Transcript Strategies for Reforming the Private Health Insurance Market

Health Savings Accounts-HSA
Health Reimbursement Arrangements-HRA
Flexible Spending Accounts- FSA
The HDH Group, Inc.
600 Grant Street, Suite 1100
Pittsburgh, PA 15219
412-391-7300
Flexible Spending Accounts
FSA
Flexible Spending Accounts
(FSAs)
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A Flexible Spending Account (FSA) is a plan that
operates under Section 125 of the Internal Revenue
Code (IRC).
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An FSA permits eligible employees to set aside pretax dollars for out of pocket medical expenses not
covered through their medical program and
dependent care expenses
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Employees or employers may contribute to FSAs.
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Employees save federal income tax, Social
Security/Medicare and state and local taxes.
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Maximum amount is statutorily limited in Dependent
Care Accounts to $5,000. No limit is imposed on
Medical Spending Accounts – employers can choose
to limit or not.
Flexible Spending Accounts
(FSAs)
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Funds are available to participating employees at
anytime throughout the year.
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Eligible expenses considered are deductible
medical expenses by the IRS (Publication 502 and
Section 213(d) of the Internal Revenue Code), are
not reimbursed by any other plan AND over the
counter medications.
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Ineligible expenses would include anything
cosmetic or products used to benefit one’s general
health as well as those expenses incurred prior to
the beginning of the plan or plan year.
Flexible Spending Accounts
(FSAs)
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Dependent Care Accounts permit reimbursement for
baby-sitters, daycare, or the care of a parent.
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Pre-tax dollars can be used to help pay the costs of
any caregiver providing services while you are at
work. These are expenses necessary in order for
employees and/or spouses, if married, to continue
working.
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Employees can be reimbursed for: adult and child
daycare services; nanny expenses for services
performed inside your home; registration fees to a
daycare facility; and expenses paid to a relative
who is not under age 19 or a tax dependent of the
participant.
Flexible Spending Accounts
(FSAs)
Use it or lose it
You must incur expenses within your plan year. You can be
reimbursed for those expenses through three months
following the end of your plan year. Otherwise, you will lose
your money.
Employers can also choose to extend the period in which
employees can claim expenses beyond the grace period.
Health Reimbursement
Arrangements
HRA
Health Reimbursement
Arrangements (HRAs)
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Employer only discretionary contributions.
Employee contributions are not permitted.
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No contribution limit (except employer’s budget).
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Carry-forward of account balance is permitted
indefinitely, however carry-forward may be capped
or not carried forward at all.
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HRAs permit employers a great deal of design
flexibility. Employers can establish forfeiture rules.
Those rules can address termination, retirement,
break-in-service and loss of eligibility.
Health Reimbursement
Arrangements (HRAs)
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No portability. Employees participating
can only use the account after a
qualifying event by paying COBRA
premiums to continue coverage.
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Employers contribution is not subject to
FICA or FUTA.
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Employees receive benefits for qualified
expenses tax-free.
Health Reimbursement
Arrangements (HRAs)
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Permissible medical expenses include: qualified
medical expenses under IRC Section 213(d),
COBRA premiums, retiree health premiums, long
term care premiums (NOT SERVICES) and overthe-counter drugs.
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Employers can limit the expenses the HRA will pay.
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If combined with an FSA, unless your Summary
Plan Description specifies, the HRA pays first and
FSA pays second.
