Tax and ERISA Implications of Employer-Provided Medical and Disability Benefits (Portfolio 330)

Tax Management Portfolio, Tax and ERISA Implications of Employer-Provided Medical and Disability Benefits, No. 330, analyzes the requirements of §104, §105, §106, §220, §223, §401(h), and §420. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Tax Management Portfolio, Tax and ERISA Implications of Employer-Provided Medical and Disability Benefits, No. 330, analyzes the requirements of §104, §105, §106, §220, §223, §401(h), and §420. It examines the exclusions from gross income provided by §104 for workers’ compensation and other statutory benefits, accident and health insurance benefits not financed by an employer, and damages for personal injuries; the exclusion provided under §105 for employer-financed sickness and personal injury benefits; and the exclusion provided by §106 for employer-financed coverage.

Included are analyses of the use of pension plan assets to provide retiree medical benefits under §401(h) and §420. The Portfolio also provides an overview of the rules governing Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs), and the treatment of long-term care insurance as amounts provided under an accident or health plan.

In addition, this Portfolio discusses the requirements of ERISA applicable to welfare benefit plans, including qualified medical child support orders, the impact of federal employment discrimination and medical and family leave legislation, and multiple employer welfare arrangements (MEWAs).

This Portfolio may be cited as Cowart, 330 T.M., Tax and ERISA Implications of Employer-Provided Medical and Disability Benefits.


Greta E. Cowart, Esq.

Greta E. Cowart, Indiana University Kelley School of Business (B.S. 1982), Indiana University Maurer School of Law (J.D. 1985).

