Orthodontia Reimbursement Rules to be Liberalized

On August 17, 2001, Harry Beker, Employee Benefits Branch Chief, Internal Revenue Service (IRS), made remarks that strongly indicate a more liberal viewpoint regarding orthodontia treatment reimbursement. During the employee benefits symposium, attended by ProBusiness personnel, Mr. Beker's view is that it would be permissible for a cafeteria plan to reimburse a Health Care Spending Account participant the full amount of the treatment once the banding service has been performed. Historically, the IRS has required reimbursement of orthodontia claims over the entire orthodontia treatment period in order to comply with Prop. Treas. Reg. § 1.125-2 Q/A 7 (6) as follows:

"Medical expenses reimbursed under a health FSA must be incurred during the participant's period of coverage under the FSA. Expenses are treated as having been incurred when the participant is provided with the medical care that gives rise to the medical expenses, and not when the participant is formally billed or charged for, or pays for the medical care."

Mr. Beker stated that he believes that orthodontia claims are an exception to the above rule since the treatment extends over a long period of time and it is difficult to pinpoint with any accuracy what percentage of the treatment is actually incurred at any given time. Mr. Beker also believes that reimbursement for obstetrical (OB) claims could be handled in the same manner.

Although these comments by Mr. Beker were not official IRS comments and were his own personal views, ProBusiness is confident that Mr. Beker's comments, along with previous Private Letter Ruling, paint a clear picture regarding IRS expectations in relation to orthodontia. Therefore, on January 1, 2002, ProBusiness will begin to adjudicate orthodontia and obstetrical claims by reimbursing up to the full amount of the treatment, equal to the participant's annual election minus any previous reimbursements, once the initial treatment has begun.

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Clarification to IRS Health Care Spending Account Enrollment Rules

Health Care Spending Accounts (HCSA) are not subject to the Special Enrollment rules contained in the Health Insurance Portability and Accountability Act (HIPAA) when the HCSA plan itself is exempt from the provisions of HIPAA. Consequently, upon the birth of a child, it was interpreted that an employee would not be allowed to enroll in the HCSA, but only increase the contribution amount to the HCSA, if the employee was previously enrolled. Furthermore, the regulations state that the only time a change could be made to the HCSA was if the eligibility to participate in the HCSA itself was affected by the status change. Since the participant was previously eligible to participate (and chose not to), the birth of the child did not affect the participant's eligibility to participate and therefore, the participant was not allowed to enroll.

However, the IRS received considerable feedback questioning the fairness of this interpretation. As a result of this feedback, the following accommodation was made for HCSAs by adding language to Treas. Reg. § 1.125-4(c)(3):

"A change in status that affects eligibility under an employer's plan includes a change in status that results in an increase or decrease in the number of an employee's family members or dependents who may benefit from coverage under the plan."

This, in effect, makes the birth of a child a change that is "on account of and corresponds with a change in status that affects eligibility for coverage under an employer's plan." Therefore, an employee can change their HCSA enrollment status based on the birth of a child. Although the regulations dealing with Permitted Election Changes state that "a cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election," it is now clarified that the employee, by not electing to enroll in the HCSA at Open Enrollment, did in fact make an election to take taxable income instead of contributing to the HCSA, and therefore made an election of zero. Consequently, the employee now may change their election from zero (not enrolled) to the desired amount up to the plan maximum based on the birth of a child.

In summary, an employee not enrolled in the HCSA may now enroll in the HCSA upon the birth, adoption or placement for adoption of a child UNLESS the terms of the plan state otherwise. Since the language includes increases in number of dependents, the same is true for marriage, or any other situation where the number of dependents change.

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HIPAA's Privacy Regulations Update

The Health Insurance Portability and Accountability Act (HIPAA) Privacy Regulations are now effective as published on December 28, 2000. Most "covered entities" must adhere to the rules set out in the Privacy Regulations no later than April 14, 2003. However, "small health plans," defined as plans with annual gross receipts of less than 5 million dollars (vast majority of Health Care Spending Accounts) will not be required to comply until April 14, 2004.

