1. A Bi-monthly publication from The Gardner Group February 2012
The Changes Ahead
New Limit on FSA Contributions Likely to
Increase Use of HSA’s
A provision in the Health Care Reform law (PPACA) limits annual contributions to medical FSA’s to $2,500. This provision becomes
effective in 2013, but most experts advise that it be implemented for plan years beginning after January 1, 2012. This limit will reduce a
very popular tax benefit for many employees while increasing revenue to the Federal government.
The change will likely encourage employers to consider Health Savings Accounts (HSA’s) as
an alternative to FSA’s. As with FSA’s, funds can be contributed tax-free to HSA’s and can be
spent tax-free on the same qualified health costs covered by FSA’s. However the
contributions limits are higher for HSA’s and, unlike FSA’s, there is no requirement that
funds deposited to an HSA be spent or forfeited by the end of the plan year.
The challenge is that an HSA can only be made available to employees covered by an HSA
qualified group health insurance plan. Employers will have to amend their health plans to
meet HSA qualifications in order to offer this benefit to employees. Then only employees
who participate in the health plan may have HSA’s. The requirements of an HSA qualified
health plan are:
~ The plan must have an annual deductible of at least $1,200 for single coverage and $2,400 if dependents are also covered.
~ If dependents are covered, the deductible must be “non-embedded.” This means no covered family member has met the
deductible until the combined deductible for dependent coverage has been met (i.e. $2,400 if minimum deductible is used).
~ There can be no copays until the deductible is met. Participants must pay the full cost of covered services until the deductible
has been met. This includes prescription drugs. Preventive Care is excluded from this requirement.
For some employers these changes may be deemed too dramatic. For others the increased attractiveness of HSA’s may be the impetus
to make this transition to a “consumer directed” health plan structure. The change to an HSA structure should reduce health insurance
costs, and employers may wish to share this saving by making employer contributions to participants’ HSA’s.
We have summarized below the key features of HSA’s:
~ The maximum annual contribution to an HSA for calendar year 2012 is $3,100 for participants with single health insurance
coverage, and $6,250 for participants who cover dependents. These maximums are increased annually based on inflation.
~ Employees may make deposits to HSA’s on a pre-tax basis via payroll deductions. With other deductions that are made on a
pre-tax basis (FSA contributions, qualified insurance premium payments), employees may not make changes to scheduled
deductions during the year unless there is a qualified change in status per Section 125 of the Internal Revenue Code. This
restriction does not apply to HSA’s. Deductions may be changed, discontinued and resumed at the participant’s discretion.
~ Employees may also make deposits from personal funds to HSA’s. Such deposits are
made from after tax funds (unlike pre-tax payroll deposits) but are deductible on the
employee’s tax return.
~ Employers may also make deposits to employee HSA’s as long as combined deposits
(employer and employee deposits) do not exceed the annual contribution limits.
Employer deposits are tax free to employees.
~ Funds deposited to HSA’s (employee and employer deposits) are immediately and fully vested. They belong to the employee
and cannot be forfeited. Unlike FSA’s, there is no requirement that these funds be spent within a plan year. Since these funds
can accumulate indefinitely and without limit, employees have an opportunity to accumulate substantial funds to meet future
needs.
~ Funds deposited to an HSA can be spent tax free on the same family medical, dental and vision care costs covered by medical
FSA’s. In addition, HSA funds can be spent tax free on COBRA premiums, Medicare premiums and Long Term Care Insurance
premiums.
~ An HSA is a personal and portable bank account. Deposits earn interest, and after a minimum balance is reached, funds can
be invested in securities and mutual funds. Interest earnings and investment earnings are not taxed.
~ Funds can be withdrawn at any time and used for any purpose. If used for non-qualified expenses, withdrawals are subject to
income tax and, if withdrawn prior to retirement age, are also subject to a 20% penalty tax. After retirement age non-qualified
expenditures are simply subject to ordinary income tax, the same as expenditures from any other qualified retirement
account.
~ There is no requirement to spend HSA accumulations. If unspent during the participant’s lifetime, accumulations can transfer
to a named beneficiary with the same exemption from probate and creditors’ claims enjoyed by life insurance proceeds and
qualified retirement plan accumulations.
