SUMMARY OF GUIDE CONTENTS... 1 HIGHLIGHTS OF TAX-ADVANTAGED PLANS... 2 EMPLOYEE SALARY REDUCTION PLANS... 5

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1 This Guide is for informational and educational purposes only. It does not constitute legal advice or a comprehensive guide to issues to be considered by employers in establishing tax-advantaged benefits programs under Sections 105 and 125 of the Internal Revenue Code (the Code). Table of Contents SUMMARY OF GUIDE CONTENTS... 1 HIGHLIGHTS OF TAX-ADVANTAGED PLANS... 2 EMPLOYEE SALARY REDUCTION PLANS... 5 TAX-FREE EMPLOYER-FUNDED ARRANGEMENTS OFFERING MULTIPLE PLANS FURTHER INFORMATION... 16

2 SUMMARY OF GUIDE CONTENTS In 2015, dues (Medical Dues) for the Medical Plan Traditional Program (the Medical Plan) will be 24.5 percent of each member s effective salary for Member + Family coverage. Medical dues for Memberonly coverage will be 23 percent of the member s effective salary for 2015 (subject to the 2015 minimum and maximum medical participation basis and standard full-time equivalent (FTE) calculation for medical dues), and remains non-contributory. Employers will have the option to pay the entire amount of medical dues for Member + Family coverage or to ask members to pay some or all of the 1.5 percent allowable dues share if Member + Family coverage is elected, in accordance with presbytery policy, if any. This Guide contains important information for employers that choose to ask members to pay any of the allowable dues share. If your organization chooses to ask members to pay some or all of the 1.5 percent allowable dues share, the Board of Pensions recommends that your organization establish a Section 125 plan, as described in this Guide, to allow members to contribute their dues share on a pretax basis. This Guide also contains information about other benefits that an employer can offer on a tax-advantaged basis under a Section 125 plan. The Section 125 plans described in this Guide allow an employee to elect to reduce cash salary and pay for dues contributions or other eligible expenses with pretax wages. The focus of this Guide is on tax-advantaged plans for medical dues and medical expenses. If an employer offers a cafeteria plan (the industry term used to describe multiple Section 125 plan choices), it may permit employee pretax salary reductions for other qualified benefits, such as dependent care expenses, dental insurance, and supplemental death and disability coverage. The employer-funded plans described in this Guide allow the employer to provide reimbursement for medical expenses incurred by employees that are not reimbursed by the Medical Plan on a tax-advantaged basis under Sections 105 and 106 of the Code. The Board of Pensions has developed sample plans for employers to consider in establishing a plan. If your organization chooses to establish one of the plans discussed in this Guide, your tax and/or legal adviser should be consulted in the process. Note: All of the plans described in this Guide are intended to supplement the benefits provided by the Medical Plan of the Presbyterian Church (U.S.A.). Beginning January 1, 2014, under the Affordable Care Act (ACA) an employer may not offer a flexible spending account (FSA) or health reimbursement arrangement (HRA) unless it also offers employer group health coverage that meets the ACA minimum value requirements to employees eligible for the FSA or HRA; and an employee must be enrolled for employer group health coverage (the employer s or a covered partner s employer s plan) to be eligible to enroll in an employer s HRA. A Health Savings Account (HSA) and Medical Savings Account (MSA) are permissible only for participants enrolled in a High Deductible Health Plan, which the Board of Pensions does not offer. Therefore, HSAs and MSAs are not addressed in this Guide

