HSAs and FSAsBenefits and Pitfalls

Presenter:Pratibha PatelCA Lic. #0E52721

OVERVIEW

The HSA and HFSA – regulations and key characteristics.

Warning! Beware! Caution! Pitfalls to avoid! How the HSA and HFSA can work together

to fit your clients’ needs. Impact of Health Care Reform.

CDHPs were the only type of health insurance plan that

grew in 2009.*

SMALL EMPLOYERS LEAD CONSUMER DIRECTED HEALTH PLAN (CDHP) GROWTH

* According to Association of Preferred Provider Organizations (AAPPO)

2010 Survey of Consumer Directed Health Plans

Estimated 23 million were enrolled in CDHPs in 2009, up from 18 million in 2008 – an increase of 27%!

2008 2009 % change

All employers 10% 15% 5%

Small employers 9% 15% 6%

Large employers 20% 20% 0%

Very large employers 45% 43% -2%

Source: Mercer National Survey of Employer –Sponsored Health Plans

CALIFORNIA MARKET

6% of California employers say they are very likely to drop coverage completely, compared to just 1% last year.

Between 2002 and 2009 premiums more than doubled, increasing 117.5% while California’s overall inflation rate increased just 23.1%.

Single coverage premiums in California cost $5,133 annually – significantly more than the national average of $4,824. Premiums for family coverage were $13,525.California Employer Benefits Health Survey, 2009

HSA and FSABenefits and Key Characteristics

Health Savings Account (HSA)*An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high deductible health plan (HDHP).

* Medicare Prescription, Drug and Modernization Act of 2003, Sec. 223

Advantageof the HSA

To the Employer:

Premium savings with High Deductible Health Plans (HDHP)

Helps employees become consumers

• Better health care choices

• Promotes wellness & responsibility

Strategic use of health care dollars – allows employees to use HSA funds for health care they need, not what the health plan will cover.

Advantageof the HSA

To the Employee:

Increased motivation to utilize consumer choice options. It’s their money!

Funds rollover year to year, eliminating “use it or lose it” philosophy.

Tax benefits on the contributions, earnings and distributions. Increases take home pay with a cafeteria plan.

Long-term investment opportunity.

Portability.

TAX SAVINGS EXAMPLE

Contribution$3,000/year for

25 years

Annual Medical

Expenses$500/year

Tax Bracket(excl. CA)

28% Federal5% State

Avg. Interest Rate/Earnings

4%

Tax Savings on

Contributions$20,625.00

Tax Savings on Deferred

Growth$13,732.87

Account Balance

$104,114.77

At the endof 25 years…

Flexible Spending Accounts (HFSA)*An HFSA is a benefit offered by an employer which allows the employee to elect a fixed amount of pretax wages to be contributed towards a flexible spending account for reimbursement of qualified expenses for health insurance premiums, health care and dependent care.

* IRC Section 125

WHO IS ELIGIBLE TO PARTICIPATE?

HSA

• Covered only by qualified HDHP & permitted insurance/coverage.

• Not enrolled in Medicare.

• Not dependent on another’s tax return.

HFSA

• Employee meeting the eligibility requirements as set forth by the employer.

The HSA Contributions vs. Distributions Contributions to an HSA can only be

made while eligible.

Distributions can be taken at any time regardless of eligibility.

WHO MAY CONTRIBUTE?

HSA

• The employer, employee, both or a family member.

• Employers can make either matching (in a cafeteria plan) or comparable contributions.

HFSA

• The employer, employee or both.

GENERALCOMPARABILITY RULES

If contributing, the Employer must make: Either the same dollar amount, or

The same percentage of HDHP deductible.

To all comparable participating employees Same employment and HDHP coverage categories

Excludable: collectively bargained employees, employees who are not HSA eligible, and may restrict HSA contributions to those employees who are covered under the employer’s HDHP

Warning! If contributions are not comparable, the IRS may impose a 35% excise tax!

Effective for taxable years beginning on or after January 1, 2007, employers may contribute more to the HSAs of non-highly compensated employees (non-HCEs) than to the HSAs of highly compensated employees (HCEs) without triggering the 35% excise tax.

CONTRIBUTION LIMITS

HSA

• 2010• $3,050 single• $6,150 family

• Prorating not required (TRHCA)

HFSA

• No IRS limit except non-discrimination requirements

• Set by employer

If partial year enrollee contributes the full annual limit, the individual must remain eligible for the HSA for 12 months following December 31st of the year in which the contribution was made.

If the individual does not pass the “testing period,” the contribution is subject to income tax and a 10% penalty.

Issue if pre-funding the HSA.

Caution!

FAILING THETESTING PERIOD

The accountholder may: Prorate the IRS maximum contribution by number of

months eligible for HSA. Monthly maximum is not determined by the deductible.

Pay the income tax and penalty on only the excess amount.

Are employee pretax contributions via a cafeteria plan allowed?

HSA: Yes – extra 7.65% savings for both EE and ER!

HFSA: Yes.

