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ProSourceSolutions Insurance Inc.

In an effort to be of further service, ProSourceSolutionsInc. continually strives to offer BETTER BENEFITS with MORE OPTIONS.  ProSourceSolutions Insurance Inc. helps us facilitate the BETTER and the MORE.

Insurance Carriers

We have aligned PSS Insurance with the very best in Life and Health providers. Carriers like Blue Cross, UNUM, United Healthcare, Guardian, Metlife, Principal, Aetna, AIG, Colonial and Standard allows us the option to select the best plan that is a fit for all our groups.

Administration

Many of our clients have their own health plans that we currently administrate and ProSource will continue to do so. PSS Insurance would appreciate the opportunity to be your agent even if you stay with your current carrier. We would like you to join us but only at a favorable and competitive rate.

General Liability

Another terrific opportunity for our clients is PSS Insurance’s ability to help with not only the Life and Health plans but also Commercial General Liability and Business Owners Policies. ProSourceSolutionsInc. already provides and administrates the Workers’ Comp insurance and now you can think of PSS Insurance as ONE STOP SHOPPING for Life-Health-Property -Casualty insurance.

FSA, HRA, HSA: THE ALPHABET SOUP OF DEFINED CONTRIBUTION HEALTH CARE PROGRAMS

Introduction

As the cost of providing health care coverage to employees continues to increase, employers are looking for ways to reduce or limit that expense. One approach being used by employers is incorporating a defined contribution element into employees’ group health care plans. This defined contribution element is usually represented by one or more of the following:

• Flexible spending accounts (FSAs).

• Health care reimbursement arrangements (HRAs).

• Health savings accounts (HSAs).

Why Add a Defined Contribution Element?

When an employer adds a defined contribution element to a group health plan, it achieves two objectives:

1. Limiting the employer’s liability for that portion of the plan to the amount of the employer’s annual contribution to the defined contribution element.

2. Shifting to the plan participant the responsibility for appropriately using the defined contribution funds for health care goods and services.

To date, few employers have converted their active employee group health plans entirely into defined contribution plans. Most employers modify their existing plans to increase deductibles and copayments and include a defined contribution element to offset those increases. This combination reduces the employer’s overall liability for the group health plan while still providing comprehensive health care coverage for employees and their families.

Flexible Spending Accounts (FSAs)

Many employers already make health care FSAs available to their employees through an Internal Revenue Code Section 125 cafeteria plan. Health care FSAs provide employees with nontaxable reimbursements for eligible health care expenses of the employee, spouse and dependents. An employer can require an employee to contribute the employee’s own money (on a pretax basis) to provide these reimbursements. The employer can also elect to make employer contributions that are nontaxable to the employee. However, rules governing when expenses must be incurred can result in an employee forfeiting the employee’s own money, and rules governing when reimbursements must be paid can result in an employer paying out more than the employee contributes.

Employee Contributions. Under the typical health care FSA, an employee elects to have a specified amount withheld from his or her compensation on a pretax basis during the year. The plan usually sets an upper limit on the amount an employee can elect to have withheld for the year. The employee’s compensation is then reduced in equal installments during the year, resulting in the total amount elected by the employee being withheld by the end of the year.

Employer Contributions. Code Section 125 permits an employer to make matching contributions or nonelective contributions (employer contributions made without regard to whether the employee makes employee contributions) or both to a health care FSA. Employer contributions to a health care FSA must satisfy the nondiscrimination requirements of Code Section 125.

Funding. Although health care FSAs are referred to as “accounts,” the employer is not required to set aside any funds, including employee contributions, in a trust or any other segregated account. All reimbursements from an employee’s health care FSA are made from the employer’s general assets. The employer or a third-party administrator only maintains a bookkeeping account of each employee’s contributions and the reimbursements paid to each employee. No identifiable pool of assets represents the employee’s “account.” The employer is not required to credit an employee’s “account” with interest or any other investment earnings during the year.

Coordination With Health Plan Coverage. An employee’s ability to participate in a health care FSA is not affected by the type of health plan coverage elected by or available to the employee. Employees with any type of health plan coverage, or no health plan coverage, can be permitted to participate in a health care FSA.

