This issue of the Benefit Minute provides a recap of some recent state and federal legislative and regulatory activity.
Federal – Family HSA Limit Back to $6,900
In March 2018, the IRS announced that the annual HSA contribution limit for family coverage under a Qualified High Deductible Health Plan (QHDHP) was being reduced from $6,900 to $6,850 due to a tax reform-related change in the index that is used for certain benefit-related amounts that are subject to inflation adjustments.
On April 26, 2018, the IRS reversed course. In response to concerns raised by stakeholders, it was announced in Rev. Proc 2018-27 that the IRS will allow taxpayers to treat the originally announced $6,900 as the 2018 HSA contribution limit for family coverage under a QHDHP.
The IRS cited the following reasons:
- costs of modifying systems for the reduced maximum;
- costs associated with distributing $50 excess contributions and related earnings; and
- compliance with Code section 223(g)(1) which requires that the annual HSA contribution limits be published by June 1 of the preceding year.
The IRS has provided several alternatives to address tax treatment if the $50 excess contribution was already withdrawn. However, in no case may the tax exclusion for 2018 exceed $6,900 (plus any catch-up contributions).
Maryland – Male Sterilization and Health Savings Accounts (HSA)
In 2016, the Maryland legislature passed a law requiring all health insurers to cover male sterilization procedures as preventive care without any cost sharing for policy years beginning on or after January 1, 2018. This raised concerns as to whether fully insured QHDHPs issued in Maryland would be HSA-compatible since the IRS had never stated whether male sterilization procedures qualified as preventive care benefits (thereby permitting the services to be covered for free before the minimum deductible for a QHDHP is met).
Two recent developments have settled this issue. First, in March 2018, the IRS issued Notice 2018-12 which states that a health plan that provides benefits for male sterilization without these services being subject to the deductible is not a QHDHP. However, the IRS has provided transition relief until January 1, 2020 if coverage has been or will be provided for male sterilization services without being subject to the deductible. During the period of transition relief, individuals covered by a health plan that fails to be a QHDHP because of the male sterilization coverage will still be treated as eligible individuals for purposes of HSA contributions.
Second, in April 2018, the Maryland legislature amended the previous law, thereby allowing coverage for male sterilization in a QHDHP to be subject to the plan’s deductible. QHDHPs are still not allowed to impose coinsurance or copayment requirements on male sterilization procedures once the deductible has been met. As a result of these developments, individuals covered by fully insured QHDHPs issued in Maryland continue to be eligible to contribute to an HSA.
Maryland – New Premium Tax on Health Insurers
The Maryland legislature has passed a bill that implements a 2.75% premium tax for 2019 on health insurers in Maryland, which will be passed on to consumers in the form of higher premium costs. This state premium tax “replaces” the ACA’s health insurance tax that was suspended for 2019 in the January 2018 short-term funding resolution passed by Congress. The funds generated from the premium tax will be used to create a state reinsurance program for insurers who offer Marketplace plans in the state.
Federal – Qualified Transportation Fringes
Federal tax reform eliminated the employer tax deduction for employer-paid transit and parking benefits and required that tax-exempt employers pay unrelated business income tax (UBIT) on employer-paid transit and parking benefits. Recent IRS guidance has clarified that the employer tax deduction is lost when employees pay for parking and transit benefits with salary reduction contributions since these salary reduction amounts are considered employer contributions. It is expected that many employers who provide these benefits will continue to do so regardless of the corporate tax implications due to mandated transit benefits in some municipalities and lower corporate tax rates beginning in 2018.
Federal – Tax Credit for Paid Family Leave
Federal tax reform allows employers that offer at least two weeks of annual paid family and medical leave with at least 50% wage replacement to receive a general business tax credit for those wages paid to certain employees in 2018 and 2019. The IRS recently issued general guidance in the form of questions and answers. Topics addressed include:
Eligible employer: an employer with a written policy that provides for at least 2 weeks of paid family and medical leave annually to all qualifying employees who work full time (pro-rated leave for part time employees) and pays at least 50% of wages normally paid to the employee.
Qualifying employee: an employee who has been employed for at least one year and who, in the preceding year, had compensation equal to or less than 60% of the compensation threshold for highly compensated employees. To obtain the credit in 2018, the employee’s 2017 wages must have been not more than $72,000.
Eligible leave: leave for any of the reasons stipulated in the federal Family and Medical Leave Act (FMLA), including birth or adoption of a child, to care for a spouse, child or parent with a serious health condition, employee’s own serious health condition, qualifying exigency related to active duty and care for a service member.
Calculation of the tax credit: the credit is available on up to 12 weeks of paid leave. The minimum percentage is 12.5% of wages paid, which increases by .25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of wages (up to a maximum of 25% if 100% of wages are paid during the leave). The employer’s tax deduction for wages paid is reduced by the amount of the tax credit. In addition, wages taken into account for any other general business credit may not be used in determining the paid leave tax credit.
The IRS expects that additional information will be provided to address other topics related to the tax credit for paid family and medical leave, including:
- when the written policy must be in place;
- how paid family and medical leave relates to an employer’s other paid leave;
- how to determine whether an employee has been employed for one year or more;
- the impact of state and local leave requirements; and
- whether members of a controlled group are treated as a single taxpayer in determining the credit.
