The IRS has issued a new bulletin, reminding Americans that funds in tax-advantaged medical savings accounts cannot be used to pay for general health and wellness expenses.
The bulletin focuses on medical savings accounts that employers will often sponsor, including flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) and health savings accounts (HSAs), which are funded by employees’ untaxed earnings.
These accounts are only to be used for qualified, legitimate medical expenses, like out-of-pocket costs for medical services, prescription medications and medical hardware.
The IRS said that it had issued the bulletin due to concerns about companies misrepresenting the circumstances under which food and wellness expenses can be paid or reimbursed through one of these accounts.
IRS Commissioner Danny Werfel said some companies behind these plans are employing aggressive marketing tactics that suggest that these accounts can pay or reimburse for things like food for weight loss, “when they don’t qualify as medical expenses.”
Mistaken Claims
Some companies mistakenly claim that notes from doctors based merely on self-reported health information can convert non-medical food, wellness and exercise expenses into medical expenses, but this documentation actually doesn’t, according to the IRS.
Such a note would not establish that an otherwise personal expense satisfies the requirement that it be related to a targeted diagnosis-specific activity or treatment; these types of personal expenses do not qualify as medical expenses.
These accounts can only reimburse for services, prescription drugs and hardware that alleviate or prevent a physical or mental defect or illness.
The IRS maintains examples of what these plans can reimburse for, and it has a set of frequently asked questions on its website to address any confusion. The essence of what is reimbursable comes down to whether it’s a qualified medical expense.
Some examples of what HRAs, HSAs and FSAs may or may not cover include:
Gym memberships: You cannot be reimbursed for membership fees if you joined the gym for general health, as it’s not a medical expense.
However, you can seek reimbursement if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension or heart disease).
Food or beverages purchased for weight loss or other health reasons: The costs can be reimbursed only if:
The food or beverage doesn’t satisfy normal nutritional needs,
The food or beverage alleviates or treats an illness, and
The need for the food or beverage is substantiated by a physician.
If any of the three requirements is not met, the cost of food or beverages is not a medical expense.
Exercise for the improvement of general health: If you are paying for swimming, dance or kayaking lessons, the costs cannot be reimbursed by these accounts, even if a doctor recommends it, because these activities are only for the improvement of general health.
Nutritional counseling or a weight-loss program: This is a qualified medical expense only if it treats a specific disease diagnosed by a physician (such as obesity or diabetes).
Smoking cessation: The cost of a smoking cessation program is a qualified medical expense because the program treats a disease (tobacco-use disorder).
The Takeaway
If you offer HSAs, HRAs and/or FSAs to your staff, you may want to consider sharing the IRS bulletin with them so they understand what they can seek reimbursement for. If they are being reimbursed for non-medical items and services, they may run afoul of federal tax law.
The IRS has announced significantly higher health savings account contribution limits for 2025, with the amount increasing 3.6% for individual HSA plans.
The IRS updates this amount annually, along with minimum deductibles as well as the out-of-pocket maximums for high-deductible health plans. Under its rules, HSAs, which help employees save for medical expenses, are only available to those enrolled in qualified HDHPs.
Understanding these amounts now can help you get an early start on human resources planning for next year.
Here are the changes coming in 2025:
HSA annual contribution limit
Self-only plan: $4,300, up from $4,150 in 2024
Family plan: $8,550, up from £8,300 in 2024
Catch-up contribution (for those aged 55 and older): $1,000 (unchanged)
HDHP minimum annual deductible
Individual plan: $1,650, up from $1,600 in 2024
Family plan: $3,300, up from $3,200 in 2024
HDHP annual out-of-pocket maximum
Individual plan: $8,300, up from $8,050 in 2024
Family plan: $16,600, up from $16,100 in 2024
What to do
If you sponsor an HDHP for your staff, you should review the plan’s minimum deductible amount and maximum out-of-pocket expense limit when preparing for the 2025 plan year.
If you allow employees to make pre-tax contributions to an HSA, you should also update your plan communications to reflect the new amounts.
The many benefits of HSAs
An HSA is a special bank account for your employees’ eligible health care costs. They can put money into their HSA through pre-tax payroll deductions, deposits or transfers. As the amount grows over time, they can continue to save it or spend it on eligible medical and medical-related expenses.
