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Feb Newsletter 2012


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Feb Newsletter 2012

  1. 1. A Bi-monthly publication from The Gardner Group February 2012 The Changes Ahead New Limit on FSA Contributions Likely to Increase Use of HSA’s A provision in the Health Care Reform law (PPACA) limits annual contributions to medical FSA’s to $2,500. This provision becomes effective in 2013, but most experts advise that it be implemented for plan years beginning after January 1, 2012. This limit will reduce a very popular tax benefit for many employees while increasing revenue to the Federal government. The change will likely encourage employers to consider Health Savings Accounts (HSA’s) as an alternative to FSA’s. As with FSA’s, funds can be contributed tax-free to HSA’s and can be spent tax-free on the same qualified health costs covered by FSA’s. However the contributions limits are higher for HSA’s and, unlike FSA’s, there is no requirement that funds deposited to an HSA be spent or forfeited by the end of the plan year. The challenge is that an HSA can only be made available to employees covered by an HSA qualified group health insurance plan. Employers will have to amend their health plans to meet HSA qualifications in order to offer this benefit to employees. Then only employees who participate in the health plan may have HSA’s. The requirements of an HSA qualified health plan are: ~ The plan must have an annual deductible of at least $1,200 for single coverage and $2,400 if dependents are also covered. ~ If dependents are covered, the deductible must be “non-embedded.” This means no covered family member has met the deductible until the combined deductible for dependent coverage has been met (i.e. $2,400 if minimum deductible is used). ~ There can be no copays until the deductible is met. Participants must pay the full cost of covered services until the deductible has been met. This includes prescription drugs. Preventive Care is excluded from this requirement. For some employers these changes may be deemed too dramatic. For others the increased attractiveness of HSA’s may be the impetus to make this transition to a “consumer directed” health plan structure. The change to an HSA structure should reduce health insurance costs, and employers may wish to share this saving by making employer contributions to participants’ HSA’s. We have summarized below the key features of HSA’s: ~ The maximum annual contribution to an HSA for calendar year 2012 is $3,100 for participants with single health insurance coverage, and $6,250 for participants who cover dependents. These maximums are increased annually based on inflation. ~ Employees may make deposits to HSA’s on a pre-tax basis via payroll deductions. With other deductions that are made on a pre-tax basis (FSA contributions, qualified insurance premium payments), employees may not make changes to scheduled deductions during the year unless there is a qualified change in status per Section 125 of the Internal Revenue Code. This restriction does not apply to HSA’s. Deductions may be changed, discontinued and resumed at the participant’s discretion. ~ Employees may also make deposits from personal funds to HSA’s. Such deposits are made from after tax funds (unlike pre-tax payroll deposits) but are deductible on the employee’s tax return. ~ Employers may also make deposits to employee HSA’s as long as combined deposits (employer and employee deposits) do not exceed the annual contribution limits. Employer deposits are tax free to employees. ~ Funds deposited to HSA’s (employee and employer deposits) are immediately and fully vested. They belong to the employee and cannot be forfeited. Unlike FSA’s, there is no requirement that these funds be spent within a plan year. Since these funds can accumulate indefinitely and without limit, employees have an opportunity to accumulate substantial funds to meet future needs. ~ Funds deposited to an HSA can be spent tax free on the same family medical, dental and vision care costs covered by medical FSA’s. In addition, HSA funds can be spent tax free on COBRA premiums, Medicare premiums and Long Term Care Insurance premiums. ~ An HSA is a personal and portable bank account. Deposits earn interest, and after a minimum balance is reached, funds can be invested in securities and mutual funds. Interest earnings and investment earnings are not taxed. ~ Funds can be withdrawn at any time and used for any purpose. If used for non-qualified expenses, withdrawals are subject to income tax and, if withdrawn prior to retirement age, are also subject to a 20% penalty tax. After retirement age non-qualified expenditures are simply subject to ordinary income tax, the same as expenditures from any other qualified retirement account. ~ There is no requirement to spend HSA accumulations. If unspent during the participant’s lifetime, accumulations can transfer to a named beneficiary with the same exemption from probate and creditors’ claims enjoyed by life insurance proceeds and qualified retirement plan accumulations. ~ Howard Dunlap
