March 5, 2013
What Churches Should Know in 2013 about the Health Care Act
Act mandates changes to FSAs, potentially affecting church cafeteria plans.
In March 2010, Congress enacted the 2,500-page Patient Protection and Affordable Care Act (the “Act” or “Affordable Care Act”) in order to increase the number of Americans covered by health insurance and decrease the cost of health care. Since being signed into law, it has been difficult for churches to navigate this new legislation, especially since new portions of the Act are being implemented each year.
In 2013, the main provision that will affect churches is the new limitation on health flexible spending arrangements under cafeteria plans. A flexible spending arrangement for medical expenses under a cafeteria plan (“Health FSA”) is health coverage in the form of an unfunded arrangement under which employees are given the option to reduce their current cash compensation and instead have the amount of the salary reduction contributions made available for use in reimbursing the employee for his or her medical expenses. The health reform legislation made the following change in Health FSAs effective for tax years beginning after 2012.
In order for a Health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses must not exceed $2,500 for a plan year (or other 12-month coverage period) for an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee. The $2,500 limitation is indexed to the CPI-U (consumer price index—urban areas) with any increase that is not a multiple of $50 rounded to the next lowest multiple of $50 for years beginning after December 31, 2012.
A cafeteria plan that does not include this limitation on the maximum amount available for reimbursement under any FSA is not a cafeteria plan within the meaning of section 125 of the tax code. As a result, when an employee is given the option under a cafeteria plan maintained by an employer to reduce his or her current cash compensation and instead have the amount of the salary reduction be made available for use in reimbursing the employee for his or her medical expenses under a Health FSA, the amount of the reduction in cash compensation pursuant to a salary reduction election must be limited to $2,500 for a plan year.
Example. A church has 10 employees, and several years ago it implemented a Health FSA plan to assist employees with their medical expenses. Beginning in 2013, in order for a Health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses under the Health FSA for a plan year must not exceed $2,500. A cafeteria plan that does not include this limitation is not a cafeteria plan within the meaning of section 125 of the tax code.
Example. A church does not provide health insurance for its employees, but has established a “health flexible saving account” (Health FSA). The most that Pastor Ted can contribute to his Health FSA is $2,500. If the church fails to impose this cap on its FSA plan, the plan loses tax benefits that would otherwise apply. This means that the entire amount that Pastor Ted contributes to his FSA is taxable.
For further information on the effects of health care reform on your church (and what’s to come in the future), download the full Feature Report on YourChurchResources.com.