Like long-hopeful sports fans whose patience is finally rewarded when their team wins the championship, advocates of change in the FSA “use-it-or-lose-it” rule have just won a huge victory.
In a move that had been expected, the U.S. Treasury Department and the IRS announced in Notice 2013-71 on October 31 that employers would be permitted to amend their health FSAs to allow workers to carry over into the immediately following plan year up to $500 of unused amounts remaining at the end of the plan year.
Significantly, Treasury specified that the $500 carryover “does not affect the maximum amount of salary reduction contributions” that participants are permitted to make, currently $2500, under the provisions of the Affordable Care Act. Workers could therefore carry over $500 in unspent FSA funds, making a maximum of $3000 available in the following plan year.
Over a decade ago Ceridian was one of the first and strongest supporters of HR 1590, legislation introduced by Minnesota representative Jim Ramstad, to allow a $500 FSA carryover. Business organizations like the American Benefits Council, the Business Roundtable, the US Chamber of Commerce and the National Association of Manufacturers all lined up in support of sensible modification of the FSA “use-it-or-lose-it” rule.
The argument for change was obvious: the “use-it-or-lose-it” rule, in requiring forfeit of unused end-of-year FSA funds, discouraged tax-advantaged saving for ever-rising out-of-pocket medical costs.
The argument against the FSA “rollover,” as it came to be known, was that it would somehow become a back door to out-of-control deferred compensation, something expressly prohibited under the governing regulations for Internal Revenue Code Section 125 cafeteria plans. Because of the deferred comp barrier, the “use-it-or-lose-it” rule remained a fixture of FSA regulation for decades.
Why the Policy Change Now?
Somewhat surprisingly, credit for the $500 FSA carryover goes to the Affordable Care Act (ACA)—specifically the provision capping annual FSA elections at $2500, which became effective for FSA plans that began during 2013.
Treasury officials hinted at the coming change in IRS Notice 2012-40, which established rules for employers to implement the $2500 FSA statutory cap. The 2012 guidance suggested that the FSA annual limit in many ways obviated the concern that FSA carryover funds might accumulate over time as deferred compensation. Put simply, the ACA cap on annual FSA contributions made a strict “use-it-or-lose-it” rule unnecessary.
Perhaps to make the $500 carryover coincide with the 2013 statutory limit on FSA contributions, Treasury and IRS decided to allow employers to adopt the carryover provision to health FSAs “for the current Section 125 cafeteria plan year,” i.e., for 2013 FSA funds.
To be sure, adoption of the carryover option comes at a price—“a Section 125 cafeteria plan that incorporates a carryover provision may not also provide a grace period in the plan year to which unused amounts may be carried over.”
In other words, employers will decide which option to choose: carryover or grace period, making it unlikely that many employers who offer a grace period will opt for the FSA carryover in this first year—2013.
The October 31 Treasury/IRS carryover announcement is good news for consumers. No longer will an important option for tax-favored saving for health costs contain an end-of-year trap door. More and more working families will be able to leverage the tax savings of FSAs without fear of forfeiting hard-earned wages.
Looking back over some 12 years of support for practical modification of the FSA “use-it-or-lose-it” rule, Ceridian can identify with the perspective of Janet Trautwein, CEO of the National Association of Health Underwriters: “This is an issue that NAHU has been working on for many years and we are glad to see these common sense changes finally come to fruition.”
Breakdowns in the rollout of the government’s health insurance exchange have fueled speculation about delaying the ACA “Individual Mandate.” This is the requirement that Americans buy health insurance in 2014 or pay a tax penalty of $95 or 1% of income, whichever is greater.
Three options are on the table to delay the individual mandate:
First, the mandate itself could be delayed for one year—much as the employer “play or pay” mandate has been delayed until 2015. Senator Joe Manchin (D-WV) advocates legislation to do just that.
While republican and some democrat lawmakers support a one-year delay, the White House opposes it, reflecting insurance industry concerns that plan pricing has been based on the mandate’s spurring millions of younger and healthier people to enroll in 2014.
A second option would be to keep the mandate in place but delay for one year any penalties for not having coverage. The argument is that potential enrollees should not be penalized for website breakdowns.
In truth, however, penalties are a murky part of individual mandate enforcement. Not only is there a so-called “hardship” exemption, which gives HHS wide latitude to waive penalties, but they would not actually be imposed until tax returns are filed in 2015.
But the biggest problems with options one and two are political: a one-year delay of either the individual mandate itself or the statutory penalties would probably require legislation—a non-starter for the White House.
A third and more promising possibility for delay is in the open enrollment period, now fixed by regulation at between October 1 and March 31, 2014. In future years open enrollment will extend from October 15 until December 7.
Last week the White House clarified an apparent “disconnect” between the statutory mandate that individuals’ health coverage be effective January 1, 2014 and a regulation keeping the enrollment window open until March 31, 2014.
