New HSA Rules

1
New HSA Rules

• Using An Cafeteria Can Help Boost Your HSA
  Enrollment

2
HSA Comparability Rule

• How to Comply With The Final IRS Rules

3
HRA and HSA Discrimination Traps

• Tests Applicable to HSAs
• Comparability
• Application of the cafeteria plan exception
• Tests Applicable to HRAs
• General 105(h) concepts

4
HSA Comparability Rule

• What is the Comparability Rule?
• If an employer makes contributions to an
  individuals HSA, it must make contributions for
  all comparable participating employees, and the
  contributions must be
• The same amount or
• The same percentage of the HDHP deductible
  covering the employee
• Comparable participating employees are employees
  with HSAs who have the same level of HDHP
  coverage (i.e., single, single plus one, employee
  plus two, employee plus three or more)
• Part-time employees are measured separately
• Employer may restrict HSA contributions to those
  who participate in the Employers HDHP
• Failure to comply results in excise tax of 35 on
  the aggregate amount of contributions made by
  employer during the year

5
HSA Comparability Rule

• Statutory and regulatory guidance
• Section 4980G (via 4980E)
• Final Regulations
• Employers are not required to make HSA
  contributions
• However, if the employer makes an HSA
  contribution to an employees HSA, the
  Comparability Rule requires employers to make
  comparable contributions during calendar year
  to all other comparable participating employees
• Who are comparable participating employees?
• What are comparable contributions?
• Comparability Rule does not apply to employer
  contributions made through cafeteria plan
• When are contributions made through a cafeteria
  plan?

6
HSA Comparability Rule

• Who is comparable participating employee?
• An employee who is an eligible individual in
  the same employment category with the same
  coverage category
• Only common law employees are considered
• Comparability rule does not apply to
• Sole proprietors
• Partners
• More than 2 shareholders
• Must consider employees of all employers in the
  same controlled group
• E.g. Company A owns 90 of Company B. Company A
  must consider Company Bs employees as his/her
  own for purposes of satisfying the comparability
  rule.

7
HSA Comparability Rule

• Comparable Participating Employees (cont)
• Comparable Participating Employees are only those
  employees who are eligible individuals as
  defined in Code Section 223(c)(1)
• Eligible individual status for a month is
  determined as of first day of the month
• Employee is eligible individual on January 1 but
  quits January 2 and doesnt pick up other
  coverage---Employee is eligible individual for
  the entire month

8
HSA Comparability Rule

• Comparable Participating Employees (cont)
• What are the applicable employment categories?
• Full-time
• Part-time (less than 30 hours per week)
• Former employees (excluding those receiving
  coverage by virtue of a COBRA election)
• Each employment category may be treated
  separately
• E.g. employer may contribute to HSAs of only
  full-time employees and/or different amount to
  part-time employees
• Exemption for collectively bargained employees

9
HSA Comparability Rule

• Comparable Participating Employees (cont)
• What are the applicable coverage categories?
• Single or self-only
• Employee plus one (child or spouse)
• Employee plus two
• Employee plus three or more
• Each coverage category may be treated separately
• E.g. Employer may contribute to the HSAs of
  full-time employees with employee plus one
  coverage and not the HSAs of full-time employees
  with self-only coverage.
• Contribution for employee with three-or-more
  dependent coverage must be greater than employee
  with plus-two coverage employee with plus-two
  coverage must be greater than employee with
  plus-one coverage employee with plus-one
  coverage must be greater than employee only
  coverage

10
HSA Comparability Rule

• Comparable Participating Employees (cont)
• Employers may further restrict contributions to
  those employees who participate in the EMPLOYERS
  HDHP
• Thus, if an otherwise comparable participating
  employee is an eligible individual but is not
  covered under the employers HDHP, he/she is not
  entitled to any HSA contributions under the
  Comparability Rule
• Special rule for married couples covered as
  participants under same plan
• Can employer restrict contributions to a
  particular HSA custodian/trustee under the
  Comparability Rule?
• Not specifically addressed in the Rule
• Informal comments from IRS officials suggest that
  may be possible

