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Two things happened in 1986. Run-D.M.C released their hit song, “It’s Tricky,” and COBRA became effective.
Thirty-two years later, Run-D.M.C.’s music is still popular, and COBRA administration is still tricky—especially
when it comes to Flexible Spending Account (FSAs). Add FSA carryover to the mix, and it gets even trickier.

 

COBRA only applies to FSAs which are said to be underspent.* This means that the amount
available for reimbursement for the remainder of the plan year exceeds the COBRA premium for that same time
period. Figuring out if the FSA is underspent involves a bit of math, so it’s best illustrated with an example.

 

How to determine the amount available for reimbursement for the remainder of the plan year:

• Jay has elected to put $2,500 into his FSA, which runs on a calendar year
  • He also has $500 in carryover funds from the previous year, for a total balance of $3,000 for the
    plan year
• Jay terminates employment on May 31.  At that time, he had been reimbursed for $1,100 in healthcare
  expenses.
• The maximum amount available for reimbursement for the remainder of the plan year is: $3,000 – $1,100 =
  $1,900

 

How to determine the COBRA premium:

• The maximum monthly COBRA premium is 1/12 of the employee’s election, plus a 2% administrative fee.
• The carryover balance should not be factored into setting the COBRA premium
  • The employee would have already paid for the carryover amount with the previous year’s contribution
• The maximum monthly COBRA premium for Jay is ($2,500 ÷ 12) X 102% = $212.50

 

How to determine if the FSA is underspent:

• Jay terminated employment on May 31, which leaves 7 months left in the plan year
• The total premium for the remainder of the plan year is: $212.50 X 7 = $1,487.50
• Since the amount available for reimbursement for the remainder of the plan year exceeds the premium for the
  same time period, the FSA is considered underspent, and COBRA would need to be offered
  • If the opposite were true, then COBRA would not have to be offered.

 

If COBRA applies to the FSA, then COBRA beneficiaries must be given the same carryover rights as current
employees. Using the above example, Jay could elect COBRA for a maximum monthly premium of $212.50. Jay’s
employer can only change him a premium for the remainder of the plan year, which is 7 months. 

 

If Jay has unused funds at the end of the plan year, then he must be allowed to carry over up to $500 for the
maximum time period permitted under COBRA law. In this case, it would be an additional 11 months since
termination of employment allows for 18 months of continuation coverage.

 

Jay’s employer is prohibited from charging him a premium for the additional 11 months of access to the carryover
amount, as Jay would’ve already paid for this amount. Additionally, Jay’s employer does
not need to give him the ability to make a new election to the FSA for the new plan
year.

 

Employers can place restrictions on the carryover amounts. For example, they can structure their FSA so that
carryover is only available to employees who make new elections in the following plan year. If Jay’s employer
had this provision in place, then he would not be entitled to any carryover amount after the plan year was over.
In other words, he’d only need to be offered COBRA for 7 months.

 

For more information, you can refer to IRS Notice 2015-87 (Q&Q #21-25).

 

Do you have a question about FSAs or COBRA? Ask the Expert!

 

* This assumes the FSA meets the definition of an excepted benefit.

Flexible Spending Accounts (FSAs) are one of the few benefits an employer can provide that often pays for
itself (and then some). While there are expenses that will be incurred by the employer when using a third-party
administrator for the FSA, there are also payroll tax savings that will offset some or all of those expenses.

 

The Federal Insurance Contributions Act (FICA) is a payroll tax imposed on employees and employers to fund
Social Security and Medicare. FICA taxes amount to 15.3% of the employees’ wages, but the tax is split equally
between the employee and employer. The employee is assessed a 7.65% tax, and the employer is also assessed a
7.65% tax. 

 

However, a key feature of FSAs is that contributions are not subject taxes, including FICA taxes. Not only does
the employee save taxes on their contributions, but the employer also reduces their FICA tax liability by
offering an FSA. In many instances, the tax savings to the employer are equal to or greater than the
administrative expenses associated with an FSA.

 

There is a simple formula to determine when contributions will provide enough tax savings to offset the FSA
administrative expenses:

 

Annual FSA Administrative Expenses ÷ 7.65%

 

Let’s assume the annual cost for an employer to administer an FSA is $1,000. We’re going to take that expense
and pide it by the employer’s FICA tax percentage (which should be entered as .0765).

