Plenty of great information is in our May Compliance Update. If you have questions - sean.scanlan@usi.com or 512-651-4120

1. Compliance
MAY 2018
Employee Benefits Compliance Update
USI Insurance Services Employee Benefits Compliance Practice
InThis Issue Page
ƒƒ IRS Announces 2019 Inflation Adjusted Amounts
for Health Savings Accounts
ƒƒ IRS Changes its Mind, Restores HSA Maximum
Contribution Limit to $6,900
ƒƒ Allowing Employees to Make Pre-tax HSA
Contributions
ƒƒ Tax-Exempt Employers with Transportation
Benefits Subject to Unrelated Business Income Tax
Under Tax Reform
ƒƒ IRS Shows Employers How to Determine ALE
Status under the ACA
ƒƒ Massachusetts Ramping Up its Form of Healthcare
Reform 2.0
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2. Page 1
IRS Announces 2019 Inflation Adjusted
Amounts for Health Savings Accounts
In brief:
ƒƒ The maximum contribution that can be made to an
HSA in 2019 will increase for both self-only and family
coverage.
ƒƒ Minimum annual deductibles remain unchanged from
2018, but maximum out-of-pocket expenses for both
tiers of coverage will increase in 2019.
The Internal Revenue Service recently announced the
2019 cost of living adjustments for health savings accounts
(HSAs) and HSA-eligible high deductible health plans
(HDHPs). The maximum HSA annual contribution for
self-only coverage for 2019 will be $3,500, up from $3,450,
while the maximum annual contribution for those with
family coverage will be $7,000, up from $6,900 (as recently
reinstated – see article below).
With respect to HSA-eligible HDHPs, the minimum annual
deductible for plan years that start in 2019 will remain
unchanged at $1,350 for self-only coverage, and $2,700
for family coverage. The annual out-of-pocket expense
maximum for an HSA-eligible HDHP will be $6,750, up
from $6,650, for self-only coverage, and $13,500, up from
$13,300, for family coverage.
IRS Changes its Mind, Restores HSA
Maximum Contribution Limit to $6,900
In brief:
ƒƒ The maximum contribution to a health savings
account for those with non-single coverage under a
qualifying high-deductible health plan is, once again,
$6,900 for 2018.
ƒƒ IRS had originally announced that the HSA
contribution limit was $6,900, then reduced that limit
to $6,850 because of federal tax reform; the latest
announcement effectively restores the original limit.
ƒƒ The maximum contribution to an HSA for those with
single coverage under an HDHP remains at $3,450
for 2018.
The Internal Revenue Service has decided to restore the
2018 maximum contribution to a health savings account
(HSA) to $6,900 for those with non-single coverage under
a qualifying high-deductible health plan (HDHP). See IRS
Revenue Procedure 2018-27. This dollar limit had previously
been reduced from $6,900 to $6,850 for technical reasons
relating to federal tax reform, as discussed in the March 2018
Employee Benefits Compliance Update.
The HSA maximum contribution for those with single
coverage under a qualifying HDHP was not affected by
federal tax reform, and remains unchanged at $3,450
for 2018.
How a given employer responds to this latest change will
depend to a large extent on what it wants to do. The new
guidance merely provides that contributions up to the
$6,900 limit will not be considered excess contributions
in 2018. So, employers that didn’t take any action earlier
this year can continue as-is. Those employers that already
effectuated a reduction will need to decide whether
to change their payroll systems yet again to let HSA
contributions accumulate up to $6,900 for the calendar year,
or merely inform affected employees they can put the extra
$50 back into their HSA on their own and claim a deduction
on their individual tax return.
Third-party vendors that are handling HSA administration
for an employer are expected to provide employer-to-
employee communications on this topic for distribution to
affected employees.