HHS announced that as long as people “enrolled” in health coverage by March 31 they would incur no penalty, even if coverage did not actually go into effect until after March 31. Since the system apparently needs two weeks to process applications and since coverage usually takes effect on the first day of the month, this means that health coverage might not be in place until April or May.
In clarifying the disconnect, therefore, the individual mandate itself has been delayed from January 1, 2014 until April or May 2014.
Further complicating individual mandate enforcement, of course, is that required employer reporting under IRC 6055 and 6056 has been delayed until 2015. HHS and IRS will therefore be unable to confirm employer health coverage individuals claim for 2014.
It’s possible that continuing breakdowns in the exchange website will in the end force the Administration to extend the open enrollment window past March 31, 2014. The White House has pledged to have the system fixed and fully operational no later than November 30, leaving time for individuals to apply by December 15 for coverage to take effect on January 1.
What seems most interesting about the latest developments is that while failure of the government’s website rollout has gotten all the headlines the subtext is potentially more important—the ACA individual mandate has been delayed for many, depending on when they enroll, from January 1 until as late as May 1. That should be front page news!
The fifth and final ACA Megatrend in our series is, paradoxically, the most important and the least connected directly to the ACA itself: the economy.
The health of our economy, nationally and regionally, sector-by-sector, will profoundly affect how employers and working families respond to the healthcare reform law.
It is the great misfortune of President Obama’s signature legislative achievement to be launched into a persistently weak economy, with anemic GDP growth, high unemployment and widespread economic uncertainty.
With only a 2% real growth rate, recovery from the worst recession since the Great Depression has been unusually lackluster. Meanwhile, 11 million people remain unemployed, with another 7 million classified part-time while seeking full-time work. It’s hard to imagine a more inhospitable climate in which to implement major social policy legislation.
This grim macroeconomic environment overshadows an equally troubling microeconomic reality: employer health costs have practically doubled over the last decade. According to the Kaiser Family Foundation, average health insurance premiums rose just under 100% from 2002 to 2012.
Putting all this together, as America’s employers prepare to implement the ACA’s major compliance provisions in 2014, 2015 and beyond, and as they formulate short and long run health benefit strategies, they face a double-barreled challenge—a weak economy and skyrocketing health costs.
A second feature of today’s economy will have an equally important impact on ACA implementation: wage stagnation. Median household income stood at an inflation-adjusted $51,017 in 2012, actually lower than the 1999 peak of $56,080. In other words, the incomes of average Americans are stuck in neutral if not in reverse—and certainly not keeping pace with healthcare costs.
How might these macro and micro developments affect the Affordable Care Act? In a word, compliance.
Starting next year individuals will be required to purchase health insurance coverage or pay a tax penalty. Even with subsidies to buy insurance on the federal or state exchanges, younger and healthier people, feeling the pressures of eroding purchasing power, may balk at paying the required premiums. In this sense the viability of the ACA exchanges depends on growth in the economy, jobs and wages.
For employers, starting in 2015, the “Play or Pay” mandate will require that affordable and comprehensive coverage be offered to full-time employees to avoid fines of $3,000 per subsidized employee. And in 2018 the so-called “Cadillac Tax” kicks in on high-value health plans.
As effective dates for these and other ACA compliance mandates approach, employers will be keeping one eye on the regulations and one eye on the economy, nationally and in their own business. A great secret of the Affordable Care Act is that its success depends on employers continuing to offer health coverage to some 160 million people—keeping your own coverage, to paraphrase the president.
Whether employers are able to continue offering health coverage, and what changes the future may hold for employee health benefits, depends totally on what happens to the macro and micro economy.
At the end of the day, ACA Megatrend #5 means that the success of the Affordable Care Act, for employers and working families, will ultimately depend on the success of the U.S. economy.
Democrats and Republicans yesterday hammered out an agreement to reopen the federal government and raise the public debt ceiling. That’s good news.
The bad news is the agreement is only for 90 days—until January 15.
But there’s more good news and bad news in this agreement that comes after a two-week government shutdown. First the good news:
- No U.S. government default on its debt obligations. With the economy still on shaky ground a blow to the nation’s Triple A credit rating could have reverberated around the globe.
- Even better news: the deal ends threatened debt default as a negotiating tactic. Default isn’t going to happen, period.
- Communication lines have re-opened between Republicans and Democrats. The silent treatment clearly didn’t work to address policy differences so the two parties are again on speaking terms—no small accomplishment in these hyper-partisan times.
- The Affordable Care Act (ACA) will not be restructured. This is good news not because the ACA is perfect and doesn’t need to be fixed—far from it. But the uncertainty around repealing or de-funding the law’s central pillars, like the Individual Mandate, has been lifted. The debt battle showed that President Obama will not accept fundamental changes to his signature legislative achievement—the issue that sparked the shutdown in the first place.