3 Employer-Funded Plans Salary-Reduction Plans HIGHLIGHTS OF TAX-ADVANTAGED PLANS Plan Type Source of Funds Benefits Subject to HIPAA Dues-Only Plan (Section 125) Employer and/or employee salary reduction Employee pays the portion of the allowable dues share required by the employer with the employee s pretax payroll dollars No Dues-Only Plan and Health Flexible Spending Account (Section 125) Employer and/or employee salary reduction Plan document specifies benefits covered by the Plan. Typically, allows employee to elect to set aside a fixed amount of cash salary on a pretax basis to pay 1) employee share of up to 1.5 percent allowable dues share for medical dues 2) employee dental plan costs 3) unreimbursed qualified medical expenses (not to exceed $2,550) Short grace period or carryover amount allowed; otherwise, annual use it or lose it rule applies. Yes* Dues-Only Plan and Health and Dependent Care Flexible Spending Accounts (Section 125) Employer and/or employee salary reduction Plan document specifies benefits covered by the Plan. Typically, allows employee to elect to set aside a fixed amount of cash salary on a pretax basis to pay 1) employee share of up to 1.5 percent allowable dues share for medical dues 2) employee dental plan costs 3) unreimbursed qualified medical expenses (not to exceed $2,550) 4) qualified dependent care expenses (not to exceed $5,000) Short grace period allowed; otherwise, annual use it or lose it rule applies. Yes* Stand-Alone Health Flexible Spending Account (Section 125) Employer and/or employee salary reduction Employer must offer employees an employer group health plan such as the Medical Plan. Yes* Health Reimbursement Arrangement (Section 105) Employer funds an amount annually in addition to wages and Benefits Plan dues. No employee contributions. Plan document designates amount, covered benefits, and whether employee may carry over unused amounts to future years. Typically reimburses deductibles, copays, and out-ofpocket amounts with submission of Medical Plan explanation of benefits (EOB) and proof of other qualified medical expenses. Amount unused by employee may carry over to another year. Unused amounts forfeit upon termination of employment. Yes* Wrap-Around Healthcare Plan (Section 105) Employer pays claims submitted without annual limit on amount. No employee contributions. Plan specifies benefits covered by the Plan. Typically covers employee's responsibility for deductibles, copays, and other out-of-pocket amounts with submission of Medical Plan explanation of benefits (EOB). These plans do not have accounts or carryover amounts. * This health plan is subject to the privacy and security requirements of the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), unless the plan has fewer than 50 participants and is self-administered. See the applicable sample plan document for more information. Yes* - 2 -

4 SECTION 125 PLAN OPTIONS (ELIGIBLE HEALTH AND DEPENDENT CARE EXPENSES WITH EMPLOYEE PRETAX WAGES) There are three healthcare expense-related cafeteria plan design options for employers that ask members to pay any of the allowable dues share for medical coverage: the Healthcare Dues-Only Plan, the Healthcare Dues-Only Plan with Health Flexible Spending Account (health FSA), and the Healthcare Dues-Only Plan with Health and Dependent Care Flexible Spending Account (health and dependent care FSA). Healthcare Dues-Only Plan A Healthcare Dues-Only Plan allows members to pay for their portion of the allowable dues share through pretax payroll deductions each pay period, similar to how deductions are taken for optional dental. These are also called Premium Only Plans. Healthcare Dues-Only Plan with a Health Flexible Spending Account (Health FSA) The Healthcare Dues-Only Plan may be combined with a health FSA. In addition to paying dues with a pretax salary reduction, members can make pretax contributions to a health FSA. Amounts contributed to the health FSA may be used to reimburse the member for eligible healthcare expenses. Healthcare Dues-Only Plan with Health and Dependent Care Flexible Spending Accounts (Health and Dependent care FSAs) The Healthcare Dues-Only Plan may be combined with health and dependent care FSAs. In addition to paying dues with a pretax salary reduction, members can make pretax contributions to Health or dependent care FSAs. Amounts contributed to the health FSA may be used to reimburse the member for eligible healthcare expenses. Amounts contributed to a dependent care FSA may be used to reimburse the member for eligible dependent care expenses. Health Flexible Spending Accounts (Health FSA) The Health FSA Plan is available for employing organizations that offer the Medical Plan or other employer group health coverage on a non-contributory basis (if employees have to make a contribution for coverage, the employer should offer a Healthcare Dues-Only Plan with a health FSA)