Permitted Reimbursements. An employee is permitted to submit eligible health care expenses for reimbursement during the year. In general, an eligible health care expense is any health care expense that the employee could claim as an itemized deduction on Schedule A of his or her individual income tax return (even if the employee’s total health care expenses do not exceed 7.5% of the employee’s adjusted gross income).

However, the Treasury Regulations under Internal Revenue Code Section 125 prohibit a health care FSA from reimbursing an employee for premiums for health care insurance. In addition, the health care FSA can impose additional restrictions on the health care expenses that are eligible for reimbursement. For example, an employer may elect to not permit the health care FSA to reimburse an employee for over-the-counter medications, even though the cost of over-the-counter medications can be claimed on Schedule A.

No other expenses can be reimbursed from a health care FSA.

Timing Issues. Proposed Treasury Regulations under Code Section 125 require a health care FSA to function essentially like an insurance policy issued for a single year. This requirement has advantages and disadvantages for both employees and employers.

Employee Advantages: An employee is entitled to receive reimbursements equaling the total amount of the employee’s contributions for the year as of the first day of the year, even if the employee has not yet contributed an amount equal to the reimbursement requested. For example, an employee elects to contribute $100 per month ($1,200 for the calendar year). The health care FSA must reimburse the employee for up to the full $1,200 as early as January 1st as soon as the employee incurs an eligible expense and submits the request for reimbursement. The health care FSA cannot delay the reimbursement until the employee has contributed sufficient dollars to pay for the reimbursement.

Employee Disadvantages: The employee must incur eligible expenses and submit reimbursement requests for those expenses before the applicable deadlines in the health care FSA—or the employee forfeits any amounts in the employee’s account that have not be paid to the employee as reimbursements. This is the “use it or lose it” rule. Unused amounts cannot roll over to the following year. Also, unused amounts as of an employee’s termination date cannot roll over to another employer’s health care FSA. However, if the employer is required to offer COBRA continuation coverage, the employee can elect to continue health care FSA participation under COBRA. By electing COBRA, the employee can continue receive reimbursements from the health care FSA for the rest of the calendar year in which the employee terminates employment.

Generally, eligible expenses must be incurred by the last day of the year. However, IRS Notice 2005-42 permits (but does not require) the health care FSA to extend the deadline by which eligible expenses must be incurred by two and a half months after the last day of the year (i.e., March 15th for a calendar year plan). The health care FSA can establish any deadline for when reimbursement requests must be submitted.

For example, the employee who elected to contribute $1,200 only incurred $1,000 of eligible expenses by the applicable deadline in the health care FSA. The employee must forfeit the $200 remaining in the employee’s account.

Employer Advantages: Any amounts forfeited by employees under the “use it or lose it” rule can be used by the employer to reduce the administrative expenses of the health care FSA.

Employer Disadvantages: Because the employer must “front” the full amount of the employee’s annual elected contribution level as of the first day of the year, an employer can end up paying out more in reimbursements to an employee than the employer collects in contributions from the employee if the employee terminates employment during the year after receiving more in reimbursements than he or she contributed. The Proposed Regulations under Code Section 125 prohibit the employer from requiring the employee to pay the remaining contributions for the year after the employee terminates employment.

For example, the employee who elected to contribute $1,200 incurs an eligible expense of $900 in February and receives a reimbursement. The employee terminates employment in March after contributing only $300. The employer has paid out $600 more in reimbursements to the employee than the employer received in contributions, and the employer cannot recover the remaining $600 from the terminated employee.

Income Tax Treatment. In general, employee contributions to a health care FSA directly reduce the employee’s compensation that is subject to FICA and income taxes, so that employee contributions are fully nontaxable to the employee. The employer also does not pay FICA on employee pretax contributions to a health care FSA. Employer contributions to a health care FSA are generally nontaxable to the employee also. Reimbursements for qualifying health care expenses paid from a health care FSA are nontaxable to the employee.

COBRA. A health care FSA is a group health plan subject to the COBRA continuation coverage requirements, and COBRA continuation of participation in the health care FSA must be offered after any COBRA qualifying event. However, a special rule under COBRA only requires that COBRA continuation participation in the health care FSA be offered until the end of the calendar year in which the COBRA qualifying event occurred.