 

$1,000 ÷ .0765 = $13,072 (rounded to nearest dollar)

 

When total employee contributions are at $13,072, the employer will save $1,000 in FICA taxes, which is the
exact amount of the administrative expenses for the FSA in this example. This formula tells the employer their
break-even point. And, if contributions exceed $13,072, the employer’s FICA tax savings will be greater than
their administrative expenses.  

 

FSAs truly are a benefit that can pay for itself. Plus, there are two different kinds of FSAs an employer can
offer. Health FSAs allow employees to pay for out-of-pocket medical expenses with tax-free dollars. Dependent
Care FSAs allow employees to pay for things like daycare with tax-free dollars. By offering both FSAs, an
employer can easily meet or exceed their break-even point, making it a win-win for everyone.  

 

 

To offer an FSA, or not to offer an FSA, that is the question. Let’s just cut right to the chase. 

 

Flexible Spending Accounts (FSAs) are a great way for employees to save on taxes for medical and dependent care
expenses, but employers also receive financial benefits by offering an FSA. 

 

While there’s an approximate cost to employers of $5/employee/month (or $60/employee/year) to outsource the
administration of an FSA, there’s also a tax savings employers receive. Employers avoid a 7.65% payroll tax
(i.e. Medicare and Social Security tax) on the amounts employees contribute to an FSA. 

 

The average employee contribution to a Health FSA is around $1,350/year, and the average contribution to a
Dependent Care FSA is around $3,200/year. We can calculate the annual tax savings as follows: 

 

• Health FSA Tax Savings: $1,350 x .0765 = $103 (rounded to nearest dollar)
• Dependent Care FSA Tax Savings: = $3,200 x .0765 = $245 (rounded to
  nearest dollar)

 

This means the employer “profits” $43/year on the average Health FSA participant and $185/year on the average
Dependent Care FSA participant. 

 

It’s hard to make an argument against offering an FSA. How many benefits are there that actually make an
employer money? We know at least one that does!

 

Flexible Benefit Service Corporation (Flex) offers debit cards as a reimbursement
option with several different Health Reimbursement Arrangement (HRA) plan designs.

Why offer an HRA?

HRAs are employer-funded plans that reimburse employees for out-of-pocket medical
expenses. HRA reimbursements are tax-free to the employer and employee. Employers can write-off
reimbursements and expenses associated with administering an HRA. Employees don’t have to pay income taxes
on reimbursements either. Both parties also avoid Medicare and Social Security taxes on
reimbursements.

HRAs are often linked to a major medical plan allowing for reimbursement of
deductibles, coinsurance and/or copay expenses. Many employers are transitioning to higher deductible health
plans, and they are using HRAs as part of their transition strategy. The HRA helps offset or reduce expenses
of employees who typically have high medical costs, and it provides a peace of mind to other employees who
may be worried about an unexpected medical event.

On average, utilization of an HRA is between 25 – 35% of the maximum reimbursement
available to the employee.*
This, in combination with premium savings associated with a high deductible health plan, can lead to total
savings of up to 20% for the employer.**

Why offer a debit card with an HRA?

HRAs, by name, are a type of reimbursement program. The old-fashioned way of
administering an HRA required an employee to pay for an out-of-pocket expense with their own money. The
employee would then request reimbursement by submitting proof that the expense was incurred.

Debit cards change the dynamic of the reimbursement process by providing
on-the-spot access to available HRA reimbursement funds. For example, if an employee had to pay a $50 copay
for an office visit, they could use the debit card associated with their HRA to make payment for the office
visit right then and there.

The employee may still need to provide documentation showing the debit card was
used for a qualified expense, but they don’t need to pay for the expense out of their own pocket and request
reimbursement later. This creates a far better experience for the employee. We can even setup
auto-substantiation rules to minimize the need to submit documentation in many cases.

Why use Flex as your HRA administrator?

Flex has been administering medical reimbursement programs since 1988. It’s part of
our DNA. We eat, sleep and breathe these programs, and we have some of the best and brightest employees who
support our HRA clients. Our HRA administrative fees are nominal compared to the savings that are received,
and there’s no extra charge for debit cards. We’ll even provide free debit cards to spouses and adult
children who are covered by the HRA.

Flex will work with the insurance producer, employer, or both, to make sure the
implementation process is smooth. We’ll provide a number of resources and tools as part of our commitment to
provide ongoing support and a great experience. Employees will be able to access account information online
or through a mobile app. Employers will have an online portal to view account activity and run an array of
reports, and a friendly voice will be on the other line whenever there are questions. 

