Med Law Blog

Click on the link to view the article, Benefit Issues Impacting Physician Groups, that was featured in the June 2008 edition of the ACMS Bulletin magazine.
www.medlawblog.com/08June_284-287.pdf

 For questions regarding this article please contact:
Joni Landy at 412-594-3945 or jlandy@tuckerlaw.com
David Sawyer at 412-594-5642 or dsawyer@tuckerlaw.com

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EMPLOYEE BENEFITS LAW ALERT

June 25, 2008

EFFECTIVE IMMEDIATELY - NEW LAW PROVIDES NEW EMPLOYEE BENEFIT
PLAN RIGHTS TO MEMBERS OF THE MILITARY AND THEIR SURVIVORS

Effective immediately, a new federal law, called the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), requires action to be taken by sponsors of qualified retirement plans and permits action to be taken by sponsors of Cafeteria Plans (or Section 125 Plans) with a health flexible spending arrangement.  Two of the changes made by the HEART Act are summarized below. 

• Qualified Retirement Plans - The HEART Act requires sponsors to amend their qualified retirement plans to provide additional benefits to survivors of participants who die while performing qualified military service.   For example, if a retirement plan provides that a participant will become fully vested upon his or her death while actively employed by the sponsor, then the retirement plan must now provide that the participant's benefit will become fully vested if he or she dies while performing qualified military service.  The effect is that the participant's survivors will receive a bigger benefit than they would have before the HEART Act was passed.  How the change affects a retirement plan will differ for each retirement plan.  Amendments to the formal retirement plan document and corresponding summary plan description will be required.
  
• Cafeteria Plans / Flexible Spending Arrangements - The HEART Act permits (but does not require) sponsors of Cafeteria Plans with a health flexible spending arrangement to allow participants who are called to active duty to take distributions of the unused balance in their health flexible spending arrangements.  Ordinarily, the use-it or lose-it rule requires participants to forfeit the unused balances of their health flexible spending arrangements if they do not incur eligible medical expenses during the year.  Now, participants called to active duty may take a distribution of their unused balance to avoid forever losing the contributions.     

Since the HEART Act is effective immediately, it is important that you consult with the professional responsible for your qualified retirement plans and flexible spending arrangements. You also may contact David Sawyer (412.594.5642 or dsawyer@tuckerlaw.com) or Joni Landy (412.594.3945 or jlandy@tuckerlaw.com) for more information on how the HEART Act impacts your employee benefit plans and for assistance in revising the qualified retirement plans and flexible spending arrangements sponsored by your company. 

******

Employee Benefits Law Group: The  Employee Benefits Law Group at Tucker Arensberg, P.C. has a diverse client base of private and public employers.  We are dedicated to working with our clients to resolve complicated legal issues in a practical, common-sense and cost-efficient manner.  In doing so, we routinely work with our clients to design, establish, implement, administer, and terminate many different types of employee benefit plans. Refer to http://www.tuckerlaw.com/practice/employee.html for more information on the Employee Benefits Law Group.

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Introduction

A properly designed retirement program can increase a physician's retirement plan benefit by more than $80,000 while decreasing the practice's contribution to the non-physician and even non-owner physician employees by $20,000. If this $100,000 plus difference catches your attention, read the rest of the article! Our examples illustrate how similarly situated physicians can have dramatically different retirement plan benefits.

Examples

Dr. John is a 55 year old physician who makes approximately $350,000 and is the sole owner of his practice. Dr. John has one 36 year old physician working for him and has 4 staff employees.   In 2007, Dr. John had a commonly-used profit sharing plan with a 401(k) feature for his practice. He wanted to put as much money away as allowed by law on a pre-tax basis for his retirement. (For 2007, the defined contribution limit was $45,000.) For Dr. John to receive the maximum personal benefit under the profit sharing plan in 2007, Dr. John’s practice had to make a total employer contribution of $55,883. The portion of the employer contribution Dr. John received was $29,500, which was equal to roughly 53% of the total employer contribution. (Dr. John could have contributed another $20,500 as a 401(k) contribution, consisting of a $5,000 catch-up contribution that is permitted because he was over 50 in 2007.) [1]

Dr. Jane is also a 55 year old physician who makes approximately $350,000 and is the sole owner of her practice. Dr. Jane also has one 36 year old physician working for her and 4 staff employees. Like Dr. John, Dr. Jane wanted to put as much money away as allowed by law on a pre-tax basis for her retirement in 2007. However, unlike Dr. John, Dr. Jane’s share of her physician group’s total contribution to the retirement plan was 87.8%! Dr. Jane was able to accomplish this by adopting a special kind of profit sharing plan with a 401(k) feature and by adopting a second kind of retirement plan called a “cash balance plan”.   Contributions to the two plans for all employees totaled $141,168, of which $124,000 was allocated to Dr. Jane’s accounts under the two plans. (Dr. Jane also could have contributed another $20,500 as a 401(k) contribution, consisting of a $5,000 catch-up contribution that is permitted because she was over 50 in 2007). 

