by Lexi Garcia | Mar 31, 2023 | Blog
QUESTION: One of our employees just noticed that her 2023 pay reflects a salary reduction for DCAP benefits. Initially, she said she never elected DCAP benefits. But when we showed her the DCAP election on her election form, she responded that she had made a mistake in completing the form and asked if we could fix it. Can we do this under the IRS rules?
ANSWER: Possibly, if you conclude that (1) there is “clear and convincing evidence” that your employee made a mistake; (2) the mistake is of a type that can be corrected; and (3) the correction is appropriate. (You may need more information before you can reach these conclusions.) While IRS cafeteria plan regulations do not address election changes for mistakes, IRS officials have informally commented that an employee’s election may be undone when there is clear and convincing evidence of a mistake. Some plans use an “impossibility” approach for evaluating whether such evidence exists, while others use a “facts and circumstances” approach. When the impossibility approach is used, an election change is allowed only if the evidence indicates that it was impossible for the employee to benefit from the mistaken election. For example, you could undo your employee’s DCAP election if she has no qualifying individuals. This approach is more cautious and is easier to administer because it does not involve examining an employee’s intentions or motives.
With the facts-and-circumstances approach, mistakes may be corrected if the plan administrator can reasonably ascertain that a mistake actually occurred. (This may involve inquiry into an employee’s intentions.) When this approach is used, we suggest adopting and consistently following written guidelines that require consideration of factors such as the employee’s past elections and benefit usage (e.g., whether your employee has elected DCAP benefits in the past or has consistently used her spouse’s DCAP); plausible evidence of a clerical mistake (e.g., an employee might easily write $5,000 instead of $500, but it is less likely that $5,000 was written instead of $2,400); assessment of the employee’s truthfulness; proximity to the first payroll date after the new election is in force; and any change in the employee’s circumstances that might indicate reconsideration rather than mistake. In addition, we suggest obtaining a signed certification from the employee describing the mistake and the intended election (e.g., if she intended to elect health FSA benefits instead, the appropriate correction would be an election of such benefits). A plan might also establish a time limit for requests to correct mistaken elections.
Under either approach, if the clear and convincing standard is met, an employee’s clerical, arithmetic, and data-entry errors may be corrected retroactively. (Note that the correction may also involve correcting mistaken payroll withholding.) But mistakes as to a benefit’s scope or tax treatment generally cannot be corrected. For example, your employee could not change her election because she mistakenly believed that the DCAP provided greater tax savings than the dependent care tax credit.
To reduce the likelihood of election mistakes surfacing after the plan year has begun, many employers provide employees with written confirmation of their elections after open enrollment and before the beginning of the new plan year. Employees are instructed to review their elections and notify the employer before the plan year begins if any corrections are needed.
Source: Thomson Reuters
by Lexi Garcia | Mar 23, 2023 | Blog
The IRS has issued FAQs that explain when certain costs related to nutrition, wellness, and general health are medical expenses under Code § 213 that may be paid or reimbursed under a health FSA, HSA, or HRA. As background, Code § 213 defines medical care as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body. The FAQs explain that medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness, and do not include expenses that are merely beneficial to general health.
The FAQs confirm that the costs of dental, eye, and physical exams are medical expenses that can be paid or reimbursed by a health FSA, HSA, or HRA because these exams diagnose whether a disease or illness is present. The costs of smoking cessation programs and programs that treat drug-related substance use or alcohol use disorders are also medical expenses because they treat a disease. For the cost of therapy to be a medical expense, the therapy must treat a disease—thus, amounts paid for therapy to treat a diagnosed mental illness are medical expenses, while amounts paid for marital counseling are not. Likewise, the costs of nutritional counseling and weight-loss programs are medical expenses only if the counseling or program treats a specific disease diagnosed by a physician (e.g., obesity or diabetes); otherwise, these costs are not medical expenses. The cost of a gym membership is a medical expense only if the membership was purchased for the sole purpose of affecting a structure or function of the body (e.g., a prescribed plan for physical therapy to treat an injury) or treating a specific disease diagnosed by a physician (e.g., obesity or heart disease). However, the cost of exercise for the improvement of general health is not a medical expense, even if recommended by a doctor.
The FAQs also explain the circumstances under which the cost of food or beverages purchased for weight loss or other health reasons will qualify as medical expenses, and that the cost of non-prescription drugs can be paid or reimbursed by a health FSA, HSA, or HRA even though these items (except for insulin) are not deductible under Code § 213. The FAQs confirm that the cost of nutritional supplements is not a medical expense unless the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician.
Source: Thomson Reuters
by Lexi Garcia | Mar 21, 2023 | Blog
QUESTION: Our company sponsors a high-deductible health plan (HDHP) in conjunction with employee HSAs. Can the medical expenses of our employees’ adult children who otherwise qualify for tax-free coverage under the HDHP be reimbursed tax-free from the employees’ HSAs?
