Latest and Greatest in HRA's and Cafeteria Plans
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Important Developments for Cafeteria Plans and Health
Reimbursement Arrangements for 2014 and Beyond
By Larry GrudzienAttorney at Law
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Agenda
• IRS Notice 2013-54 & Technical Release 2013-03
• DOMA
• Health FSA Carryover
• Other Developments
IRS Notice 2013-54 &
Technical Release 2013-3
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• They prohibit the reimbursement of premiums for individual medical policies from health reimbursement arrangements and
premium only plans.
• Allow premiums for other types of individual coverages to be reimbursed.
• Provide requirements for integrated HRAs.
• Rules are effective for plan years beginning in 2014.
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Reimbursing Premiums for Individual Policies
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• Arrangements that help employees to pay for individual health insurance
policies on a tax-free basis fail to satisfy the ACA’s annual dollar limit and
preventive health services “market reform” provisions.
• There are exemptions for certain plans.
Reimbursing Premiums for Individual Policies
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• A employer payment plan will not meet these mandates unless it meets the
rules pertaining to participation in a group health plan.
• It is defined as any arrangement that facilitates the direct or indirect payment
of individual market coverage.
• It does not include any arrangement whereby employees may choose between
cash or an after-tax amount to be applied toward health coverage, including
forwarding post-tax payroll deduction to the insurer, as long as the
arrangement satisfies the voluntary plan safe harbor under the DOL
regulations.
Employer Payment Plans
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• According to the IRS and DOL, any arrangement that provides for the
purchase of individual market coverage on a pre-tax basis will fail these market
mandates.
Bottom-line
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• Retiree plans
• Reimbursement of exempted benefits
• Voluntary benefits safe harbor
Exemptions
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• Guidance requires that HRAs be integrated with group health plans for plan
years beginning in 2014.
• Rules vary depending on whether the group health plan is of minimum value.
• Free standing HRAs can still reimburse premiums and expenses for “excepted
benefits.”
Free Standing HRAs
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• Must be integrated with group health plan of the employer of another
employer.
• Two integration methods provided.
• First method is with a group health plan that does not provide minimum value.
• Second method is with group health plan that provides minimum value.
Integrated HRAs
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• A Group plan that does not provide minimum value:
Employee must be enrolled in group health plan.
Reimbursements limited to copays, coinsurance deductibles premiums for
group health plan and non-essential health benefits.
Must allow permanent opt out and waiver of future reimbursements
annually.
Upon termination, must require remaining amounts to be forfeited or
permanently opt out and waiver of future reimbursements.
Integrated HRAs
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• Group plan that does provide minimum value:
Employee must be enrolled in group health plan.
No restrictions on reimbursements.
Must allow permanent opt out and waiver of future reimbursements
annually.
Upon termination, must require remaining amounts to be forfeited or
permanently opt out and waiver of future reimbursement.
Integrated HRAs
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• Unused amounts that were credited to an HRA while the HRA was integrated
with other group health plan coverage may be used to reimburse medical
expenses in accordance with the terms of the HRA even after the employee
ceases to be covered by other integrated group health plan coverage without
causing the HRA to fail to comply with the market reforms.
• The HRA coverage will be considered minimum essential coverage, which will
prevent an employee from obtaining a premium assistance tax credit for
coverage purchased through the Exchange.
Other Rules
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• For health FSAs to avoid the requirements of Health Care Reform, they must
meet the requirements of an “excepted benefit.”
• Free standing health FSAs are still possible if reimbursing excepted benefits.
• What requirements apply if a Health FSA is not an excepted benefit?
Health FSAs
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• A health FSA is considered an excepted benefit” if it satisfies two
conditions:
Maximum Benefit Condition: The maximum benefit payable under the
health FSA to any participant in the class for a year cannot exceed two
times the employee's salary reduction election under the health FSA for
the year (or, if greater, the amount of the employee's salary reduction
election for the health FSA for the year, plus $500), and
Availability Condition: Other nonexcepted group health plan coverage
(e.g., major medical coverage) must be made available for the year to the
class of participants by reason of their employment.
Health FSAs
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• On May 13, 2014, the IRS issued Q&A guidance restating the conclusion in
Notice 2013-54, that an employer is considered to establish a type of group
health plan-called an "employer payment plan"-if it reimburses employees'
premiums for individual health insurance policies.
• Q/A-1 provides that the employer's exposure to excise taxes of $36,500 per
year (i.e., $100 per day) for each employee affected by the failures.