Summary of Examples

• In 2007, Dr. John’s practice contributed $55,883 to its retirement plan where Dr. John received a personal benefit of only $29,500, i.e., 53% of the practice’s total contribution.
• In 2007, Dr. Jane’s practice contributed $141,168 to its two retirement plans where Dr. Jane received $124,000, e.g., (87.8% of the practice’s total contribution.
• Dr. Jane’s practice contributed a total of $85,285 more to its two retirement plans, and Dr. Jane received $94,500 more contributions to her retirement plan accounts.

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TUCKER ARENSBERG HEALTH PLAN SUBROGATION SERVICES

Aggressive Subrogation Saves on Health Plan Costs. 
An aggressive subrogation program can save your business money on health plan costs.     Tucker Arensberg has handled subrogation for employer health  plans for many years.  We like to tell the story about how one year, one subrogation recovery alone paid for all the technical employee benefits work for the client for the entire year.   Although this result is not typical, we do our very best to make sure we help our clients control their health plan costs.

Typically self-insured plans will let the plan's third party administrator (TPA) handle subrogation.   What this means in many cases is that the TPA will hire outside lawyers, unknown to you and your company, to handle subrogation recoveries for the company's plan.  These lawyers typically keep a percentage of the recovery. Sometimes the TPA will also keep a percentage that is in addition to the administrative fee they already receive. The company  may not be aware of  how much of the health plan's recoveries are being retained by these parties.  And  the fiduciaries of the company's health plan have a duty to understand how much is not being returned to the plan.

Why Use Tucker Arensberg?
We think there is no better lawyer to handle subrogation for your company's health plan  than a lawyer who advises employer plans on a routine basis.   Not only do we at Tucker advise on the technical employee benefits laws that govern health plans, but we routinely handle subrogation recoveries for plans.    Our involvement with your company's  health plan assures you that your subrogation rights will be vigorously pursued and protected.    And, we work with you directly in keeping you informed and keeping you in control of the recoveries for the plan. 

 For more information on Tucker's subrogation services  please contact
 Joni Landy at: 412-594-3945;  jlandy@tuckerlaw.com.

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HSA limits for 2008 are as follows:

Annual Contribution Limits:   The maximum HSA contribution is  $2,900 for individual coverage and $5,800 for family coverage.

High Deductible Health Plan Limits:  

·        Deductible:  The minimum deductible for HSA-qualified high deductible health plans is $1,100 for individual coverage and $2,200 for family coverage policies.

·         Out- of-Pocket Maximums:    The out- of-pocket maximums are $5,600 for individual coverage and $11,200 for family coverage policies.

Original Source:   Rev. Proc 2007-36  http://www.irs.gov/irb/2007-22_IRB/ar14.html#d0e3138

For further information on HSAs,  contact 

Joni Landy, Esq.   http://tuckerlaw.com/att/alpha/L/landy_joni.html

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Health Plan Subrogation -   In the News

            By Joni L. Landy, Esq.  http://tuckerlaw.com/att/alpha/L/landy_joni.html

In a nutshell, subrogation is the right of a health plan to recover money it paid out for medical care to treat injuries or conditions caused by another party. For example, subrogation may apply when a participant sustains injuries as a result of a slip and fall on a slippery sidewalk, or may apply if a participant is injured by another driver in a car accident. If the participant sues the party that caused his injuries and recovers, the health plan gets paid back from the recovery. Subrogation rights are typical provisions in health plans.  

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Can Medicare Premiums for the Account Holder's 65 Year Old Spouse be Reimbursed from an HSA?

By: Joni Landy, Esq.  

In general, the law prohibits distributions from an HSA for health insurance premiums. There are several exceptions. The only exception that can apply to Medicare premiums is the exception that allows for payment of health insurance (other than a Medicare supplemental policy) in the case of an account holder who has reached age 65 (the "65 Exception").  

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By: Joni L. Landy, Esq.

