Health Care Savings Accounts

Presented by

Linda A. Meyerhoffer, CPA

June 6, 2006

www.yourflex.com

Benefit Solutions, Inc.

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Consumer Driven Health Care Vehicles

High-Deductible Health Insurance MERP’s – employer & employee funded HRA’s – ER funded, carry over & spend

down features Health FSA’s MSA’s HSA’s

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Medicare Reform Legislation

Most significant change to Medicare since it’s inception

Also helps those not eligible for Medicare by adding HSA’s, effective January 1, 2004

Legislation is hailed as “historic breakthrough” by some, criticized as flawed and limited by others

While new law provides framework for change, details will emerge over time.

Implementation of programs scheduled from 2004 to 2010+

Benefit Solutions, Inc.

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HSA Eligibility Requirements

An individual is eligible only if Covered by a qualifying HDHP Not covered by another disqualifying coverage

• General purpose health FSA or HRA• Impact of new FSA 2 ½ month rule

Pharmacy benefits must be under the HDHP – no card program below the deductible unless 100% paid for by employee

Not eligible to be claimed as a dependent (Code Sec 152)

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HSA Eligibility Requirements

An individual is eligible only if Not ENTITLED TO Medicare

Have attained age 65 and - have applied for and are receiving retirement benefits

from Social Security or the Railroad Retirement Board; or

is eligible for monthly retirement benefits from Social Security or the Railroad Retirement Board (but is not receiving such benefits because he or she has not applied for them) and has filed an application for Medicare Part A.9

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HSA Eligibility Requirements

Other Types of Insurance Permitted Insurance associated with a specific disease Hospitalization that pays a fixed amt/day Vision Dental Limited FSA - covering vision, dental and preventive

care (Not OTC meds) Suspended HRA – elect forgoing coverage before

coverage period begins Many EAP’s and Wellness Mgmt Programs

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HSA Eligibility Requirements

Other Types of Insurance Not Permitted Va Benefits within 3 months before month of

eligibility (preventive excluded) TRICARE – Health care for active-duty &

retired members of uniformed service/family On-site clinic – if it provides more than

nominal medical services and preventive/permissible care.

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HSA Eligibility Requirements

The following can also establish an HSA and contribute but not under a 125 plan. Therefore any contributions by the employee can not be pre-taxed. Since they are not employees, any ER contribution is not tax deductible either.

More than 2% shareholder of an S Corp Partners in a Partnership Self-employed individuals

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HSA Eligibility Requirements

Eligibility is determined on the 1st of each month

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HSA Eligibility Requirements

Once a participant becomes ineligible, they can not contribute but they can take distributions

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HSA Coverage Requirements

Employee must have plan with deductible of $1,050 or more in 2006 ($2,100 for family) Plan out-of-pocket maximum cannot be greater

than $5,250 ($10,500 family) OK if plan imposes no deductible for preventive

care or has higher OOP limit for out-of-network benefits

Deductible and OOP maximums are indexed annually

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HSA Contribution Requirements

• Maximum annual contribution is lesser of deductible or $2,700 ($5,450 family) for 2006 – $225/month Additional contributions allowed for 55+ : $700

($1,400 family) increasing to $1,000 ($2,000 family) in 2009+

Roll over contributions not subject to limits (HSA to HSA)

Maximum annual contributions are indexed Cannot rollover HRA or FSA funds in to HSA

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ER Contributes to HSA

Outside of a 125 plan –

then comparable contributions must be made for all employees with comparable coverage – same $ or % of deductible. Employees don’t have a choice of what to do with the money.

Inside of a 125 plan –

comparability does not apply, only discrimination testing regs. More flexibility on allocating funds, matching, etc.

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Special Rule for Married Couples

If either spouse has family coverage, then both spouses are treated as having only that family coverage.

If both spouses have family coverage, then the lower annual deductible is used for purposes of determining both eligibility and the combined monthly contribution limit.

Separate Trusts – no joint HSA

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Tax Treatment

Contributions (subject to limits) Employer contributions excluded from income and

wages Individual after-tax contributions deductible “above the

line” Contributions can be made until April 15 of the following

year Pre-tax contributions allowed through Section 125

“cafeteria plan” if limited to permitted coverage

Earnings Trust earnings grow tax-free

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Tax Treatment

Distributions Distributions for qualified medical expenses are tax-free Other distributions are permitted but are included in

income and subject to 10% penalty tax (no penalty if eligible for Medicare)

Special rules for distributions upon death and divorce Can be used for self, spouse and dependents even

though they may not be eligible for HSA Self-adjudicating – keep those receipts

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What Happens at Death

If beneficiary is spouse, transfer to spouse is non-taxable

If non-spouse, the account ceases to be an HSA and the fair market value of the account is given and taxed then

Claims for qualified medical expenses of the decedent can be deducted first if done within a year

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Tax Treatment

Only approach where contribution, investment earnings and withdrawals for health-related expenses are all free from taxation

Expenses must be incurred after an HSA is established

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What Expenses Will HSA’s Cover

Most insurance not covered except:– COBRA, – LTC within Code § 213(d)(10) limit– any received while unemployed, – any health insurance when 65 or over except for

Medicare Supplement

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Investing Options

No life insurance No co-mingling with other property No collectibles Yes - Same investment options of an IRA Yes Bullion or coins No borrowing against it

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Special Considerations

HSA’s offered through 125 plans– Irrevocable election rules do not apply– Changes are prospective– Uniform coverage rule does not apply– No required 12 month coverage– No comparability rules– Include when running Key Man Test (25% rule)– Can still fund LTC through HSA

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Special Considerations

COBRA does not apply ERISA does not apply as long as

– Establishment of the account is voluntary– Limit the ability for the employee to move the $– Must not impose conditions on utilization – Must not make or influence investment decision– Must not represent that the HSA is established or

maintained by the employer– must not receive any payment or compensation in

connection with the HSA. HIPAA not sure if “health plan” yet

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Employer Options

Do nothingAdopt a HDHP (HSA compliant)

With or without employer-sponsored HSA With or without employer contribution to HSA Convert

existing CDHC from HRA to HSA

Adopt an HSA Convert existing Archer MSA to HSACommunicate changes in conjunction with future reductions in retiree subsidies

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Employer Options - HDHP

Offer an HSA-compliant HDHP Employees have option of setting up HSA of their own No cost to employer for HSA

Offer HDHP and sponsor an HSA for eligible employees Employees can contribute through employer or set up HSA on

their own Administrative cost for employer unless employees pay cost

Offer HDHP, sponsor HSA and make contributions to the HSA Employer plus employee contribs cannot exceed limits Employer pays HSA cost plus administrative cost (unless paid by

employees) Funding HSA’s by employer is not a long-term liability but has a

cash cost

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Employer Options - CDHC

Consumer Driven Health Care – Implement HSA compliant plan, or convert current HRA based plan to an HSA

Disadvantages: Contraints on insurance protection provided No employer control over savings account qualified expenses and

carryover provisions Greater risk that employees will not use savings account wisely Employees less bound to employer Cash funding required Cannot roll “unused” HRA funds into HSA

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Vendor Overview

Vendor landscape is morphing Stay alert Many not certain what final shape will be

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Questions & Answers