2021 Inflation-adjusted Limits for HDHPs

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The IRS recently issued several advisories about 2021 inflation-adjusted limits for High Deductible Health Plans (HDHPs) paired with Health Savings Accounts (HSAs), non-grandfathered health plans, and ACA employer shared responsibility penalties under IRC §4980H. The purpose of this post is to summarize these various 2021 limits. We will also comment on Health FSAs.

2021 Inflation-adjusted Limits for HDHPs

HDHPs/HSAs

Although the minimum deductibles of $1,400 for Self-only coverage and $2,800 for Family coverage will not change from 2020, the limits for annual contributions and in-network out-of-pocket expenses will be increased as follows:

Calendar Year 2020Calendar Year 2020Calendar Year 2021Calendar Year 2021
Self-onlyFamilySelf-onlyFamily
Annual Contribution Limit$3,550$7,100$3,600$7,200
HDHP Out-of-Pocket Limit
(includes deductibles and
coinsurance)
$6,900$13,800$7,000$14,000

Non-Grandfathered Health Plans

As you know, the ACA requires “traditional” non-grandfathered plans (other than those HDHPs paired with HSAs) to limit annual out-of-pocket expenses for in-network essential health benefits. The following compares the 2020 and 2021 limits:

Calendar Year 2020Calendar Year 2020Calendar Year 2021Calendar Year 2021
Self-onlyFamilySelf-onlyFamily
Out-of-Pocket Limit (includes deductibles and coinsurance)$8,150$16,300$8,550$17,100

Notes: a) If an employer offers both traditional and HDHP/HSA plans (that are not grandfathered), the plans are subject to both sets of requirements, and the employer must comply with the lowest applicable out-of-pocket maximum.

b) The ACA requires that a per person, embedded out-of-pocket maximum doesn’t exceed the ACA self-only limit, even if the person is in the family tier.

ACA Employer Shared Responsibility Penalties

If an Applicable Large Employer fails to provide essential health benefits to at least 95% of full-time employees, the penalty under IRC §4980H(A) will increase from $2,570/FTE to $2,700. This is in accordance with the premium adjustment percentage rules set out in this IRC provision.

If the Applicable Large Employer fails to provide essential health benefits that are deemed “unaffordable”, the penalty under IRC §4980H(B) will increase from $3,860 to $4,060 for each employee who purchases subsidized coverage on the ACA Market Place (i.e. the “exchange”).

Health Care FSA

The IRS has not yet announced a change from the 2020 maximum Heath FSA salary deferral of $2,750. However, the maximum carryover amount has been increased from $500 to $550 for the plan year beginning in 2021. Thereafter, the carryover amount will be equal to 20% of the maximum Health FSA salary reduction contribution under IRC §125 (i) for that plan year.

To learn more about how Inflation-adjusted Limits can affect HDHPs contact Bruce Davis in the form below.

Published June 3, 2020

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Copyright © 2020 by Findley, Inc. All rights reserved.

Taking Public Sector Retiree Medical To The Next Level

Faced with the sobering reality of more than $1 trillion in unfunded retiree healthcare liabilities, public sector employers across the country are seeking a sustainable retiree health benefit solution. Their shift to relying on retiree health insurance exchanges will not be without challenges or concerns. One solution that is just starting to be used is to work with state legislatures and make benefit changes that allow public sector employees to convert unused sick leave into retiree health insurance credits.

Numerous plan sponsors for public sector organizations may already be using – or contemplating the use of — retiree healthcare insurance exchanges to facilitate purchase of pre-65 individual policies or Medicare supplemental benefits. As public sector employers review this option, they should consider issues that may arise if future cuts are made to retiree medical stipends. What will be the exchange-based solution?

Earlier this year, the Ohio Public Employees Retirement System (OPERS) announced that serious financial pressure will result in significant reductions in stipends for retiree health benefits. The cuts for pre-65 retirees may be as much as $400 per month and will affect retirees including police and fire department pensioners. Although the mandatory retirement age for a public safety officer may be 65, many police officers and firefighters retire well ahead of Medicare entitlement, because of health status and long service.