5 OTHER SECTION 105 PLAN OPTIONS (EMPLOYER-PAID MEDICAL EXPENSES) If an employer wants to provide coverage for medical expenses not covered by the Medical Plan (e.g., deductibles, copays, out-of pocket expenses, and other qualifying medical expenses under Section 213 of the Internal Revenue Code), as well as pay the entire amount of the allowable dues share, it may do so through a plan under Section 105 of the Code. Two forms of supplemental employer group health plans used for this purpose are the Health Reimbursement Arrangement (HRA) and Wrap-Around Plan (Wrap). Health Reimbursement Arrangement (HRA) Health Reimbursement Arrangement (HRA) is a program funded solely by the employer that provides reimbursement accounts for certain medical expenses up to an annual limit established by the employer. Wrap-Around Plan (Wrap) Wrap-Around Plan (Wrap) is an employer self-funded plan that reimburses an employee for the employee's share of medical expenses unreimbursed by the Medical Plan. Legal and operational details about these tax-advantaged plans are described in this Guide generally. The Board of Pensions offers sample plan documents on pensions.org for employers to consider and review with their counselors

6 EMPLOYEE SALARY REDUCTION PLANS HEALTHCARE DUES-ONLY PLAN A Healthcare Dues-Only Plan (a type of Premium-Only Plan) allows a member to pay for an allowable dues share through a pretax deduction from the member s paycheck. To qualify for the advantage of a pretax reimbursement, the Healthcare Dues-Only Plan must follow certain rules established by the Internal Revenue Service (IRS). These rules limit changes in salary reduction elections mid-year; and require that the program not be discriminatory. Establishing a Healthcare Dues-Only Plan. An employing organization should adopt a plan setting forth the terms and conditions of the Healthcare Dues-Only Plan. The document should establish the rules relating to eligibility, salary reduction agreements, and when elections may be changed. Eligible Participants. An employing organization sets the eligibility requirements for members who can participate in the Healthcare Dues-Only Plan. Only employees enrolled in the Medical Plan of the Presbyterian Church (U.S.A.) or other employer-provided coverage may participate. A self-employed individual is not considered an employee for Healthcare Dues-Only Plan purposes. A teaching elder employed by a congregation is an employee for federal income tax purposes even though a minister is considered self-employed for Social Security purposes (paying SECA instead of FICA). Employed teaching elders are eligible to participate in a Healthcare Dues-Only Plan. How the Healthcare Dues-Only Plan Voluntary Salary Reduction Election. A member participating in a Healthcare Dues-Only Plan voluntarily elects to reduce his or her salary by the amount the employer asks the member to pay of the allowable dues share each year. The salary reduction is taken from the member s paycheck in an equal amount per pay period. Mid-Year Election Changes. Under IRS rules, a member s salary reduction election must be set for the entire plan year. A member may not change the amount of his or her salary reduction election during a plan year unless the member has a qualified life event or other recognized reason for a mid-year election change. Any election change must be consistent with the qualified life event. A qualified life event includes a change in 1. legal marital status 1, including marriage, divorce, the death of a spouse (see note below), legal separation, or annulment; 2. the number of the member s dependents, including birth, adoption, placement for adoption, or the death of a dependent; 1 Employers are responsible for administering their plans in compliance with federal and state laws related to same-sex marriage. Employers should refer to the guidance on same-sex partners provided by the Board of Pensions

7 3. the member s, spouse s, or dependent s employment status that is a termination or commencement of employment, a strike or lockout, a commencement of or a return from an unpaid leave of absence, or a change in worksite; 4. the member s, spouse s, or dependent s employment status that causes the individual to become or cease to be eligible for the plan, which may include a change in work schedule or a change between salaried and hourly employment; 5. the dependent s eligibility for coverage under the plan because of the attainment of a particular age or other similar event; 6. the member s, spouse s, or dependent s residence. In addition to qualified life events, a member may also change his or her salary reduction election midyear under the following circumstances: 1. If the member or member s dependent is or becomes entitled to Medicare or Medicaid coverage, the member may change his or her election to cancel or reduce coverage. 2. If the member or the member s dependent loses eligibility for coverage under Medicare or Medicaid, the member may elect to commence or increase coverage. 3. If a qualified medical child support order requires coverage of a member s child, the member may change his or her election. 4. If a qualified medical child support order requires a spouse or former spouse to provide coverage, the member may change his or her election. NON-DISCRIMINATION RULES In general, the eligibility, contribution, and benefit provisions of the programs may not discriminate in favor of highly compensated employees or key employees. You should consult with your legal or tax counsel to advise you further on this subject if you choose to offer these programs only to select employees