• This excise tax liability requires self-reporting on IRS Form 8928.
• Adverse consequences are also possible under ERISA and the PHSA.
• Q/A-2 indicates that the DOL issued substantially identical guidance in
Technical Release 2013-03, and HHS is expected to announce soon that it
concurs.
Recent Guidance
Repeal of Defense of Marriage Act (“DOMA”)
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• May recognize same sex spouses, but not required.
• If do not, may be in violation of other federal laws.
• May require proof, but have to require of all married couples.
Repeal of DOMA
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• Cafeteria plans:
May allow employees who are married as of June 26, 2013 to change
existing elections.
Change can be made at any time during the cafeteria plan year that
includes June 26, 2013 or cafeteria plan year that include December 16,
2013.
May wait until 2014 to make change.
Repeal of DOMA
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• If an employer decides to offer same-sex coverage:
make any necessary amendments to the definition of “spouse” in the cafeteria and
wrap plan documents (and possibly amend the definition of “children” and
“dependents” as well).
confirm with that the third-party administrators/providers are updating policies and
providing required notices to same-sex spouses (e.g., initial COBRA notices and
notices to those already in the COBRA election period).
make sure the insurance policies are consistent with the decisions.
determine how same-sex spouses will be identified.
ensure the payroll systems are updated to reflect proper tax treatment of group
coverage for same-sex spouses (and their children).
Repeal of DOMA
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• Same-Sex Spouses: Taxes on Health Insurance Coverage: For employees
who purchased same-sex spousal health insurance coverage from their
employer on an after-tax basis, such amounts paid for that coverage may be
treated as pre-tax and excludable from income, the IRS said.
• FSA Deduction Limits and Reimbursements: Regarding FSA
reimbursements, in Notice 2014–1, the IRS said cafeteria plans are allowed to
permit a participant's FSA to reimburse covered expenses incurred by a
participant's same-sex spouse starting either at the beginning of the cafeteria
plan year that includes the date of the Windsor decision (6/26/13), or the date
of marriage, whichever is later.
Same-Sex Marriage: Federal Tax Guidance
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• Dependent Care FSA
Same-sex married couples also are subject to the $5,000 contribution limit
for contributions to a dependent care FSA, the IRS said.
If, prior to the Windsor decision, the couple contributed to separate
dependent care FSAs and the combined accounts now exceed the limit
for married couples, employers can reduce the contributions of the
spouses for the remainder of the year to avoid exceeding the limit, the IRS
said.
Same-Sex Marriage: Federal Tax Guidance
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• HSA Deduction Limits: In Notice 2014–1, for HSA contribution limits, same-
sex married couples are subject to the joint deduction limit for contributions to
an HSA, the IRS said.
• For calendar year 2014, the maximum yearly contribution to an HSA is $6,550
($6,650 for calendar year 2015) for an individual with family coverage under a
high-deductible plan.
• “This deduction limit applies to same-sex married couples who are treated as
married for federal tax purposes with respect to a taxable year,” the IRS said,
“including the 2013 taxable year.”
Same-Sex Marriage: Federal Tax Guidance
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• COBRA:
Same sex spouses treated as qualified beneficiaries
COBRA notice must now be provided
• HIPAA:
Special enrollment rights
• FMLA: An employee can take leave for a serious medical condition,” including
military-family leave, of the same-sex spouse if the employee lives in a state
that allows same-sex marriage.
Other Areas
Health FSA Carryover
IRS Notice 2013-71
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• On October 31, IRS and Treasury issued new guidance (Notice 2013-71) that
modifies the “use or lose” rule that applies to health flexible spending
arrangements (“FSAs”).
• Under the guidance, employers may now allow employees to carry over up to
$500 of unused FSA balances to the next plan year.
• The Notice permits employers to adopt the carryover provision as early as the
current 2013 plan year.
• The Notice also clarifies the transition relief provided in earlier proposed
regulations so that employers of all sizes can permit certain changes in salary
reduction elections for their non-calendar year cafeteria plan.
Introduction
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• Under the IRS’ proposed regulations under Code § 125, unused FSA balances
at the end of a plan year cannot be used to reimburse expenses in the next
plan year and must be forfeited.
• This “use or lose” rule was intended as a means of meeting the requirement
under Code § 125 that a cafeteria plan not provide for deferred compensation.
• An employer may, however, adopt a run-out period immediately following the
end of the plan year in which the employee may submit claims for
reimbursements incurred during the plan year.