Establishing a Health Care FSA. The employer must formally adopt a written Code Section 125 plan with a health care FSA component before any employee contributions can be withheld from employees’ compensation and before any reimbursements can be paid to employees. Health care FSAs are considered group health plans subject to Employee Retirement Income Security Act (ERISA) and accordingly must comply with the written plan, summary plan description and other rules generally applicable to group health plans, with some minor modifications (e.g., a modified COBRA continuation of coverage rule).

Health Care Reimbursement Arrangements (HRAs)

Another defined contribution option for an employer is to establish health care reimbursement accounts for employees or retirees. Employers are increasingly using HRAs for retiree health care plans.

Because HRAs are not subject to Code Section 125, they offer employers significantly more flexibility than FSAs. However, HRAs are subject to nondiscrimination rules under Code Section 105(h), which generally prohibit the employer from favoring highly compensated employees or former employees in the eligibility, design or operation of HRAs.

Employee Contributions. Employees and retirees cannot make contributions to HRAs.

Employer Contributions. All amounts contributed to HRAs must be employer contributions. The amount of employer contributions made to HRAs on behalf of employees or retirees cannot discriminate in favor of highly compensated employees or former employees.

Funding. Similar to health care FSAs, an employer is not required to set aside any funds in a trust or any other segregated account for an HRA. All reimbursements from an HRA are made from the employer’s general assets. The employer or a third-party administrator only maintains a bookkeeping account for each employee or retiree, recording employer “contributions” made to the account and reimbursements paid from the account. No identifiable pool of assets represents the employee’s or retiree’s “account.” The employer is not required to credit an employee’s or retiree’s “account” with interest or any other investment earnings during the year, although it may do so to add value to the account.

Coordination With Health Plan Coverage. An employee’s or retiree’s ability to participate in an HRA is not affected by the type of health plan coverage elected by or available to the employee or retiree. Employees or retirees with any type of health plan coverage, or no health plan coverage, can be permitted to participate in an HRA.

Permitted Reimbursements. An HRA participant is permitted to submit eligible health care expenses of the employee, spouse or dependents for reimbursement during the year. In general, an eligible expense is any health care expense that the HRA participant could claim as an itemized deduction on Schedule A of the employee’s individual income tax return (even if the employee’s total health care expenses do not exceed 7.5% of the employee’s adjusted gross income). Unlike health care FSAs, an HRA can reimburse for health care insurance premiums.

The HRA can impose additional restrictions on the health care expenses that are eligible for reimbursement. For example, an HRA can limit reimbursements to deductibles and copayments under the employer’s group health care plan, or to dental expenses only, or to any other type or class of otherwise permissible health care expenses. Similarly, the HRA can provide that only the employee’s own health care expenses can be reimbursed. In essence, employers have significant flexibility to design an HRA that meets their business and employee relations objectives.

No expenses other than permissible health care expenses can be reimbursed from an HRA.

Timing Issues. An HRA is not subject to the special timing rules imposed on health care FSAs. An HRA can limit the amount of reimbursements available to an HRA participant at any particular time during the year in order to minimize the possibility that the HRA participant will terminate employment before the end of the year but after the employer pays out the full year’s reimbursement.

For example, an HRA provides total reimbursements of $1,200 per year. However, the HRA limits an HRA participant to receiving $300 of reimbursements each calendar quarter. If the HRA participant incurs an eligible expense of $1,200 in the first calendar quarter, the HRA participant would only receive $300 each quarter, as long as the HRA participant remains employed until the first day of each quarter. If the HRA participant terminates employment before the first day of the third quarter, the HRA participant would only receive $600 in reimbursements.

An employer is permitted (but not required) to roll over unused amounts in an HRA to the following year. An employer is permitted to limit the amount that rolls over each year and the total amount an HRA participant can accumulate in an HRA.

HRAs are not portable. An employer may require any unused amount in an HRA participant’s account when the HRA participant terminates employment to be forfeited (subject to the participant’s election of COBRA continuation coverage under the HRA). Alternatively, an employer may allow an employee to receive reimbursements for eligible expenses incurred after termination of employment or even establish a retiree-only HRA, available only post-employment to employees who retire from the employer. If the employee dies, an employer may, but is not required to, permit a surviving spouse to access the account.

Income Tax Treatment. Employer contributions to an HRA are generally nontaxable to the employee or retiree. Reimbursements for qualifying health care expenses paid from an HRA are nontaxable to the employee or retiree.

