Health Insurance

<div class="Section1"><br /> <br /> Nondiscrimination requirements apply to self-insured health benefits, although the IRS announced in Notice 2011-1 on December&nbsp;22, 2010, that compliance with nondiscrimination rules for health insurance plans will be delayed until regulations or other administrative guidance has been issued. This guidance remains pending. The IRS indicated that the guidance will not apply until plan years beginning in specified periods after guidance is issued. Some plans will be grandfathered.<br /> <br /> Benefits under a self-insured plan generally are excludable from an employee&rsquo;s gross income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8794">8794</a>). If a self-insured medical expense reimbursement plan or the self-insured part of a partly-insured medical expense reimbursement plan discriminates in favor of highly compensated individuals, certain amounts paid to highly compensated individuals are taxable to them.<br /> <br /> A self-insured plan is one in which reimbursement of medical expenses is not provided under a policy of accident and health insurance.<a href="#_ftn1" name="_ftnref1">¹</a> According to regulations, a plan underwritten by a cost-plus policy or a policy that, in effect, merely provides administrative or bookkeeping services is considered self-insured.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A medical expense reimbursement plan cannot be implemented retroactively. To allow this would render meaningless the nondiscrimination requirements of IRC Section&nbsp;105.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A self-insured plan may not discriminate in favor of highly compensated individuals either with respect to eligibility to participate (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="338">338</a>) or benefits (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="339">339</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 105(h)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.105-11(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Wollenburg v. U.S.</em>, 75 F. Supp.&nbsp;2d 1032 (D.C Neb. 1999); <em>American Family Mut. Ins. Co. v. U.S.</em>, 815 F. Supp.&nbsp;1206 (W.D. Wis. 1992). <em>See also</em> Rev. Rul. 2002-58, 2002-38 IRB 541.<br /> <br /> </div></div><br />

<div class="Section1">If an eligible individual was enrolled in the monthly HCTC program during the tax year, they were sent a Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments. This form was provided because the HCTC Program made monthly payment(s) to the individual’s health plan administrator in one or months in the tax year.</div><br /> <div class="Section1"><br /> <br /> Boxes 3 through 14, on Form 1099-H, reflect the tax credit amount the individual received for each month in (an 80 percent tax credit for payments made by the HCTC Program in<br /> January and February and a 65 percent tax credit for payments made in March through December).<br /> <br /> To claim the additional 7.5 percent retroactive credit:<br /> <ol><br /> <li>Refer to the box to the left of box 8 on Form 1099-H. This is the additional<br /> 7.5 percent retroactive credit that the HCTC Program has calculated. If the amount listed is $0.00, there is no retroactive credit amount.</li><br /> <li>Complete and file Form 8885, Health Coverage Tax Credit, with Form 1040, U.S. Individual Income Tax Return. Enter the retroactive tax credit amount on line<br /> 7 of Form 8885, Health Coverage Tax Credit. It is not necessary to complete lines 1 through 6 and it is not necessary to submit any supporting documentation.</li><br /> </ol><br /> Note: If a credit is claimed for any month for which a payment was made directly to a qualified health plan, lines 1 through 6 must be completed for those months. Then, the additional 7.5 percent retroactive credit amount is added to the sum of any amount on Part II, line 6, of Form 8885 and the total is entered on Part II, line 7. All required supporting documentation must be submitted and copies should be retained.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Form 8885 must be filed along with Form 1040.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Section 9003 of the ACA adds IRC Section 106(f), which revises the definition of medical expenses for employer-provided accident and health plans, including health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs). Section 9003 also revises the definition of qualified medical expenses for health savings accounts and Archer medical savings accounts.</div><br /> <div class="Section1"><br /> <br /> Prior to 2020, over-the-counter drugs were not eligible for reimbursement by these plans unless a physician issued a prescription. The requirement was removed in 2020. Prior to that, for example, if a physician were to prescribe aspirin, this expense could be reimbursed but the purchase of aspirin without a prescription could not be reimbursed.<br /> <br /> Other changes in health FSAs and HRAs are discussed in the following Q&amp;As.<br /> <br /> </div>