Health Savings Accounts
HSA
Health Savings Accounts (HSAs)
Defined
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Health Savings Account = special account
owned by an individual where contributions
are used to pay current and future medical
expenses
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Used in conjunction with a “High Deductible
Health Plan” (HDHP)
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Insurance that does not cover first dollar
medical expenses (except preventive
care)
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Can be HMO, PPO or indemnity plan as
long as it meets the requirements
Health Savings Accounts (HSAs)
Eligibility
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Any individual that:
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Is covered by an HDHP
Is not covered by other health insurance
Is not enrolled in Medicare
Cannot be claimed as a dependent on someone
else’s tax return
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Children cannot establish an HSA
Spouses can establish their own HSA
No income limits on who may contribute
No earned income requirement
Health Savings Accounts (HSAs)
Other Permitted Health Coverage
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Specific disease
Hospital indemnity
Auto insurance
Vision
Dental
Disability
Employee assistance programs*
Disease management programs*
Wellness programs*
Drug discount cards
Eligibility for VA benefits
 Unless you have received benefits in the last
three months
*These programs must not provide significant benefits in medical care or
treatment
Health Savings Accounts (HSAs)
1st Dollar Medical Benefits Making
Someone Ineligible for an HSA
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Medicare
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TRICARE Coverage
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Flexible Spending Arrangements
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Health Reimbursement Arrangements
There are permitted HSA/HRA/FSA Combinations
Health Savings Accounts (HSAs)
Permitted HSA/HRA/FSA Combinations
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Limited purpose” FSAs and HRAs that reimburse certain
benefits (i.e. vision, dental, or preventive care benefits)
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“Post-deductible” FSAs or HRAs that only provide
reimbursement after the minimum annual deductible has
been exhausted under the HDHP
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“Retirement” HRAs providing reimbursement after
retirement
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“Suspended” HRAs when employees have elected to
forgo health reimbursements for the coverage period
Health Savings Accounts (HSAs)
High Deductible Health Plan Defined (HDHP)
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2007 Minimum Deductible:
o $1,100 (self-only coverage)
o $2,200 (family coverage)
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Annual out-of-pocket (including deductible and co-pays):
o $ 5,500 (self-only coverage)
o $11,000 (family coverage)
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Benefit Designs not counted toward the out of pocket
maximum:
Lifetime limits on benefits
Limits to UCR amounts
Limits on specific benefits:
max number of days
max dollar reimbursement
Health Savings Accounts (HSAs)
High Deductible Health Plan Defined (HDHP)
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HDHPs can have:
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First dollar coverage (no deductible) for
preventive care (co-pays allowed)
Higher out-of-pocket (co-pays and coinsurance)
for non-network services
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All covered benefits must apply to the plan
deductible, including prescription drugs
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Prescription Drugs
o Must apply costs to the annual deductible
o May NOT contribute if drugs are separate plan
or rider
Health Savings Accounts (HSAs)
Preventive Care - Defined:
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Excludes any benefit or service intended to treat an existing
illness, injury or condition
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Certain drugs and medications can be considered preventive
care
Drugs taken by a person who has developed risk factors for
a disease that has not yet manifested itself or to prevent
reoccurrence of a disease (i.e. Cholesterol-lowering
medication)
Plan sponsors can apply co-pays to preventive care services
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Be aware of state mandated 1st dollar coverage – it is possible
to lose HDHP status
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Safe harbor list - Defining Preventive Care:
o Periodic health evaluations (e.g. annual physicals)
o Screening services (e.g. mammograms)
o Routine pre-natal and well-child care
o Child and adult immunizations
o Tobacco cessation programs
o Obesity weight loss programs
Health Savings Accounts (HSAs)
HSA Contribution Rules
Contributions to an HSA can be made by the employer or the individual
or both
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Employer contributions are not taxable to the employee
Employee contributions are an “above the line” deduction
Maximum contribution specified by law (indexed) to an HSA
from all sources is:
 $2,850 (self-only coverage – 2007)
 $5,650 (family coverage – 2007)
Catch-up contributions for individuals age 55 and older are:
 $ 800 – 2007
 $ 900 – 2008
 $1,000 – 2009 and after
Mid-Year enrollments will be entitled to contribute up to the
maximum allowable contribution amount for the plan year.