8 HEALTHCARE DUES-ONLY PLAN WITH A HEALTH OR DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT An employing organization may offer a Healthcare Dues-Only Plan with a health FSA and/or dependent care FSA. A health FSA allows a member to set aside a portion of his or her salary on a pretax basis and use the money to be reimbursed for eligible healthcare expenses incurred by the member or his or her eligible dependents. A dependent care FSA allows a member to set aside a portion of his or her salary on a pretax basis and use the money to be reimbursed for eligible dependent care expenses incurred by his or her eligible dependents. This plan design allows a member to continue to make a salary reduction election to pay for the amount of his or her allowable dues share, and to make pretax contributions to his or her health and/or dependent care FSA through additional salary reduction(s). The health and/or dependent care FSA must follow certain rules established by IRS. These rules limit the amount that may be contributed to each FSA on an annual basis; limit changes in salary reduction elections mid-year; require that all amounts contributed to the FSA be used during the plan year (or grace period); require that amounts not used during the plan year are forfeited (pursuant to the plan s grace period or carryover provisions); and require that the program not be discriminatory. The steps to establishing FSAs are generally the same as those for establishing the Healthcare Dues- Only Plan. There are a few special rules for FSAs, which are noted in the following section. Establishing a Health FSA. As with the Healthcare Dues-Only Plan, the employing organization should set forth the terms and conditions of the FSA in a plan document, including rules relating to eligibility, approved reimbursable expenses, salary reduction agreements, and when elections may be changed. Note: A health FSA is subject to the Health Insurance Portability and Accountability Act of 1996, as amended (HIPAA), unless it has fewer than 50 participants and is self-administered. Eligible Participants. Similar to the Healthcare Dues-Only Plan, the employing organization sets the eligibility requirements for members who can participate in an FSA. Only employees may participate in an FSA. A self-employed individual is not considered an employee for FSA purposes. A teaching elder employed by a congregation is an employee for federal income tax purposes even though he or she is considered self-employed for Social Security purposes (paying SECA instead of FICA). Employed teaching elders are eligible to participate in FSAs

9 HEALTH FLEXIBLE SPENDING ACCOUNT An employing organization may offer a health FSA only or a health FSA and dependent care FSA, provided that the employer offers employer group health care that meets the ACA minimum value requirements. This plan would be suitable for employers offering Medical Plan Traditional Program coverage on a non-contributory basis. The steps to establishing FSAs are generally the same as those described above. How FSAs Work Voluntary Salary Reduction Election. In addition to the member s pretax deduction for the payment of his or her allowable dues share, FSAs allow a member to voluntarily elect to reduce his or her salary by a specified amount each year. The salary reduction is taken from the member s paycheck, generally in an equal amount per pay period. For health FSAs, the annual maximum allowable amount is $2,550 per employee. For dependent care FSAs, the annual maximum allowable amount is $5,000 ($2,500 for married filing separately). Note: For health FSAs, the entire amount of the elected annual contribution must be available immediately to pay reimbursable expenses. This may require current payment from employer funds until subsequent recovery from future member contributions. Most employers establish a maximum contribution amount for member salary reduction contributions. The total reimbursable expenses for the coverage period cannot exceed the total health FSA pretax contribution election for the year. Dependent care FSA reimbursements are limited to the amount contributed to date less any payments already distributed. Mid-Year Election Changes. The same mid-year election change rules for the Healthcare Dues-Only Plan also apply to FSAs. A member s salary reduction election must be set for the entire plan year and may not be changed during a plan year unless the member has a qualified life event or other recognized reason for a mid-year election change. The qualified life events listed under the Healthcare Dues-Only Plan also apply to FSAs. An employing organization may choose to incorporate some, all, or none of the mid-year election change options into its FSA. Use It or Lose It Rule. Any money that remains in a member s FSA after the end of the claims period is forfeited and becomes property of the plan. The employer can elect in the plan document whether the claims period coincides with the calendar year or the plan year (if different from the calendar year). The plan may choose one of the following options to offer its members for FSAs: 1) to carry over into the next claims period an FSA balance of up to $500 (rollover option), or 2) to extend the claims period by two and a half months (the grace period ) following the end of the calendar year or plan year. (Claims incurred during the applicable claims period may be submitted for reimbursement after the end of the claims period, up to a specified date determined by the employer.) It is important for an FSA participant to accurately budget expense amounts to avoid losing money set aside in the account. Outside of the $500 maximum balance or the two-and-a-half-month grace period, FSA contributions may not be carried over from year to year