11
HSA Comparability Rule

• What are comparable contributions?
• Contributions that are the same amount or same
  percentage of the deductible
• There are three funding methods
• Pay as you go
• Look back
• Pre-fund
• Rule looks at actual contributions made during
  the calendar year not contributions that were
  merely made available

12
HSA Comparability Rule

• Comparable Contributions (cont)
• Pay as you go
• Contributions made at one or more times during
  the year (generally for each month)
• Contributions made at employers usual payroll
  intervals are deemed made at the same time
• E.g. Assume that salaried employees are paid
  twice monthly and hourly employees are paid
  weekly. Employer may make weekly contributions
  for hourly and twice monthly contributions for
  salaried
• Alternatively, employer may make one contribution
  during the month for all eligible individuals for
  whom a contribution is made
• Comparable contributions for the year determined
  on a monthly basis for each month that the
  employee was a comparable participating
  employee during the year
• If employee was comparable participating employee
  for full year and receives 1200, then employee
  who was comparable participating employee for 3
  months must receive 300
• Employer may change contribution amount (or even
  stop) at any time on a prospective basis
• Employees who are comparable participating
  employees for months after employer ceases to
  make contributions are not entitled to any
  contributions for months after employer ceases to
  make contributions

13
HSA Comparability Rule

• Comparable Contributions (cont)
• Example of Pay-as-You-Go Method Employer
  contributes 100 a month to the HSA of each
  full-time employee with single HDHP coverage and
  200 per month to the HSA of each full-time
  employee with family HDHP coverage. Employer
  contributes January through May (5 months).
  Employee A is a full-time employee with single
  HDHP coverage from January through December.
  Employee B has family HDHP coverage from February
  through May 15 when he terminates employment.
  Employee C is hired in November and has single
  HDHP coverage.
• Employer must contribute
• Employee A 500 (5 months)
• Employee B 800 (4 months)
• Employee C 0

14
HSA Comparability Rule

• Comparable Contributions (cont)
• Look-Back Basis (as of last day of calendar year)
• A single contribution made for all individuals
  who were comparable participating employees for
  any month during the calendar year
• Must employer track down former employees who
  were comparable participating employees at any
  time during the year?
• YES
• What if former employee no longer has HSA? What
  if no longer has HSA with partner custodian?
• Comparable contributions determined on monthly
  basis
• If employee was comparable participating employee
  for entire year and receives 1200, then employee
  who was only comparable participating employee
  for 3 months must receive 300

15
HSA Comparability Rule

• Comparable Contributions (cont)
• Example of Look-Back Basis Employee A was a
  comparable participating employee with single
  coverage from January through March. Employee B
  was a comparable participating employee with
  single coverage from July through November.
  Neither is employed by Employer on December 31
• Employer contributes 300 to Employee As HSA
• How much must Employer contribute to Bs HSA?
• 500

16
HSA Comparability Rule

• Comparable Contributions (cont)
• Pre-funding
• Employers may make annual contribution amount on
  first day of calendar year (or if a comparable
  participating employee after January 1, then on
  first day of month that he/she is comparable
  participating employee)
• Does not violate Comparability Rule that those
  who terminate employment/cease to be a comparable
  participating employee before end of the year
  will receive more per month than full-year
  employees
• Cannot recoup funds contributed to HSA if
  employee leaves before end of year
• Employer may change method of funding for all who
  become comparable participating employees after
  initial funding
• Must use the same method (pre-fund, look back, or
  pay as you go) for all who are hired after
  initial funding date
• Must make contribution for all comparable
  participating employees

17
HSA Comparability Rule

• Effect of comparability rule on...
• Matching contributions
• E.g., Employer agrees to make an HSA contribution
  equal to the employees HSA contributions (up to
  a specified amount)
• Impermissible generally
• Comparable employees will receive different
  matching amounts if the elect to contribute
  different amounts
• Permissible if made through the cafeteria plan
• E.g., Employer agrees to make an HSA contribution
  equal to the employees pre-tax salary reduction
  HSA contributions
• HSA as bonus or incentive for participating in
  disease management or health assessment
• Impermissible generally under comparability rule
• Permissible if made through the cafeteria plan