As discussed in the last issue of Tech Flex, it appears that the Privacy Regulations may undergo a number of changes. On February 28, 2001, the Department of Health and Human Services (DHHS) announced it would consider additional public comments regarding the final regulations published on December 28, 2000. It has been reported that between February 28 and April 12, 2001, the DHHS received in excess of 24,000 additional comments regarding the Privacy Regulations. In a press release issued on April 12, Health and Human Services Secretary Tommy Thompson made the following statement:

"We will keep these comments in mind as we continue to make sure patients receive the highest quality care and begin the process of issuing guidelines on how this rule should be implemented. The guidelines will allow us to clarify some of the confusion regarding the impact this rule might have on health care delivery and access. And we will consider any necessary modifications that will ensure the quality of care does not suffer inadvertently from this rule."

This statement does not specifically spell out any modifications that might be forthcoming, but ProBusiness will continue to closely monitor the evolution of the Privacy Regulations and will keep you informed in a timely manner.

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Status of Cafeteria Plan Bills Under Consideration in Congress

In the last Tech Flex, we reviewed four bills currently being discussed in Congress that could significantly improve participation in cafeteria plans. Please find below brief summaries of these proposed legislative actions followed by the current status as of these bills.

H. R. 63

Title: To amend the Internal Revenue Code of 1986 to allow unused benefits under cafeteria plans and flexible spending arrangements to be distributed.

H. R. 63 would allow any unused contributions accumulated in a participant's flexible spending account would be distributed back to the employee as taxable income. Under the current rules these unused balances must be forfeited to the employer as a result of the "use-it-or-lose-it" stipulations contained in cafeteria plans. Should this amendment become law, it would become effective for taxable years beginning after December 31, 2000.

Status: Referred to House Committee on January 3, 2001.

H. R. 167

Title: To amend the Internal Revenue Code of 1986 to allow unused benefits from cafeteria plans to be carried over into later years and used for health care reimbursement rollover accounts and certain other plans, arrangements, or accounts.

H. R. 167, proposed to be effective for plan years beginning on or after January 1, 2002, contemplates giving participants a choice of what the participant wishes to do with any unused cafeteria plan account balances. End of plan year balances of up to $3,000 (indexed annually for inflation) could either be applied to the participant's following cafeteria plan year elections, or the unused funds could be distributed to the participant as taxable income. In addition, the participant may avoid being taxed on the distribution if the participant rolls the distribution into an Individual Retirement Account, 401 (k), 403 (b), 457 plan, Medical Savings Account, or an Education Individual Retirement Account.

Status: Referred to House subcommittee on February 7, 2001.

H. R. 253

Title: To amend the Internal Revenue Code of 1986 to expand alternatives for families with children and to establish incentives to improve the quality of child care.

H. R. 253 proposes an increase in the amount that a participant would be able to contribute to Dependent Care Spending Account to a total of $7,000, when the employee has two or more individuals who qualify for dependent care reimbursement. However, in cases where the employee only has one dependent for whom they are incurring dependent care expenses, the current limit of $5,000 would still apply. Although the dollar limit for the Dependent Care Tax Credit will also be increased to $3,600 for one dependent and $6,000 for two or more dependents, it appears that the Dependent Care Spending Account will remain a better benefit for most employees. This legislation has been presented with a proposed effective date of taxable years beginning January 1, 2001.

Status: Referred to House committee on January 30, 2001.

H. R. 831

Title: To amend the Internal Revenue Code of 1986 to allow individuals a deduction for qualified long-term care insurance premiums, use of such insurance under cafeteria plans and flexible spending arrangements, and a credit for individuals with long-term care needs.

H. R. 831 proposes to eliminate the prohibition against the inclusion of long-term care benefits in the offerings of a cafeteria plan. This current prohibition is based on Section 125 (d) which states "the term cafeteria plan does not include any plan which provides for deferred compensation." Long-term care plans are considered to be a benefit which will be paid for in one year and whose benefits will be derived in future years. The contemplated bill would allow long-term care premiums to be paid under a cafeteria plan on a pre-tax basis to the extent that these contributions do not exceed the eligible long-terms care premiums as follows contained in Section 213 (d) (10) :

Status: Referred to House committee on March 1, 2001.

Although the status of these bills appears to suggest that progress is stagnant, it is widely reported that these pieces of legislation, with the possible exception of HR. 253 (increase to Dependent Care Spending Account maximum) will be tied to any "Health Care Reform Act" that may be passed by Congress and signed into law by the President. ProBusiness is closely watching these events unfold and will report our findings to you in subsequent releases of the ProBusiness Tech Flex.

Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (425) 417-4795
e-mail: bsa@probusiness.com

(ProBusiness does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

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