ANSWER: Not necessarily—it depends on whether the adult children qualify as tax dependents under the HSA rules. As group health plans, HDHPs that provide dependent coverage of children must make the coverage available until a child turns age 26. (The age 26 mandate does not generally apply to HSAs because they are not group health plans.) The income exclusion for employer-provided health coverage includes employees’ children who are under age 27 as of the end of the taxable year, regardless of whether those children qualify as tax dependents. But similar provisions do not appear in the HSA tax-free reimbursement rules. Instead, whether an adult child’s medical expenses can be reimbursed tax-free from a parent’s HSA depends on whether the child qualifies as a tax dependent for HSA distribution purposes—i.e., whether the adult child is a qualifying child (for example, due to disability) or a qualifying relative (where the parent provides over one-half of the child’s support). Distributions from a parent’s HSA that reimburse a nondependent adult child’s medical expenses are taxable and may be subject to an additional 20% tax.
Thus, the medical expenses of some adult children who are enrolled as dependents in your company’s HDHP will not qualify for tax-free reimbursement from the employee-parent’s HSA. It is possible, however, that these children may be HSA-eligible themselves. If they cannot be claimed as tax dependents and they meet the other HSA eligibility requirements, they could open HSAs of their own.
Source: Thomson Reuters
by Lexi Garcia | Mar 9, 2023 | Blog
HHS has proposed regulations that would adopt a set of standards for the electronic exchange of clinical and administrative data to support prior authorizations and health care claims adjudication. As background, HIPAA requires that covered entities (and their business associates) comply with rules designed to standardize the format and content of specified electronic transactions. Specifically, the proposed regulations would adopt standards for “health care attachments” transactions that would support both health care claims and prior authorization transactions, along with a standard for electronic signatures. Regulations proposed in September 2005 would have adopted certain standards for health care attachments but were never finalized.
Explaining that the prior regulations were not finalized due to comments about the standards’ “lack of technical maturity and stakeholders’ lack of readiness to implement electronic capture of clinical data,” the preamble to the new proposed regulations notes that despite the subsequent widespread deployment of electronic health records and greater industry experience with the HIPAA standards, transmitting health care attachments is still primarily a manual process. The preamble provides detailed information about the organizations responsible for developing and maintaining the transactions standards and advises that the timing for implementation is right because the industry consensus-based standards are now mature, and covered entities are ready to implement them. The regulations do not propose to adopt attachments standards for all health care transaction business needs. Instead, the approach is for covered entities to gain experience with several standard electronic attachment types so that technical and business issues can be identified to inform potential future rulemaking for other electronic attachments standards.
Source: Thomson Reuters
by Lexi Garcia | Mar 2, 2023 | Blog
HHS’s Center for Medicare & Medicaid Services (CMS) has issued a fact sheet addressing the end of the COVID-19 public health emergency (PHE), which (along with the COVID-19 national emergency) is anticipated to end on May 11, 2023. The fact sheet, which is addressed to individuals, confirms that HHS is expecting the PHE to expire at the end of the day on May 11 and provides information about the implications for coverage under private health insurance, as well as Medicare, Medicaid, and CHIP. Here are highlights relevant to employer-sponsored group health plans:
- COVID-19 Vaccines, Testing, and Treatments. Most plans must continue to cover vaccines furnished by in-network providers without cost sharing but may require individuals receiving vaccines from out-of-network providers to share part of the cost. When the PHE ends, mandatory coverage for OTC and laboratory-based COVID-19 PCR and antigen tests will end. Plans may choose to cover these tests but may require cost sharing, prior authorization, or other forms of medical management. The end of the PHE will not change how COVID-19 treatments are covered; plans that require cost sharing or apply deductibles may continue to do so.
- Access to Telehealth Services. As is currently the case during the PHE, coverage for telehealth and other remote care services may vary from plan to plan after the PHE ends. When covered, plans may impose cost-sharing, prior authorization, or other forms of medical management.
Source: Thomson Reuters
by Lexi Garcia | Feb 28, 2023 | Blog
QUESTION: For 2023, an employee elected $2,400 of health FSA coverage under our calendar-year cafeteria plan, which is funded solely through employee salary reductions and does not provide for carryovers or include a grace period. The employee has already incurred medical expenses equal to this amount in 2023 and wants to be reimbursed for the expenses now, even though she has only made health FSA salary reductions of $400 to date. Do we have to reimburse all of these expenses right away, or can we limit reimbursements to the amount our employee has already contributed and ask her to resubmit the remaining expenses as additional contributions are made?
ANSWER: Your employee must be reimbursed for all of her expenses now, assuming that the expenses are otherwise eligible for reimbursement (e.g., they are for medical care incurred during the current period of coverage, and appropriate substantiation has been provided). That’s because IRS requirements for health FSAs include a “uniform coverage” rule under which the maximum amount of reimbursement must be available at all times during the plan year (or other period of coverage), reduced only for any prior reimbursements for the same period. Reimbursement is deemed “available” under the uniform coverage rule if claims are paid at least monthly, or when an employee’s submitted claims reach a reasonable plan minimum (e.g., $50). Thus, reimbursements cannot be restricted to the amount of the employee’s contributions.
The uniform coverage rule also prohibits accelerating an employee’s salary reductions based on health FSA claims submitted or paid. Note that the uniform coverage rule does not apply to DCAPs, so reimbursements under a DCAP can be limited to the amount that has been contributed, less expenses already reimbursed.
Source: Thomson Reuters