10 If any FSA contributions are forfeited to the plan after the end of the claims period, most employers use the money to offset administrative expenses. An employer may allocate the funds as an employer contribution to members FSA accounts for the following year as long as that allocation is uniform among the participants and not in relationship to amounts forfeited. Employer and employee contributions still may not be greater than $2,550 in a plan year. Qualified Benefits under the Health FSA. Contributions to a health FSA may only be used to reimburse a member for qualified medical expenses up to the amount the member elected to contribute to the health FSA. Qualified medical expenses are expenses for healthcare services for the member and his or her spouse and dependents that are not paid under the employing organization s healthcare benefit coverage, or otherwise reimbursed or claimed as a deduction on his or her tax return. Qualified medical expenses generally include any healthcare expense that the member could deduct on his or her federal income tax return if the member qualified for the itemized deduction of medical expenses. Only expenses for the member or the member s spouse or eligible dependents for federal tax purposes may be reimbursed from a health FSA. Members may not use health FSA amounts to pay premiums for any insurance coverage, including their medical and/or dental coverage. These premiums may be paid with pretax dollars per the previous section, Healthcare Dues-Only Plan. The following list includes some of the most common eligible healthcare expenses: any amount that is paid primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, including copays and deductibles or other cost sharing for routine medical and dental checkups any amount paid for the purpose of affecting any structure of the body. This includes not only surgery, but also the purchase of equipment that is used to help the body function properly, including prescription eyeglasses and contact lenses. the purchase of any prescription drug or insulin; the purchase of over-the-counter drugs may be reimbursed only if they are prescribed. transportation that is primarily for, and essential (not merely convenient) to, receiving medical care payment of the portion of any healthcare expenses otherwise described above that is not reimbursed under the employing organization s medical plan because of deductibles or copayment requirements; usual, reasonable, and customary fee limitations; or other limitations on the amount or nature of benefits covered by the employing organization s medical plan. Qualified Benefits under the Dependent Care FSA. Contributions to a dependent care FSA may only be used to reimburse a member for qualified dependent day care expenses up to the amount the member elected to contribute to the dependent care FSA. Qualified dependent care expenses are day care expenses for a dependent child or adult, including certain expenses for day care provided in your home, someone else s home, or a licensed day care center. You and your spouse (if married) must both be working to participate in a dependent care FSA, unless your spouse is a full-time student or is totally disabled. Eligible dependents include your children under age 13 whom you claim as tax dependents on your federal income tax return, or a dependent adult who is not capable of self care and spends at least eight hours a day in your home