Background
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• In 2005, the IRS relaxed the use-or-lose rule and permitted employers to
provide a grace period of up to 2 months and 15 days following the end of the
plan year in which participants could continue to incur expenses and received
reimbursements for those expenses from the unused amounts in the FSA at
the end of the plan year.
• An employer adopting a grace period was also permitted to provide a run-out
period after the end of the grace period.
Background
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• Prior to the Affordable Care Act (“ACA”), there was no statutory limit on the
amount of FSA salary reduction contributions that an employee could elect,
although many employers imposed limits in the plan.
• The ACA limited the amount of salary reduction elections to an FSA to $2,500
per taxable year.
• In Notice 2012-40, the IRS recognized that the potential for using FSAs to
defer compensation was restricted with the application of the limits on FSA
salary reduction elections and requested comments on whether it should
modify the use-or-lose rule.
Background
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• Permitted Carryover – The Notice permits an employer to allow an employee
to carryover up to $500 of any unused amount remaining in the FSA after the
end of the run-out period to the next plan year.
• The carryover does not reduce the permitted $2,500 salary reduction election
limit in the next plan year, and an employee with a carryover may still choose
salary reduction elections for the next plan year of up to $2,500 (or other
lower limit provided for in the plan).
• If the employer decides to allow a carryover, the same carryover limit must
apply to all participants.
Carryover of Unused FSA Balances
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• Permitted Reimbursements – Consistent with the general cafeteria plan rules, the amount carried
over may only be used to pay or reimburse permitted medical expenses.
• The carryover amounts may be used to reimburse expenses during the run-out period that were
incurred during the previous plan year or may be used to reimburse expenses incurred in the current
plan year.
• The salary reduction election in the current plan year, however, may only be used to reimburse
expenses in the current plan year (unless carried over to the next plan year) and may not be used to
reimburse expenses for the prior plan year during the run-out period.
• The Notice provides that for ease of administration, a plan is permitted (but not required) to treat
reimbursements of all claims for expenses incurred in the current plan year as reimbursed first from
the amounts credited from the current plan year and then as reimbursed from carried over amounts.
Carryover of Unused FSA Balances
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• The maximum amount of reimbursement must be available at all times during
the period of coverage is still required for FSAs.
Carryover of Unused FSA Balances
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• Removal of the Grace Period – The Notice provides that a plan that adopts the
carryover provision may not also provide a grace period for the FSA.
• An FSA may either provide for the carryover or provide for a grace period, but
cannot provide for both.
• Informing Participants – The employer must inform participants of the
carryover provision.
• Employers that adopt the carryover provision for the 2013 plan year should
inform participants of both the new carryover feature and the removal of the
grace period as soon as possible.
Carryover of Unused FSA Balances
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• Timing of Amendment – An employer has until the last day of the plan year
from which amounts may be carried over to amend its cafeteria plan to adopt
the new carryover option, and the amendment may be retroactive to the first
day of that plan year.
Cafeteria Plan Amendment
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• Special Rule for 2013 Plan Years –Recognizing that for many plans,
employers would only have a few months to amend their cafeteria plans for the
2013 plan year, the Notice contains a special rule for the 2013 plan year that
permits an employer to amend its cafeteria plan to adopt the carryover
provision for a plan year that begins in 2013 at any time on or before the last
day of the plan year that begins in 2014.
• For a calendar year plan, this means that an employer could amend its
cafeteria plan as late as December 31, 2014 to adopt a carryover from the
2013 plan year to the 2014 plan year.
Cafeteria Plan Amendment
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• Grace Period Amendment – An employer adopting the carryover must also
amend its cafeteria plan to remove the grace period no later than the end of
the plan year from which amounts may be carried over.
• An employer with a calendar year cafeteria plan that provides a grace period
that wishes to adopt the carryover for the 2013 plan year should amend its
cafeteria plan to eliminate the grace period and provide for the carryover
before the end of the 2013 plan year.
Cafeteria Plan Amendment
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• The ability for an employer to provide for a carryover and also permit
employees newly eligible for a health saving account (“HSA”) to contribute to
the HSA is uncertain.
• Generally, an individual who is covered by a general purpose FSA may not
make contributions to an HSA.
• However, an individual may be covered under certain types of FSAs, such as
a limited purpose FSA that pays or reimburses expenses only for preventive
care and certain “permitted coverage” or a post-deductible FSA that pays or
reimburses preventive care and other permitted medical expenses only if
incurred after the minimum annual deductible for the high deductible health
plan is satisfied.