 

The Department of Labor (DoL), Department of Treasury (DoT) and the Department of Health and Human Services (HHS) have jointly proposed new rules that would impact Health Reimbursement Arrangements (HRAs) effective January 1, 2020.

The proposed rules, which are open for public comment until December 28, 2018, would make a significant change to the HRA integration requirements. Current regulations require HRA participants to also be covered by a traditional group health plan with limited exceptions. The proposed rules do not eliminate the integration requirement, but the rules would allow integration to also be available for employees covered by an individual health plan.  

If the proposed rules are finalized, this would allow employers of all sizes to establish an HRA which reimburses individual health insurance premiums.

Some employers may shift from offering a traditional group health plan to offering an HRA which reimburses individual health insurance premiums, and the proposed rules make it clear that an employer cannot offer the same class of employees the choice between a traditional group health plan and an HRA which reimburses individual health insurance plans. However, an employer could offer a traditional group health plan to one class of employees (e.g. full -time employees) and an HRA which reimburses individual health insurance premiums to another class of employees (e.g. part-time employees).

Employers would be free to establish the maximum reimbursement limits under the HRA, but variances for employees could only be based on an employee’s age and/or family size. Variances would be allowed for these two factors because they have a significant impact on the cost of an individual health insurance plan.

A question that remains, and a question that is expected to be addressed with future guidance, is how an employer who is subject to the Employer Mandate (generally, those with 50 or more employees) can establish this type of HRA and avoid the risk of penalties. The Employer Mandate requires a health plan to be offered that is both affordable and has minimum value to avoid the risk of penalties. The proposed rules indicate that a future safe harbor rule will be issued and will tell employers how they can structure this type of HRA so that it can meet the affordability and minimum value requirements.

In addition to the above information, the proposed rules would also create a new limited, excepted benefit HRA. This HRA would be capped with an annual reimbursement limit of $1,800 with the carryover of unused funds permitted. The HRA could reimburse expenses for things like out-of-pocket dental and vision care, or premiums for short-term medical plans and COBRA. This type of HRA could be offered by employers who also offer a traditional group health plan.

This is all big news as indicated in a DoL press release. Preliminary estimates from the Treasury Department suggest that 800,000 employers are expected to offer HRAs which reimburse individual health insurance premiums for more than 10 million employees. We may be in for a significant shift in the way employee benefits are delivered.

 

Interested in an HRA for your company?

Using a debit card just got a whole lot easier!

Debit cards offer easy access to tax-advantaged benefits and should improve the overall experience of the employee. Yet sometimes, substantiating debit card charges on a Health Care Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) can be frustrating and time-consuming. As a benefits administrator for 30 years, Flex has been working hard to solve this problem for participants.

 

Flex is excited to announce that we now have the ability to access claims information electronically from most medical, dental, and vision carriers! The claims information can be used to automatically substantiate matching debit card transactions and provide a seamless experience for the participant. 

 

This new feature will reduce and often eliminate the need for participants to provide additional paperwork, and it will deliver a far better and more convenient process for employees.

 

We’ve put together a free, 30-minute informational webinar to introduce our latest technology enhancement, explain how it works, and show you how it can make life easier for your clients and their employees.

 

On November 15th, the IRS released Revenue Procedure 2018-57 which includes inflation adjustments for certain
employee benefit programs and other items. The following
inflation adjustments will be made for 2019:

Health Care Flexible Spending Account (Health Care FSA)

Salary reduction limits will be increasing by $50. The annual Health Care FSA
salary reduction limit will now be $2,700.

 Note: Dependent Care FSA limits will remain unchanged for
2019. 

Commuter Accounts

Monthly limits will be increasing by $5. The monthly commuter plan limit will now be $265 for mass
transportation and $265 for qualified parking expenses.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) 

The maximum reimbursement limit will increase by $100 for single coverage and $200
for family coverage. The annual QSEHRA maximum reimbursement
limits will now be $5,150 for single coverage and $10,450 for family
coverage.

 

As a reminder, the Health Savings Account (HSA) limits for 2019 were released earlier this
year.

Want to see how certain tax-advantaged plans can be stacked for even more savings?
View our bundling chart.

If you have questions related to the new limits or if you are interested in adding
these types of plans to your portfolio, please contact a Flex Sales Consultant at
888-353-9178.