Employers can also contribute to the accounts, but the annual contribution maximum applies to all contributions in total (from the employee and the employer).
The money in the HSA belongs to the employee and is theirs to keep, even if they switch jobs. If they go to a new employer that offers qualified HDHPs, they can continue to fund the account in their new job.
Funds roll over from year to year and can earn interest. Many plans also have investment options for the funds to help savers further grow the account.
There are a number of benefits for employees who have an HSA:
The money an employee contributes to an HSA is not subject to income taxes, which reduces their overall taxable income.
They are not taxed on withdrawals.
If employees contribute to their HSA with after-tax money, they can deduct their contributions during tax time on Form 1040.
Employees can tap the funds for any approved out-of-pocket medical expenses.
They can also grow the account tax-free by investing the funds in the account, sort of like a nest egg for medical expenses in retirement.
HSA-eligible expenses:
Payments for services or medicine that go towards health plan deductibles, copayments or coinsurance.
Dental or vision care (including orthodontics, eye exams, corrective lenses).
Medical devices.
Certain over-the-counter medicines, like pain relievers, allergy medication, cold and flu medicine, and menstrual products.
Vitamins and health supplements, if recommended by a medical or health professional for the treatment or prevention of a specific disease or condition.
Employer adoption of specialized accounts that they fund to help reimburse employees when they buy health insurance on their own is surging in 2024.
The number of employers who offer individual coverage health reimbursement accounts (ICHRAs) grew 30% in 2024 from the year prior, expanding a benefit that provides employers another option than purchasing group health plans for their employees, according to a new report by the HRA Council.
Employers fund these accounts with money that employees can use to purchase health insurance, often on Affordable Care Act exchanges.
Uptake has been even larger among employers with 50 or more full-time employees (up 85%). These employers are required to purchase health coverage under the ACA, and offering ICHRAs allows them to satisfy the employer mandate under the law.
Thanks to generous subsidies on the exchanges, the funds that employers contribute are often enough for workers to purchase either Silver- or Gold-level plans, which have the lowest copayments, coinsurance and deductibles.
How ICHRAs work
As mentioned above, employers fund ICHRAs with money that workers can use to help reimburse for the purchase of health insurance, often on an ACA exchange. Excess funds can be used to reimburse them for qualified medical expenses, including copays, coinsurance and deductibles, in addition to medications and some medical equipment.
Funds are deposited into the ICHRA on a monthly basis. These funds are not taxed.
Employers that offered an ICHRA between July 1, 2022 and June 30, 2023 contributed an average $908.80 a month, which was more than enough to purchase the lowest-cost self-only Gold plan on an ACA exchange, according to a report by PeopleKeep, a benefits administration software company.
Some other features of these plans include:
No reimbursement limits.
Firms of any size can offer an ICHRA.
Employers may designate different reimbursement amounts to different types of employees.
Employers can offer both group health plans and an ICHRA concurrently.
Satisfying the employer mandate
ICHRAs can satisfy the ACA employer mandate if they meet the standards the law sets out for group health plans:
Affordability: To be considered affordable, employer-sponsored health insurance or benefits for employees should cost no more than 8.39% of the employee’s household income in 2024, using the lowest-cost Silver plan on the ACA exchange as a standard after accounting for the employer’s ICHRA contributions.
In other words, the lowest-cost Silver plan premium, minus the employer’s ICHRA monthly allowance, must be less than 8.39% of the worker’s household income.
Minimum value: Under the ACA, a health plan meets the minimum value standard if pays at least 60% of the total cost of medical services for a standard population, and its benefits include substantial coverage of physician and inpatient hospital services. Any plan a worker purchases on an ACA exchange will satisfy the employer mandate.
Small-employer option
There is actually a similar plan that is only available to employers with fewer than 50 full-time equivalent workers: the qualified small employer health reimbursement account. QSEHRAs differ from ICHRAs in a number of ways.
They have maximum contribution limits, determined by the IRS each year. For 2024, those limits are $6,150 for each self-only employee and up to $12,450 per employee with a family.
While an ICHRA allows for varying allowance amounts based on many employee classes, QSEHRAs only allow employers to vary reimbursement amounts based on age and family size.
All full-time W-2 employees and their families are automatically eligible for a QSEHRA. Employers may offer plans to part-time employees as well.
