May 11, 2004
BB 04—55

In this issue:

  • Senate Approves Nonqualified Deferred Compensation Provisions in Tax Bill
  • Treasury Issues Guidance on Coordination of HSAs, FSAs, HRAs
  • Senate GOP Task Force on Health Care Costs and the Uninsured Releases Recommendations
  • Council Urges SEC to Reconsider Mandatory Redemption Fees

Senate Approves Nonqualified Deferred Compensation Provisions in Tax Bill

On May 11, the Senate included a package of nonqualified deferred compensation provisions as part of a manager's amendment to the Jumpstart Our Business Strength (JOBS) Act (S. 1637).

By a vote of 90 to 8, the Senate agreed to limit debate and accept the provisions. The nonqualified deferred compensation provisions generally mirror those in the National Employee Savings and Trust Equity Guarantee Act (NESTEG) pension bill approved by the Senate Finance Committee in 2003, which were then added to S. 1637 through approval of an amendment offered by Senate Finance Committee Chairman Charles Grassley (R-IA). These provisions are also similar to the provisions contained in the House of Representatives version of the international tax bill, H.R. 2896.

The Senate bill includes two provisions not in the House version. These provisions would impose current taxation on the present value of any right to defer gain on stock options and other employer security-based compensation, and restrictions on investment control by the participant. The bill would also impose a one-year waiting period for corporate insiders receiving a distribution as a result of a change in control.

The nonqualified deferred compensation provisions do not include any provisions relating to company-owned life insurance (COLI). The proposal is now generally effective for amounts deferred after December 31, 2004.

The provisions were modified (when added to S. 1637) to clarify some technical aspects of the language including the definition of disability, the requirements for additional deferrals and the direction to the Treasury Department to issue guidance permitting participants to revoke certain elections with respect to post-December 31, 2004 deferrals.

Through the adoption of the manager's amendment, the change was made to require that amounts be "deferred" prior to the year in which the services are "performed." This is consistent with the House bill.

A side-by-side comparison chart of the various deferred compensation proposals, as included in pending legislation, is available on the Council Web site.

For more information, contact Diann Howland, Council vice president, retirement policy, or Lynn Dudley, Council vice president & senior counsel, at (202) 289-6700.

Treasury Issues Guidance on Coordination of HSAs, FSAs, HRAs

On March 11, the U.S. Treasury department issued Revenue Ruling 2004-45 addressing the coordination of Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs). Coordination of these savings vehicles was one of the top priority issues for the Council as established in our comment letter to Treasury. The Council advocated the ability to fully coordinate these arrangements to help increase employer sponsorship of the new HSA vehicles.

Revenue Ruling 2004-45 establishes the general rule that an individual who is covered by a health FSA or HRA that pays or reimburses medical expenses is generally not an eligible individual for the purpose of making contributions to an HSA. However, the guidance establishes four arrangements that would allow a participant in an HSA to also be enrolled in an FSA or HRA:

  1. Limited-Purpose Health FSA or HRA An individual may be enrolled in both an HSA and a health FSA that pays or reimburses benefits for “permitted insurance” (for a specific disease or illness or that provides a fixed amount per day (or other period) or per hospitalization) or an HRA that pays or reimburses benefits for “permitted insurance” or “permitted coverage” (dental and vision benefits, but not long-term care services). In addition, the limited-purpose FSA or HRA may pay or reimburse preventive care benefits.

  2. Suspended HRA. An individual may be enrolled in both an HSA and an HRA if the individual elects prior to the beginning of the HRA coverage period that the HRA will not pay or reimburse, at any time, any medical expense incurred during the suspension period except preventive care, permitted insurance, or permitted coverage (if otherwise allowed to be paid or reimbursed by the HRA.) When the suspension period ends and the HRA begins paying or reimbursing for expenses, the individual will no longer be eligible to contribute to an HSA. The employer may make contributions to the HRA during the suspension period, but the money must not become available until the suspension period ends and may not at any time reimburse for expenses incurred during the suspension period (other than the exceptions noted above).