Health Savings Accounts (HSAs)
HSA Contribution Rules
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Contributions can be made at any time during the year in
one or more payments
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Deadline for contributions is April 15th
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Excess contributions must be withdrawn by the
individual/owner or be subject to an excise tax
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Pro-rata portion of earnings must be included with
return of contributions
Pay income tax on withdrawn amount, but no 10%
penalty
If maximum was not reached, any other non-qualified
withdrawal will be subject to income tax and the 10%
penalty
Health Savings Accounts (HSAs)
HSA Contribution Rules - Employee Contributions
Contributions can be made by a salary reduction arrangement
through a cafeteria plan (Section 125 plan)
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Elections can change on a month-by-month basis
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Pre-tax contributions to the HSA are not subject to
individual and employment taxes
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Employer can automatically make cafeteria plan
contributions on behalf of individuals unless the individual
affirmatively elects not to have contributions made
(“negative elections”)
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Employer matching contributions through a cafeteria plan
are permitted
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Cafeteria plan nondiscrimination rules apply
Health Savings Accounts (HSAs)
HSA Contribution Rules - Employer Contributions
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Are always excluded from employees’ income (pre-tax)
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Final regulations effective on July 31, 2006 require that
employer contributions be “comparable” for all employees
participating for contributions made on or after January 1,
2007.
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If contributions are not comparable = 35% excise tax
applies to the amount contributed on behalf of
employees
Self-employed, partners and S-Corporations shareholders
are generally not considered employees and cannot receive
an employer contribution – they can make deductible
contributions to the HSA on their own
Health Savings Accounts (HSAs)
HSA Contribution Rules – Employer Contributions “Comparable”
IRS rules on comparable HSA contributions
Employers are not required to make any contributions, if you do,
each calendar year’s contributions must be comparable across
certain groups of employees
Contributions must be made to “comparable participating
employees”
This means employer contributions are comparable if they are either
(1) the same amount or (2) the same percentage of the employee’s
deductible for employees within the same category of HDHP
overage
Health Savings Accounts
(HSAs)
HSA Contribution Rules - Employer Contributions -“Comparable”
Three categories of employees that may be treated separately are
recognized:
Current full-time employees
Current part-time employees, and
Former employees (except former employees with HDHP
coverage due to a COBRA election)
Categories of HDHP coverage that may be treated separately:
Self
Self plus one
Self plus two (contributions not less than self plus one)
Self plus three or more (contributions not less than self plus
two)
Health Savings Accounts
(HSAs)
HSA Contribution Rules -Employer
Contributions – “Comparable”
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Comparability rules apply to a category of
employees only if an employer contributes to the
HSA of any employee within the category.
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Other categories based on employment status,
such as collectively bargained/non-collectively
bargained or salaried/hourly are not permitted
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IRS rules present three methods employers can
use to make contributions:
 pay-as-you-go
 look-back (made at the end of the year)
 Pre-funded (made at the beginning of the
year)
Health Savings Accounts (HSAs)
HSA Distribution Rules
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Tax-free distributions for “qualified medical
expenses”, including over-the-counter drugs
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Must be incurred on or after the HSA was
established
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If HDHP coverage effective on first on month, HSA can be
established as early as first day of same month
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If HDHP coverage effective on any day other than first day
of month, HSA cannot be established until first of following
month
Distributions can be taken for covered employee,
spouse, or dependent of the employee
Health Savings Accounts (HSAs)
HSA Distribution Rules
Non-qualified distributions are included in income of
employee/individual
Non-qualified distributions are subject to 10% penalty. Exceptions
to this rule are:
 Individual dies or become disabled
 Individual is age 65
Qualified medical expenses do not include premiums for other
health insurance.
Exceptions include:
 COBRA continuation coverage
 Any health plan coverage while on unemployment
compensation
 Individuals enrolled in Medicare (except Medigap
premiums)
 Qualified long-term care insurance premiums
 Tax-free reimbursement cannot exceed annually adjusted
“eligible long-term care premiums” in IRC
Health Savings Accounts (HSAs)
HSA Distribution Rules
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Individuals must keep track of HSA activity (including
employer contributions) – Account holders should keep
receipts:
o May need proof for IRS for claims substantiation
o May be required by insurance company to prove that
HDHP deductible was met
o Not all medical expenses paid out of the HSA have to be
charged against deductible
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Distributions can be used to reimburse prior years’ expenses
as long as they were incurred on or after the date the HSA
was established:
o No time limit on when distributions occur
o Keep receipts to prove that expenses were incurred and
were not paid for or reimbursed by another source or
taken as an itemized deduction
Health Savings Accounts (HSAs)
HSA Distribution Rules
Mistaken distributions from an HSA can be returned to
the HSA:
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Individual must produce clear and convincing
evidence that the distribution was a mistake of
fact
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Must be repaid by April 15 of the year following
the year in which the individual knew or should
have known the distribution was a mistake
Health Savings Accounts (HSAs)
HSA Accounts
HSA Accounts are owned by individuals, not an
employer, and are required to be held in trust.