<div class="Section1">An HSA generally is exempt from income tax unless it ceases to be an HSA.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> In addition, rules similar to those applicable to individual retirement arrangements (IRAs) regarding the loss of the income tax exemption for an account where an employee engages in a prohibited transaction<a href="#_ftn2" name="_ftnref2">²</a> and those regarding the effect of pledging an account as security<a href="#_ftn3" name="_ftnref3">³</a> apply to HSAs. Any amounts treated as distributed under these rules will be treated as not used to pay qualified medical expenses ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(e)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 408(e)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 408(e)(4).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(e)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under IRC Section 106(f), expenses incurred for medicines or drugs may be paid or reimbursed by an employer-provided plan, including a health FSA or HRA, only if the medicine or drug:<br /> <blockquote>(1)     requires a prescription;<br /> <br /> (2)     is available without a prescription, that is, is an over-the-counter medicine or drug, (before 2020, the individual was required to obtain a prescription); or<br /> <br /> (3)     is insulin.</blockquote><br /> These rules generally apply to expenses incurred for taxable years beginning on or after January 1, 2011. Congress removed the prescription requirement for over-the-counter drugs in 2020.<br /> <br /> Additionally, for plan years beginning in 2013 and thereafter, contributions to flexible savings accounts are limited to $3,300 in 2025 ($3,200 in 2024, $3,050 in 2023, $2,850 in 2022, $2,750 for 2020-2021 and $2,700 for 2019), as indexed for inflation in subsequent years.<a href="#_ftn1" name="_ftnref1">¹</a> Flexible spending accounts are those accounts, typically in cafeteria plans, that may be used to reimburse medical or dependent care expenses.<br /> <br /> Further, the IRS has modified the cafeteria plan use it or lose it rule for health FSAs. Health FSAs may now be amended so that $660 in 2025 ($640 in 2024, $610 in 2023, $570 in 2022 and $550 in 2021) of unused amounts remaining at the end of the plan year may be carried forward to the next plan year.<a href="#_ftn2" name="_ftnref2">²</a> However, plans that incorporate the carry forward provision may not also offer the two-month grace (run-out) period that would otherwise allow FSA participants an additional two-month period after the end of the plan year to exhaust account funds.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.    Notice 2013-71.<br /> <br /> </div>

<div class="Section1">HSA law provides special treatment for spouses in the following areas:<br /> <blockquote><strong>Tax-Free Distributions.</strong> An HSA owner can use his or her HSA tax-free to pay the qualified medical expenses of spouses. This benefit does not extend to domestic partners (in limited circumstances a domestic partner could be a tax dependent and an HSA owner can use an HSA for a tax dependent).<br /> <br /> <strong>Beneficiary Treatment.</strong> A spouse beneficiary can treat the HSA as his or her own upon the death of the HSA owner. Non-spouse beneficiaries must take a full distribution of the money remaining in the HSA.<br /> <br /> <strong>Divorce Transfer.</strong> An HSA owner can transfer assets into an HSA of former spouse in the case of a divorce.<br /> <br /> <strong>Estate Tax Treatment.</strong> If a spouse is named as the beneficiary of the HSA, the treatment of the HSA may change for estate tax purposes.<br /> <br /> <strong>Family HDHP Treatment.</strong> Spouses covered under a family HDHP are capped at the combined HSA family limit. Also, if one spouse has a family HDHP, then both spouses are deemed to have family HDHPs. This rule closes a loophole that allowed each partner in a same-sex couple to contribute the family HSA maximum in certain circumstances.<br /> <br /> <strong>Child of Former Spouse.</strong> An HSA owner can use the HSA to pay for medical expenses of his or her child that is claimed as a tax dependent by a former spouse (this is helpful in cases of divorce and legal separation).</blockquote><br /> </div>