Employers can’t offer both group insurance and a QSEHRA to their staff.
The takeaway
While these accounts are growing in use, it’s a risky move to stop offering group health insurance and replace it with an ICHRA. These are new accounts and most workers will be unfamiliar with them.
And considering that health insurance is one of the main benefits that employees look for, offering a reimbursement arrangement may turn some workers off. Give us a call if you have questions.
The Equal Employment Opportunity Commission has published a final rule that will give new protections akin to disability accommodation under the Americans with Disabilities Act to pregnant workers and those who have recently given birth.
The rule, which takes effect June 18, will require employers to make reasonable accommodations for employees or applicants with known limitations related to pregnancy, childbirth or related medical conditions.
The new regulations apply to employers with 15 or more workers on their payroll. This is a significant new labor law and another source of potential lawsuits for employers.
Who is covered
Essentially, the Pregnant Workers Fairness Act (PWFA) requires employers to make reasonable accommodations for these workers if they ask for it, particularly if they are temporarily unable to perform one or more essential functions of their job due to issues related to their pregnancy or recent childbirth.
Reasonable is defined as not creating an undue hardship on the employer. Temporary is defined as lasting for a limited time, and a condition that may extend beyond “the near future.” With most pregnancies lasting 40 weeks, that time frame would be considered “the near future.”
What’s required
Like what is required by the ADA, if an employee asks for special accommodation due to a covered issue under the PWFA, the employer is required to enter into an interactive process with the worker to identify ways to accommodate her.
The law requires employers to accommodate job applicants’ and employees’ “physical or mental condition related to, affected by, or arising out of pregnancy, childbirth, or related medical conditions.”
The condition does not need to meet the ADA’s definition of disability and the condition can be temporary, “modest, minor and/or episodic.”
The PWFA covers a wide range of issues beyond just a current pregnancy, including:
Past and potential pregnancies,
Lactation,
Contraception use,
Menstruation,
Infertility and fertility treatments,
Miscarriage,
Stillbirth, and
Abortion.
What’s a ‘reasonable accommodation’
The law’s definition of reasonable accommodation is similar to that of the ADA. The regulation lays out four “predictable assessments,” which would not be an undue hardship in “virtually all cases”. These would allow an employee to:
Carry or keep water nearby and drink, as needed;
Take additional restroom breaks, as needed;
Sit if the work requires standing, or stand if it requires sitting, as needed; and
Take breaks to eat and drink, as needed.
Employer rights
As mentioned, an employer may reject an accommodation if it would create an undue hardship, which is defined as a significant difficulty or expense.
Employers may ask for documentation under the PWFA if it is reasonable and the employer needs it to determine whether the employee or applicant has a covered condition and has asked for accommodation due to limitations the condition causes her.
If the worker is obviously pregnant, the employer may not require documentation.
The takeaway
Employers with 15 or more workers will need to add mentions of the new rule in their employee handbooks and train managers and supervisors about it, in order to keep from running afoul of the PWFA.
The ramping up period is short and it’s important that you have in place policies that require supervisors and managers to notify human resources if a worker asks for special accommodations.
The Department of Labor on April 29 issued a final rule rescinding Trump-era regulations that expanded the number and types of employers that could band together to create association health plans to cover their employees.
The 2018 regulations, which have been in legal limbo since 2019, also allowed these association health plans avoid many consumer-protection elements of the Affordable Care Act, which critics said would open the door to participating employers offering insufficient coverage.
The DOL said it needed to rescind the law due to concerns about the potential for fraud and mismanagement in association plans. It said that the new rules limit these plans to “true employee benefit plans” that are the result of a “genuine employment relationship” and not an effort to skirt consumer protections built into the ACA.
Once the final rule takes effect in late May, employers that want to create an association plan will have to comply with much stricter rules that narrowly define these plans and limit the instances under which they can be formed.
Background
Prior to 2018, groups or associations that could meet the three criteria below would be considered a single group health plan, which in turn would determine whether they must comply with small-group market or large-group market rules under the ACA:
Business purpose standard — Whether the group or association has a business or organizational purpose and function that is unrelated to providing health insurance benefits.
Commonality standard — Whether the employers share a commonality of interest and genuine organizational relationship unrelated to the provision of benefits. For example, a trade group for auto shops could qualify since all of the members have a common interest.
