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Know Your Limits!

    I know we just made it through the holidays and you want to take a break, but there is no rest for the wicked.  It’s time to start planning for 2017 expenses.  The IRS revealed the new limits for HSA, FSA, 401 (k) and other tax deferred accounts.

    Let’s start with the HSA/HDHP limits.  First – how much can I put away in 2017?  For individuals, the IRS increased the limit by $50 allowing 3,400 to be socked away for future healthcare expenses and family $6,750.  That’s a $50 increase over 2016. Don’t forget that for those age 55+, you get a catch-up contribution if you like and increase your contribution by $1,000.00.  Did the minimum deductibles go up though?  Nope!  Individual deductible stayed the same at $1,300 for an individual and $2,600 for a family and just in case your forgot, the IRS changed the individual out of pocket maximum on a family plan from aggregate to embedded which means that even if the family out of pocket maximum is $13,700, an individual can only spend a maximum of $6850.  Now, here’s an inside tidbit of information, the ACA has increased the oop in 2017 from $6,550 to $7,100, HOWEVER, the IRS maximum on an HDHP plan is still $6,850, how’s that for complicated!  Here’s an example from Tower’s Watson

     Let’s assume, for example, that a hypothetical group health plan has the following design:

    • Single coverage OOPM in 2016: $6,850
    • Family coverage OOPM in 2016: $13,700

      An employee enrolled in family coverage incurs $7,000 in expenses, then the spouse incurs $5,000, and then the child incurs $2,000. According to the embedded individual OOPM rule, and ignoring the effect of any plan deductibles, covered participants and beneficiaries would be responsible for the following:

    • Employee incurs $7,000 expense. Employee pays $6,850 (because he or she reached the maximum allowable $6,850 individual OOPM); the plan pays $150.
    • Spouse incurs $5,000 expense. Employee/spouse pays $5,000 (because $6,850 + $5,000 is still less than the $13,700 family OOPM); the plan pays $0.
    • Child incurs $2,000 expense. Employee pays $1,850 (because $6,850 + $5,000 + $1,850 reaches the $13,700 family OOPM). The plan pays $150.

      Group health plans with a family OOPM of $6,850 or less do not have to adopt the embedded individual OOPM because no family member’s out-of-pocket expense could exceed $6,850. For example, if the family OOPM were $5,000, no embedded individual OOPM would be necessary.

      Also note that the embedded individual OOPM is based on the statutory limit for self-only coverage rather than the out-of-pocket limit for self-only coverage established under the plan. For example, if the plan’s OOPM limits were $3,000 single/$7,000 family, the embedded individual OOPM in the family coverage tier could still be $6,850, not $3,000 (although the plan could always choose to impose a lower limit).

      EMBEDDED INDIVIDUAL OOPM RULE APPLIES TO HSA-QUALIFYING HDHPS

      According to a FAQ from HHS and the FAQ recently issued by the departments, the embedded OOPM also applies to non-grandfathered HSA-qualifying high-deductible health plans (HDHPs), and an employer can offer an HDHP that complies with both the applicable IRS HDHP limits and the embedded OOPM. 

      The HHS FAQ presents a scenario where, for 2016, a plan offers an HDHP with a $10,000 family deductible. This plan design would meet the applicable rules as long as it applies an annual OOPM of $6,850 to each individual in the plan, even if the family $10,000 deductible has not yet been satisfied. HHS clarified that this standard does not conflict with IRS rules for HSA-qualifying HDHPs.

      Moreover, with the exception of preventive care, an HDHP may not provide benefits until the participant meets the annual minimum deductible, which is $2,600 for a family in 2016. HHS states in the FAQ that, because the $6,850 self-only OOPM will exceed the 2016 minimum annual deductible amount for family HDHP coverage, it will not cause the plan to fail to satisfy the requirements for an HSA-qualifying HDHP.

      Let’s move on to the other account that often gets mixed up with HSA’s – FSA’s or Flexible Spending Arrangements.  These used to be use it or lose it accounts but in 2013 the IRS has redefined the use of unspent funds.  here have been two options for handling unused funds in a health FSA at year-end that employers can adopt:

    • If a health FSA plan has a carryover feature, participants can roll over up to $500 of unused FSA dollars to the next year but will forfeit any excess over $500 at year-end. Any allowable amount that rolls over into the new plan year will not affect the maximum election that employees can make.
       
    • Alternatively, an optional grace period can give employees an additional two-and-a-half months—through March 15—to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds must be forfeited to the employer.

    Plans can offer either the carryover option or a grace period, but not both, or they can offer neither. 

    We need to give a shout out to the 401 (k) accounts. Nothing exciting here though, on October 27th, the IRS announced that contribution limits will remain unchanged at $18,000 for 2017.  The catch-up contribution for those aged 50 and over remains at $6,000.

    By Jan Fernandez