Table of Contents

Detailed Analysis
I. Introduction
II. Taxation of Nonemployer Financed Health and Disability Benefits Provided to an Individual
A. Workers’ Compensation Act Benefits
B. Treatment of Damages for Personal Injuries Under §104(a)(2)
C. Accident and Health Benefits Not Financed by an Employer
1. Benefits Received Through Insurance
2. Self-Employed Individuals
D. Military and Certain Other Federal Disability Benefits
1. Disability Benefits for Military and Other Government Officials
2. Disability from Foreign Terrorist Attack
3. Disability of Public Safety Officers
III. Taxation of Employer-Provided Sickness and Personal Injury Benefits
A. In General
B. Reimbursements for Medical Expenses Are Excludible Under §105(b)
1. In General
2. Non-Discrimination Requirements
a. Discrimination in Eligibility in Self-Insured Plans
b. Discrimination in Benefits in Self-Insured Plans
c. Excess Reimbursements from Self-Insured Plans
d. Insured Plans
3. Medical Expenses
a. Definition
b. Dependents
(1) General Rule
(2) Definition of Spouse
(3) Adult Children
(4) Domestic Partner
C. Disability Payments
D. Permanent Injury Payments
E. Disability Retirement Benefits
1. Tax Credit
2. Anti-Cutback Rule
F. Plan Requirement
1. Existence of Plan
2. Sickness or Injury Benefits
a. Employee Election
b. Pension and Profit-Sharing Plans
c. Other Employee Plans
3. Plan for Employees
G. Funding
1. Welfare Benefit Funds
a. VEBA Trusts
b. Taxable Trusts
2. The §401(h) Account
a. Contribution and Other Limits
b. Use of Excess Pension Plan Assets
H. Federal Income Tax Withholding
I. Employment Taxes
IV. Employer-Provided Accident and Health Coverage
A. In General
B. Who Is a Dependent?
1. Adult Children
2. Domestic Partners
C. Treatment of a Same-Sex Spouse
1. Defense of Marriage Act
2. Gross-Ups
D. Taxability of Coverage
E. Premium Payment Plans
1. Taxation of Premiums
2. Excise Tax on Certain Premium Reimbursement Arrangements
F. Partners and S Corporation Shareholders
V. Employer Deductions
A. General Rule
1. Common Law Employees — Deductibility of Medical Expenses and Excludability by Employees
2. Self-Employed Individuals — Partnerships and 2% Sharesholders
B. Contributions to a Fund
VI. Treatment of Long-Term Care Insurance as Provided Under an Accident and Health Plan
A. In General
B. Tax Attributes of a Qualified Long-Term Care Contract
C. Requirements for Qualified Status
D. Reporting Requirements
E. Consumer Protection Requirements
VII. Health Reimbursement Arrangements (HRAs)
A. In General
B. Treatment as Group Health Plan and Required Integration
C. Exceptions to Integration with Group Health Plans
1. Small Plans
2. Benefits Limited to Excepted Benefits
3. Amount Credited Under HRA Prior to January 1, 2014
4. Cures Act HRAs for Small Employers after January 1, 2017
VIII. Health Savings Accounts
A. In General
B. Eligible Individuals Under HSA Rules
1. Permitted Coverage
a. Permitted Insurance
b. Health FSA Grace Period Coverage
2. Noneligible Individuals
a. Noneligible Individuals — Medicare-Eligible Individuals
b. Noneligible Individuals — Dependents
C. Deductibility of HSA Contributions
1. Rollover Contributions
a. IRA Rollovers
b. Health FSA and HRA Rollovers
2. Maximum Deductible Amount
3. Excise Tax
D. HSA Comparability Requirement
E. High-Deductible Health Plan
1. HDHP Requirements
2. Preventive Care
3. COBRA and Health Savings Accounts
F. Taxation of Distributions
G. Establishing and Maintaining HSAs
1. Institutional Trustee or Custodian
2. Reporting by Trustees and Custodians
3. Prohibited Tax Shelter Transactions
H. Applicability of ERISA to HSAs
I. Employer Contributions
J. Creditors’ Rights to HSA Amounts
IX. Medical Savings Accounts (Archer MSAs)
A. In General
B. Eligible Employees and Employers
C. Deductibility of Archer MSA Contributions
D. Comparability Requirement for Archer MSAs
E. High-Deductible Plan for Archer MSAs
F. Taxation of Distributions for Archer MSAs
G. Maintaining Archer MSAs
1. Institutional Trustee or Custodian
2. Reporting by Trustees and Custodians
H. Medicare Advantage MSAs
X. Qualified Small Employer Health Reimbursement Arrangements
A. In General
B. QSEHRA Exclusion from Group Health Plan Treatment
C. Establishing and Maintaining a QSEHRA
1. QSEHRA Eligible Employers
2. QSEHRA Eligible Employees
3. Funding the QSEHRA
4. Same Terms Requirement
5. Limitations on QSEHRA Reimbursements
6. Proof of Coverage
7. Substantiation of Expense
8. Correction of Erroneous Reimbursements
D. QSEHRA Notice
1. QSEHRA Notice Requirements
2. Penalty for Failure to Provide QSEHRA Notice
E. QSEHRA Reporting Requirements
F. Taxation of Reimbursements from a QSEHRA
G. Interaction of QSEHRAs with Other Laws
1. Health Savings Accounts
2. HRAs and FSAs
3. Premium Tax Credit
XI. Elective Continuation of Medical Coverage (COBRA)
XII. HIPAA: Group Health Plan Portability, Access and Renewability Requirements
XIII. Federal Regulation of Medical, Mental Health and Substance Use Disorder Benefits
XIV. Medicare Secondary Payer (MSP) Rules
A. Overview
B. Basic Rules
1. Working Aged
2. Disability
C. Group Health Plan Reporting Requirements
D. Enforcement
1. Action by the Center for Medicare and Medicaid Services (CMS)
2. Excise Tax
3. Other Enforcement Provisions
4. CMS Regulations
XV. Compliance with Employee Retirement Income Security Act of 1974 (ERISA)
A. Scope of Coverage
B. Reporting and Disclosure
1. Annual Report
2. Summary Annual Report
3. Summary Plan Description
4. Summary of Material Modifications
5. Summary of Benefits and Coverage
6. Access to Plan Documents
7. Exemptions
8. Enforcement
C. Fiduciary Standards
1. Duties of Fiduciaries
2. Prohibited Transactions
3. Fidelity Bonding
D. Plan Requirements
1. Documentation
2. Trust Fund
3. Claims Procedure
a. ERISA Requirements
b. ACA Claims Procedures for Coverage Determinations and Claims Denials
(1) Overview of Requirements and Effective Date
(2) Notices
(3) Internal Claims Appeals
(4) External Review Process
c. Non-Health Benefits and Services and Grandfathered Group Health Plans
(1) In General
(2) Disclosure Requirements
(3) Time Limits for Processing Claims
(a) Medical Claims Under Grandfathered Health Plans
(b) Disability Claims
(c) Appeal of Denied Claims
(d) Disability Claims Procedures
(e) State Law Claim Procedures
4. Vesting
E. Preemption of State Law
1. Scope
a. State Health Care Reform
b. Insurance Exception
2. Status of Business Owners
F. State Court Domestic Relations Orders
1. Assignment of Benefits to Relative
2. Qualified Medical Child Support Orders
a. Characteristics
b. Required State Legislation
c. Notice Requirements
d. Impact on Plan
G. Retiree Medical Benefits
1. Analysis of Plan Documents
2. Collectively Bargained Plans
3. Noncollectively Bargained Plans
a. Plan Documents
b. Different Classes
XVI. Compliance with Other Laws
A. Age Discrimination
B. Pregnancy Discrimination
C. Disability Discrimination
D. Family and Medical Leave Act
E. Military Service
F. Bankruptcy Code and Retiree Medical Benefits
G. State Laws
A. Purpose
B. Effect of State Regulation
1. Application of State Law
2. Collective Bargaining Exemption
3. Definition of ERISA Plan
C. Special Reporting Requirement
D. Enforcement Mechanisms to Curb Fraud
XVIII. Employment and Severance Agreements — Effect of Health Care Law
XIX. Health Care Reform

Working Papers

Table of Worksheets
Worksheet 1 Charles K. Kerby and Keith D. Bilezerian, Health Savings Accounts: A New Option for Consumer-Directed Health Plans, 32 Tax Mgmt. Compensation Plan J. 53 (Feb. 6, 2004)
Worksheet 2 Greta E. Cowart and T. David Cowart, Choosing A New Health Plan Design? Differences Among HRAs, HSAs and FSAs Beyond the Basics