Control standard — Whether the employers participating in the benefit program exercise control over the program, both in form and in substance.
Trump rules never took off
The Trump-era rules turned the earlier regulations on their head, particularly the first two standards:
Business purpose: Under the 2018 rule, a group of employers could have formed bona fide associations that had as their primary purpose the provision of health coverage.
Commonality: The 2018 rule would have let associations meet the commonality standard solely through the geographic proximity of its members, such as being located within the same state or city, without having any other common interests.
The 2018 rule also eliminated requirements that these plans comply with essential patient-protection elements of the ACA.
In 2019, the U.S. District Court for the District of Columbia held that a large portion of the rule was based on an unreasonable interpretation of the Employee Retirement Income Security Act and inconsistent with “congressional intent.” It later stayed action on the case and ordered the DOL to reassess its rulemaking.
After that, White House administrations changed and the department last year proposed the rule that was finalized April 29.
Employer adoption of specialized accounts that they fund to help reimburse employees when they buy health insurance on their own is surging in 2024.
The number of employers who offer individual coverage health reimbursement accounts (ICHRAs) grew 30% in 2024 from the year prior, expanding a benefit that provides employers another option than purchasing group health plans for their employees, according to a new report by the HRA Council.
Employers fund these accounts with money that employees can use to purchase health insurance, often on Affordable Care Act exchanges.
Uptake has been even larger among employers with 50 or more full-time employees (up 85%). These employers are required to purchase health coverage under the ACA, and offering ICHRAs allows them to satisfy the employer mandate under the law.
Thanks to generous subsidies on the exchanges, the funds that employers contribute are often enough for workers to purchase either Silver- or Gold-level plans, which have the lowest copayments, coinsurance and deductibles.
How ICHRAs work
As mentioned above, employers fund ICHRAs with money that workers can use to help reimburse for the purchase of health insurance, often on an ACA exchange. Excess funds can be used to reimburse them for qualified medical expenses, including copays, coinsurance and deductibles, in addition to medications and some medical equipment.
Funds are deposited into the ICHRA on a monthly basis. These funds are not taxed.
Employers that offered an ICHRA between July 1, 2022 and June 30, 2023 contributed an average $908.80 a month, which was more than enough to purchase the lowest-cost self-only Gold plan on an ACA exchange, according to a report by PeopleKeep, a benefits administration software company.
Some other features of these plans include:
No reimbursement limits.
Firms of any size can offer an ICHRA.
Employers may designate different reimbursement amounts to different types of employees.
Employers can offer both group health plans and an ICHRA concurrently.
Satisfying the employer mandate
ICHRAs can satisfy the ACA employer mandate if they meet the standards the law sets out for group health plans:
Affordability: To be considered affordable, employer-sponsored health insurance or benefits for employees should cost no more than 8.39% of the employee’s household income in 2024, using the lowest-cost Silver plan on the ACA exchange as a standard after accounting for the employer’s ICHRA contributions.
In other words, the lowest-cost Silver plan premium, minus the employer’s ICHRA monthly allowance, must be less than 8.39% of the worker’s household income.
Minimum value: Under the ACA, a health plan meets the minimum value standard if pays at least 60% of the total cost of medical services for a standard population, and its benefits include substantial coverage of physician and inpatient hospital services. Any plan a worker purchases on an ACA exchange will satisfy the employer mandate.
Small-employer option
There is actually a similar plan that is only available to employers with fewer than 50 full-time equivalent workers: the qualified small employer health reimbursement account. QSEHRAs differ from ICHRAs in a number of ways.
They have maximum contribution limits, determined by the IRS each year. For 2024, those limits are $6,150 for each self-only employee and up to $12,450 per employee with a family.
While an ICHRA allows for varying allowance amounts based on many employee classes, QSEHRAs only allow employers to vary reimbursement amounts based on age and family size.
All full-time W-2 employees and their families are automatically eligible for a QSEHRA. Employers may offer plans to part-time employees as well.
Employers can’t offer both group insurance and a QSEHRA to their staff.
The takeaway
While these accounts are growing in use, it’s a risky move to stop offering group health insurance and replace it with an ICHRA. These are new accounts and most workers will be unfamiliar with them.
And considering that health insurance is one of the main benefits that employees look for, offering a reimbursement arrangement may turn some workers off. Give us a call if you have questions.