- Income verification for ACA subsidies. D’s and R’s agreed that the government will verify the income eligibility of those who apply for taxpayer-financed subsidies to purchase insurance on the exchanges. This is aimed at HHS’ decision in July to allow an “honor system” for 2014 subsidies. In any event, IRS had planned to have taxpayers “reconcile” subsidies with income reported on 2014 tax returns.
Now the Bad News:
- The philosophical chasm between Capitol Hill liberals and conservatives, and to some extent among Republicans, persists. This debt deal only “kicks the can down the road,” as the saying goes. Congressional Democrats and the White House have won an important battle, but partisan warfare will continue.
- The tactic of threatening default in order to de-fund Obamacare served mainly to distract from the biggest issue—skyrocketing U.S. government debt, now headed above a mind-bending $17 trillion. With the exception of last year’s “sequester,” little has been done to reduce budget deficits and get the public debt on a sustainable trajectory.
- Yet another committee. Yesterday’s debt deal creates a new “negotiating committee” to develop a longer term budget plan by December 13. Seriously. Friday the 13th?
- A triumph of hope over experience, it’s hard to imagine the new committee coming up with a budget reduction plan that could be adopted in this Congress.
- Other big issues on ice. With all the noise around the debt ceiling and the government shutdown you’d think no other issues were on the table. Alas, immigration reform, climate change, tax reform and yes, ACA amendments, remain urgent action items.
While it’s possible that lawmakers will become like your favorite football team and immediately turn their attentions to the next game, in all likelihood the debt deal winners and losers melodrama, coupled with the need to stay focused for the next few months on the budget deficit and public debt, will leave little energy for other priorities.
Moreover, 2014 is just around the corner, when one-third of Senate seats and all House seats are up for election. Expect most other legislation to wind up on the back burner.
So where are we? Default has been avoided; the government is re-opened. The best news is the immediate crisis has been averted.
But the basic problem has not been solved. The much-needed longer term solution for America’s fiscal imbalances remains elusive. The worst news is that nothing that happened in Washington DC this week suggests that a compromise can be found anytime soon.
With the controversy swirling around the Affordable Care Act and launch of health insurance exchanges, it’s easy to lose sight of a Megatrend the 2010 law could accelerate: healthier people!
Affordable Care Act Megatrends 1, 2 and 3, respectively Uncertainty, Re-imagination and Consumer-Directed Health, will inevitably lead to a new culture of personal health responsibility as a keystone of employer-sponsored health benefits.
History will judge healthcare reform on many levels, including by the success of the exchanges, the response of individuals and employers, the effect on health costs and insurance premiums, the burden of employer compliance mandates, the impact of subsidies on the federal budget deficit, entitlement spending and taxes, the reduction in the number of uninsured, now roughly 50 million, and the involvement of government in healthcare, with Medicare, Medicaid and now “Obamacare.” But at the end of the decade the biggest test may be whether Americans are healthier.
In this sense, healthier people will be the most decisive ACA Megatrend.
Meanwhile, as employers are pushed to aggressively manage ACA cost and compliance pressures, they will increasingly see the potential of wellness initiatives to help contain costs—including developing new concepts of “wellness” based on value outcomes.
Spurred by the healthcare reform law’s special incentive for employment-based wellness designs, i.e., up to 30 percent discounts for participation in health-contingent and other programs, employers will invent new value-based wellness opportunities. Indeed, employers will leverage the law’s incentive flexibility not only to offer but to drive participation in wellness programs.
This is already happening. Consulting firm Towers Watson in a recent survey found that some 70 percent of employers have “outcomes-based incentives” either in place today, planned for 2014 or under consideration for 2015 or 2016.
Employers and participants are redefining the vocabulary of “wellness”—to encompass new and more proactive strategies built around health management and personal responsibility. As ACA implementation unfolds in 2014, 2015 and beyond, employer health plans will increasingly shift from Defined Benefit to Defined Contribution models. As with 401(k)-type retirement plans, employees and their families will assume more responsibility for costs, plan choices and, of course, outcomes—in short, for their personal health management.
To be sure, employers will help employees navigate the health care waters so that employees have the knowledge and resources to take more ownership of personal health.
The key elements of the new designs are clear: employee engagement; risk targeting; innovative web portals; high-risk case management; nurse navigators; health and wellness seminars; employee communication campaigns; health and fitness activities; weight loss and smoking cessation seminars; new social media like Twitter, Facebook and Yammer; and, of course, wellness solutions that offer a variety of engaging resources and tools that empower employees to be healthy, engaged and productive. Ceridian LifeWorks is a leader in providing such solutions.