About the author: Joni Landy is a shareholder in the Employee Benefits Practice Group at Tucker Arensberg, P.C.   See http://www.tuckerlaw.com/att/alpha/L/landy_joni.html

New proposed cafeteria plan regulations were released on August 6, 2007 that replace prior proposed and temporary regulations, which are withdrawn, and consolidate law changes and guidance issued by the IRS over the past twenty years. The regulations preserve much of the existing guidance but clarify some outstanding issues and include a few new rules. Existing cafeteria plan regulations governing mid-year election changes and FMLA operations remain the same. This alert highlights some of the more notable new or clarifying provisions of the proposed regulations.

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The Internal Revenue Service issued a private letter ruling on April 20, 2007 concluding that captive professional corporations were beneficially owned by the hospital, but that the activities of the professional corporations were conducted on a larger scale then was reasonably necessary for the performance of the hospital’s exempt functions and that the professional corporations’ provision of medical services to their own patients did not have a substantial causal relationship to the achievement of the hospital’s exempt purposes, and that, therefore, income earned from the professional corporations was unrelated taxable business income for the hospital.

PLR 2007160334 has already been criticized by the national commentators as incorrect. An article in BNA’s Health Law Reporter on April 26, 2007 explains some of those comments.

The professional corporations were normally owned by physicians who were employed by the hospitals, because the professional corporation law of the state in question required ownership by license professionals. However, the physician employment agreements with the hospital contained numerous restrictions on the control and disposition of that stock, principal among them being the requirement that the physician must sell the stock to the hospital in the event of the termination of employment. The IRS concluded that the hospital was the beneficial owner of the stock.

It is difficult to justify the conclusion that a hospital could directly employ these physicians to engage in the practice of treating health patients but that the same practice is outside of the hospital’s mission if it is conducted in the captive PC model. Expect further scrutiny and criticism of this decision.  

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The Internal Revenue Service has issued guidance regarding rollovers from Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (RHAs) to Health Savings Accounts (HSAs). The guidance is necessary because Health Savings Accounts are typically not available to individuals who are covered by standard FSAs and HRAs. The Tax Relief and Health Care Act of 2006 allowed rollovers from FSAs and HRAs into Health Savings Accounts. The purpose of the guidance is to allow the establishment of an HSA and the rollover of the qualified distributions for 2007 when the employee could potentially be covered by both types of plans.

The new rules provide for certain amounts in the FSA or the HRA to be rolled into the HSA. Generally, under the new rules, all of the following conditions must be satisfied in order to achieve the favorable tax treatment of the rollover:

A.        By plan year-end, the plan must have been amended, though the employee must have elected the rollover, and the year-end balance must have been frozen.

B.         The funds must have been transferred by the employer within 2-1/2 months after the end of the plan year resulting in a “zero” balance in the FSA or the HRA.

Under the special transition relief provided in Notice 2007 - 22, available at  (  www.irs.gov/pub/irs-drop/n-07-22.pdf ),  the amounts remaining at the end of the year for 2006 can be rolled over without the freezing of the year-end balance in either the FSA or the HRA and the amendment, election and transfer may be completed on or before March 15, 2007.

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The Tax Relief and  Health Care Act of 2006 contains provisions to improve health savings accounts (HSAs):

1.         HSA Funding Contributions: The Act allows rollover contributions from flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) into HSAs as long as the contributions are no more than the balance of those accounts as of September 21, 2006 and are made on or before January 1, 2012. 

2.         Increase in Deductible Limits of HSA Contributions: The contribution limitation which previously limited contributions to the lesser of the deductible of the high deductible health plan or the statutory limitations i.e. $2,250 for individuals and $4,500 for families (as adjusted for cost of living), have been revised to delete the plan deductible as a limitation.

3.         IRA Rollovers: The revision allows one time rollovers from IRAs into HSAs. This revision is a one time opportunity and the rollover, which is effected by excluding the transfer from gross income, is limited to the annual limitation for contributions to NSA less any prior HSA funding distribution from a FSA or HRA. 

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The release of the August 2006 inflation figures has allowed calculation of the 2007 financial limits for health savings accounts (HSAs), according to a press release from HSA Clearing Corporation.

§      The maximum HSA contribution (excluding catch-up contributions) will be $2,850 for individual coverage and $5,650 for family coverage.

§      The minimum deductible for HSA-qualified high deductible health plans (HDHPs) will be $1,100 for individual coverage and $2,200 for family coverage policies.

§      The out- of-pocket maximums will be $5,500 for individual coverage and $11,000 for family coverage policies.

More information is available at http://www.hsaclearing.com.