FSA and HSA
Office of Chief CounselMemorandum 201413005
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• The IRS Office of Chief Counsel recently released a memo that provide
employers with helpful rules regarding medical flexible spending accounts
(FSAs), including the impact of the new medical FSA carryover rule on HSA
eligibility.
Introduction
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• It relates to the new medical FSA carryover rule and its effect on HSA
eligibility.
• In late 2013, the IRS modified the "use-it-or-lose-it" forfeiture rule for medical
FSAs by allowing employers to amend their medical FSAs to permit a $500
annual carryover of an employee's unused account balance.
• However, the IRS did not address the impact of the new $500 carryover option
on an employee's HSA eligibility.
CCA 201413005
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• To be eligible to contribute to an HSA, an individual must be covered under a
high-deductible health plan (HDHP) and have no other health coverage,
among other requirements.
• The IRS memo clarifies unanswered questions related to the carryover rule .
CCA 201413005
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• An individual who is covered by a general purpose medical FSA is ineligible to
contribute to an HSA, even if the individual's medical FSA balance consists
solely of unused amounts carried over from the prior plan year.
• Further, the individual is ineligible to contribute to an HSA for the entire plan
year, even if the amounts carried over are exhausted prior to the end of the
plan year.
CCA 201413005
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• An individual with an unused balance in a general purpose medical FSA will
remain eligible to contribute to an HSA for the following plan year in any of the
following alternative situations:
CCA 201413005
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• The individual waives or declines a carryover of unused amounts from a
general purpose medical FSA to the subsequent plan year;
• The cafeteria plan offers an HSA-compatible FSA (such as a limited purpose
FSA, a post-deductible FSA or a combination of both) and the individual elects
to carry over unused amounts to the HSA-compatible FSA for the subsequent
plan year; or
• The cafeteria plan is designed to automatically enroll those who elect HDHP
coverage for the following plan year in an HSA-compatible FSA (including
carryover amounts).
CCA 201413005
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• The memo also provides detailed guidance on the ordering and
reimbursement of claims during the run-out period where an individual elects
to carry over unused amounts from a general purpose medical FSA to a HSA-
compatible FSA.
CCA 201413005
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• Overall, the new guidance provides a number of options to employers who are
interested in offering the medical FSA carryover option while still preserving
employees' HSA eligibility in subsequent plan years.
• Further, by allowing participant-by-participant choices regarding the carryover
of any unused amounts, the new guidance on carryovers provides more
flexibility to employers than current IRS rules on grace periods.
CCA 201413005
FAQ’s About Affordable Care Act
Implementation (Part XIX)
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• The IRS has confirmed that unused carry over amounts remaining at the end
of a plan year that satisfy the modified "use or lose" rule should not be taken
into account when determining if the health FSA satisfies the maximum benefit
payable limit prong under the excepted benefits regulations.
FAQs
Other Developments
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• Cafeteria plan elections must be made before the start of the plan year and are
irrevocable during the plan year unless the employee or his/her spouse or dependents
experience certain qualifying events.
• The availability of health coverage through a Marketplace is not a permitted change in
status, and thus, employees generally cannot change their salary reduction elections for
health coverage to cease salary reductions and purchase coverage through an
Marketplace.
• Similarly, employees generally cannot elect to begin salary reduction elections mid-year
to purchase the employer’s health coverage and avoid the individual mandate penalty.
• This is a concern for non-calendar year cafeteria plans because individuals can begin
purchasing Marketplace coverage effective January 1, 2014 and the individual mandate
penalty applies beginning in January 2014.
Cafeteria Plan Salary Reduction Election Transition Rule
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• The IRS provided transition relief from the cafeteria plan election rules for an employer-
provided accident and health plan with a non-calendar year plan year that begins in
2013.
• Under this transition relief, an employer can amend its cafeteria plan to permit
employees to make the following changes in salary reduction elections, even if the
employee did not experience a change in status event:
if the employee elected to salary reduce for accident and health plan coverage,
prospectively revoke or change his/her election with respect to the accident and
health plan once during that plan year; and
if the employee failed to make a salary reduction election, make a prospective
salary reduction election for accident and health coverage on or after the first day of
the 2013 plan year.
Cafeteria Plan Salary Reduction Election Transition Rule
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• The Notice clarifies that this transition relief is available to all employers and is not
limited to applicable large employers.
• The Notice also clarifies that employers may adopt amendments that are more
restrictive than the two options in the transition relief, but the amendment may not be
less restrictive.