11 Administering FSAs. The employing organization can administer FSAs internally or may appoint a third-party administrator. Ultimately, the employing organization will be considered plan administrator for purposes of the FSAs and will have a fiduciary duty to operate the plan solely in the interest of plan participants and their beneficiaries. Filing Claims under FSAs. Claims for qualified expenses under FSAs should be submitted as soon as possible after they are incurred, but in no circumstance later than a set number of days after the end of the claims period. The claim must clearly identify the dollar amount of the expenses, the date, the provider, and the type of service claim. Photocopies of bills, receipts, or cancelled checks should be used as proof of incurred expenses. The FSA participant must certify that the expense for which reimbursement is sought has not been compensated by insurance or otherwise and was incurred during the plan s claims period. The employer will have to implement a claim reimbursement procedure. The health FSA may not reimburse a medical care expense that is attributable to a federal income tax deduction for any year. You cannot claim a tax credit or deduction for any services or expenses that are reimbursed through a dependent care FSA. Qualified expenses must be incurred after the execution of the salary reduction agreement, on or after the beginning of the plan year, and while the member is participating in the FSA. Impact on Employing Organization. Under the Healthcare Dues-Only Plan, the Healthcare Dues-Only Plan with a health FSA, the Healthcare Dues-Only Plan with a health and dependent care FSA, or the Health FSA Plan only, the employing organization must cover the costs of administering the plan. Costs include plan documentation, preparation of forms, withholding salary reduction contributions, processing FSA reimbursements (including reimbursements for which salary reduction amounts have not yet been contributed), and legal compliance updates, as required. The employing organization will encounter some benefit savings from FSAs. When salaries are reduced, the cost to the employing organization for benefits related to salary may also decrease. The employing organization will not have to pay the employer FICA contribution (7.65percent for Social Security and Medicare) for lay members. Impact on Employee. Under an FSA, a member can reduce his or her taxable income and use the reduction to pay for expenses that otherwise would have been paid with after-tax dollars. Member tax savings include federal income tax, and state and local income tax in most, but not all, states. Also, a member will not pay employee FICA contributions (7.65 percent for Social Security and Medicare) on amounts excluded from income. Teaching elders will not pay SECA taxes on the amounts set aside for FSAs. Social Security benefits are based on salary earned throughout a member s career. If a member contributes to FSAs, his or her taxable salary may be less than it otherwise would have been and Social Security benefits may be lower. The same could be true for worker s compensation and unemployment benefits

12 As mentioned previously, a member participating in a health FSA is entitled to be reimbursed for the full amount of his or her salary reduction from the time of election at the beginning of the plan year (i.e., before he or she has made the full amount of contributions to the health FSA for the year). This means the employing organization must make available to the member the full amount of his or her elected benefit whenever reimbursable expenses occur. For example, if a member s voluntary salary reduction election is $1,200 per year ($100 per month), the member can receive reimbursement for qualified expenses of up to $1,200 in the first month of health FSA participation. Since only $100 will have been paid into the account by the end of the first month, the employing organization must come up with the additional $1,100 for reimbursement. The employing organization will continue reducing the member s salary for the remainder of the plan year

13 TAX-FREE EMPLOYER-FUNDED ARRANGEMENTS HEALTH REIMBURSEMENT ARRANGEMENT (HRA) In addition to the Healthcare Dues-Only Plan, the Healthcare Dues-Only Plan with a health FSA, or the Healthcare Dues-Only Plan with a health and dependent care FSA, employing organizations may also offer members the benefit of a Health Reimbursement Arrangement (HRA). An HRA is a program established under Section 105 of the Internal Revenue Code through which an employer can offer to reimburse members for certain medical expenses incurred by the member and his or her spouse and dependents on a nontaxable basis. The employing organization makes all contributions to the HRA; no member contributions are permitted. Members submit qualifying medical expenses and are reimbursed for such expenses from the HRA. Medical expenses reimbursed through an HRA for a member and his or her dependents are not subject to federal income, FICA (Social Security and Medicare), or SECA taxes. Reimbursements under an HRA are subject to fewer restrictions than health FSAs. The unused portion of the employing organization s contribution can be carried over and accumulated for future reimbursements from year to year if the employing organization chooses to offer such an arrangement. Establishing an HRA. An employing organization should adopt a written plan setting forth the terms and conditions of the HRA. HRAs are subject to certain Internal Revenue Code nondiscrimination rules. Note that an HRA is subject to HIPAA. Employers should consult with legal counsel to ensure compliance with HIPAA. Eligible Participants. An employing organization sets the eligibility requirements for employees who may participate in the HRA. Reimbursements may be provided to current and former employees (including retired employees), their spouses and dependents, and the spouses and dependents of deceased employees (the term dependent includes an employee s same sex partner if he or she qualifies as the employee s spouse or dependent for federal tax purposes). Employee does not include a self-employed individual. A teaching elder employed by a congregation is considered self-employed for Social Security and Medicare purposes but an employee for federal income tax purposes. Employed teaching elders are eligible to participate in HRAs. How the HRA Works The employing organization determines a set dollar amount that it will reimburse annually or contribute to an account for reimbursement of a member s eligible medical expenses. The member may submit requests for reimbursement of expenses incurred for medical care up to the annual amount (or the accumulated amount if the employing organization s plan provides for year-to-year accumulations). The types of expenses eligible for reimbursement from an HRA are the same as those under the health FSA. However, unlike the health FSA, amounts paid for dues or premiums for an employer s group healthcare coverage by current members, retirees, continuation beneficiaries, and their dependents also may be reimbursed from the HRA. Also, unlike a health FSA, employees cannot set aside amounts in addition to the employer funding