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Health Savings Accounts (HSAs) offer a unique and perhaps unintended opportunity to create tax-favored savings vehicles similar to IRAs.  HSAs were established by the Medicare Modernization Act of 2003 with the intention of encouraging consumer-directed healthcare and providing an alternative source for health insurance coverage. The concept pairs HSAs with High Deductible Health Plans (HDHPs). Individuals and families who are covered by HDHPs and are not covered by other health insurance plans are permitted to fund HSAs as a means of financing the deductible portion of the HDHP. 

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The Pennsylvania Legislature enacted the Health Savings Account Act (the "HSA Act") 72 P.S. §§3402b.1-3402b.6, on July 14, 2005, to be effective sixty days thereafter. As enacted, Section 4 of the HSA Act did not provide an exclusion from Pennsylvania tax for contributions by employers and employees to health savings account plans. Accordingly, there were not deductions allowed from taxable income for contributions to health savings accounts for Pennsylvania purposes under the HSA Act. Under Section 4 of the HSA Act, the following items were excluded from Pennsylvania tax:

            (1)        any income of a health savings account;

(2)        any amount paid or distributed out of a health savings account that is used exclusively to pay the qualified medical expenses of the account beneficiary; and

(3)        any amount paid or distributed out of a health savings account that is used exclusively to reimburse an account beneficiary for qualified medical expenses.

                                    72 P.S. §3402b.4(a)

The following items were included in the income of the account beneficiary and subject to Pennsylvania tax:

(1)        any amount paid or distributed out of a health savings account that is used for any purpose other than to pay the qualified medical expenses of the account beneficiary;

(2)        any excess contribution distribution that has not previously been included in the account beneficiary's income; and

(3)        any amount of the account beneficiary's income attributable to an excess contribution distribution

                                    72 P.S. §3402b.4(b)

On February 14, 2005, an amendment to the HSA Act was proposed in House Bill 2125, so that the Pennsylvania Act could follow the health savings account provisions set forth in Section 223 of the Internal Revenue Code. In addition, although the HSA Act contained no tax exclusion or deduction for contributions made to a health savings account, the Pennsylvania Department of Revenue issued a tax bulletin (PIT-06-005) on April 12, 2006, in which it indicated that: (1) payments made by an employer for a nondiscriminatory health plan are excluded from compensation and accordingly, not subject to withholding tax and (2) payments directed by an employee to a health savings account under the employer's federally qualified cafeteria plan and maintained as a qualified benefit of that plan are excluded from compensation and therefore not subject to withholding tax.

By amendment dated June 21, 2006, for tax years beginning after December 31, 2005 and effective immediately, the entirety of Section 4 of the HSA Act has been repealed, and Pennsylvania has adopted law that conforms to the federal tax treatment of health savings accounts so that the definition of income now includes the following language of Section 303(a)(6) of the Pennsylvania Tax Reform Code of 1971 (72 P.S. §7303(a)(6)), as amended:

Interest derived from obligations which are not statutorily free from state or local taxation under any other act of the General Assembly of the Commonwealth of Pennsylvania or under the laws of the United States and any amount paid under contract of life insurance of endowment or annuity contract, which is includible in gross income for federal income tax purposes and any amount paid out of the Archer Medical Savings Account or Health Savings Account that is includible in the gross income of an account beneficiary for federal income tax purposes.

Accordingly, effective immediately an applying to tax years beginning after December 31, 2005, where contributions to and income and distributions from qualified health savings accounts are deductible for purposes of Section 223 of the Internal Revenue Code, they shall, under 72 P.S. §303(a)(6), above, not be included in taxable income for Pennsylvania purposes. Under both federal and Pennsylvania law, distributions that are not used for qualified medical expenses will be taxable as interest income.

For more information , contact Jamie Aul at 412.594.3923.

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Health Savings Accounts (HSAs) offer a unique and perhaps unintended opportunity to create tax-favored savings vehicles similar to IRAs. HSAs were established by the Medicare Modernization Act of 2003 with the intention of encouraging consumer-directed healthcare and providing an alternative source for health insurance coverage. The concept pairs HSAs with High Deductible Health Plans (HDHPs). Individuals and families who are covered by HDHPs and are not covered by other health insurance plans are permitted to fund HSAs as a means of financing the deductible portion of the HDHP. 

            Congress provided significant tax incentives to support HSAs. Contributions to HSAs are essentially "tax free" and the earnings of the account are "tax free", as explained in more detail below. Individuals who can preserve the HSA, either or through efficient management of the deductible or through the ability to pay the required health care deductible from other sources, are presented with a unique opportunity to create an additional retirement savings plan similar to our IRA. The purpose of this article is to expand both the basic HSA concepts and describe this financial opportunity.