According to a January 16, 2020 cleveland.com article, the changes will reduce OPERS unfunded healthcare liabilities from $6.2 billion to $27 million. Officials from OPERS said the $11 billion healthcare fund was set to run out of money in 11 years, but with the changes that will be implemented beginning in 2022, the fund will be solvent for 18 years.

In addition to cutting premium subsidies for retirees in 2022, healthcare coverage will no longer be provided through OPERS. Retirees will receive an OPERS subsidy to be used toward the purchase of healthcare coverage through the healthcare marketplace.

public sector employers across the country are seeking a sustainable retiree health benefit solution

Look beyond HSAs

It is evident that there is an acute need for public sector employers to accumulate funds for retiree medical benefits while the plan participant is actively employed. While Health Savings Accounts (HSAs) provide an opportunity for employees to create a nest egg, implementing a qualified high deductible health plan for collectively bargained public sector groups remains a challenge. In addition, these high deductible plans are not immune to problematic healthcare trends, including how high cost specialty drugs can ravage an employer’s (and employee’s) health benefits budget.

An alternative to an HSA, Health Reimbursement Accounts (HRAs) do not need to be paired with a high deductible plan, but the employer contributions are typically modest and easily consumed by out-of-pocket medical, prescription drug, dental and vision expenses. For instance, according to Mercer’s 2018 National Survey of Employer Sponsored Health Plans, the median HRA annual contribution for those with single coverage was just $625.

A better mechanism is needed to establish funds for public sector retiree medical benefits – and the states of New York and Wisconsin may be on the right track. New York’s policy allows eligible state employees to cover some retiree health insurance costs with unused sick leave, while in Wisconsin, the Accumulated Sick Leave Credit Conversion Program allows state employees covered by the State Group Health Insurance Program to convert unused sick leave into credits to pay for health insurance when they retire. The credits cannot earn interest or be used to pay for insurance that is not part of the State Group Health Insurance Program.

Since most employers, public sector and private, are interested in reducing health care liabilities and not subsidizing retirees under their active employee health benefits plan, the Wisconsin approach – with some important tweaks — is an intriguing solution that should be considered in other states.

Retiree medical’s future: Sick leave conversion, HRAs and marketplace options?

First, the decision to convert unused sick leave into health insurance credits should be left to each retiring employee without triggering a taxable event. In 2005, the Internal Revenue Service (IRS) issued Revenue Ruling 2005-24 that allowed employers to use sick leave and vacation conversion programs to fund an HRA, as long as the employees did not have the option to take these converted amounts in cash. Then, in 2007, the IRS issued a Private Letter Ruling (PLR 200708006) indicating the sick leave and vacation conversion arrangement did not result in taxable income if the employer mandates what unused amounts would be converted to cash, contributed to the HRA, or used to pay other benefits.

In other words, the employee has no say in any of these important decisions.

Second, the retiree should not be forced into remaining in their former employer’s group health plan. They should have the ability to shop the insurance marketplace for a plan and medical provider network that meets their needs.

Third, the retiree should be able to decide how to spend the HRA funds. Even the new Excepted Benefit HRA unveiled last year by the Trump administration (where up to $1,800/year may be contributed by the employer) does not allow the HRA to be used to pay premiums for Medicare Parts B or D; individual health insurance (except for short-term limited duration insurance); group insurance coverage (except COBRA); or Medicare supplements or Advantage plans.

Although a traditional HRA or Retirement HRA may allow payment of premiums for Medicare or long-term care insurance; and if using a trust, accept employee/retiree after-tax contributions and accrue interest tax-free, there is still the issue that conversions of unused sick leave must be made on a mandatory basis by the employer. The employee cannot make such an election before retirement.

As state legislatures consider strategies to deal with the ever growing costs of providing retiree healthcare, the option of new legislation that would permit state and local governments to create sick leave conversion programs that would enable their retirees to use those funds to help pay for health insurance purchases on or off an insurance exchange. To give employees more control over the conversion to credits, there would have to be some changes to the employer’s  IRC 125 cafeteria plan.  The approach could provide a more sustainable bridge to Medicare for those public sector employees who retire before age 65.