  2. 2. February, 2012 New Limit on FSA Parts of Health Reform Law Gaining in Contributions Based Acceptance: Poll on a “Tax Year” Americans are slowly starting to embrace some key components of the controversial health care reform act signed into law by President BarackWith Health Care Reform imposing the Obama nearly two years ago, according to a new Harris$2,500 limit on annual salary reduction Interactive/HealthDay poll released January 30, 2012.contributions to medical Flexible SpendingAccounts, comes concern for non- To be sure, Americans remain sharply divided over the legislation, withcalendar-year plans. Effective January 1, slightly more than one-third (36 percent) of U.S. adults saying they want the2013 the $2,500 limit will apply to all FSA law repealed and 21 percent saying they want it to remain as is. Twenty-fiveaccounts based on a taxable year (January percent would like to see only certain elements of the law modified.1st-December 31st). Non-calendar year However, support for certain components of the law seems to be slowlyplans that track medical FSA salary increasing with time. For instance, 71 percent of those polled now back thereductions solely on a plan year basis may laws provision that prevents insurance companies from denying coverage toinadvertently permit an employee to those already sick. At the end of 2010, a Harris Interactive/HealthDay pollexceed the $2,500 limit for a calendar indicated that 64 percent supported this provision.year. These plans must take the limit intoaccount when conducting enrollment for The poll shows some other provisions of the health reform law gainingthe plan year that includes the January 1, acceptance. They include:2013 effective date. To simplify  Allowing children to stay on theiradministration, sponsors of non-calendar parents insurance plans until theyyear plans may wish to consider turn 26 -- 57 percent in Jan. 2012implementing the limit on their 2012 versus 55 percent in Nov. 2010.renewal date, as opposed to waiting. AllSponsors should provide advance notice to  Creating insurance exchanges wherepotential participants that their annual people can shop for insurance -- 59benefit will be reduced due to PPACA at percent versus 51 percent.their next plan year renewal date.  Providing tax credits to small businesses to help pay for their employees insurance -- 70 percent versus 60 percent.  Requiring all employers with 50 or more employees to offer insurance to their employees or pay a penalty -- 53 percent versus 48 percent.  Requiring research to measure the effectiveness of different treatments -Employees that coverer dependents are - 53 percent versus 44 percent.also limited to the $2,500 limit. The limit isa flat dollar amount and applies on a per-  Creating a new Independent Payment Advisory Board to limit the growthparticipant basis, so employees with family of Medicare spending -- 38 percent versus 32 percent.members are not permitted to makehigher medical FSA salary reductions. But the most controversial aspect of the law -- the individual mandate thatHowever, a husband and wife who are requires all adults to have health insurance or face a fine -- remains widelyeach eligible for their own employment- unpopular, with only 19 percent of those polled supporting it, regardless ofbased medical FSAs will have separate political party affiliation.limits. Each Spouse could make medical The poll included 2,415 U.S adults over age 18 surveyed online between Jan.FSA salary reductions up to the limit. 17-19, 2012, by Harris Interactive. Full data on the poll and its methodology are available at Harris Interactive. Finally, 408 (b)2 rule released. What does it all mean?The Department of Labor (DOL) has issued the long-anticipated final service provider fee disclosure regulation. Now the rulerequires covered service providers to disclose to retirement plan sponsors a description of services to be provided and all directand indirect compensation to be received for those services. The idea for the rule is that it will assist responsible plan fiduciariesin fulfilling their duties to assess reasonableness of compensation and identify potential conflicts of interest.We think the most important changes are the following:• The extension of the compliance date from April 1, 2012 to July 1, 2012• The fact that service providers are not required to provide a summary of the disclosures, though the DOL provided a sample “guide” that is not mandatory• The addition of the requirement to describe the arrangement between the service provider and the payer of indirect compensation• Limited relief for disclosures for brokerage accounts and similar arrangements• Clarification that electronic disclosure of the disclosures is permitted• Relief from the disclosure requirements for “frozen” 403(b) contracts• The requirement that plan sponsors terminate the relationship with a service provider who fails or refuses to provide information on request.Have you reviewed your retirement plan in preparation for the new ruling? If you would like a complimentary benchmarkinganalysis of your 401(k) plan, please contact Brian Cook. John K. Mitsis CRPS®