HEALTH SAVINGS ACCOUNTS New Planning Opportunities For Employer Health Plans

1
HEALTH SAVINGS ACCOUNTSNew Planning
Opportunities For Employer Health Plans

• By
• Jim Griffin
• Jackson Walker L.L.P.
• 214-953-5827
• Jgriffin_at_jw.com

2
Medicare Prescription Drug, Improvement, and
Modernization Act of 2003

• Pub. L. No. 103-173
• December 8, 2003
• Effective beginning January 1, 2004

3
NEW LAW

• New Code Section 223
• New Code Section 4980G

4
LEGISLATIVE POLICY

• Allows employees to save for health needs in
  retirement
• Contain medical inflation by giving employees
  incentive to forego unneeded care
• Reduce waste and bureaucracy by giving patients a
  stake in the savings

5
WHAT IS AN HSA?

• Tax - exempt trust or custodial account
• Qualified medical expenses
• Eligible account beneficiary
• Highdeductible health plan

6
CONTRIBUTIONS

• Employee
• Employer
• Both
• Cafeteria Plan

7
CARRIERS AND PRODUCTS

• Aetna
• Fortis Health
• United Health Group
• Lumenos

8
IMPROVEMENT OVER MSAs

• First introduced in 1996
• Expand availability
• No small employer requirement (50 or fewer)
• No distinction between corporations, L.L.C.s,
  partnerships and self employed
• No employer involvement required
• Make permanent in the tax code
• Loosen MSA restrictions

9
WHO IS AN ELIGIBLE ACCOUNT BENEFICIARY?

• Monthly Determination
• Covered by HDHP
• Not covered by any other plan
• Not entitled to Medicare
• Not a dependent of someone else

10
HIGH DEDUCTIBLE HEALTH PLAN
In Network Amounts
Annual Deductible Out of Pocket 2004 Contribution Limit
Self Only At least 1,000 Not more than 5,000 Lesser of annual deductible or 2,600
Family At least 2,000 Not more than 10,000 Lesser annual deductible or 5,150
Indexed in 50 increments
11
EXCLUSIONS FROM THE DEDUCTIBLE

• Preventive care services
• Accident coverage
• Disability coverage
• Dental care
• Vision care
• Long term care

12
OUT OF POCKET EXPENSES

• Deductible
• Co-payments
• Other amounts

13
TAX TREATMENT OF CONTRIBUTIONS

• Contributions are tax deductible
• Above the line
• Not an itemized deduction
• Amounts paid from an HSA are not also deductible
  as Section 213 medical expenses
• Employer contributions are excludable from the
  employees income
• Not subject to FICA taxes

14
TAX BENEFIT CHART
Here are the tax savings for a 2,000
contribution to an HSA for families of various
income levels
INCOME (AGI) TAX BENEFIT
25,000 35,000 50,0000 150,000 500,000 1,000,000 0 200 300 615 721 721

• Married couple with two children in tax year 2004
• No tax benefit because at this income level
  all tax liability would be eliminated by the
  child tax credit

15
HIGH DEDUCTIBLE HEALTH PLAN

• Fully insured
• Self - funded

16
HIGH DEDUCTIBLE HEALTH PLAN PERMITTED INSURANCE

• Workers Compensation
• Tort Liabilities
• Property Insurance (for example, car insurance)
• Specific disease or illness (for example, cancer
  insurance)
• Fixed amount per day of hospitalization

17
EMBEDDED DEDUCTIBLES

• The XYZ Company health plan has an individual
  deductible of 750 and a family deductible of
  2,250. If Employee A incurs covered medical
  expenses in a year of 1,500, the Plan would pay
  750, even if the familys covered medical
  expenses do not exceed 2,000. The Plan is NOT a
  HDHP.

18
CATCH-UP CONTRIBUTION

• Eligibility Ages 55 to 65
• Catch-up Limit

2004 2005 2006 2007 2008 2009 and later 500 600 700 800 900 1,000
19
CONTRIBUTION LIMIT CO-ORDINATION WITH OTHER
PLANS

• Reduced by amount paid to MSAs
• Reduced by employer contributions

20
CONTRIBUTION LIMIT

• Computed monthly
• Spouses
• If either spouse has family coverage, then both
  spouses are treated as having family coverage
• If both spouses have family coverage under
  different plans, both spouses are treated as
  having family coverage with the lowest annual
  deductible
• Both spouses may make catch-up contributions, if
  age 55 but not 65

21
CONTRIBUTION LIMIT

• Excess contributions are subject to a 6 excise
  tax, unless removed from the HSA

