Health Savings Accounts

1
Health Savings Accounts

• An Overview of the Rules and
• Open Issues
• April 2004

2
Health Savings Accounts

• Tax-free accounts combined with high deductible
  health plan (HDHP)
• Minimum HDHP deductible 1,000
  individual/2,000 family
• Employee and employer contributions
• Tax-free distributions for qualified medical
  expenses
• Accounts are fully portable
• Effective January 1, 2004

3
Who Can Set Up an HSA?

• An individual or an employer
• Eligible individual
• Covered by HDHP
• Not covered by another health plan
• Not eligible to be claimed as a dependent
• Not eligible for Medicare
• Funds managed by trustee or custodian

4
What is a HDHP?

• Annual deductible of at least 1,000
• May not have total annual out-of-pocket
  expenditures in excess of 5,000
• Both are doubled for family coverage
• May provide first dollar coverage for preventive
  care

5
Preventive Care

• Safe harbor definition that is illustrative, not
  exhaustive
• Periodic health evaluations (including related
  tests and diagnostic procedures)
• Routine prenatal and well-child care
• Child and adult immunizations
• Tobacco cessation and weight loss programs
• Screening services (Notice 2004-23 includes an
  appendix of approved screenings)
• Generally does not include any service or benefit
  intended to treat an existing illness, injury, or
  condition

6
Preventive Care (Contd)

• Interaction with state law
• Look at the specific state law coverage mandate
  to determine whether it will fit Treasurys
  definition of preventive care
• If the state law does not fit Treasurys
  definition, presumably can still offer a
  self-insured plan
• Treasury is seeking additional comments on
  Employee Assistance, mental health, and drug
  treatment programs

7
Network Plans

• A plan may have different in-network and
  out-of-network benefits
• A network HDHP may require charges for services
  provided outside of the network that exceed the
  annual out-of-pocket limit
• The annual deductible for out-of-network services
  is not taken into account in determining the
  annual contribution limits

8
Other Permitted Insurance

• General rule the individual must be enrolled in
  only a HDHP
• Exception for Permitted Insurance
• Workers Compensation
• Coverage for tort liabilities
• Coverage for property (e.g., car or homeowners)
• Specified disease or illness policies
• Insurance paying a fixed amount for
  hospitalization
• Coverage for accidents or disability
• Dental, vision, or long-term care coverage

9
Prescription Drug Carve Outs

• Prescription drug carve out plans not permitted
  may not offer first dollar or non-HDHP
  prescription drug coverage
• Limited transition relief
• May have a separate Rx plan until 1/1/06
• Must be a separate plan or rider policy
• May start a new plan- not a grandfathering rule

10
Contribution Limits

• Individuals, their family members, and employers
  may contribute
• Contributions must be in cash
• 2004 contribution limits are the lesser of
• 100 of the deductible for the HDHP, or
• 2600 for self-only, 5150 for family (indexed
  for inflation)

11
Contribution Limits (Cont.)

• Catch-up contributions are allowed between ages
  55 and 65
• 500 per year in 2004
• Increases 100 per year until the amount reaches
  1000 in 2009
• MSA balances may be rolled over

12
Qualified Medical Expenses

• Internal Revenue Code Section 213(d)
• May not be used for insurance premiums, except
  the following
• COBRA
• Health coverage while the individual is receiving
  unemployment compensation
• Health insurance (other than Medicare Supplement
  coverage) for individuals age 65 and over
• Qualified long-term care insurance

13
Tax Treatment Individual Contribution

• HSAs may be offered through a cafeteria plan
• Employee contributions made through salary
  reduction
• Pre-tax contributions
• For an individual HSA, the individual may take
  deduction on their federal income tax return
• Above the line deduction
• Do not need to itemize

14
Tax Treatment Employer Contribution

• Employer is allowed a deduction
• Contribution is excludable from the employees
  gross income and is not subject to withholding
  from wages for income tax, FICA, or FUTA
• Excess employer contributions are subject to a
  35 penalty