HSA Basics

            HSHs and HDHPs are a package deal. The HDHP is an otherwise standard health insurance plan but with a "high deductible". HDFPs are defined by statute as plans with minimum deductibles of $1,000 for individuals and $2,000 for families and maximum deductibles of $5,000 for individuals and $10,000 for families. The limits were indexed for inflation when established, so the maximum deductibles for 2006 are $5,250 and $10,500 respectively. 

            HSAs also have maximum contribution limitations, which were originally established at $2,000 per individual and $5,000 per family. These limits are also indexed for inflation and are $2,700 and $5,450 respectively for 2006. In addition, HSA contribution limitations have catch-up provisions for individuals who are between ages of 55 and 65 which allow an additional $700 contribution for individuals in 2006, $800 in 2007, $900 in 2008 and $1,000 in 2009 and thereafter.   Therefore, an individual can contribute up to $3,400 ($2,700 maximum plus $700 catch-up) for an individual HSA in 2006. Since the HDHP maximum deductibles and the HSA maximum contribution do not match, it is possible to have the required deductible exceed the HSA fund. 

            1.         Contributions to HSA are tax favored transactions. They can be accomplished through a combination of:

·        Salary reduction contributions by employee,

·        Flexible spending account contributions, and/or

·        Employer contributions to HSA on behalf of employee.

Employer contributions are deductible when paid by the employer and are not taxable to the employee when made by employer. Employee contributions through salary reduction agreements operate to reduce the employee compensation, i.e. they are pre-tax contributions.

2.         Non-Taxable Distributions. HSA funds can be withdrawn from the HSA account and used to pay eligible medical expenses on a tax-free basis at any time.

3.         Taxation of Other Distributions. HSA funds withdrawn for reasons other than eligible medical expenses are taxable as income to the employee and are subject to the a 10% penalty to an extent they are withdrawn prior to the employee reaching age 59-1/2.

4.         Tax-Free Growth. HSA funds accumulate tax free during the existence of the HSA account. If the funds are withdrawn for permissible benefits, the growth is never taxed. If withdrawn for impermissible benefits, taxation is deferred until withdrawal, with   the additional 10% penalty for withdrawal prior to age 59-1/2.

5.         Permissible Benefits. HSA funds can be used for medical and dental expenses, preventive care, prescription drug plans provided the deductible has been spent, COBRA coverage and long-term care insurance.

II.          SAVINGS OPPORTUNITY. 

            Although the tax laws require the purchase of a HDHP as a condition to creating an HSA and the HDHP requires the exhaustion of the deductible in order to qualify for the health insurance coverage, there is no requirement that the HSA fund be used to pay the deductible. One of the touted benefits of HSHs has been the possibility that individuals who judiciously managed their healthcare utilization might be left with HSA funds to carryover to future years, which funds could be used for future medical expenses, including post-retirement expenses.

            However, since the use of the HSA is not mandatory, individuals who can afford to pay the deductible expenses from other sources, i.e. essentially out-of-pocket, may then retain the entire HSA fund for future needs.

1.         The funds can be used for future permissible benefits, including long term care insurance.

2.         If the funds are not needed for healthcare costs, they can simply be withdrawn from the account on the same basis as IRA funds, i.e. ordinary income taxation plus the 10% premature withdrawal penalty.

The significant opportunity is that the funds can be used as a savings opportunity similar to IRAs.

III.         HSA TOOL KIT

            USI Colburn and the Allegheny County Medical Society have prepared an HSA Tool Kit which:

                        1.         Provides a comparison of HDHPs to standard health insurance plans;

                        2.         Contrasts the premiums for typically available health insurance plans to the combination of the premium for the HDHP and the deductible; and

                        3.         Provides a forecast of what could be saved in and HSA over time for a family with typical healthcare needs.

The ability to build retirement savings in an HSA is a significant opportunity for physicians and their employees; one that can help them cover their healthcare expenses or supplement their retirement income. For more information about HSA’s and a copy of the HSA Tool Kit call USI Colburn Insurance Service at (800)-327-1550   or go to their web site at www.colburn.com.

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Under Medicare Part D Regulations, employers who sponsor health plans must: (1) determine whether the plan's prescription drug coverage is equivalent to Medicare Part D ("Creditable"); (2) send notice of the status at least to Medicare-eligible participants and dependents' and; (3) must report the status to CMS. These reporting requirements help Medicare-eligible individuals decide whether to enroll in or to delay enrollment in Medicare Part D.

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President Bush has included two tax measures in his fiscal 2007 budget proposal intended to encourage the development of health savings accounts (HSAs).

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