Recent IRS Notices (Benefit Minute)
HSA Limits for 2022
IRS Revenue Procedure 2021-25 updated the limits for qualified high deductible health plans (QHDHPs) for plan years beginning in 2022 as well as the 2022 calendar year health savings account (HSA) contribution limits, as set forth below:
For health plans that are not QHDHPs, the out-of-pocket maximums for plan years beginning in 2022 are $8,700 (individual) and $17,400 (family – must include an embedded individual out-of-pocket maximum not to exceed $8,700).
IRS Provides Clarification on Taxation of Dependent Care Benefits
On May 10, the IRS issued Notice 2021-26 which clarifies the tax treatment of dependent care flexible spending account (DCFSA) benefits received under a grace period or carryover. As a reminder, DCFSAs are generally permitted to offer a 2½ month claims expense grace period, although few do. Relief under the Consolidated Appropriations Act allows for a 12 month grace period or an optional carryover of unused DCFSA amounts. In addition, the American Rescue Plan Act (ARPA) increased the Code section 129 limit for employer-provided dependent care assistance (including DCFSAs) from $5,000 to $10,500 for calendar year 2021.
This Notice states that when DCFSA amounts are carried over into a subsequent plan year or made available under a grace period, then amounts reimbursed will remain excludable from income in the current tax year to the extent they would have been excluded from income in the preceding tax year. In addition, these amounts will not count towards the $10,500 limit applicable under Section 129 for calendar year 2021.
The notice provides an example. If an employee participated in a calendar year plan and contributed $5,000 in calendar year 2020 and then carried that $5,000 over into the 2021 plan year, that employee can still contribute up to $10,500 in 2021 without having any amount of DCFSA reimbursements included in taxable income for 2021. Therefore, the employee could potentially receive up to $15,500 in tax-free DCFSA reimbursements in calendar year 2021.
IRS Issues Guidance on ARPA COBRA Subsidy
On May 18, the IRS issued Notice 2021-31 which provides guidance on implementation of the 100% COBRA premium assistance under ARPA. Key points in the guidance include:
Assistance Eligible Individual (AEI) – is any individual who 1) is a qualified beneficiary as a result of reduction in hours or involuntary termination of employment; 2) is eligible for COBRA for all or some of the period between April 1, 2021 and September 30, 2021; and 3) elects COBRA continuation coverage. This includes covered dependents who are qualified beneficiaries, but not domestic partners. Importantly, an AEI cannot be eligible for another group health plan or Medicare.
Involuntary termination – is defined as a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services. A determination of whether a termination of employment is “involuntary” is based on the facts and circumstances. An employee’s unwillingness to work due to a COVID-related reason is not an involuntary termination unless the employee can demonstrate that an employer’s actions (or inactions) resulted in a material negative change in the employment relationship equivalent to a constructive discharge. In addition, if the facts and circumstances indicate that the employee’s absence due to a COVID-related reason was a temporary absence that did not end the employment relationship, then this is treated as a reduction in hours.
Eligibility for other group health plan coverage – means able to enroll in other group health plan coverage. Eligibility does not include the waiting period under the other group health plan nor the time before an open enrollment period if the AEI is otherwise not permitted to enroll. However, an individual who remains eligible to enroll in other group health plan coverage under a HIPAA special enrollment period that has been extended due to the COVID Outbreak Period is not an AEI.
Self-certification of AEI status – may be required by the employer for an individual to attest that they are not eligible for disqualifying group health plan coverage or Medicare. Employers who claim the COBRA premium assistance tax credit must retain in their records either the self-certification or other documentation to substantiate that the individual was eligible.
Severance arrangements – that include an employer’s promise to pay all or some of the COBRA premium impact the premium assistance tax credit that an employer may claim. The amount of the credit is limited to the COBRA premium that the AEI would otherwise have been responsible for paying.
Extended election period – permits an AEI who never elected COBRA or an individual who elected and then discontinued COBRA prior to April 1, 2021 to make a new election. The effective date of the extended election may be 1) April 1, 2021; 2) a prospective date later than April 1, 2021; or 3) earlier than April 1, 2021 if the qualified beneficiary is still in the Outbreak Period with respect to a COBRA election and chooses to pay the past due premiums through March 31, 2021. If the plan option that previously covered an AEI is no longer offered by the employer, the employer must enroll the AEI in a plan option most similar to the one that previously covered the AEI.
End of COBRA premium assistance period – is earliest of 1) the first date an AEI becomes eligible for other group health plan coverage or Medicare; 2) the end of the AEI’s maximum COBRA continuation period; or 3) the end of the last period of coverage beginning on or before September 30, 2021.
Premium assistance tax credit – is claimed by the employer (for plans subject to federal COBRA) by reporting the credit amount and number of individuals receiving premium assistance on the designated lines of Form 941. In anticipation of receiving this tax credit, an employer may reduce deposits of employment taxes that would otherwise be required to be deposited and request an advance payment of the anticipated premium tax credits that exceed employment tax deposits. The IRS has confirmed that this tax credit is treated as income to the employer. The tax credit is claimed by the insurer when the plan is only subject to state continuation requirements.