COBRA. An HRA is a group health plan subject to the COBRA continuation coverage requirements, and COBRA continuation coverage under an HRA must be offered after any COBRA qualifying event. COBRA continuation coverage under the HRA must be offered for the full 18, 29 or 36-month COBRA continuation coverage period. The special rule limiting COBRA to the end of the calendar year in which the COBRA qualifying event occurred does not apply to an HRA.

Establishing an HRA. An HRA is an employee welfare benefit plan subject to the ERISA requirement that the plan be administered under a written plan document. However, because employee contributions are not permitted under an HRA, an HRA plan document can be adopted retroactively as long as the plan document is adopted before the end of the plan year in which it became effective.

Health Savings Accounts (HSAs)

The newest defined contribution option for an employer is the health savings account. HSAs are required to be a component of a consumer-driven health care plan because contributions can only be made to individuals who are also covered by a high-deductible health plan (HDHP) that meets certain Code requirements.

HSAs are subject to Code Section 223, which governs who is eligible to participate in an HSA as well as the total amount of contributions that can be made to an HSA.

Employee Contributions. Contributions to an HSA can only be made by an “eligible individual.” An eligible individual can make contributions to an HSA either on a pretax basis through payroll reduction or on an after-tax basis through direct contributions and take an “above-the-line” deduction on his or her federal tax return on the amount of the contribution.

Employer Contributions. An employer can also make contributions to an HSA for an eligible individual. Employer contributions not made through a cafeteria plan are subject to a “comparable contributions” requirement under Code Section 4980G, which generally requires the employer contribution to an HSA to be the same amount or percentage of deductible for all “comparable employees.” A comparable employee is an employee who is covered by any HDHP of the employer and who has the same category of coverage (self or family coverage) under the HDHP.

The total amount of employee and employer contributions that can be made to an HSA for any calendar month is limited by Code Section 223. The limit is 1/12th of the lesser of the HDHP’s annual deductible or a maximum contribution amount under Code Section 223 (for 2005, $2,650 for individual coverage and $5,250 for family coverage). Additional contributions are permitted for eligible individuals who attain age 55 by the end of the calendar year.

Funding. Unlike FSAs or HRAs, an HSA is an individual account established for the eligible individual with a trustee or custodian. The HSA is held in the individual’s name and is the property of the individual. Once an employer makes an employer contribution to an HSA, the employer cannot recover the contribution.

The HSA is exempt from federal income tax. Any investment earnings on amounts contributed to the HSA accumulate without being subject to income tax.

Coordination With Health Plan Coverage. An “eligible individual” for HSA purposes must be covered by an HDHP on the first day of a calendar month. Code Section 223 establishes the requirements for an HDHP. For an eligible individual with single coverage, an HDHP must have an annual deductible of at least $1,000 and total out-of-pocket expenses (including the deductible) must not exceed $5,100. For an eligible individual with family coverage, an HDHP must have an annual deductible of at least $2,000 and total out-of-pocket expenses (including the deductible) must not exceed $10,200.

“Eligible Individual.” Only an eligible individual may make or receive contributions to an HDHP. To be eligible, the individual cannot be covered by any other health plan that is not an HDHP, including coverage through the individual’s spouse or parent. The eligible individual cannot be covered by any other health plan that provides coverage for any benefit covered by the HDHP. Also, the eligible individual cannot be eligible or entitled to Medicare and cannot be eligible to be claimed as a dependent on another person’s individual income tax return, even if the other person does not claim the eligible individual as a dependent.

Permitted Reimbursements. An HSA is generally permitted to reimburse any health care expense that can be claimed as an itemized deduction on Schedule A of an individual income tax return (even if total health care expenses do not exceed 7.5% of adjusted gross income). However, an HSA can only reimburse health care insurance premiums that are for COBRA coverage, qualified long-term care insurance, health care insurance coverage while the individual is receiving unemployment benefits or, if the individual is aged 65 or older, health insurance other than Medicare supplemental insurance.

An HSA can reimburse these qualified health care expenses even if the individual for whom the HSA was established is not an “eligible individual” at the time the reimbursement is paid. “Eligible individual” status only governs when contributions can be made to the HSA, not when reimbursements can be paid from the HSA.