We are interested in your thoughts about this topic. Please contact Bruce Davis with your comments and questions at Bruce.Davis@findley.com or 419.327.4133

Published March 24, 2020

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© 2020 Findley. All Rights Reserved.

Side-by-side Comparison of HSAs, HRAs and FSAs

With the new HRA rules announced earlier this year, we have created a side by side comparison of Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs), to help our clients and friends navigate the similarities and differences between each. Our goal is to simplify complex topics to help employers identify the right plan and approach for their specific benefit strategies.

Published September 11, 2019

6 Best Practices to Consider When Introducing a Qualified High Deductible Health Plan

Organizations interested in designing a qualified high deductible health plan (QHDHP) have many variables to consider. Begin by developing a strategy that aligns with your company’s goals using these six best practices to guide your efforts.

Background

One of the most common types of health plans that are offered by employers today are QHDHPs. These plans have only been around since 2003 and continue to grow in popularity (66% of Midwest companies with over 500 employees offer an HSA-eligible HDHP[1]).

QHDHPs have minimum thresholds as set by the IRS to keep them qualified and eligible for Health Savings Account (HSA) contributions. The 2019 minimum deductibles and maximum out of pocket limits as set by the IRS are as follows:

  • Deductibles (Single/Family): $1,350/$2,700
  • Maximum Out of Pocket (Single/Family): $6,750/$13,500

One of the biggest advantages provided to those enrolled in a QHDHP, is the ability to fund money for qualified health expenses into the HSA. HSAs are able to be funded with contributions made by both the employee and employer.

Advantages for those enrolled in a QHDHP (known as the “Triple Tax Advantage”) with an HSA are:

  1. Contributions into these accounts are pre-tax
  2. The interest earned on the account grows tax-free.

Withdrawals from the HSA, for qualified health expenses, are tax free.

Best Practices

Unfortunately some employers offer this type of plan only with the intent on cost savings. If your intent is to make this a viable and meaningful alternative for your employees, to promote accountability and to encourage healthcare consumerism, then consider the following best practices in designing your plan:

  • Employer HSA contribution: Helping to fund the HSA accounts and bridge the gap of a higher deductible will demonstrate to your employees that you value this plan offering. When making a contribution, consider offsetting 30-40% of the deductible so that the contribution is also meaningful.
  • Consider a 3-year commitment to the HSA contribution: A three-year commitment for an employer contribution helps give peace of mind to employees that this is not just a one-time incentive and demonstrates this plan is valued by their employer and is viewed as a long-term strategy.
  • Prescription coinsurance or copays after deductible (to promote continued consumerism): Offering drug benefits tied to coinsurance or copays after the deductible is met will continue to promote the consumerism aspect of these plans. Members may be more inclined to continue to look for lower-cost alternatives such as generics.
  • Evaluate cost and transparency tools: Employees will need information to allow them to be consumers of health care. Employers should research the cost transparency tools their vendor offers. This helps employees enrolled in the plan make informed decisions on where to go for their care. Depending on your vendor’s capabilities, consider evaluating a carve-out solution for cost and transparency.
  • Communication/Communication/Communication: Remember that not everyone is a health care expert. If employers want a successful QHDHP adoption, a strong communication strategy is needed. Ideally this involves multiple steps starting with an overview of what a QHDHP plan is followed by plan selection support.
  • Does this align with current benefits strategy and offerings? Consider the plans in place today and what the net impact to the employer would be (gross funding rate, less employee premium contributions, plus any employer HSA contribution = Net Funding by the Employer). When setting up the plan, factor in the company’s cost impact to determine how much employees may contribute to the premium (cost of the plan) or how much employers should fund into an HSA.

In Perspective

Whatever your reason for offering a QHDHP, cost savings, offering employees more choice, or attracting and retaining employees, a formal strategy is essential to ensure alignment with your company’s goals.

Questions? For additional information about developing or enhancing your strategic plan, contact the Findley consultant you normally work with, or Blake Babcock at Blake.Babcock@findley.com or 216.875.1904.

[1] 2017 Mercer National Survey of Employer-Sponsored Health Plans

Posted November 26, 2018

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