Health Savings Accounts The Basics

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Health Savings AccountsThe Basics
Updated April 2007
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Presentation Outline

• HSA Overview What Why - How?
• High Deductible Health Plans HDHP
• HSAs, HRAs, FSAs
• HSA Contributions Distributions
• Estate Treatment of HSAs
• Advantages Disadvantages

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Health Savings Account Overview

• HSAs were created as a part of Medicare Reform
  Legislation signed into law by President Bush in
  December 2003 Effective 1/1/04
• HSAs are modeled after Archer M S As
• An HSA is money put in a special account owned by
  an individual to pay for current and future
  medical expenses
• HSAs must be used in conjunction with High
  Deductible Health Plans (HDHP)
• Insurance that does not cover the first dollar
  medical expenses (except Preventive/Wellness
  Benefits)

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Why HSAs???

• Health Care Costs Skyrocketing
• Rising Medical Inflationary Trends
• Advancements in
• Technology
• Medical Procedures
• RX Treatments
• Social Economic Issues
• Social Security Medicare Funding
• Baby Boomer Retirement Benefits

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Why HSAs???

• Rising Costs - Group Health Benefits
• Employee Expectations (past, present, future)
• Lack of Consumerism Need for Change?
• Employee Participation Shared Cost/Risk?
• Employers looking for ways to share group health
  benefit costs
• Employee Contributions Cost Sharing
• Tax Incentives Employee Employer
• Promote Consumerism Taking Responsibility
• Building a more secure future

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Four Main Reasons Why HSAs Are Considered by
Organizations of all Sizes

• Cost Healthcare costs have been rising at a
  faster pace than wages and inflation.
• Personal Responsibility Individual lifestyle
  decisions affect healthcare costs.
• Tax Incentives There are powerful tax
  incentives for HSAs.
• Reduce Annual Premium Increases Anticipate
  ongoing healthcare costs will be lower than
  standard medical trends.

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How HSAs Work
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Who is Eligible for HSAs ?

• Any Individual that meets all of the following
  criteria
• Is covered by a qualified HDHP
• Is not covered by other health insurance coverage
  except for specific injury, accident, disability,
  dental, vision, and/or long term care.
• Is not eligible for Medicare
• Cant be claimed as a dependent on someone elses
  tax return

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High Deductible Health Plans (HDHP)
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High Deductible Health Plans (HDHP)

• Health insurance plan with a minimum deductible
  of
• 1,100 Individual/Single Coverage
• 2,200 Double/Family Coverage
• Annual out-of-pocket expense (including
  deductibles co-insurance) does not exceed
• 5,500 Individual/Single Coverage
• 11,000 Double/Family Coverage

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High Deductible Health Plans (HDHP)

• HSA Qualified HDHPs can have
• First dollar coverage (no deductible or
  co-insurance) for Preventive Care Services
  (preventive coverage may include prescription
  drugs)
• Higher out-of-pocket (deductibles co-insurance)
  for non-network services
• Fixed dollar or percentage coinsurance allowed
  once HSA deductibles are satisfied
• Prescription Drug Coverage is optional but must
  be included within medical deductibles to qualify.

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HSAs, HRAs, FSAs Compared

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Flexible Spending Accounts (FSA)

• Section 125 Flexible Spending Accounts are a
  voluntary, tax free way for employees to save for
  qualified group medical insurance premiums (POP),
  un-reimbursed medical expenses, and/or dependent
  care expenses incurred during a single plan year.
  
• Unlike an HSA, contributions to an FSA not used
  during the calendar year (or first quarter of the
  following year) do not rollover to the employee.

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Health Reimbursement Accounts (HRAs)

• HRAs are a consumer-driven health care spending
  account set up by the employer for each employee
  covered by the group health plan.
• HRAs are commonly set up using an HDHP as a way
  to control costs for the employer while giving
  flexibility to plan design.
• Only the employer can contribute HRA funds, which
  are used exclusively to reimburse employees for
  covered plan expenses as specified in the groups
  Summary Plan Description (SPD).
• HRAs may reimburse employees for group Medical,
  Prescription Drugs, Dental, and Vision insurance
  premiums and out-of pocket expenses as specified
  in the groups SPD

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Health Reimbursement Accounts (HRAs)

• Employer contributed funds to an HRA are tax
  deductible and the funds used to reimburse
  employees for qualified expenses are tax free.
• The employer can specify if employee or HRA
  contributions pay for eligible expenses first.
• Unspent HRA funds in a plan year remain in the
  employees account and can be rolled over into
  the following plan year employer controls
  funds.
• The groups SPD (set up by employer) will specify
  maximum reimbursement amounts and the amount that
  can be rolled over in each employees account at
  year end.

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Health Reimbursement Accounts (HRAs)

• HRAs can be offered with multiple plan designs
  within the same group
• HRA contributions can vary by different employee
  classes
• HRAs can be offered with other health plans,
  including Section 125 Flexible Spending Accounts.
• An HRA may serve as a defined contribution
  retirement benefit plan based on the groups SPD.