  3. Post-Deductible Health FSA or HRA. An individual may be enrolled in both an HSA and a health FSA or HRA that does not pay or reimburse any medical expense before the minimum annual deductible under the HSA rules is satisfied. The deductible for the HRA or health FSA need not be the same as the deductible for the high deductible health plan (HDHP), but in no event can the HDHP, HRA, or FSA pay benefits before the HSA statutory deductible is satisfied. If the HDHP and FSA or HRA have different deductibles, the contribution limit for the HSA is the lowest deductible.

  4. Retirement HRA. An individual may be enrolled in both an HSA and an HRA that pays or reimburses only those medical expenses incurred after the individual retires. In this case, once the individual becomes eligible to have benefits paid from the retirement HRA, the individual will no longer be eligible to make contributions to the HSA. Note that the employer can make contributions to the retirement HRA while the employee is working, even if the individual is enrolled in an active-employee HSA.

The guidance also notes that an individual may have a combination of these arrangements.

This issuance of guidance is the third in a series issued by Treasury since HSAs were established by the Medicare Modernization Act enacted last December. Treasury is expected to issue a final round of guidance on all other open issues in June. For more information, please contact Susan Relland, Council health policy legal counsel, at (202)289-6700.

Senate GOP Task Force on Health Care Costs and the Uninsured Releases Recommendations

The Senate Republican Task Force on Health Care Costs and the Uninsured released its recommendations on May 11.  The recommendations include empowering consumers to make better health care decisions, improving patient safety and quality, promoting the efficient use of technology, curtailing waste, fraud and abuse and reforming the medical liability system including requiring responsible third parties to pay the medical expenses of an injured individual and avoiding double recovery of medical expenses.

To reduce the number of uninsured, the task force recommends tax credits for the purchase of health insurance, financial incentives to encourage young adults to purchase insurance, and removal of “barriers” that prevent individuals in some states from participating in a Health Savings Account (HSA) when enrolled in a high-deductible health plan that meets federal requirements.  The Task Force also made recommendations on strengthening the “safety net of care” such as increasing the number of community health centers. 

The task force could not come to unanimous agreement on association health plans (AHPs), so it included a recommendation on AHPs and an alternative.  AHPs would be permitted to offer self-insured health coverage to their members, free of state regulation and benefits mandates but still subject to a set of federal standards under the jurisdiction of the Department of Labor (DOL).  The alternative is a recommendation to standardize insurance products from state to state but continue state-based regulation of the products.

Senator Judd Gregg (R-NH), who chaired the task force and is also the Chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, said the recommendations will be drafted into a legislative package but conceded that action on the measures is not likely this year and the recommendations will likely serve as a starting point for 2005.  For more information, contact Maria Ghazal, Council director, health policy, at (202) 289-6700.

Council Urges SEC to Reconsider Mandatory Redemption Fees

On May 10, the Council submitted comments to the Securities and Exchange Commission (SEC) concerning the Commission’s proposed mandatory redemption fees for redeemable securities. The Council’s letter commended the SEC for its efforts to protect mutual fund investors and to restore investor confidence in mutual funds.  However, we reiterated our concern that the mandatory redemption fees will disadvantage retirement plan participants and would not constitute the most effective method of addressing market-timing activity.   The Council also suggested a number of changes if the SEC decides to mandate the fees.

The SEC’s rule intends the mandatory redemption fees to address market-timing  trading abuses by requiring mutual funds (with limited exceptions) to impose a 2 percent redemption fee on the redemption of shares purchased within the previous five days. The Council’s letter noted that this could mean the mandatory redemption fee will be imposed on various plan transactions where it is clear that market timing is not the motivation for the activity and is further concerned that fees will be imposed when the participant clearly does not have any control over the timing of a particular transaction. 

For more information on this issue, please contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.