~ Howard Dunlap

2. February, 2012
New Limit on FSA Parts of Health Reform Law Gaining in
Contributions Based Acceptance: Poll
on a “Tax Year” Americans are slowly starting to embrace some key components of the
controversial health care reform act signed into law by President Barack
With Health Care Reform imposing the Obama nearly two years ago, according to a new Harris
$2,500 limit on annual salary reduction Interactive/HealthDay poll released January 30, 2012.
contributions to medical Flexible Spending
Accounts, comes concern for non- To be sure, Americans remain sharply divided over the legislation, with
calendar-year plans. Effective January 1, slightly more than one-third (36 percent) of U.S. adults saying they want the
2013 the $2,500 limit will apply to all FSA law repealed and 21 percent saying they want it to remain as is. Twenty-five
accounts based on a taxable year (January percent would like to see only certain elements of the law modified.
1st-December 31st). Non-calendar year However, support for certain components of the law seems to be slowly
plans that track medical FSA salary increasing with time. For instance, 71 percent of those polled now back the
reductions solely on a plan year basis may law's provision that prevents insurance companies from denying coverage to
inadvertently permit an employee to those already sick. At the end of 2010, a Harris Interactive/HealthDay poll
exceed the $2,500 limit for a calendar indicated that 64 percent supported this provision.
year. These plans must take the limit into
account when conducting enrollment for The poll shows some other provisions of the health reform law gaining
the plan year that includes the January 1, acceptance. They include:
2013 effective date. To simplify
 Allowing children to stay on their
administration, sponsors of non-calendar
parents' insurance plans until they
year plans may wish to consider
turn 26 -- 57 percent in Jan. 2012
implementing the limit on their 2012
versus 55 percent in Nov. 2010.
renewal date, as opposed to waiting. All
Sponsors should provide advance notice to  Creating insurance exchanges where
potential participants that their annual people can shop for insurance -- 59
benefit will be reduced due to PPACA at percent versus 51 percent.
their next plan year renewal date.
 Providing tax credits to small businesses to help pay for their employees'
insurance -- 70 percent versus 60 percent.
 Requiring all employers with 50 or more employees to offer insurance to
their employees or pay a penalty -- 53 percent versus 48 percent.
 Requiring research to measure the effectiveness of different treatments -
Employees that coverer dependents are - 53 percent versus 44 percent.
also limited to the $2,500 limit. The limit is
a flat dollar amount and applies on a per-  Creating a new Independent Payment Advisory Board to limit the growth
participant basis, so employees with family of Medicare spending -- 38 percent versus 32 percent.
members are not permitted to make
higher medical FSA salary reductions. But the most controversial aspect of the law -- the individual mandate that
However, a husband and wife who are requires all adults to have health insurance or face a fine -- remains widely
each eligible for their own employment- unpopular, with only 19 percent of those polled supporting it, regardless of
based medical FSAs will have separate political party affiliation.
limits. Each Spouse could make medical The poll included 2,415 U.S adults over age 18 surveyed online between Jan.
FSA salary reductions up to the limit. 17-19, 2012, by Harris Interactive. Full data on the poll and its methodology
are available at Harris Interactive.
https://checkpoint.riag.com www.harrisinteractive.com
Finally, 408 (b)2 rule released. What does it all mean?
The Department of Labor (DOL) has issued the long-anticipated final service provider fee disclosure regulation. Now the rule
requires covered service providers to disclose to retirement plan sponsors a description of services to be provided and all direct
and indirect compensation to be received for those services. The idea for the rule is that it will assist responsible plan fiduciaries
in fulfilling their duties to assess reasonableness of compensation and identify potential conflicts of interest.
We think the most important changes are the following:
• The extension of the compliance date from April 1, 2012 to July 1, 2012
• The fact that service providers are not required to provide a summary of the disclosures,
though the DOL provided a sample “guide” that is not mandatory
• The addition of the requirement to describe the arrangement between the service provider
and the payer of indirect compensation
• Limited relief for disclosures for brokerage accounts and similar arrangements
• Clarification that electronic disclosure of the disclosures is permitted
• Relief from the disclosure requirements for “frozen” 403(b) contracts
• The requirement that plan sponsors terminate the relationship with a service provider who fails or refuses to provide
information on request.
Have you reviewed your retirement plan in preparation for the new ruling? If you would like a complimentary benchmarking
analysis of your 401(k) plan, please contact Brian Cook.
John K. Mitsis CRPS®