For employees who front-loaded their full $6,900 HSA
contribution early in 2018 before the announcement of the
$50 reduction, and who have already received an excess
contribution distribution from their HSA, the latest IRS
guidance provides three options for corrective treatment:
„„ The individual can repay the excess contribution
distribution (as a “mistaken” distribution) to the HSA
by April 15, 2019, if the HSA vendor agrees to allow
the repayment. If this procedure is followed, the excess
contribution distribution would not be treated as taxable
income to the individual, and would not be subject to
the 20% additional tax.
Employee Benefits Compliance Update | May 2018

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„„ The individual could keep the excess contribution
distribution, and use it to pay for qualified medical
expenses. In that case, the distribution would not be
treated as taxable income to the individual, and would
not be subject to the 20% additional tax.
„„ The individual could keep the excess contribution
distribution, without using it to pay for qualified medical
expenses. In that case, the distribution would be treated
as taxable income to the individual, and would be
subject to the 20% additional tax.
Unfortunately, the moral of this story is that it sometimes
does not pay to react too quickly to unexpected changes in
the law, when there is a chance that the IRS will announce
administrative procedures to smooth out the situation.
Allowing Employees to Make Pre-tax HSA
Contributions
In brief:
ƒƒ Employers sponsoring HDHPs should consider the
benefits of allowing employees to make pre-tax HSA
contributions.
ƒƒ The employer’s §125 cafeteria plan must include the
HSA in order for employee HSA contributions to be
treated as pre-tax.
ƒƒ Employees allowed to contribute to HSAs pre-
tax through a cafeteria plan must be allowed
to commence, modify, or terminate their HSA
contribution amount at least once per month for any
reason.
ƒƒ Employer and employee HSA contributions made
through the §125 cafeteria plan must be included in
that plan’s non-discrimination testing.
Many employers offer employees coverage under a high
deductible health plan (HDHP) that is compatible with a
health savings account (HSA). Such employers also will
almost certainly want to allow eligible employees to make
pre-tax contributions from salary into their HSAs, for the
following reasons.
First, both the employer and the employee will save money,
because the employee’s taxable wages are reduced by the
employee’s pre-tax HSA contributions. Therefore, the
employer pays less in payroll taxes for federal purposes and
in most states, and the employee pays less in federal and
(most) state income taxes. (Currently, Alabama, California,
and New Jersey do not allow a state income tax exclusion for
HSA contributions.)
Second, the employer will have far more flexibility in
defining any amounts it would like to contribute to
employees’ HSAs if it also allows employees to make their
own pre-tax HSA contributions through salary reductions.
This is because the employer will avoid having to comply
with the strict “comparability” rules that would otherwise
govern an employer’s HSA contributions. See Treas. Reg.
§§54.4980G-1 through 54.4980G-5.
Under the comparability rules, an employer is subject to a
35% excise tax on all employer HSA contributions in a year
unless the employer has made comparable contributions
to the HSAs of all comparable participating employees.
This means all HSA-eligible employees in the same non-
collectively bargained employee category (current full-time,
current part-time, or former employees) that have the same
HDHP coverage category (self-only, self-plus-one, self-plus-
two, or self-plus-three-or-more) must receive a comparable
employer HSA contribution (the same dollar amount, or
same percentage of the HDHP deductible).
For example, an employer offering a wellness program that
rewards employees with contributions to their HSAs likely
could not do so under the comparability rules without
incurring an excise tax. This is because two comparable
employees (e.g., both full-time with self-only HDHP
coverage) would not receive the same dollar amount of
employer HSA contributions if one employee participated
in the wellness program and received the HSA contribution,
and the other employee chose not to participate.
However, employer HSA contributions that are made
through a cafeteria plan defined in section 125 of the
Internal Revenue Code are exempt from these restrictive
comparability rules, and are instead subject to the relatively
more flexible cafeteria plan rules prohibiting discrimination
in favor of key employees and certain highly compensated
individuals. Employer HSA contributions are considered
to be made “through a cafeteria plan” if employees have the
ability to make pre-tax salary reduction contributions to
their HSAs through the cafeteria plan (regardless of whether
any employee actually makes such an election). Treas. Reg.
§54.4980G-5, Q/A-1(b).
