MEDICARE PRESCRIPTION DRUG, IMPROVEMENT
AND MODERNIZATION ACT OF 2003

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. At a high level, this law adds a new Medicare prescription drug benefit and makes a number of modifications to the Medicare program. Additionally, this legislation creates a new tax-favored account, known as health savings accounts (HSAs) which allows individuals covered under "high deductible" health plans to pay for certain medical expenses on a pre-tax basis. We recommend that you review the information set out in the link below and contact your advisors if you would like detailed information regarding this new law. ADP National Account Services, ProBusiness Division has set out below some summarized information that specifically impacts the services we provide. Again, for complete information on the Medicare Prescription Drug, Improvement and Modernization Act of 2003, including the legislation, Conference Report and Joint Explanation Statement, please click on the link below:

http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=108_cong_reports&docid=f:hr391.108.pdf

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NEW MEDICARE LAW EXCEPTS HEALTH FSA DEBIT/CREDIT CARD PURCHASES FROM FORM 1099 REPORTING REQUIREMENT

Included in the final version of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, is an exception to the Form 1099 reporting requirements for debit/credit card payments made under a health flexible spending accounts (health FSAs). This is of significant importance for FSAs that provide debit cards to participants as a method of reimbursement. When the Internal Revenue Service released Revenue Ruling 2003-43 (May 6, 2003), which formally allowed the use of debit/credit cards as a method of reimbursement for health FSA expenses, the IRS stated "

"…payments made to medical service providers through the use of debit, credit, and stored-value cards are reportable by the Employer on Form 1009-MISC under § 6041."

Consequently, that language required all sponsors of health FSAs who made an aggregate payment (meaning the total claims for all participants) to a provider of services of $600.00 or more in a taxable year were required to file returns (1099-MISC) with the IRS. However, the newly passed language amends the language surrounding Form 1099 reporting requirements to except payments "for medical care (as defined in Code Section 213 (d) and made under (1) a flexible spending arrangement (as defined in Code Section 106(c)." Further, this exception is effective for payments made after December 31, 2002. Therefore, health FSA plan sponsors who utilized a debit card as a reimbursement method for health FSA expenses during the 2003 tax year will NOT be required to file a 1099-MISC with the IRS in cases where $600.00 or more was paid to a provider through a debit/credit card tied to a participant's health FSA.

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FSA "ROLLOVER" PROVISION CUT FROM FINAL LEGISLATION

House version (HR 1) of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 included a provision to allow a $500.00 rollover of unused health FSA participant contributions. This provision would have allowed up to $500.00 of unused health FSA balances to be 1) rolled over into the participant's health FSA account for the following plan year, or 2) deposited into a 401(k), 403(b), 457 plan or Individual Retirement Account However, when the House and Senate reconciled their respective versions of the legislation, this "rollover" provision was eliminated. Consequently, unused health FSA balances will continue to be governed by the "use-it-or-lose-it" rule whereby any amounts of money left in an individual's health FSA account at the end of the plan year must be forfeited (subject to claims incurred prior to the end of the plan year and the grace-period run-out) to the plan. Note that the "use-it-or-lose-it" rule will continue to apply to Dependent Care Spending Accounts as well.

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GUIDANCE GIVEN ON LENGTH OF COVERAGE IF COBRA ELECTED
UNDER 2002 TRADE ACT

As reported in previous TechFlex issues, the Trade Act of 2002 created a second COBRA election period for those workers who become eligible for trade adjustment assistance. Generally, the COBRA election period is a 60-day window measured from the later of (1) the loss of coverage under the employer's plan, or (2) the date the individual is notified of his or her COBRA rights. The second 60-day COBRA election period afforded under the Trade Act of 2002 begins on the first day of the month in which the worker becomes eligible for trade adjustment assistance. In this case, the election must be made within six months of the original loss of the group health coverage.

Length of COBRA Coverage:

Although the Trade Act of 2002 was clear that there is no retroactive coverage for the period of time between the initial loss of coverage and the first day of second election period, the legislation did not address the issue of whether the COBRA coverage period is to be measured from the date of the initial loss of coverage or from the first day of the Trade Act second election period. Consequently, this lack of clarification had given rise to two interpretations within the industry. The first being that if an employee initially loses active coverage due to termination on, for example, January 1, but did not elect COBRA until June (to be effective June 1), under the Trade Act provisions, that this employee would receive 18 months as measured from January 1. Consequently, the employee would only receive 13 months of COBRA coverage. The second interpretation, using the facts in the example above, is that the employee's coverage period is to be measured from the June 1 effective date, rather than the January 1 initial loss of coverage date, which would give the employee 18 months of COBRA coverage from the June 1 effective date.

Perhaps in an effort to stop the questions from pouring in, the IRS has clarified, via the Health Care Tax Credit Newsletter Issue 05, dated November 25, 2003, that the special second election period does not extend the length of COBRA available to a participant. Specifically, the IRS stated the following:

"The second COBRA election period does not extend the original COBRA benefit period, which is still measured from the date of the loss of coverage due to the qualifying event. An individual will not receive a second COBRA election notice; the termination date on the original notice is valid."

Therefore, the first interpretation set out above (which results in a truncated COBRA coverage period) is the correct interpretation according to the IRS. Further, the plan administrator is not required to send a second COBRA election notice to Trade Act Adjustment Assistance participants upon the establishment of eligibility, as the termination date on the original COBRA notice remains valid.

For a copy of the IRS communication, please click on the link provided below:

http://www.irs.gov/individuals/article/0,,id=118091,00.html

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Please contact ADP National Account Services, ProBusiness Division for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 · Fax: (800) 269-5231 · e-mail: bsa@probusiness.com

(ADP National Account Services, ProBusiness Division 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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