FSA, HSA & HRA

Under the Affordable Care Act, Flexible Spending Arrangements, Health Savings Accounts and Health Reimbursement Arrangements have all undergone significant changes.

FSA, HSA & HRA

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Limits on Health FSA Salary Reductions

For plan years beginning on or after January 1, 2013, the Affordable Care Act (ACA) imposed a $2,500 limit on annual salary reduction contributions to health flexible spending arrangements (health FSAs).  For plans year beginning on or after January 1, 2015, the limit increased to $2,550.  The limit applies on an employee-by-employee basis regardless of the number of individuals whose medical expenses are reimbursed under the employee’s health FSA (e.g., a spouse’s expenses).  However, spouses eligible for their own employment based health FSA may each make an annual salary reduction contribution up to the $2,550 limit even if they both participate in the same health FSA sponsored by the same employer.

Additional information on salary reduction limits is available in our May 2013 Briefing below.

Health FSA Grace Periods or Carryover

In general, health FSAs have a “use-it or lose-it” rule whereby amounts not used for qualified medical expenses by the end of the plan year are forfeited.  To minimize the harshness of this rule, plan sponsors have the option of adopting either a “grace period” or a $500 carryover of unused amounts remaining in a health FSA at the end of the plan year.

Under a “grace period,” unused amounts from the health FSA are allowed to be applied toward expenses incurred after the close of the plan year for up to two months and 15 days.  This grace period is different from a “run-out period” that allows a participant to submit claims following the close of the plan year for expenses incurred before the close of the plan year.  Typically, a “run-out period” is a three-month period following the close of a plan year or “grace period.”

Instead of using a “grace period,” plan sponsors may allow for a carryover of unused amounts into the next plan year.  The amount can be up to $500.  Plan sponsors may use either a “grace period” or carryover but they cannot use both.

Additional information on using a “grace period” or carryover is available in our November 2013 Briefing, which is available below.

Limits on Over-the-Counter Medicines and Drugs

The ACA limits reimbursement of over-the-counter medicines and drugs from employer provided health reimbursement plans such as health FSAs, health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs).

Beginning January 1, 2011, expenses incurred for medicines or drugs may be paid or reimbursed from an employer provided health reimbursement plan only if:

  • The medicine or drug requires a prescription
  • The medicine or drug is available without a prescription (i.e., an over-the-counter medicine or drug) and the individual obtains a prescription
  • The medicine is insulin

Amounts distributed from an HSA or Archer MSA for any medicine or drug that does not meet these requirements will be treated as distributions for nonqualified medical expenses, which are includable in the employee’s gross income and generally subject to a 20% additional excise tax.

Additional information on reimbursement for over-the-counter medicines and drugs is available in our January 2011 Briefing and is available below.

HSA Limits for 2016 and 2017

For 2016, the limits on contributions to HSAs and for out-of-pocket spending under high-deductible health plans (HDHPs) are:

Self-only coverage:

  • Annual contribution limits may not exceed $3,350
  • Annual deductible must be at least $1,300
  • Annual out-of-pocket limits may not exceed $6,550

Family coverage:

  • Annual contribution limits may not exceed $6,750
  • Annual deductible must be at least $2,600
  • Annual out-of-pocket limits may not exceed $13,100

The limits for 2017 are:

Self-only coverage:

  • Annual contribution limits may not exceed $3,400
  • Annual deductible must be at least $1,300
  • Annual out-of-pocket limits may not exceed $6,550

Family coverage:

  • Annual contribution limits may not exceed $6,750
  • Annual deductible must be at least $2,600
  • Annual out-of-pocket limits may not exceed $13,100

Stand-alone and Integrated HRAs

The ACA made important changes to how employers can use the tax-advantaged status of HRAs to pay for employee health coverage.  Since HRAs are group health plans, they are subject to some of the ACA mandates, such as the prohibition on annual dollar limits on the value of essential health benefits.  This prohibition is problematic for most HRAs since, by their very nature, they impose limits on the dollar value of benefits.

Regulatory guidance from the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) distinguish between two types of HRAs that remain viable under the ACA – stand-alone HRAs and integrated HRAs.  The following are stand-alone HRAs that remain viable under the ACA:

  • Retiree-only plans (i.e., less than two participants who are current employees)
  • Excepted benefit plans, such as limited scope dental or vision plans and health FSAs meeting certain requirements.

All other HRAs must be integrated, which means the HRA must be combined with a group health plan.  An HRA combined with a group health plan is considered integrated if it meets certain requirements specified by the DOL and IRS.  In essence, these integrated HRAs satisfy the ACA mandates by virtue of being integrated with a group health plan that satisfies the mandates.

 

 

Additional Information
Health Care Reform: New Guidance on $2,500 Health FSA Cap
This Briefing outlines the limits on annual salary reduction contributions to a health FSA.
Health Flexible Spending Arrangements $500 Carryover and More
Questions and Answers addressing the use of “grace periods” and the $500 carryover option for unused amounts in health FSAs.
Health Care Reform: Debit Cards – Over-the-Counter Medicines and Drugs
This Briefing outlines regulatory guidance on the use of FSA and HRA debit cards for purchasing over-the-counter medicines and drugs.