By 2020 ten years will have passed since President Obama signed the Affordable Care Act into law. By then it will be possible to judge the success or failure of the most sweeping piece of social policy legislation since Medicare in 1965.
Will the state exchanges be working to make affordable insurance available to the uninsured? Will employers still be sponsoring top quality employee health benefits? Will the number of uninsured be significantly reduced? Will the U.S. still boast the best medical care system in the world? Will skyrocketing health costs have been contained? And most importantly, will Americans be healthier than they are today?
If employers help build, with working families, a new workplace culture of outcomes-based wellness, healthier people will almost certainly be the answer.
For the first time in 17 years the US government today is shut down—triggered once again by a policy dispute between the House of Representatives and the White House.
The policy issue is healthcare reform, specifically a Republican amendment to a federal government spending bill to delay the Affordable Care Act’s (ACA) “individual mandate,” scheduled to take effect on January 1.
Of course the ACA requirement that everyone buy health insurance or pay a penalty tax remains controversial, with majorities of the public opposed. Nevertheless, the ACA is the law of the land and upheld last year by the US Supreme Court. While Republicans would like to delay one of the law’s central tenets, Capitol Hill Democrats and President Obama himself staunchly defend them.
How will the government shutdown affect employers? How will it affect the economy? How will it ultimately affect healthcare reform implementation?
Much, of course, depends on the duration of this shutdown. Assuming lawmakers soon hammer out a short-term spending compromise the shutdown could be over in a few days with little effect except on furloughed government workers.
It’s even possible that a compromise plan could tweak the ACA, maybe to repeal controversial provisions like the medical devices tax or the Medicare Payment Advisory Board, both of which are opposed by Democrats as well as Republicans.
What seems certain, however, is that the White House and Congressional Democrats will not agree to any delays in central ACA elements like the individual mandate.
Moreover, as time goes on, and time in this case means 4-5 days, the government shutdown may increasingly be attributed to Republican intransigence—a Quixotic attempt to “Stop Obamacare” regardless of the cost to the economy or to vital government services. For this reason it seems unlikely that the shutdown will extend past this weekend.
But what about the larger significance? To use a healthcare metaphor, this government shutdown should be viewed as a symptom rather than the disease itself.
The fundamental problem is that the political chasm between President Obama and Capitol Hill Democrats on one side and Republicans on the other, including in state and local governments, has widened to the point where bipartisan compromise is increasingly difficult on contentious issues.
While today’s shutdown battle will probably end in a few days the philosophical war will not end. Obamacare implementation will continue to be hotly contested; legislation to raise the public debt ceiling sometime this month will be hotly contested; the bill to create a path to citizenship for undocumented immigrants will be hotly contested; and tax reform to simplify the tax code will be hotly contested.
The government shutdown demonstrates that political gridlock in Washington DC has become the New Normal.
The first big step in the Megatrend of consumer-directed health occurred ten years ago, with enactment of tax-favored Health Savings Accounts (HSAs) for out-of-pocket medical expenses coupled with high-deductible health plans.
According to America’s Health Insurance Plans, more than 13.5 million people are covered by HDHP/HSA plans, a jump of almost 20 % in one year.
While HSAs gave a push to consumer-directed health, the Affordable Care Act could turbo-charge this trend. With so much uncertainty about how healthcare reform will affect employer costs, new ACA compliance mandates could catalyze a transformation of employer-sponsored health coverage.
Facing a cascade of onerous new regulations, employers will share greater responsibility with employees for making choices about coverage options, health care providers and wellness programs.
Among the most difficult ACA compliance rules will be the “Play or Pay” mandate that requires employers to provide “affordable” and “minimum value” health coverage or risk expensive penalties.
But the ACA provision that will surely propel the trend towards consumer-directed health is the so-called “Cadillac Tax.” Starting in 2018, Washington will levy a 40% excise tax on employer-sponsored health plans that exceed certain dollar value thresholds. In the first year these triggers will be $10,200 for individual coverage and $27,500 for family plans, with higher levels in certain cases.
Experts predict that by 2020 the healthcare reform tax on high value health plans could potentially impact half of all employer-sponsored plans. The Cadillac Tax could prove to be the single most important provision in the healthcare reform law.
With employers on the hook for a new 40% tax on their “excess value” health plans, it’s safe to assume they will do everything possible to limit premiums and increase participant cost-sharing, precisely what Congress intended the provision to do.
The days of $250 deductibles and $10 co-pays are over. The trend toward consumer leadership in healthcare and health insurance, sparked by HSAs, has now become a Megatrend.
Shifting from an employer-based to a consumer-based health coverage model represents a seismic change in the world of work. It will no doubt prove challenging for employers and consumers and further complicate real-world implementation of the Affordable Care Act. Consumer- directed health is inevitable; we can only hope that at the end of the day healthier families are its enduring result.