Transcript Introducing HSAs HEALTH SAVINGS ACCOUNTS from FIC|Fortis

New HSA Rules
Using An Cafeteria Can
Help Boost Your HSA
Enrollment
HSA Comparability Rule
How to Comply With The Final IRS Rules
HRA and HSA Discrimination Traps
• Tests Applicable to HSAs
– Comparability
– Application of the cafeteria plan exception
• Tests Applicable to HRAs
– General 105(h) concepts
HSA Comparability Rule
• What is the “Comparability Rule”?
– If an employer makes contributions to an individual’s 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 Employer’s HDHP
– Failure to comply results in excise tax of 35% on the aggregate
amount of contributions made by employer during the year
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
employee’s 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?
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 B’s employees as his/her own for purposes of
satisfying the comparability rule.
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 doesn’t pick up other coverage---Employee is
“eligible individual” for the entire month
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
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 plustwo coverage must be greater than employee with plus-one coverage;
employee with plus-one coverage must be greater than employee only
coverage
HSA Comparability Rule
• Comparable Participating Employees (cont’)
– Employers may further restrict contributions to those employees
who participate in the EMPLOYER’S HDHP
• Thus, if an otherwise comparable participating employee is an
eligible individual but is not covered under the employer’s 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
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
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 employer’s 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
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
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
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 A’s HSA
– How much must Employer contribute to B’s HSA?
• $500
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
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
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 employee’s 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)
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
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
No Direct or Indirect HRA Funding
with 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
HRA Prohibition Against Direct Funding
• Employees cannot elect to pay for HRA with pretax contributions
– Salary reduction agreement should indicate that pretax 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)
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: HRA=$500/Salary Reduction=$300
– Option 2: HRA=$800/Salary Reduction=$500
• 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
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: HRA=$500/Salary Reduction=$300
– Option 2: HRA=$800/Salary Reduction=$200
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
Creative Strategies for Voluntary
HDHP Participation
HUGE LOOP HOLE!!
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
The CDHC Marketplace
What’s 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
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
Cafeteria Non-discrimination Plan Rules
• Eligibility test
(classification, length of service, participation)
• Contributions and benefits test
(facts and circumstances)
• Key employee concentration test
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”
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
What’s 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 you’re 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
A Couple of Caveats
• IRS has requested comments whether the
ratio of an employer’s matching HSA
contributions to an employee’s salary
reduction HSA contributions should be
limited
• Cafeteria Plan non-discrimination rules are
expected to be re-visited by the IRS during
the 2006
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 (4:1)
• Employers subsidize 12%-15% less of the cost per
employee than traditional medical options
• Large employers rely on voluntary enrollment and
gradual migration
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
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
Tiered Match Examples
Challenge / Objective:
Encourage
participation
Base match on:
Employee
contribution
3:1 on $0 - $250
2:1 on $251 - $500
1:1 on > $500
Tiered Match Examples
Challenge / Objective:
Engage employees
less able to meet
deductible
Base match on:
Employee
salary
2:1 for <$30k;
1:1 for >$30k
Tiered Match Examples
Challenge / Objective:
Direct more vested
$$ to longer service
employees
Base match on:
Employee
service
1:1 for <1 year;
2:1 for 1-2;
3:1 for 3 or more
Tiered Match Examples
Challenge / Objective:
Engage employees
in understanding
health risk factors
Base match on:
Employee HRA
completion
$50 for employee;
$50 for covered
spouse
Tiered Match Examples
Challenge / Objective:
Increase disease
management
program participation
Base match on:
Enrollment
Participation
$100 upon Enrollment;
$200 at Completion
Address the Biggest Impediments
Membership
level
Eligibility
Benefits
Silver
HSA contributions
from $250 - $499
$1,000 in first dollar
accident coverage
Gold
HSA contributions
from $500 - $1,499
Hospital income
coverage paying
$1,000 per day
Platinum
HSA contributions
>$1,500
Silver plus Gold
Possible Contribution Formulas Clarified by the
Treasury Comparability Guidance
Flat Employer
Contribution:
Defined dollar amount or % of deductible
Simple Match:
Employer matches 50% of every $1 employee
contributes up to max of $X
Tiered Match:
Variable employer match
Incentive
Contribution
Financial reward for a specific action or
behavior
If done right, the savings are REAL
Savings Activities
Trend Savings - %
Reduce utilization: Broad change in employee
behaviors
3% - 6%
Better utilization: Disease management
3% - 6%
Redirect to more effective providers and/or
treatments
8% - 12%
Shift from insurance to other payments forms
1% - 6%
TOTAL ANNUAL SAVINGS FROM TREND
15% - 30%
Additional Savings from
Reduced absenteeism;
Reduced turnover;
Improved productivity;
Improved value perception