By Amelia M. Klein
Health insurance premiums are expected to increase by double-digit percentages for 2017. What are you going to do about it?
Many employers will choose to increase deductibles, co-payments and/or coinsurance amounts in order to reduce the premium cost. This shifts some of the cost of health coverage to employees without violating the “affordability” requirement of the Affordable Care Act.
Under the ACA, an employer health plan is considered to be affordable if the employee’s share of the 2017 premium for individual coverage under the lowest-cost option does not exceed 9.69 percent of the employee’s 2017 W-2 wages, 9.69 percent of the 2017 individual federal poverty line, or 9.69 percent of the employee’s rate of pay multiplied by a 30 hour “full-time” work week.
But employees don’t like cost shifting. To ease their concerns, an employer might offer to reimburse all or a portion of the actual amount of the out-of-pocket costs that the employee is required to pay. However, you can’t just reimburse the expenses on an ad hoc basis as employees come in with their receipts – you must follow one of the three IRS-approved methodologies or there will be some serious tax penalties to pay.
The Health Flexible Spending Account (HSFA) is the least flexible of the options available to reimburse the additional out-of-pocket costs. In addition to the employee’s pre-tax contribution of up to $2,550, the maximum amount that the employer may contribute on behalf of the employee is $500. Contribute more than that, and the FSA will not be exempt from the ACA’s requirements for a full-fledged health plan. Unspent amounts are forfeited after the end of the year, subject to either a $500 maximum carryover or a 2.5-month grace period.
A Health Savings Account (HSA) is appropriate if you offer a high-deductible health plan (HDHP), which is a health plan that has (for 2017) an annual deductible/out-of-pocket amount for individual coverage between $1,300 and $6,500 and a family coverage deductible/out-of-pocket amount between $6,700 and $13,100.
Tax-free contributions to an HSA may be made by the employer or the employee for amounts up to $3,400 for individual coverage and $6,750 for family coverage. There is a $1,000 annual HSA catch-up contribution for participants who are 55 or older on Dec. 31. This amount does not get indexed.
The good thing about an HSA is that it is a personal account that is portable, and unspent amounts roll over from year to year.
The complicated part about HSAs is that a contribution may only be made for an individual who, as of the first day of any month, is covered under a HDHP and no other health plan that is not a HDHP. This prevents a contribution for any month that the employee (or a covered spouse or dependent) is covered under another health plan, including a health reimbursement arrangement (HRA) or FSA (whether through the same employer or, for example, a spouse's employer) unless it is a "limited purpose" HRA or FSA that reimburses only dental and vision expenses.
An additional obstacle occurs when the employee has a traditional HRA or FSA where reimbursements for medical expenses will carry over into a new year in which the employee will be covered under a HDHP with an HSA.
Unless the carryover or grace period reimbursements are limited to dental and vision expenses, they will preclude HSA contributions.
The Health Reimbursement Arrangement (HRA) is the most common vehicle for reimbursing out-of-pocket payments. An HRA can be structured to reimburse only the expenses claimed during the year or allow unspent employer contributions to be carried over from year to year.
No employee contributions may be made to an HRA. But, subject to nondiscrimination rules, the employer may decide the amount they are willing to contribute or reimburse for the year and what types of medical expenses will be reimbursed. There are hurdles here, too.
First of all, your health insurer may not permit reimbursement of all of the out-of-pocket payments because health care usage changes when there is no out-of-pocket cost. In addition, the HRA must be "integrated" with a group health plan of the employer or another group health plan (such as the group health plan of the spouse's employer, or a plan sponsored by a union). Reimbursements may be made only for an employee and family members who are actually enrolled in the group health plan.
It can be administratively difficult to ensure reimbursement is permissible if you integrate with another plan. Finally, if the HRA permits payment of health insurance premiums, the employer also may not permit employees to pay required premiums on a pre-tax basis. Thankfully, this can be handled by proper design.
If you want to help your employees with their out-of-pocket health costs, you must put the proper documents in place before the beginning of the new enrollment year. Once the parameters of your plans are set, the annual enrollment materials should include thorough descriptions of how the new arrangement will work.
Klein is a member of Bond, Schoeneck & King PLLC, where she assists employers with benefits design and compliance issues.