18
HSA Comparability Rule

• Comparability rule DOES NOT APPLY to HSA
  contributions made through the cafeteria plan
• When are contributions made through the
  cafeteria plan?
• Matching contributions-amounts that match all or
  a portion of the employees pre-tax HSA
  contributions
• What if no cash option (e.g. Wellness
  incentives)?
• Arguably, employer HSA contributions are made
  through the cafeteria plan if employees have the
  option to contribute to the HSA with pre-tax
  dollars (without regard to whether they do or not)

19
Highlights of Final Comparability Rule

• Clarification on cafeteria plan exception
• Simply stated, if additional salary reduction HSA
  contributions can be made under written cafeteria
  plan, exception applies
• Additional coverage category for employee plus
  one, plus two, etc.
• Part year employees
• New exception for collectively bargained groups
• Affirmative obligation to find missing
  participants
• Interest obligation for late contributions

20
HRA Nondiscrimination Rules

• Self-insured benefits cannot discriminate in
  favor of highly compensated employees (HCEs) as
  to eligibility and benefits
• Two tests
• Eligibility Test
• Could be an issue if HRA offered only to a
  limited group consisting substantially of HCEs
  (top 25 in pay)
• Contributions and Benefits Test
• Pass test if same HRA accrual is made available
  to all participants for same contribution

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No Direct or Indirect HRA Fundingwith Pre-Tax
Contributions

• HRA cannot be funded by pre-tax salary reduction
  (including cashable Flex Credits) under a
  cafeteria plan
• An HRA may be offered in conjunction with major
  medical plan under a cafeteria plan provided it
  is not funded directly or indirectly with pre-tax
  salary reductions

22
HRA Prohibition Against Direct Funding

• Employees cannot elect to pay for HRA with
  pre-tax contributions
• Salary reduction agreement should indicate that
  pre-tax contributions do NOT fund HRA
• Salary reduction (and otherwise cashable credits)
  attributable to medical coverage cannot exceed
  applicable premium for non-HRA medical coverage
• Applicable premium is determined using COBRA
  criteria (not including 2 admin charge)

23
HRA Prohibition Against Indirect Funding

• No Positive correlation between salary reduction
  for medical plan and HRA amount
• Impermissible practices
• HRA and salary reduction amount cannot increase
  or decrease in tandem
• Option 1 HRA500/Salary Reduction300
• Option 2 HRA800/Salary Reduction500
• Cannot allow employees to elect to use HRA funds
  to pay for employer coverage in lieu of funding
  coverage via salary reduction
• Cannot allow FSA forfeitures to fund HRA

24
HRA Prohibition Against Indirect Funding

• Permissible practices
• Variation between individual/family coverage
• Single coverage/HRA of 500/Salary Reduction 300
• Family Coverage/HRA of 700/Salary Reduction 500
• Threshold correlation (in/out HRA option)
• Inverse Correlation
• HRA amount for multiple options decrease (or
  increases) as salary reduction amount for
  multiple options increases (or decreases)
• Option 1 HRA500/Salary Reduction300
• Option 2 HRA800/Salary Reduction200

25
HRA Discrimination Testing Problem Areas

• Disease Management and wellness incentives
• Varied accruals
• Clearly impermissible age, years of service,
  compensation
• Analysis required business classification,
  location, FLSA status

26
Creative Strategies for VoluntaryHDHP
Participation

• HUGE LOOP HOLE!!