14 Administering the HRA. The employing organization may administer the HRA internally or may appoint a third-party administrator. Ultimately, the employing organization will be considered the plan administrator for purposes of the HRA and will have a fiduciary duty to operate the plan solely in the interest of plan participants and their beneficiaries. Filing Claims under the HRA. An HRA participant must provide written substantiation of any requested medical expense reimbursement under the HRA. The HRA may not reimburse a medical care expense that is attributable to a federal income tax deduction for any year. Qualified expenses must be incurred while the HRA is in existence and while the individual is participating in the HRA. The employing organization will have to implement a claim reimbursement procedure. The plan should establish a reasonable claims limitation period after the close of the calendar year for the filing of claims. Unlike the health FSA, the maximum available reimbursement is limited to the accumulated HRA balance. Impact on Employing Organization. The employing organization must cover the cost of funding the HRA. HRA contributions are not included in effective salary, and therefore no dues are assessed. Costs include the yearly contribution and the recordkeeping involved with processing reimbursement requests and accounting for any amounts that the HRA permits a member to carry over from year to year. Employing organizations offering HRAs will have to monitor IRS developments to ensure continued legal compliance, including HIPAA compliance. Impact on Employee. A member participant in an HRA has greater control over his or her healthcare dollar than in a health FSA. The member can use the HRA for reimbursement of dues contributions (e.g., dependent continuation coverage), and if the member does not use the amount in the HRA by the end of the year, it may be carried over to the next year if the plan so provides. The employing organization s contribution to the HRA will be excluded from gross income to the member. WRAP-AROUND PLAN (WRAP) The Board of Pensions understands that some employers offer a Wrap-Around Plan (Wrap) as a supplemental plan to the Medical Plan of the Presbyterian Church (U.S.A.). A Wrap typically reimburses the employee for deductible, copays, and out-of-pocket copayment amounts. A Wrap is appropriate where the employer is already funding 100 percent of the dues payable to the Board of Pensions for Medical Plan coverage and wants to provide coverage for its employees share of healthcare costs under the Medical Plan. A Wrap is a self-insured program established by the employer under Section 105 of the Internal Revenue Code through which an employer can offer to reimburse members for certain medical expenses incurred by the member and his or her spouse and dependents on a nontaxable basis. Members submit Medical Plan explanation of benefit (EOB) forms and are reimbursed for the employee share of the unreimbursed expenses. Medical expenses reimbursed through a Wrap for a member and his or her dependents are not subject to federal income, FICA (Social Security and Medicare), or SECA taxes. Unlike an HRA, a Wrap does not typically have a cap on benefits (other than the out-of-pocket limits of the Medical Plan), so the employer does not fund a fixed amount annually and no account is established for each employee