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An employer that does allow employees to make pre-
tax HSA contributions must keep in mind the following
requirements:
„„ HSA contributions must be included in the employer’s
written cafeteria plan document as an offered benefit in
order to receive favorable pre-tax treatment;
„„ Eligible employees must be allowed to commence,
modify, or terminate their HSA cafeteria plan
contribution amounts at least once per month for any
reason. HSA contribution elections are not subject
to the same irrevocability rules as other cafeteria plan
benefit elections, which employees ordinarily cannot
change mid-year except in limited circumstances; and
„„ Employee pre-tax HSA contributions and any employer
HSA contributions must be taken into account when the
cafeteria plan non-discrimination testing is performed.
Note About the Cadillac Tax
One potential downside to allowing employees to make pre-
tax HSA contributions is that under current guidance, those
contributions will count toward the total cost of coverage
for purposes of the Cadillac tax, and increase the likelihood
that the threshold cost will be exceeded and trigger an
excise tax for the employer. (All employer contributions to
an employee’s HSA are expected to count for purposes of
the Cadillac tax, regardless of whether they are considered
to be made through a cafeteria plan or not.) However, the
Cadillac tax has been delayed several times, and is currently
not scheduled to become effective until 2022; the guidance
could change before then.
Tax-Exempt Employers with Transportation
Benefits Subject to Unrelated Business
Income Tax Under Tax Reform
In brief:
ƒƒ Federal tax reform law eliminated the deduction
for taxable employers for qualified transportation
fringe benefits, including transit passes and qualified
parking, starting in 2018.
ƒƒ Apparently to place tax-exempt employers on equal
footing with taxable employers, the law directed
that such employers treat employer-paid qualified
transportations fringe benefits as unrelated business
taxable income.
As reported in our December 27, 2017 Legislative Alert,
as supplemented by the January 2018 Employee Benefits
Compliance Update, Federal tax reform legislation (H.R.1)
signed into law on December 22, 2017, eliminated the
ability for employers to deduct the expenses for qualified
transportation benefits provided to an employee. Such
benefits include transit passes and qualified parking, and
the elimination of the deduction applies to amounts paid or
incurred after December 31, 2017.
Of course, elimination of a tax deduction generally has no
impact on tax-exempt employers. However, as briefly noted
in the January 2018 Update, H.R.1 amended section 512(a)
of the Internal Revenue Code (IRC) by adding language
that would increase the unrelated business taxable income
(UBTI) of a tax-exempt organization “by any amount
for which a deduction is not allowable [with respect to
taxable employers]...and which is paid or incurred by such
organization for any qualified transportation fringe (as
defined in section 132(f)) [and] any parking facility used
in connection with qualified parking (as defined in section
132(f)(5)(C)).” H.R.1 further stated that the Secretary of
the Treasury shall issue related regulations or other guidance
on this change. However, neither regulations nor guidance
has been released to date.
Tax-exempt organizations with $1,000 or more of UBTI
must file Form 990-T. Estimated tax may be required if the
tax for a year is expected to be $500 or more. H.R.1 also
changed various tax rates, including the rates on UBTI such
Employee Benefits Compliance Update | May 2018

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that a flat rate of 21% now applies to UBTI. For further
information on reporting and payment of unrelated business
income tax, see https://www.irs.gov/charities-non-profits/
unrelated-business-income-tax.
While the consequences of direct payment of qualified
transportation benefits by a tax-exempt employer is clear, it
remains to be seen whether employee pre-tax contributions
to a qualified transportation fringe benefit program would
be viewed as employer payments. Hopefully upcoming
regulations or guidance will clarify this situation. Note
that, under H.R.1, employees will be allowed to continue
to exclude from income employer-provided transportation
fringe benefits (except for bicycle commuting expenses)
and/or, if allowed by their employer, to set aside their own
money pre-tax for reimbursement of qualified expenses.
