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.
Can Our DCAP Reimburse Expenses for the Care of a Child Who Will Turn 13 Later in the Plan Year?
A participant in our company’s Dependent Care Assistance Program (DCAP) faces a common scenario: hiring an adult son to provide after-school care for their 10-year-old daughter. The burning question: Can the DCAP reimburse payments to the son? Let’s dive into the details.
Eligibility for Reimbursement:
Payments to certain relatives or dependents do not qualify for reimbursement under the DCAP requirements.
Specifically, a DCAP cannot reimburse payments to an employee’s child who is under age 19 at the end of the year or to someone whom the employee (or the employee’s spouse) could claim as a dependent.
Whether the DCAP can reimburse the participant for care provided by the son hinges on the son’s age and whether the participant (or the participant’s spouse) can claim him as a dependent for federal income tax purposes.
Limitations on Reimbursement:
DCAPs cannot reimburse payments to an employee’s spouse or to the parent of an under-age-13 qualifying child (e.g., an employee’s former spouse who is also the child’s parent).
It’s essential to communicate this information clearly in your DCAP summary or open enrollment materials.
Documentation Requirements:
Participants must include specific details when claiming an exclusion for reimbursement of dependent care expenses on their tax returns (using Form 2441).
For individual care providers, participants need to provide the name, address, and taxpayer identification number (TIN) (usually the Social Security number).
Exempt organizations require only the provider’s name and address.
In summary, while the DCAP can potentially reimburse payments for care provided by the son, it’s crucial to understand the eligibility criteria, limitations, and documentation requirements. Clear communication and accurate reporting are key to ensuring compliance with DCAP rules.
LEAWOOD, Kansas – NueSynergy, Inc., one of the nation’s fastest growing employee benefits and billing administrators in the country, is pleased to announce its preferred partnership with Broker Builder Solutions (BBS), a national leader in support services for the benefits and technology industry.
“NueSynergy is an industry partner that reflects our shared commitment to solution-oriented strategies for benefits brokers and Human Resource professionals within the employee benefits sector,” said Tonya Taylor, Marketing Leader and Client Relationship Liaison at BBS. This alliance leverages both teams’ expertise to educate clients and effectively provide solutions to their benefits administration and technology challenges. Our shared foundation of outgoing and professional staff is crucial in delivering excellence to the industry and the companies we serve. Through this collaboration, BBS looks forward to expanding our network of trusted benefits professionals.”
NueSynergy continues to achieve exceptional business results with innovative products like its SpouseSaver Incentive Account and COBRAcare+ administration. NueSynergy will work with BBS to offer agents and agencies a wide variety of administrative services for their new and existing employer clients.
“After investing heavily in technology and expansion of our overall infrastructure, NueSynergy has concentrated on partnering with well-known benefits leaders as we continue to expand our nationwide presence,” said Josh Collins, President of NueSynergy. “As we continue to focus on industry-leading service and expanding administration solutions for employers, we have found Broker Builder Solutions to be a natural fit in helping us build new broker and client relationships.”
About NueSynergy NueSynergy is known for industry-leading service, innovative technology, and excellence in providing full-service administration of consumer-driven and traditional account-based plans to employers of all sizes and sectors. Headquartered in Leawood, Kansas, NueSynergy also has locations in Arizona, Florida, Idaho, North Carolina, Pennsylvania, Virginia, Washington, and Rzeszów, Poland.
NueSynergy offers a fully integrated suite of administration services, which include Health Savings Account (HSA), Health Reimbursement Arrangement (HRA), Flexible Spending Account (FSA), Lifestyle Savings Account (LSA), and COBRAcare+ administration as well as SpouseSaver Incentive Account, Combined Billing, Direct Billing, and Specialty Solutions. For more information, visit www.NueSynergy.com.
About Broker Builder Solutions Broker Builder Solutions is dedicated to assisting organizations with their benefits administration needs. Whether setting up a new benefits administration platform or maintaining/leveraging an existing platform, BBS can help. With over 15 years of benefit administration experience, the BBS team are experts in leveraging Ben Admin platforms to provide seamless implementations and carrier file transmissions. But their most important win is fostering positive and long-lasting relationships with all organizations across the benefits industry ecosystem.
BBS has expertise in Client Implementation, 834 EDI File Implementation, Carrier and Payroll Integrations, Eligibility Maintenance Support, ACA Reporting, and Data Migration support for cross platform transitions. For more information, visit www.brokerbuildersolutions.com.
QUESTION: I am reviewing our company’s employee benefit programs and confirming that they are treated appropriately for ERISA compliance purposes. Our disability program provides income-replacement benefits to employees who are unable to work because of illness or injury; payments commence once an employee is out of work for more than two weeks. Benefits are paid from the company’s general assets, not from a trust or separate account. Am I right that for this reason, our program is not an ERISA plan, or do additional conditions apply?