15 Establishing a Wrap. An employing organization should adopt a written plan setting forth the terms and conditions of the Wrap. Like all employer medical benefits, Wraps are subject to certain Internal Revenue Code nondiscrimination rules. Note that a Wrap is subject to HIPAA. Employers should consult with legal counsel to ensure compliance with HIPAA. Eligible Participants. An employing organization sets the eligibility requirements for employees who may participate in the Wrap. The eligibility rules applicable to HRAs also apply to Wraps. Administering the Wrap. The employing organization may administer the Wrap internally or may appoint a third-party administrator. Ultimately, the employing organization will be considered plan administrator for purposes of the Wrap and will have a fiduciary duty to operate the plan solely in the interest of plan participants and their beneficiaries. Filing Claims under the Wrap. A Wrap participant must provide written substantiation of any requested medical expense reimbursement under the Wrap. The employing organization will have to implement a claim reimbursement procedure. The plan should establish a reasonable claims limitation period after the close of the calendar year for the filing of claims. Impact on Employing Organization. The employing organization covers the cost of funding the Wrap benefits. Section 105 copayment and deductible reimbursements are not considered part of effective salary, and therefore dues are no assessed on these amounts. Costs include the annual benefits reimbursements and the recordkeeping involved with processing reimbursement. Impact on Employee. The employer reimbursements under the Wrap will be excluded from gross income of the member

16 OFFERING MULTIPLE PLANS An employing organization may offer the Healthcare Dues-Only Plan with a health FSA, a dependent care FSA, and an HRA. If both the health FSA and HRA are offered, the health FSA is used first to reimburse eligible claims unless that plan specifically provides that the HRA is primary. The advantage to using the health FSA first is that the HRA is not necessarily subject to the use it or lose it rule and may include a rollover provision. TAX CONSEQUENCES Benefits offered under either FSAs or an HRA generally will not be subject to federal income tax. Neither the employer nor the member will pay FICA or SECA (Social Security and Medicare) taxes on the reimbursed amounts. State and local income tax treatment varies state by state. An employing organization should consult with its tax counsel before implementing FSAs or an HRA. CHURCH PLAN STATUS Generally, a Section 125 plan, HRA, or Wrap is a welfare plan subject to the Employee Retirement Income Security Act of 1974 (ERISA). ERISA imposes specific disclosure and recordkeeping requirements on plans. However, welfare plans established by church employing organizations are church plans; they are exempt from ERISA unless the plan makes an affirmative election under Section 410(d) of the Internal Revenue Code to be subject to ERISA. The Benefits Plan of the Presbyterian Church (U.S.A.) has not elected to be subject to ERISA. NON-DISCRIMINATION ISSUES Employer medical plans (insured and self-funded), including Section 125 cafeteria plans and employerfunded HRAs and Wraps, are subject to the nondiscrimination requirements of the Internal Revenue Code. In general, the eligibility, contribution, and benefit provisions of the programs may not discriminate in favor of highly compensated employees or key employees. You should consult with your legal or tax counsel to advise you further on this subject if you choose to offer these programs only to select employees. FEDERAL INCOME TAX DEDUCTION An individual who itemizes deductions on his or her tax return may deduct medical expenses in excess of 7.5 percent of adjusted gross income. If medical expenses are reimbursed through a health FSA, an HRA, or a Wrap, the expenses may not be counted toward the income tax deduction amount. The member will have to determine, based on his or her tax rate and amount of medical expenses, if it is more advantageous to participate in the health FSA or HRA, or to take the deduction on his or her tax return. ISSUES TO CONSIDER WHEN IMPLEMENTING An employing organization wishing to implement FSAs, an HRA, or a Wrap should consider the following: Will the arrangement benefit members? Will members want to contribute to the program? Can members afford to contribute to the program?

17 Does the employing organization want to contribute to the program? Can the employing organization afford to contribute to the program? Does the employing organization have the administrative capacity to administer the program? What mid-year election changes will the employing organization recognize under the FSAs? Does the employing organization want to allow HRA contributions to be accumulated from one plan year to the next? Does the employing organization want to continue HRA eligibility for terminated and/or retired employees? Surviving dependents? How will the employing organization keep abreast of changing laws and regulations? FURTHER INFORMATION The Board of Pensions has prepared samples of plan documents for the Healthcare Dues-Only Plan, the Healthcare Dues-Only Plan with Health FSA Plan, the Healthcare Dues-Only Plan with Health and Dependent Care FSA Plan, the Health and Dependent Care FSA Plan, and the HRA Plan, as well as the Session Resolution you will need to establish a Section 125 cafeteria plan. For any questions, please contact the Board of Pensions at (800-PRESPLAN) to speak with a member service representative. MED-636 Rev. 8/

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