27
Dual Option Offerings

• Experience so far
• Little evidence of adverse selection based on
  post-enrollment demographics
• First-year take-up rates for HDHP/HSA range from
  4 to 50
• Biggest driver of employee HDHP/HSA enrollment
  was employer HSA contribution
• Largest cost reductions seen in previously rich
  plans
• Poor enrollment results when employees perceive
  the change as continued cost-shifting
• 2005 employer contribution strategies were
  generally developed prior to regulatory guidance

28
The CDHC Marketplace

• Whats next?
• Large employers will provide incentives for
  voluntary CDHP enrollment
• CDHP growth rate will increase accelerate
• New hires will arrive with HSA balances, and
  multiple HDHP options will be necessary
• Employee/employer contribution-matching will be
  creative
• The juice will have to be worth the squeeze

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Comparability Rule

• It is a simple tool, and, like most simple
  tools, it is also a crude tool. -Treasury
  spokesperson
• Comparability should be like a party no one
  attends
• Most employers are not charitable institutions
• Why give money away without getting something of
  value in return
• Ownership mindset
• Engagement
• Behavior change

30
Cafeteria Non-discrimination Plan Rules

• Eligibility test
• (classification, length of service,
  participation)
• Contributions and benefits test
• (facts and circumstances)
• Key employee concentration test

31
Fundamental Questions

• What is a cafeteria plan?
• A written plan under which all participants are
  employees and participants may choose among two
  or more benefits consisting of cash and qualified
  benefits
• What is cash?
• Important distinction between salary deduction
  and salary reduction

32
Cafeteria Plan Rules

• Modified election rules
• HSA salary reduction election may be changed
  prospectively during year
• Cafeteria plan election allowed mid-year to add
  HSA
• Negative elections permitted
• Non-discrimination rules
• Eligibility test classification, length of
  service, participation
• Contributions and benefits test facts and
  circumstances
• Key employee concentration test

33
Whats Next in the CDHP Marketplace?

• Employers provide incentives for voluntary
  enrollment
• CDHP Growth rate accelerates (15-25 million HSAs
  by 2010)
• Creative employee/employer contribution-matching
  tailored to the needs of specific employee
  population segment
• If youre depending on voluntary enrollment,
  making the offering as sweet as possible becomes
  essential
• A drop of honey catches more flies than a
  gallon of gall.
• -Abraham Lincoln

34
A Couple of Caveats

• IRS has requested comments whether the ratio of
  an employers matching HSA contributions to an
  employees salary reduction HSA contributions
  should be limited
• Cafeteria Plan non-discrimination rules are
  expected to be re-visited by the IRS during the
  2006

35
And the Survey Says...

• Employers offer CDHPs to reduce costs (85) and
  expose employees to the true cost of health care
  (56)
• Confidence is rising that CDHPs drive participant
  behavior
• Employers believe HSAs do a better job at
  controlling costs than HRAs (41)
• Employers subsidize 12-15 less of the cost per
  employee than traditional medical options
• Large employers rely on voluntary enrollment and
  gradual migration

36
Consumer-Driven Health Plans So Far...

• First-year take-up rates typically from 1 to 50
• Employer HSA contribution is biggest driver of
  enrollment
• Many plan offerings to date have led to the sour
  grapes phenomenon
• The juice must be worth the squeeze

37
Why is Voluntary Contribution Important?

• Results in engagement
• Provides motivation for education
• Generates active involvement
• If you get their money, their hearts and minds
  will follow

38
Tiered Match Examples
Challenge / Objective
Base match on
Encourage participation
Employee contribution
31 on 0 - 250 21 on 251 - 500 11 on gt 500
39
Tiered Match Examples
Challenge / Objective
Base match on
Engage employees less able to meet deductible
Employee salary
21 for lt30k 11 for gt30k
40
Tiered Match Examples
Challenge / Objective
Base match on
Direct more vested to longer service employees
Employee service
11 for lt1 year 21 for 1-2 31 for 3 or more
41
Tiered Match Examples
Challenge / Objective
Base match on
Engage employees in understanding health risk
factors
Employee HRA completion
50 for employee 50 for covered spouse
42
Tiered Match Examples
Challenge / Objective
Base match on
Increase disease management program participation
Enrollment Participation
100 upon Enrollment 200 at Completion
43
Address the Biggest Impediments
44
Possible Contribution Formulas Clarified by the
Treasury Comparability Guidance
45
If done right, the savings are REAL