Distributions from an HSA can also be made for purposes other than reimbursing qualified health care expenses. However, these nonqualifying distributions are subject to different treatment for income tax purposes, as discussed below.

Timing Issues. Contributions to an HSA are subject to the monthly limits described above. The balance in the HSA is available to reimburse permitted health care expenses at any time, even if the owner of the HSA is no longer “eligible individual.”

Because the individual owns the HSA, HSAs are nonforfeitable and fully portable. Any amounts remaining in the HSA at the end of a year automatically roll over and remain in the HSA for use in a future year. There are no limits on the amount that can be accumulated in an HSA.

Income Tax Treatment. Employee contributions to an HSA made by payroll reduction through a cafeteria plan are not subject to FICA or income tax. Individual contributions made directly to an HSA on an after-tax basis can be deducted on the HSA owner’s individual income tax return. Employer contributions to an HSA are generally nontaxable to the HSA owner.

Reimbursements for qualified health care expenses paid from an HSA are nontaxable to the HSA owner.

Distributions from an HSA for purposes other than reimbursing qualified health care expenses must be included in the gross income of the HSA owner and are generally subject to a 10% excise tax. However, nonqualified distributions made because of the death or disability of the HSA owner, or after the HSA owner attains age 65, are not subject to the 10% excise tax.

COBRA. An HSA is not a group health plan subject to COBRA.

Establishing an HSA. Individual HSA accounts must be established with a trustee or custodian before any contributions can be made. However, HSAs can be established any time before the end of the calendar year to which the HSA contributions will be attributable, and the cumulative allowable monthly HSA contributions can be made any time before the end of the calendar year.

Summary Chart

 

FSAs

HRAs

HSAs

Who funds?

Employee only or both.

Employer only.

Employer only or employee only or both.

Who determines annual contribution amount?

Employee annually elects contribution amount to be withheld from compensation; employer sets annual maximum.

Employer determines annual contribution.

Employer and employee each determine own annual contribution amounts; employer total annual contributions limited by Code §223 maximums.

Funding source

Employer’s general assets.

Employer’s general assets.

Tax-exempt trust or custodial account.

Is it a personal account?

No; employee does not have claim to any specific assets.

No; employee does not have claim to any specific assets.

Yes; similar to individual retirement arrangements.

What other type of health plan coverage is permitted?

Any type of health plan.

Any type of health plan.

Can only be covered by high-deductible health plan (HDHP) and no other health plan that is not an HDHP, with limited exceptions.

Does interest accrue?

Interest usually not accrued.

Interest usually not accrued.

Yes; earnings grow tax-free.

It is portable?

No; unused funds as of employment termination are forfeited.

No; HRAs cannot be rolled over to a new employer.

Yes; account is owned by employee.

Do unused amounts roll over?

No; roll over prohibited by Code §125.

Employer can permit unused amounts to roll over at year end or when employment terminates. Employer can limit amount rolled over each year.

Yes; no limit on amount of roll over or how long rolled-over amounts can remain in account.

Is COBRA continuation coverage available?

Yes, but only until end of calendar year in which qualifying event occurred.

Yes; COBRA must be offered for the full 18, 29 or 36-month COBRA period.

No.

Can funds be used for nonmedical expenses?

No.

No.

Yes.

What is the tax treatment of employee contributions?

Employee salary reduction contributions reduce employee’s compensation subject to income tax and FICA.

Not applicable; employee contributions not permitted.

Contributions made by an eligible individual are deductible or reduce employee’s compensation if made by salary reduction through a cafeteria plan.

What is the tax treatment of employer contributions?

Nontaxable to employee.

Nontaxable to employee.

Nontaxable to employee if employee is eligible individual.

What is the tax treatment of reimbursements?

Nontaxable to employee.

Nontaxable to employee.

Distributions for qualified medical expenses are nontaxable to employee. Distributions not for qualified medical expenses are included in employee’s gross income and generally subject to a 10% excise tax.

Conclusion

Employers can limit a portion of their health care plan liabilities and engage employees and retirees in the management of health care plan resources by incorporating a defined contribution element into their health care plans. Because of the unique characteristics of FSAs, HRAs and HSAs, an employer must carefully select the defined contribution element that best suits its health care plan objectives and its employee or retiree population.