Since the UBTI provisions of H.R.1 apply to “amounts
paid or incurred after December 31, 2017,” tax-exempt
organizations that pay for qualified transportation fringe
benefits and operate on a fiscal year may have taxes due for
their fiscal year that started in 2017.
As this new tax provision is already in effect, tax-exempt
employers with qualified transportation fringe benefit
programs should contact their own tax advisor regarding
calculation and payment of any UBTI tax. Such advisor
should also be able to advise as to UBTI treatment of
employee pre-tax contributions to a qualified transportation
fringe benefit program as employer payments.
IRS Shows Employers How to Determine ALE
Status Under the ACA
In brief:
ƒƒ IRS Publication 5208 contains steps to follow in
determining whether an employer is an “applicable
large employer” for purposes of the Affordable Care
Act.
The Internal Revenue Service has released Publication
5208, which contains a summary of the steps that employers
should follow in determining whether they are an “applicable
large employer” (or ALE) under the Affordable Care Act
(ACA).
An employer that is classified as an ALE for a calendar year is
required to file Forms 1095-C and 1094-C with the IRS, and
is subject to potential penalties under the ACA’s employer
“play-or-pay” mandate, for that year. Although there is no
new substantive guidance included in Publication 5208, it
does serve as a reminder that these ALE-based requirements
will remain in effect beyond 2018 (even though the ACA
individual mandate is ending on December 31, 2018), unless
the Federal government enacts new legislation to postpone
or eliminate the employer mandate.
Massachusetts Ramping Up its Form of
Healthcare Reform 2.0
In brief:
ƒƒ As the federal ACA starts to unwind, Massachusetts
is adding back into its state law certain provisions to
obtain funding from employers to help finance state-
subsidized healthcare coverage.
ƒƒ In addition to temporarily raising the employer
contribution rate under the Employer Medical
Assistance Contribution (EMAC) program,
Massachusetts also added a new supplemental
program that may result in a more severe financial
burden on certain employers with non-disabled
employees residing in Massachusetts who are not
offered, or who waive, employer-sponsored group
health plan coverage.
ƒƒ Later this year, Massachusetts will also start requiring
employers to start filing a new “Health Insurance
Responsibility Disclosure” (or HIRD) form on a web-
based system to disclose certain employer-level
information about its employer-sponsored healthcare
offerings.
The Commonwealth of Massachusetts has been at the
forefront of healthcare reform efforts for many years. Certain
elements included in its landmark 2006 healthcare reform
law were subsequently picked up on the federal level upon
the passage of the Affordable Care Act (ACA). Subsequently,
to minimize the duplicative nature of certain portions of the
ACA and Massachusetts healthcare reform, certain state law
provisions were repealed. Now, with various legislative and
regulatory actions being taken at the federal level to unwind
the ACA, Massachusetts is adding back into its state law new
provisions that apply to employers regarding offers of health
insurance coverage. (Note that Massachusetts’ individual
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Employee Benefits Compliance Update | May 2018
coverage mandate, referred to as the Minimum Creditable
Coverage (MCC) requirement, continues to remain in
effect essentially unchanged since its original enactment. A
thorough discussion of the MCC requirement is beyond the
scope of this article.)
Employer Medical Assistance Contribution (EMAC)
In 2014, after the repeal of the Massachusetts “fair share”
contribution requirement, Massachusetts created the EMAC
program to provide for some employer funding by employers
with employees covered under MassHealth (Massachusetts’
state Medicaid program) or who receive subsidized coverage
through ConnectorCare (a portion of Massachusetts’
Marketplace exchange that uses state subsidies to provide
coverage to individuals with household incomes of less than
300% of the Federal Poverty Level).
The EMAC applies to all employers with more than five
employees working in Massachusetts, regardless of whether
they offer healthcare coverage to their employees. Prior to
2018, the EMAC rate was 0.34% of wages up to $15,000,
resulting in a potential maximum of $51 per employee per
year. However, for wages paid in 2018 and 2019 the EMAC
rate has been raised (with the increase scheduled to sunset
after December 31, 2019) to 0.51% of wages up to $15,000,
resulting in a potential maximum of $77 per employee per
year.