15
Tax Treatment Earnings

• Earnings on an HSA are not considered income for
  federal tax purposes

16
Tax Treatment Excess Contributions

• Contributions in excess of the contribution
  limits are considered income to the individual
• The income accrues regardless of who made the
  contribution
• Account holder will be subject to a 6 excise tax
  on the excess contribution amount
• Treasury correction procedures

17
Tax Treatment Distributions

• Qualified distributions for expenses of the
  individual or family members are excluded from
  the individuals gross income
• Non-qualified distributions are includible in
  gross income and subject to a 10 excise tax
• Exception after death or disability, or when the
  individual reaches age 65

18
Do Nondiscrimination Rules Apply?

• It appears an employer may define who is covered
• Internal Revenue Code Section 105(h), which
  prohibits discrimination in favor of highly
  compensated employees, does not seem to apply
  (but would apply to a self-insured HDHP)
• Cafeteria plan nondiscrimination rules seems to
  apply
• HSA statue includes a comparable contribution
  standard an employer must make a comparable
  contribution available to all participating
  individuals

19
Priority Open Issues

• Comparable Contributions- an employer may provide
  the same dollar amount or percentage of
  deductible
• Are matching contributions allowed?
• Can an employer provide wellness credits?
• Can an employer make additional catch up
  contributions for employees over age 55?

20
Priority Open Issues (Contd)

• Likely HSA/ Flexible Spending Arrangement (FSA)/
  Health Reimbursement Arrangement (HRA)
  Coordination Rules
• General rule HRAs and FSAs are not allowed to
  provide benefits below the deductible
• High deductible HRA and FSA plans are okay
• Dental and vision HRAs and FSAs are okay
• HRAs for future retiree health benefits are okay
• Model custodial trust document

21
Open Issues That May be Addressed in June Guidance

• Are HRA rollovers allowed?
• Are embedded family deductibles allowed? If an
  HDHP has them, what is the HSA contribution
  limit?
• What cafeteria plan rules apply?
• May an employer make an employees full HSA
  contribution at the beginning of the year? What
  if the employee leaves mid-year?
• Can the HDHP include an annual or lifetime max or
  treatment limits?

22
Does ERISA Apply to HSAs?

• To avoid ERISA, the employer cannot
• Limit the ability of eligible individuals to move
  their funds to another HSA beyond restrictions
  imposed by the Code
• Impose conditions on utilization of HSA funds
  beyond those permitted under the Code
• Make or influence the investment decisions with
  respect to funds contributed to an HSA
• Represent that the HSAs are an employee welfare
  benefit plan established or maintained by the
  employer
• Receive any payment or compensation in connection
  with an HSA

23
Flexibility Created by DOL Rule

• What restrictions are allowed if the employer is
  willing to accept ERISA responsibility?
• Can an employer place restrictions on rejoining
  an HSA?
• Can an employer require that all HSA
  distributions be made for health expenses?
• Can an employer require that HSA funds be used
  only for benefits covered by the HDHP?

24
Possible ERISA Obligations

• What ERISA obligations would apply?
• Health plan rules Plan document, SPD, file Form
  5500, claims procedure rules, HIPAA portability
  and privacy, ERISA preemption of state law?
• 401(k) plan rules prohibited transaction rule,
  fiduciary liability, investment obligations and
  relief for self-directed funds?

25
Possible Legislative Changes

• Ability to deduct premiums for HDHPs purchased in
  the individual market
• Use of HSA balances for retiree health premiums
• Federal preemption of state law mandates

26
Summary of Rules to Date

• HSA Statute Internal Revenue Code Section 223
  created as part of the Medicare Prescription
  Drug, Improvement, and Modernization Act (MMA)
  (PL 108-173)
• Treasury Guidance
• Notices 2004-02, 2004-23, and 2004-25
• Revenue Procedure 2004-22
• Revenue Ruling 2004-38
• Department of Labor Field Assistance Bulletin
  2004-01

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Questions about HSAs?