• For example, the employer may limit the period that the employee can make the salary
reduction election change to a certain time period, such as the first month in 2014,
instead of during the entire 2013 – 2014 plan year.
Cafeteria Plan Salary Reduction Election Transition Rule
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• HRAs and nonexcepted health FSAs subject to the fee.
• Based on average number of employees.
• Fee is $1 per employees for plan years ending before October 1, 2013 and $2 after.
• Report and report fee on Form 720, due July 31 of the calendar year after the plan year
ends.
PCORI Fee
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• HRA is not subject if “integrated” with self-insured or insured coverage.
• Health FSA is not subject if an exempted benefit.
Reinsurance Fee
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• To meet federal requirements, large health plans must obtain a national health plan
identifier number (HPID) by November 5, 2014.
• For this requirement, a large health plan is one with more than $5 million in annual
receipts.
• Self-funded plans should look at claims paid for the prior plan year.
• Small health plans have until November 5, 2015, to obtain an HPID.
HPID
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• A HPID is an all-numeric, 10-digit identifier that will be used as the plan's unique
identification number for all HIPAA-covered transactions.
• One of the goals of the Health Insurance Portability and Accountability Act (HIPAA) is to
pay claims more efficiently.
• Efficient electronic processing requires standardization, and the HPID requirement is
part of that standardization and automation effort.
• Plans will be required to use HPIDs in specified HIPAA standard transactions by
November 7, 2016.
HPID
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• Controlling Health Plans" (CHPs) are required to obtain an HPID.
• "Subhealth Plans" (SHPs) may obtain an HPID.
• A CHP is defined as a health plan that either:
• Controls its own business activities, actions, or policies; or
• Is not controlled by an entity that is not a health plan, and if it has one or more subhealth
plans, exercises sufficient control over the subhealth plan to direct its business activities,
actions, or policies.
• An SHP is defined as a health plan whose business activities, actions, or policies are
directed by a controlling health plan.
HPID
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• In general, for self-funded plans, the self-funded major medical plan will be the CHP.
• If the employer uses a master "wrap" plan document that includes several different
benefits, the employer will need to decide whether it wishes to use a single CHP number
for all of the health benefits included under the wrap plan, or if some of those benefits
should be treated as SHPs.
HPID
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• An employer will apply for its HIPD through the Centers for Medicare and Medicaid
Services (CMS) website. Most employers will need to register and set up a health
insurance oversight system (HIOS) account at
https://portal.cms.gov/wps/portal/unauthportal/home/.
• Once the account is in place, the employer can apply for the plan identification
number(s).
• Detailed information on this process is available at: http://www.cms.gov/Regulations-
and-Guidance/HIPAA-Administrative-Simplification/Affordable-Care-Act/Health-
Plan-Identifier.html and at http://www.cms.gov/Regulations-and-Guidance/HIPAA-
Administrative-Simplification/Affordable-Care-Act/Downloads/
HPOESTrainingSlidesMarchSlideDeck.pdf
HPID
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• HIPAA-covered entities (health plans, health care clearinghouses, and health care
providers) that electronically transmit health information relating to a covered transaction
will be required to use the plan's HPID beginning in November 2016.
• Covered transactions include the payment of health care claims, health care claim
status, health plan eligibility, and the payment of health plan premiums.
• If the covered entity does not engage in standard transactions (which is usually the case
with self-funded plans), the covered entity must require that its business associates use
an HPID whenever they are involved in a standard transaction on its behalf.
HPID
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• Form W-2
Health FSA: only employer contributions used are reported.
HRAs: no reporting in the past.
Reporting
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• Information Reporting (Code §6055 ):
Reporting is not required for coverage that supplements minimum essential
coverage, the preamble to the final regulations states that reporting generally is not
required for HRAs, on-site medical clinics, wellness programs that provide reduced
premiums or cost-sharing under a group health plan, or coverage that supplements
the primary plan of the same plan sponsor.
Reporting
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• Information Reporting (Code §6056 ):
It may apply for reporting for large employers. For large employers.
A link to the forms is provided below:
• Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and
Coverage Information Return: http://www.irs.gov/pub/irs-dft/f1094c--dft.pdf
• Form 1095-C, Employer Provided Health Insurance Offer and Coverage:
http://www.irs.gov/pub/irs-dft/f1095c--dft.pdf
Reporting
Questions?
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Larry Grudzien
• Phone: 708-717-9638
• Email: [email protected]
• Website: www.larrygrudzien.com
Contact Information