Employer Medical Assistance Contribution Supplement
(EMAC Supplement)
In addition to temporarily increasing the EMAC rates,
Massachusetts also created a new EMAC Supplement. The
EMAC Supplement is applicable to employers with more
than five employees working in Massachusetts who have
non-disabled employees enrolled in MassHealth (excluding
those who are merely obtaining premium assistance
through that program) or subsidized coverage through
ConnectorCare. The EMAC Supplement rate is 5% of annual
wages for each non-disabled employee, regardless of whether
they are full-time or part-time, up to an annual wage cap
of $15,000, for a maximum of $750 per affected employee
per year. Employees must be covered under MassHealth or
ConnectorCare for a continuous period of at least 14 days in
a calendar quarter for the EMAC Supplement to apply for
that quarter. Also, an employer is not subject to the EMAC
supplement if MassHealth or ConnectorCare coverage is a
secondary payer because the employee is also enrolled in an
employer-sponsored group health plan.
Importantly, however, just offering coverage, even coverage
that satisfies the ACA’s standards for affordability and
minimum value, may not be sufficient to protect an employer
from being subject to the EMAC Supplement. For example,
a non-disabled employee who is eligible for and enrolls in
MassHealth and who waives any offer of employer-provided
group health plan coverage is still included in the EMAC
Supplement calculations. Furthermore, even though an
employee who is offered employer-provided coverage that
is both affordable and provides minimum value should
not be allowed to obtain subsidized ConnectorCare
coverage, such coverage is nevertheless mistakenly provided
in practice on occasion. Nevertheless, the permissible
grounds upon which an employer may challenge an
assessment appear to be limited to the employee being
enrolled in employer-sponsored coverage, the employee
not being a Massachusetts resident, or the employee
having wages which are inconsistent with the applicable
income eligibility rules. Thus, at least at the Massachusetts
Department of Unemployment Assistance (DUA) level,
it does not appear that an employer can assert that it is
not liable because it offered affordable minimum value
coverage to an employee who may have mistakenly obtained
subsidized ConnectorCare coverage. An appeal of the DUA
determination to a state Superior Court is available.
Payment of the EMAC Supplement is required quarterly,
and is due and payable on or before the last day of the first
month succeeding the quarter in which wages were paid and
reported. Any payment owed is included on the statement
showing the employer’s unemployment insurance liability
issued from the DUA. Thus, the first assessments started to
appear on the April 2018 statements.
New HIRD Forms
Prior to its repeal in 2013, Massachusetts healthcare reform
required certain employers to issue a “Health Insurance
Responsibility Disclosure” (or HIRD) form to provide
information necessary to administer that law’s individual
and employer mandates, specifically to identify employees
who declined coverage under an employer-sponsored group
health plan. Now, in conjunction with the resurrection of

7. This material is for informational purposes and is not intended to be exhaustive nor should any discussions or opinions be construed as legal advice. Contact your broker for insurance
advice, tax professional for tax advice, or legal counsel for legal advice regarding your particular situation. USI does not accept any responsibility for the content of the information
provided or for consequences of any actions taken on the basis of the information provided.
© 2018 USI Insurance Services. All rights reserved.
Employee Benefits Compliance Update | May 2018
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please contact your local USI Benefits Consultant,
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different aspects of Massachusetts healthcare reform as the
federal ACA law starts to unwind, the Commonwealth is
now imposing a new type of healthcare coverage form filing
requirement on employers with six or more employees
in Massachusetts, starting in 2018. The purpose of this
new HIRD form is to collect employer-level information
about employer-sponsored group health plan offerings to
assist MassHealth in identifying individuals with access
to employer-provided coverage who may be eligible for
MassHealth’s premium assistance program.
This new reporting requirement, which is separate and apart
from the EMAC and EMAC Supplement assessments, will
be administered by MassHealth and the Massachusetts
Department of Revenue through a web-based reporting
system that should be available later this year.