ANSWER: You are correct that a DOL regulation exempts certain “payroll practices,” including disability payments, from ERISA-plan status. You are also correct that the main condition of this regulatory exemption (often referred to as a safe harbor) is that the payments come from the employer’s general assets. It sounds like your program meets this requirement—but several other elements also must be considered to determine whether your program falls within the exemption. If a disability program has any of the following features, the payroll practice safe harbor is not available, and the program is most likely subject to ERISA:
Trust or Separate Account. As noted above, making payments from the employer’s general assets is a key component of the exemption, so funding the program through a trust or separate account will take it outside the safe harbor. It is, however, generally permissible to earmark funds for the program within the employer’s general assets, so long as the funds remain available for other purposes, such as to pay the employer’s creditors.
Insurance. Payment of benefits through insurance is not payment from the employer’s general assets, so using insurance will take the program outside the safe harbor.
Paying More Than Normal Compensation. To fall within the safe harbor, the program may pay eligible employees only their normal compensation, or less (for example, 60% of normal compensation).
Paying Benefits to Former Employees. The safe harbor covers only payments to employees while absent from work, not to former employees—the exemption does not apply if payments continue after an individual terminates employment. You will need to consider the duration of benefits available under the program and ensure that it does not extend beyond when the company considers termination of employment to occur. For example, if an employee who does not return to work is treated as having terminated employment before exhaustion of the disability benefits available under the program, the program does not fall within the safe harbor. As a practical matter, long-term disability programs are more likely to provide benefits beyond termination of employment and thus not meet the requirements, even if paid from the employer’s general assets.
Although it is possible that an arrangement that does not fall within the regulatory exemption may still avoid ERISA’s application under the general standard (a plan, fund, or program established or maintained by an employer to provide ERISA-listed benefits to employees), such a result is unlikely. Thus, any variations from the safe harbor requirements should be discussed with legal counsel. As a final caution, if your company wishes to treat this program as not subject to ERISA, make sure that any program documents, descriptions, and employee communications are consistent with this intent. Even though an employer generally cannot make a non-ERISA arrangement subject to ERISA by simply calling it an ERISA plan, the employer’s treatment is a factor—at least one court has found that treating a potentially exempt payroll practice as an ERISA plan was a “strong reason to find ERISA coverage.” If the company uses a single “umbrella” or “wrap” document to bundle multiple benefit programs, the document should specify which programs are—and are not—intended to be subject to ERISA.
QUESTION: We are planning to add an HDHP and to make company contributions to employees’ HSAs. We have been told that an HSA contribution program—unlike the HDHP coverage—would not be subject to ERISA. Is that always true, or are there circumstances in which ERISA might apply?
ANSWER: Employer-facilitated HSA contribution programs generally are not subject to ERISA. Even though HSA funds may be intended to provide medical care, HSAs are viewed as personal accounts that are not ERISA-covered welfare benefit plans, so long as employee participation is completely voluntary and the employer’s involvement is limited. However, there are ways in which an HSA contribution program could become subject to ERISA. Those ERISA triggers should be avoided because ERISA’s compliance obligations were not crafted with HSAs in mind, and it is not clear how and whether all of ERISA’s requirements could be satisfied by an HSA program.
The DOL has established two safe harbors from ERISA coverage that may apply to workplace HSA programs. One, the voluntary plan safe harbor for group or group-type insurance programs, does not allow employer contributions, so for your purposes, we will focus instead on the HSA-specific safe harbor, which allows employer contributions. Under that safe harbor, employer contributions will not result in ERISA’s application if all of the following requirements are met:
Voluntary Employee Contributions. An employer using the safe harbor can unilaterally establish HSAs for employees and deposit employer funds into those accounts. But any contributions made by employees, including salary reduction contributions, must be voluntary.
Portable Funds. An employer’s program may limit forwarding of HSA contributions to a single HSA provider without triggering ERISA. But the employer cannot limit what happens after that initial deposit; employees must be able to move funds to another HSA if they desire.
Unrestricted Use of Funds. Some employers may wish to impose conditions on how HSA funds are used, such as a requirement that funds be used only for qualified medical expenses. Any such restrictions, however, will cause the arrangement to fall outside the safe harbor.
No Employer Influence. When selecting an HSA provider, employers may choose trustees or custodians that offer only a limited selection of investment options or options replicating those available under the employer’s 401(k) plan. Generally, however, the employer cannot make or attempt to influence employees’ investment decisions.
Not Represented as an ERISA Plan. This requirement seems simple, but it is also easily violated. Participant communications must not represent the HSA program as part of an ERISA plan, or as an ERISA plan of its own, and should include appropriate disclaimers indicating that the HSA is not part of an ERISA plan. From a drafting perspective, the HSA provisions should not be included in an ERISA plan document. While bundling non-ERISA and ERISA benefits will normally not make the non-ERISA benefits subject to ERISA, careful drafting and communications are required to ensure that the HSA satisfies the safe harbor.
No Employer Compensation. The employer cannot receive any direct or indirect payment or compensation in connection with its employees’ HSAs. This rule precludes discounts on other products that the employer may purchase from the HSA vendor, and may raise questions in other situations (e.g., bundled arrangements). This prohibition does not preclude making HSA contributions through a cafeteria plan; the employment tax savings realized by the employer is not considered compensation for this purpose.
Failure to meet any one of these elements will cause the program to fall outside the safe harbor. Although a program involving employer actions or program rules not specifically authorized by the safe harbor might still avoid ERISA, any variations should be discussed in advance with counsel.
