Compliance Corner

2023 Updates

Health FSA Limit Increases for 2024

November 13, 2023

On Nov. 9, 2023, the IRS released Revenue Procedure 2023-34 (Rev. Proc. 23-34), which includes the inflation-adjusted limit for 2024 on employee salary reduction contributions to health flexible spending accounts (FSAs). For plan years beginning in 2024, the adjusted dollar limit on employees’ pre-tax contributions to health FSAs increases to $3,200. This is a $150 increase from the 2023 health FSA limit of $3,050.

The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health FSAs. This limit started as $2,500 for plan years beginning on or after Jan. 1, 2013, and has been adjusted for inflation for subsequent plan years.Employers should ensure that their health FSAs will not allow employees to make pre-tax contributions over $3,200 for the 2024 plan year. Employers can impose a lower limit on employees’ pre-tax contributions to a health FSA.

Employers should confirm that their health FSA contribution limit is included in the plan’s documents and communicated to employees at enrollment time.

Pre-tax Contributions

The ACA’s dollar limit applies only to employees’ pre-tax contributions to a health FSA. Nonelective employer contributions to a health FSA (for example, matching contributions or flex credits) generally do not count toward the health FSA contribution limit. However, if employees may elect to receive the employer contributions in cash or as a taxable benefit, then the contributions must be treated as salary reductions and counted toward the health FSA contribution limit.

Per Employee Limit

The health FSA limit applies on an employee-by-employee basis. Each employee may only elect up to $3,200 in salary reductions in 2024, regardless of whether they have family members who benefit from the funds in that FSA. However, each family member eligible to participate in their own health FSA has a separate limit. For example, a married couple who have their own health FSAs can both make salary reductions of up to $3,200 for 2024, subject to any lower employer limits.

Health FSA Carryovers

As an exception to the use-or-lose rule, employers with health FSAs may allow employees to carry over a certain amount of funds remaining at the end of a plan year to reimburse eligible expenses incurred in the plan year immediately following. The maximum carryover amount is adjusted annually for inflation. For 2024, Rev. Proc. 23-34 increases the maximum carryover limit to $640 (from $610 for 2023). Employers that allow carryovers may impose their own limit that is lower than the maximum carryover limit.

Penalties for HIPAA Violations Increase

November 7, 2023

The U.S. Department of Health and Human Services (HHS) has released its inflation-adjusted civil monetary penalties for violations of the HIPAA Privacy and Security Rules. The new amounts apply to penalties assessed on or after Oct. 6, 2023.

Because HIPAA’s penalties are substantial, employers with group health plans should periodically review their compliance with the Privacy and Security Rules.

Increased Penalties

Potential penalties for HIPAA violations depend on the type of violation involved. Penalties are broken down into “tiers” that reflect increasing levels of culpability. Each tier carries a minimum and maximum penalty, all of which have increased as follows :

For violations where the covered entity or business associate did not know about the violation (and by exercising reasonable diligence, would not have known about the violation), the penalty amount is between $137 and $68,928 for each violation.

If the violation is due to reasonable cause, the penalty amount is between $1,379 and $68,928 for each violation.

For corrected violations that are caused by willful neglect, the penalty amount is between $13,785 and $68,928 for each violation.

For violations caused by willful neglect that are not corrected, the penalty amount is $68,928 for each violation, with an annual cap of $2,067,813.

HIPAA Enforcement

HHS’ Office for Civil Rights (OCR) is responsible for enforcing the HIPAA Privacy and Security Rules. When OCR determines that a HIPAA violation has occurred, it will often pursue a resolution agreement rather than imposing civil penalties. A resolutionagreement typically requires a covered entity or business associate to take corrective action and pay

a settlement amount, which is usually much less than the applicable penalty amount. However, if the covered entity or business associate does not take action to resolve the matter in a way that is satisfactory, OCR may decide to impose civil penalties.

Common HIPAA Violations

According to HHS, the compliance problems most frequently reported under HIPAA are:

Impermissible uses or disclosures of protected health information (PHI)
Lack of safeguards on PHI
Lack of patient access to their PHI
Lack of administrative safeguards for electronic PHI
Use or disclosure of more than the minimum necessary PHI

Section 125 Election Rules

October 19, 2023

Under a Section 125 plan, or cafeteria plan, benefits can be funded in a variety of ways. The most common way is for employees to reduce their salaries on a pre-tax basis to pay for benefits via “salary reduction agreements” with their employers. Only participants can make elections under a cafeteria plan, even though the underlying benefits (e.g., health insurance) may cover other individuals (e.g., dependents). The following rules apply to these elections.

Prospective Only

Participant elections under a Section 125 cafeteria plan must be made before the first day of the plan year or the date taxable benefits would currently be available, whichever comes first. Typically, employees make their elections each year during anannual open enrollment period. There are only two exceptions to the general rule that Section 125 elections must be made on a prospective (not retroactive) basis:

Limited exception for new hires—Elections that new employees make within 30 days after their hire date can be effective on a retroactive basis. Elections made during this enrollment window can be effective as of the employee’s date of hire.

HIPAA special enrollment—Elections under a Section 125 plan may be retroactive to correspond with HIPAA special enrollment rights when an employee acquires a new dependent through birth, adoption or placement for adoption.

Irrevocable

Participant elections generally must be irrevocable until the beginning of the next plan year. This means participants ordinarily cannot make changes to their cafeteria plan elections during a plan year. Employers do not have to permit any exceptions to the election irrevocability rule for cafeteria plans. However, IRS regulations permit employers to design their cafeteria plans to allow employees to change their elections during the plan year if certain conditions are met. Provided to you by Legacy Partners Holdings, LLC

Types of Elections

Affirmative elections (most common): Employees complete a written agreement authorizing their cafeteria plan elections.
Automatic elections: Employees who do not want to participate must complete a waiver. Employers must provide adequate notice to employees and confirm the default elections do not violate state tax withholding laws.
Rolling elections: Current participants’ elections continue to the next plan year unless the employee files an election not to participate.

Plan Document Procedures

A cafeteria plan must specify the procedures that govern participants’ elections under the plan, including when elections may be made and the periods for which they are effective.

This Legal Update is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

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