March 28, 2014
- Council Briefs Capitol Hill Staff on Retirement Plan Tax Incentives
- IRS Chief Counsel Issues Interpretive Guidance on Health FSA Carryover, HSA Eligibility, Corrective Procedures for Improper FSA Payments
- IRS Releases New Procedures for 403(b) Plan Administration
Council Briefs Capitol Hill Staff on Retirement Plan Tax Incentives
The Council’s retirement policy staff, joined by representatives from the American Council of Life Insurers (ACLI) and Investment Company Institute (ICI), provided an educational briefing for congressional staff on March 27, explaining the critical role played by current tax incentives in encouraging employer-sponsored retirement plan participation.
The three organizations recently collaborated on Our Strong Retirement System: An American Success Story, a white paper that gathers the most recent statistical data and the results of rigorous academic research to demonstrate the strength of the private retirement system in general and defined contribution plans in particular.
The March 27 event, held on Capitol Hill, was attended by 21 staff members (from 17 House and Senate offices) and featured presentations from the organizations on how tax incentives affect retirement plan coverage and how individual workplace savings plans can generate substantial retirement benefits.
Lynn Dudley, the Council’s senior vice president, retirement and international benefits policy, described the real-world implications of recent proposals that would limit the value of retirement saving incentives. In particular, she noted that these tax incentives are deferrals, not expenditures, emphasized that the tax-deferred savings from defined contribution plans create a future taxable stream of income for participants. She also explained how “squeezing” the up-front value of tax incentives could affect stakeholders’ attitudes towards retirement savings and employer-sponsored plans.
The March 27 briefing was the latest in a series of initiatives to clarify pervasive misconceptions about the retirement tax incentives, complementing our many individual meetings with members of Congress and other policymakers.
Upon direction from the Council’s Policy Board of Directors, the Council has also begun a Board-level initiative to develop a public educational and media relations strategy addressing misunderstandings about the current retirement system and its success. The Council will continue to promote the principle that employees are more financially secure with access to, and participation in, employer-based plans.
To participate in meetings with Capitol Hill staff or to provide input for our discussions with lawmakers, please contact Dudley or Diann Howland, vice president, legislative affairs, at (202) 289-6700.
IRS Chief Counsel Issues Interpretive Guidance on Health FSA Carryover, HSA Eligibility, Corrective Procedures for Improper FSA Payments
The Internal Revenue Service (IRS) Office of Chief Counsel released two memoranda on March 28 addressing a range of issues related to health FSA carryovers and HSA and correction procedures for improper health FSA payments. The Chief Counsel’s office advises the IRS Commissioner on matters pertaining to the interpretation, administration and enforcement of the tax code and provides legal guidance and interpretive advice to the IRS, Treasury and to taxpayers.
Health FSA Carryovers and Eligibility for an HSA
IRS Chief Counsel Memo No. 201413005 provides official interpretation of a number of questions related to eligibility for a health savings account (HSA) and the implications for “carry-overs” of unused amounts in a health flexible spending account (FSA).
As we reported in the October 31, 2013, Benefits Byte, under IRS Notice 2013-71, up to $500 of unused health flexible spending account (FSA) funds may be used to be paid or reimbursed for qualified medical expenses in the following year, provided that the plan does not also incorporate the existing FSA “grace period” rule. Notice 2013-71 did not expressly address issues related to how a carryover from a general purpose health FSA would affect eligibility to contribute to an HSA for an individual who elects an HDHP in the following year.
Memorandum No. 201413005 provides the answers to seven specific questions related to HSA eligibility for individuals who participate in health FSAs that allow for a carryover. According to the memo:
- An individual who is covered by a general purpose health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This includes an individual who has coverage in a general purpose HSA solely as the result of a carryover of unused amounts in a health FSA from the prior year.
- An individual who is covered by a general purpose health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA during the entire plan year of the health FSA without regard to the amount available from the health FSA for any month during the plan year. Thus, an individual covered by a general purpose health FSA solely as the result of a carryover of unused amounts in a health FSA may not contribute to an HSA even for months in the plan year after the health FSA no longer has any amounts available to pay or reimburse medical expenses.
- An individual who participates in a general purpose health FSA and elects, for the following year, to participate in an HSA-compatible health FSA may elect to have any unused amounts from the general purpose health FSA carried over to the HSA- compatible health FSA. There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.
- An individual who participates in a general purpose health FSA and elects, for the following year, to participate in an HSA-compatible health FSA and have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA is eligible to contribute to an HSA during the following year if the individual is otherwise eligible under Internal Revenue Code Section 223(c)(1)(A).
- A cafeteria plan that offers both a general purpose health FSA and an HSA- compatible health FSA may automatically treat an individual who elects coverage in an HDHP for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA compatible health FSA for the following year.
- A cafeteria plan may provide that if an individual participates in a general purpose health FSA that provides for a carryover of unused amounts, the individual may elect prior to the beginning of the following year to decline or waive the carryover for the following year. In that case, the individual who declines under the terms of the cafeteria plan may contribute to an HSA during the following year if the individual is otherwise eligible under Code Section 223(c)(1)(A).
- If an individual elects to carry over unused amounts from a general purpose health FSA to a HSA-compatible health FSA, the uniform coverage rules may be applied during the run- out period of the general purpose health FSA as follows: During the run-out period for the general purpose health FSA, the unused health FSA amounts may be used to reimburse any allowed section 213(d) medical expenses incurred prior to the end of the general purpose health FSA plan year. Any claims covered by the HSA-compatible health FSA must be timely reimbursed up to the amount elected for the HSA-compatible health FSA plan year. Any claims in excess of the elected amount may be reimbursed after the run-out period when the amount of any carryover is determined. (The memo provides an illustrative example.)
Correction Procedures for Improper Health FSA Payments
IRS Chief Counsel Memo No. 201413006 interprets the rules for how the sponsor of a health FSA must correct “improper payments” (i.e., “includ[ing] a payment that is not properly substantiated as well as a reimbursement of an expense that is later identified as not a qualified expense).
In a series of three questions and answers, Memorandum No 201413006 specifically addresses:
- Whether the correction procedures for debit cards provided in the proposed cafeteria plan regulations may be applied to improper payments from a health flexible spending arrangement;
- Whether an employer may alter the order of correction procedures provided in the proposed cafeteria plan’s regulations; and
- In cases in which all other correction procedures have been exhausted and the employer treats the improper payment as business indebtedness, whether the amount of a forgiven improper payment is reported by the employer to the employee on Form W-2 or Form 1099.
Both issuances are dated February 12 but were not released by IRS until March 28. For more information, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.
IRS Releases New Procedures for 403(b) Plan Administration
On March 25, the Internal Revenue Service (IRS) issued Revenue Procedure 2014-28, amending the procedures for issuing opinion and advisory letters for pre-approved 403(b) plans (i.e., prototype and volume submitter plans).
Under the program as amended by this revenue procedure, the IRS will accept applications through April 30, 2015, for opinion and advisory letters regarding the acceptability of prototype plan and volume submitter plan formats under Section 403(b) of the Internal Revenue Code. This revenue procedure amends the opinion and advisory letter procedure established by Revenue Procedure 2013-22, which allows more plan sponsors and eligible employers to participate in the pre-approved 403(b) plan program.
For more information, contact Jan Jacobson, senior counsel, retirement policy, at 202-289-6700.