<div class="Section1">It is not considered a COBRA qualifying event if an employer stops making contributions to a multiemployer plan. Further, when an employer stops making contributions to a multiemployer group health plan, the plan continues to be obligated to make COBRA continuation coverage available to qualified beneficiaries associated with the employer. Once the employer provides group health insurance to a significant number of employees who were formerly covered under the multiemployer plan or starts contributing to another multiemployer plan, the employer’s plan or the new multiemployer plan must assume the COBRA obligation.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> If, however, the employer that stops contributing to the multiemployer plan makes group health plan coverage available to (or starts contributing to another multiemployer plan that is a group health plan) a class of the employer’s employees formerly covered under the multiemployer plan, the plan maintained by the employer (or the other multiemployer plan), from that date forward, has the obligation to make COBRA continuation coverage available to any qualified beneficiary who was receiving coverage under the multiemployer plan on the day before the cessation of contributions. The qualifying event must have occurred in connection with a covered employee whose last employment prior to the qualifying event was with the employer.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 54.4980B-9, A-10.<br /> <br /> </div>

<div class="Section1">Yes. The IRS has ruled that premiums paid on an overhead expense disability policy, a special type of contract that reimburses professionals or owner-operators for overhead expenses actually incurred during periods of disability, are deductible as a business expense and the proceeds are taxable.<a href="#_ftn1" name="_ftnref1">¹</a> The ruling relates to self-employed individuals.<div class="Section1"><br /> <br /> Premiums paid on standard personal disability insurance are not deductible as a business expense but the proceeds are tax-exempt as compensation for personal injuries or sickness ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="382">382</a>).<a href="#_ftn2" name="_ftnref2">²</a> This is true even though a taxpayer intends to use the benefits to pay overhead expenses during periods of disability.<a href="#_ftn3" name="_ftnref3">³</a> (<em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="377">377</a>.)<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 55-264, 1955-1 CB 11.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 55-331, 1955-1 CB 271; Rev. Rul. 70-394, 1970-2 CB 34.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 58-480, 1958-2 CB 62; <em>Blaess v. Commissioner</em>, 28 TC 710 (1957); <em>Andrews v. Commissioner</em>, TC Memo 1970-32.<br /> <br /> </div></div><br />

<div class="Section1">No. An employer cannot sponsor a stand-alone health FSA. An employer may only offer a health FSA if it also offers a major medical plan to the health FSA participants, who are not required to accept the offer of coverage in the employer’s major medical plan.</div>

<div class="Section1">For amounts paid after December 31, 2010 and before 2020, a distribution from an HSA or Archer MSA<a href="#_ftn1" name="_ftnref1">¹</a> for a medicine or drug was a tax-free qualified medical expense only if the medicine or drug (1) required a prescription, (2) was an over-the-counter medicine or drug and the individual obtained a prescription, or (3) was insulin. The prescription requirement for over-the-counter drugs was eliminated beginning in 2020.</div><br /> <div class="Section1"><br /> <br /> If amounts are distributed from an HSA or Archer MSA for any medicine or drug that does not satisfy these requirements, the amounts are distributions for nonqualified medical expenses, which are includable in gross income and generally are subject to a 20 percent additional tax. This change does not affect HSA or Archer MSA distributions for medicines or drugs made before January 1, 2011, nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before that date.<br /> <br /> IRS guidance reflecting these statutory changes makes it clear that the rules in IRC Sections 106(f), 223(d)(2)(A), and 220(d)(2)(A) do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. These items may qualify as medical care if they otherwise meet the definition of medical care in IRC Section 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.<br /> <br /> Expenses for items that are merely beneficial to the general health of an individual, such as expenditures for a vacation, are not expenses for medical care.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 223(d)(2)(A), IRC § 220(d)(2)(A).<br /> <br /> </div>