The individual decides:
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Whether he or she should contribute;
How much to use for medical expenses;
Which medical expenses to pay from the
account;
Whether to spend or save contributions in their
account;
Which company (trustee) will hold their
account;
What type investments they will use to grow
the account.
Health Savings Accounts (HSAs)
HSA Accounts
HSA custodians or trustees can put reasonable limits on
accessing the money in the account:
 Frequency of distributions, and
 Size of distributions.
Trustees or Custodians can be:
 Banks,
 Insurance Companies
 Credit Unions, and
 Entities already approved by the IRS to be an IRA or
Archer MSA trustee or custodian.
 Trustee or Custodian fees can be:
 Paid from the assets in the HSA account without
being subject to tax or penalty, or
 Can be directly paid by the beneficiary without being
counted toward the HSA contribution limit.
Health Savings Accounts (HSAs)
HSA Accounts
Rollovers from Archer MSAs and other HSAs are permitted:
 Only one rollover per year permitted,
 A rollover to a new HSA must be completed within 60 days,
Multiple trustee to trustee transfers are allowed in a single year
 Both trustees must agree to do the transfer although they
are not required to accept rollovers.
Once in a lifetime trustee to trustee transfer is permitted from an
IRA into an HSA, subject to annual contribution limitations.
One-time, tax-free rollover of funds from a Flexible Spending
Account (FSA) or Health Reimbursement Arrangement (HRA)
effective from January 1, 2007 through December 31, 2011.
Health Savings Accounts (HSAs)
HSA Accounts - Beneficiaries
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When an HSA account holder dies, if the beneficiary
listed on the account is the surviving spouse, the
spouse will be the new owner of the HSA.
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If the beneficiary is other than the surviving spouse,
the amount of funds in the HSA are taxable income to
the beneficiary, except for medical expenses of the
account holder paid within one year of death.
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The taxable amount will be reduced by the amount of
estate tax paid due to inclusion of the HSA into the
deceased individual’s estate.
Health Savings Accounts
(HSAs)
HSA Accounts – Investments
Accounts can grow through investment earnings with the same
investment options and investment limitations as an IRA
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Permitted investment options:
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Cash;
Stocks;
Bonds;
Options (some trustees may limit); or
Gold, silver, platinum, or palladium bullion.
Prohibited investment options:
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Life insurance and
Collectibles, including
Any work of art;
Any rug or antique;
Any metal or gem;
Any stamp or coin;
Any alcoholic beverage; or
Coins of most foreign countries.
Health Savings Accounts
(HSAs)
HSA Accounts - Taxes
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Contributions by an eligible individual / family member
are tax deductible by the eligible individual on an
“above the line” basis. This means a person can deduct
their HSA contribution without itemizing.
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Employer contributions to an HSA must be reported on
the employee’s Form W-2.
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Form 1099-SA will be required to be filed by the
trustee.
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Form 8889, Health Savings Accounts, will be required
to be completed along with the employee’s Form 1040
to report contributions to and distributions from HSAs.
Health Savings Accounts (HSAs)
HSA Treasury Assistance
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Website – www.treas.gov
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Click on “Health Savings Accounts”
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All Treasury guidance
Frequently asked questions
IRS forms and publications
HSA statute
Examples of tax savings from HSA contributions
Links to other useful sites
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E-mail address: [email protected]
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Voice mailbox:
(202) 622-4HSA