCAP election change:
Adjustments in the hours for which care is provided.
Changes in the fee charged by a provider.
Relative Exception:
Be cautious: An election change isn’t allowed if the cost change is imposed by a care provider who is the employee’s relative (as defined by IRS rules).
Health FSAs vs. DCAPs:
Remember that the cost or coverage election change rules apply broadly to DCAPs but not to health flexible spending arrangements (health FSAs).
This distinction is essential for employers to navigate effectively.
As an employer, staying informed about DCAP rules ensures that you can accommodate midyear changes when necessary. By understanding the nuances, you can support your employees while maintaining compliance with IRS guidelines. If you have further questions, consult your tax or employee benefits advisors.
Remember, flexibility within the rules allows for better employee experiences and smoother transitions.
In the realm of cafeteria plans, health Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAPs) play a crucial role. However, the process of claim substantiation often raises questions among administrators. This blog post aims to shed light on the IRS rules regarding claim substantiation for health FSAs and DCAPs.
The Necessity of Claim Substantiation
According to IRS rules, all health FSA and DCAP claims must be substantiated. This substantiation requires information from an independent third party describing the service or product, the date of the service or sale, and the amount of the expense. These requirements are designed to ensure that health FSAs and DCAPs reimburse only legitimate claims.
The Role of Debit Card Programs
IRS rules regarding debit card programs also require that claims be substantiated and reviewed. However, certain categories of expenses are treated as automatically substantiated without any receipts or review beyond the swipe.
The Risk of Substantiation Shortcuts
Administrators might be tempted to engage in substantiation shortcuts such as reviewing only a percentage of claims (i.e., sampling) or automatically reimbursing claims that are below a “de minimis” dollar threshold or that appear to be from medical or dependent care providers. However, these actions could jeopardize the income exclusion that would otherwise apply to reimbursements from these arrangements under the Code. This could result in all reimbursements becoming taxable, not just those approved using the impermissible techniques.
The Consequences of Non-Compliance
If a health FSA or DCAP fails to comply with applicable substantiation requirements, all employees’ elections between taxable and nontaxable benefits under the entire cafeteria plan will result in gross income. A March 2023 IRS Chief Counsel’s office memorandum reconfirms the substantiation requirements for medical and dependent care expenses, as well as the prohibition and consequences of sampling and other substantiation shortcuts.
While the process of claim substantiation might seem daunting, it is a necessary step to ensure the legitimacy of claims under health FSAs and DCAPs. Administrators must adhere to IRS rules and avoid substantiation shortcuts to maintain the tax benefits of these programs.
In today’s ever-evolving landscape of healthcare benefits, Health Savings Accounts (HSAs) have become a cornerstone for both employers and employees. With the rising deductibles of High Deductible Health Plans (HDHPs), employers are increasingly considering making contributions to HSAs to alleviate the financial burden on their workforce. However, the question arises: when should these contributions be made?
Here, we delve into the intricacies of timing employer HSA contributions to optimize benefits for both employers and employees.
Understanding the Contribution Window
HSA contributions for a taxable year cannot precede the start of that year or extend beyond the due date for the account holder’s federal income tax return for that year. Typically, contributions must fall between January 1 of the contribution year and April 15 of the following calendar year.
Factors Influencing Timing
Several factors come into play when determining the optimal timing for employer HSA contributions:
Prorating Based on Employment: Employers may prorate contributions for employees who haven’t worked the full year, either by making contributions ratably over the year or with prorated year-end contributions.
Risk of Overcontribution: Employers need to be cautious of exceeding the HSA contribution limit, which aggregates employer and employee contributions. Delaying employer contributions until year-end can mitigate this risk.
Employer’s Tax Deduction: For corporate taxpayers, the filing deadline without extensions is March 15. Contributions made by this date enable the company to take the deduction on the corporate tax return.
Nondiscrimination Testing: Employer contributions are subject to cafeteria plan nondiscrimination rules, necessitating careful consideration of timing to avoid issues.
Expense-Timing Considerations: Accelerated contributions may be beneficial for employees facing increased out-of-pocket expenses due to higher deductibles. However, this approach comes with its own set of challenges.
Ensuring Compliance and Administration
Cafeteria plan documents may need amending to accommodate new employer contributions, and timely communication with HSA trustees or custodians is crucial for crediting contributions to the correct year.
Conclusion
Navigating the timing of employer HSA contributions requires a nuanced understanding of regulatory requirements, tax implications, and employee welfare. By strategically evaluating these factors, employers can maximize the benefits of their HSA programs while ensuring compliance and efficient administration.
In conclusion, proactive planning and thoughtful execution are key to leveraging employer HSA contributions effectively, ultimately benefiting both employers and employees alike.
In a recent news release, the Internal Revenue Service (IRS) has reiterated important guidelines regarding the eligibility of health and wellness expenses for deductions and reimbursements under health Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Medical Savings Accounts (MSAs).
What Qualifies as a Medical Expense? According to the IRS, for an expense to be considered a medical expense under Code § 213, it must be directly related to the diagnosis, cure, mitigation, treatment, or prevention of disease, or must affect the structure or function of the body. This definition excludes expenses that are solely for general health benefits.
The Risk of Nonmedical Reimbursements: The IRS warns that if health FSAs or other account-based health plans reimburse nonmedical expenses, it could result in all plan payments, including those for legitimate medical expenses, being included in participants’ taxable income.
Misleading Claims and the Importance of Diagnosis-Specific Documentation: The IRS has expressed concerns about companies misleading individuals by suggesting that a doctor’s note can transform general food and wellness expenses into medical expenses. However, without a clear connection to a diagnosis-specific treatment or activity, these expenses do not qualify as medical expenses.
Case in Point: The Denied Claim Highlighting the issue, the IRS shared an instance where an individual with diabetes was denied reimbursement for healthy food expenses through his health FSA. Despite obtaining a doctor’s note from a company that advertised such services, the claim was rejected because the food did not meet the criteria for a medical expense.
Guidance for Taxpayers: For those seeking clarity on what constitutes a reimbursable medical expense, the IRS points to its FAQs on nutrition, wellness, and general health expenses. These resources clarify that food or beverages purchased for health reasons, such as weight loss, can only be reimbursed if they do not fulfill normal nutritional needs, are used to alleviate or treat an illness, and are substantiated by a physician’s prescription.
Understanding the fine line between general wellness and medical care is crucial for taxpayers and plan administrators. As the IRS emphasizes, only expenses that meet the stringent criteria set forth in the Code will be considered for deductions and reimbursements, ensuring the integrity of health-related financial plans.