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Comparison HRA HSA
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HSA Contributions
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HSA Contribution Rules

• HSA Contributions can be made by the employer,
  employee, or both
• If made by employee it is an above-the-line
  deduction
• If made by the employer, it is not taxable to the
  employee (excluded from income)
• Employer contributions not subject to FICA or
  FUTA
• Employees must be full time 30 hrs/wk
• All contributions are aggregated (combined)

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HSA Contribution Rules

• Maximum HSA contributions (for qualified tax
  deduction)
• Maximum HSA contribution specified in law
  (indexed annually by M-CPI)
• 2,850 (Self-Only Coverage) in 2007
• 5,650 (Family Coverage) in 2007
• Maximum Contributions Are Now Allowed Regardless
  of the HDHP Deductible
• No Minimum Contribution Requirement
• New Rollover Provision Allows Balance Transfers
  from FSA or HRA into H S A

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HSA Contribution Rules

• Changes in H S A Contributions Effective 1/1/07
• Family contributions may be subdivided into two
  new categories (within existing rules for maximum
  family contributions)
• Self One Dependent
• Self Two Dependents
• Self Three Dependents (or more)

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HSA Contribution Rules

• Individuals age 55 may contribute additional HSA
  catch up dollars
• 2006 700
• 2007 800
• 2008 900
• 2009 and after 1,000
• More 2007 Changes
• First year contribution limit is no longer
  pro-rated based on the number of months that the
  HDHP is in force.
• Full amount can be funded with any effective date
  provided HDHP is maintained at least 12 months
  (otherwise 10 Tax Penalty).

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HSA Contribution Rules

• Unused account balances roll over to next plan
  year. Employee is 100 vested (including employer
  HSA funding).
• Employer cannot discriminate with HSA
  contributions all employees must be treated
  equally.
• Contributions must stop once Medicare eligible

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Example HSA Product Model (Individual)
Employer Selects of Coinsurance Coverage Not to
Exceed Maximum Out of Pocket Limits
Catastrophic Coverage
Health Tools and Resources
HSA Employee Funded
550 EE
1,100 Deductible
HSA Employer Funded
550 ER
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Example HSA Product Model (Family)
Employer Selects of Coinsurance Coverage Not to
Exceed Maximum Out of Pocket Limits
Catastrophic Coverage
Health Tools and Resources
HSA Employee Funded
1,100 EE
2,200 Deductible
HSA Employer Funded
1,100 ER
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HSA Distributions
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HSA Distributions

• HRA distributions are tax-free for qualified
  medical, prescription drug, dental, and vision
  expenses (including over-the-counter drugs)
• Cannot be used to pay for other health insurance
  premiums except
• COBRA Continuation Coverage
• Health Coverage while receiving unemployment
  compensation
• For individuals enrolled in Medicare
• Medicare parts A, B and D (new Rx benefits)
  premiums, Medicare HMO or Medicare Advantage
  premiums (but not Medigap).
• Employee share of premiums for employer based
  group health plan
• Qualified Long Term Care Insurance Premiums

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HSA Distributions

• Should HSA account holder keep receipts? YES!!!
• Must have proof (for IRS) that the distributions
  were for qualified expenses
• Helps prove HDHP deductible was met
• Not all expenses paid out of the HSA have to be
  charged against deductible such as dental and
  vision care.
• The account holder is solely responsible for
  substantiating all HSA distributions
• not the account administratornot the
  employer.not the care giver or point of service

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HSA Distributions

• Non-Qualified Distributions
• Subject to ordinary income tax plus 10 penalty
• Penalty waived upon death, disability, or
  attainment of age 65 however, ordinary income
  taxes still apply for non-qualified distributions

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HSA Distributions

• What happens to an HSA upon account holders
  death
• Married Spouse becomes new owner and continues
  to use the HSA
• Single Beneficiary becomes new owner and funds
  become part of your estate (subject to applicable
  taxes)

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Health Savings AccountsAdvantages

• Helps employers control group health premium
  costs
• Provides employers and employees with payroll tax
  savings
• Promotes consumerism cost awareness among
  employees
• Portability Employee owns all contributions in
  HSA
• Encourages employees to save for future medical
  expenses and retirement

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Health Savings AccountsDisadvantages

• Limitations HSAs are limited by law to defined
  plan designs, rules, and regulations
• Employer give more control of health care dollars
  to employees
• Added responsibility to employees - pay for
  health care ahead of deductible seek
  reimbursement IRS record keeping for tax filing
  
• Under use of health care will members avoid
  necessary care to save the dollars?

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Good Candidates for HSAs

• Employees have access to the Internet for
  researching health benefit options.
• Employees typically are not covered by a
  collective bargaining agreement.
• Employees pay significant of premium.
• In-network deductibles and member coinsurance
  payments are in current plan design.
• Average employee receives competitive
  compensation.
• Company promotes an active culture of employee
  wellness.
• Company has a Section 125 Flex plan in place.
• Company demographics are favorable.
• Company plans to make a fixed contribution or a
  matching contribution to the employees HSA
  account.

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Consumer Directed Health CareIn the future???