Individuals and/or their spouses, over the age

of 55 and not enrolled in Medicare, can make

catch-up contributions.

CATCH-UP CONTRIBUTION

Note: if a husband and wife are covered by a HDHP and both are over the age of 55 and not enrolled in Medicare, they can both contribute the additional catch-up contribution if they each open an HSA.

Year Catch-up Amount

2007 $800

2008 $900

2009+ $1,000

REQUIREMENTSFOR HEALTH PLAN

HSA

• HDHP with minimum deductible of:• $1,200 single• $2,400 family

• Maximum out of pocket:• $5,950 single• $11,900 family

HFSA

• None

Is other coverage permitted?HSA: No, except for permitted insurance and coverage (dental, vision, specific illness, fixed hospital, life, liability, etc.).

HFSA: Yes.

NON-PERMITTED COVERAGE

Scenario

• Employee is covered by EE-only HDHP

• Spouse has EE-only coverage through his employer and HFSA coverage

• Employee is ineligible for HSA due to spouse’s HFSA, unless it is EE-only HFSA

General health HFSAs, HRAs

Chiropractic/Acupuncture insured plans

What type of expenses are allowed?

HSA: Section 213 Medical.Non-medical subject to income tax and 10% penalty. After 65, penalty no longer applies.

HFSA: Section 213 Medical.

Can funds be used to pay health premiums?

HSA: Yes, when receiving unemployment benefits, COBRA , for Long Term Care premiums, or if over age 65 (except Medigap policies, LTD).

HFSA: No.

Must expenses be reimbursed within the same plan year?

HSA: No.

HFSA: Yes. Use It or Lose It rule applies. Optional grace period.

When are funds available?HSA: Per accrual.

HFSA: Immediately, with uniform coverage.

Subject to COBRA?HSA: No.

HFSA: Yes, but not for ARRA subsidy.

RolloversTo roll or not to roll?

ROLLOVERS FROM IRA TO AN HSA*

One time only direct trustee to trustee transfer. Limited to the maximum HSA contribution. Amount contributed is not allowed as

a deduction. The IRA transfer will not be included in

income or subject to the early withdrawal additional tax.

* TRHCA

ROLLOVER FROM HFSA

General: One time transfer.

Amounts are over and above annual maximum contribution limit.

Employer Requirements: Must have HFSA prior to September 2006.

Plan amendment required.

HFSA must have Grace Period.

Qualified HSA distribution directly to the HSA trustee within 75 days after the end of the plan year.

ROLLOVER FROM HFSA

Employee Requirements: Individual must be covered by HFSA on

September 21, 2006.

Maximum contribution is the balance in the HFSA as of September 21, 2006, or, if less, the balance as of the date of the transfer.

Individual must be eligible for the HSA on 1st of month when rollover is made to avoid income tax and 10% penalty.

Individual must elect the “qualified HSA distribution” prior to end of plan year.

Beware!

If individual does not remain an eligible individual for the 12 months following the month of the contribution, the transferred amount is included in income and subject to a 10% additional tax.

How can HSAs and FSAs work together?

For HSA compatibility, the HFSA must not provide benefits below the health deductible.

• Post-deductible HFSA: stacking of plans.• Limited HFSA: designed for dental, vision and

preventive coverage only.HFSAs can be designed creatively and be paired with HDHPs and with Employer Contributions.

Example

• EE contributes to HSA.

• EE has $2,000 elected in LHFSA to pay for orthodontia, dental and vision expenses.

• HSA is only used for medical expenses, allowing more funds to accumulate.

Savings! Stacking HSA-compatible HFSA with HSAs allow greater accumulation in the HSA for future expenses.

Employer and Employee save more in wage taxes.

Why is it worth it?

LIMITED HEALTH FLEXIBLE SPENDING ACCOUNT (LHFSA)

Effective immediately for FSAs: Expenses for dependents less than age 27 in the calendar year may be reimbursed from FSA/HRA.

Plan amendment required before 12/31/10.

Employees my modify or newly elect FSAs to cover adult dependents.

Effective 01/01/2011 for FSAs, HSAs & HRAs: No OTC medication/drugs/biological treatments without Note of Medical Necessity (NMD).

No Advil, Claritin, antibacterial ointments, cold/cough medication, etc. without written prescription or NMD.

Braces, band-aids, thermometers, etc. are allowed.

HEALTH CARE REFORM: FSA & HSA

HEALTH CARE REFORM: FSA & HSA

Effective 01/01/2011 for HSAs: Increase in excise tax from 10% to 20% on HSA withdrawals for non-medical expenses prior to age 65.

Effective 01/01/2013 for FSAs: Annual contribution cap. Employees will be permitted to contribute a maximum of $2,500 by salary reduction, indexed by the Consumer Price Index (CPI) for subsequent years.

Presenter Contact Info

Pratibha PatelCoPower11020 Olson Drive, Suite 220Rancho Cordova, CA 95670Tel: 916.669.8335E-mail: ppatel@copower.comCA Lic.# 0E52721