22
CONTRIBUTION LIMIT SPOUSES

• H and W are married. H is 58 and W is 53. Both
  work and have separate HDHP family coverage. Hs
  deductible is 3,000. Ws deductible is 2,000.
• Hs HSA contribution limit is 1,500
• Ws HSA contribution limit is 1,000

23
ADDITIONAL CONTRIBUTION REQUIRMENTS

• Must be made in cash
• Not stock or other property
• April 15 deadline
• Entire contribution amount may be made on 1st day
  of the year

24
EMPLOYER CONTRIBUTIONS DISCRIMINATION
RERQUIREMENTS

• Comparable contributions
• Same dollar amount
• Same percentage
• Comparable participating employees
• Applied separately to part time employees (lt30
  per week)
• 35 excise tax

25
DISTRIBUTIONS

• May be made at anytime
• If used for qualified medical expenses,
  distributions are excluded from gross income and
  are not subject to penalty tax

26
DISTRIBUTIONS

• Other distributions are includable in income and
  are also subject to a 10 penalty tax unless the
  account holder has
• Attained age 65
• Becomes disabled or
• dies

27
QUALIFIED MEDICAL EXPENSES

• For account beneficiary, that persons spouse and
  dependents
• Defined in Internal Revenue Code Section 213(d)
• Includes over-the-counter drugs as permitted by
  Revenue Ruling 2003-102

28
QUALIFIED MEDICAL EXPENSES

• Other insurance premiums
• Qualified long-term care insurance
• Cobra premiums
• Health coverage while receiving unemployment
  benefits
• Medicare premiums, if over 65
• Not Medigap
• Retiree health insurance premiums after account
  holder reaches age 65

29
DISTRIBUTIONS

• Debit, credit or stored-value cards are ok
• HSA may be divided in connection with the account
  holders divorce

30
DISPOSITION OF HSA UPON DEATH OF ACCOUNT HOLDER

• Spousal beneficiary account continues tax-free
  for spouse
• Non spousal beneficiary account terminates and
  is taxed as income to the recipient
• Taxable amount is reduced by amounts incurred
  before the account holders death and paid within
  1 year after date of death

31
HSA TRUSTEE/ CUSTODIAN

• Insurance company
• Bank
• Similar financial institution
• Any trustee or custodian for
• IRAs
• MSAs
• Not required to be connected to institution that
  provides HDHP

32
HSA INVESTMENTS

• NOT life insurance
• No commingled ownership, except
• Common trust fund
• Common investment fund
• Held in U.S.
• Non forfeitable not subject to use it or lose
  it
• Subject to UBTI

33
ROLLOVERS

• MSA to HSA OK
• Need not be in cash
• Not subject to contribution limits
• IRA Not OK
• HRA Not OK
• 125 Account Not OK
• HSA to HSA OK
• 60 day rule
• 1 time per year

34
RECORDKEEPING

• Burden is on employee
• Not employers
• Not HSA trustee or custodian

35
SIMILARITIES BETWEEN HSA, HRA AND FSA

• Pre tax
• Employee and employer contributions permitted
• Unused balances may be carried over to later
  years (except for FSA)

36
DIFFERENCES BETWEEN HSA, HRA AND FSA

• HSA assets must be held in trust
• HSAs are completely portable
• HSA limits are subject to inflation adjustments
• HSA have more liberal distribution rules
• HRA do not have to be combined with HDHP

37
FIRST ROUND OF GUIDANCE IRS NOTICE 2004-2

• Issued December 22, 2003
• HDHP requirements
• Trustee requirements
• Tax Treatment
• Contributions
• Distributions
• Transfers
• MSAs
• others

38
FURTHER GUIDANCE

• Relationship between HSAs, HRAs, and 125 plans
• Definition of preventive care
• Corrective procedures
• HDHP requirements
• IRS Notice 96-53 regarding MSAs
• Interplay between HDHP and state mandated coverage

39
CO-ORDINATION WITH CAFETERIA PLANS

• Is FSA coverage considered other disqualifying
  coverage?
• FSA coverage for dental or vision benefits
• Applicability of nondiscrimination rules
• Ability to fund long term care through HSA funded
  through FSA
• Election changes

40
SOME OBSERVATIONS

• Boost for consumer driven health plans
• Equalizer for self-employed individuals
• New retirement savings vehicle
• Cost control technique
• Impact on current plan designs and premiums
• Impact on low deductible plans
• Predictability in employer costs

41
SOME OBSERVATIONS

• Cap on employer expenses
• Impact on Health Reimbursement Accounts
• IRS Notice 2002-45
• Rev. Rul 2002-41
• Applicability of ERISA, COBRA, HIPAA
• Substantiation requirements

42
TARGET MARKETS

• Individuals
• Younger, healthier people
• Upper income people
• Middle aged, middle class (?)
• Small groups
• Large groups (?)