REFRESHER ON HEALTH SAVINGS ACCOUNTS (HSAs)

Transcription

1 Volume Twenty, Issue One January 2017 REFRESHER ON HEALTH SAVINGS ACCOUNTS (HSAs) The Medicare Prescription Drug Improvement and Modernization Act of 2003 established Health Savings Accounts (HSAs). These tax-favored custodial accounts allow accountholders to make qualifying tax-free contributions, earn interest and pay for qualified medical expenses tax-free. HSAs have a number of rules that apply to eligibility. The most basic rule is that an accountholder must be covered by a qualifying high deductible health plan (HDHP) to make contributions. Many employers now pair HDHPs that meet specific IRS requirements with HSAs to form consumer-driven health plans (CDHPs). Employers feel a consumer-driven approach may encourage members to consider costs. Employers were slow to adopt these plans initially because they felt minimum deductible requirements might be too high. Back in the early days, the HDHP minimum deductible was significantly higher than the benchmark plan deductibles. With economic challenges and cost pressures of the last five years, we have seen a dramatic increase in the number of employ- ers offering consumer driven health plans (CDHPs). According to the Marsh & McLennan Agency s 2016 Mid-Market Group Benefit Survey, almost 50 percent of Southeast Michigan employers offer CDHPs. Mercer s 2015 Survey of Employer-Sponsored Health Plans reports 59 percent of large employers (500 or more employees) offer CDHPs. HDHPs paired with HSAs are the most common CDHP. Because these plans are complicated, both employers and employees need to understand the rules. HSA accountholders bear tremendous responsibility in relation to HSAs. This Advisor reviews the following key aspects of HDHPs with HSAs: HDHP requirements HSA eligibility rules HSA contribution rules HSA distribution rules Employers should weigh key factors when deciding whether CDHPs are a good option. This Advisor discusses key employer considerations. Continued on Page 2 We welcome your comments and suggestions regarding this issue of our Benefit Advisor. For more information, please contact your Account Manager or visit our website at WORLD CLASS. LOCAL TOUCH.

2 Volume Twenty, Issue One January 2017, Page 2 HDHP REQUIREMENTS An HDHP can be an individual or a group plan. The plan can be fully insured or self-funded. Both types must meet these IRS requirements: The deductible must apply to all expenses the plan covers including office visits and prescription drug costs. The plan can cover preventive care services before the deductible is met. These services include all the services plans must cover with no member cost-sharing under the Affordable Care Act (ACA). The plan must meet the following annually indexed IRS parameters. The 2017 parameters are: Minimum single deductible: $1,300 Minimum family deductible: $2,600 Single maximum outof-pocket limit: $6,550 Family maximum outof-pocket limit: $13,100 Notice the HDHP out-ofpocket maximum is less than the ACA limits. To qualify as an HDHP, the plan can t exceed these out-of-pocket maximums. The plan must meet all ACA requirements such as covering children to age 26, requiring no lifetime dollar or annual dollar maximum, and so on. Fourth quarter carryover deductibles can affect the maximum HSA contribution permitted; therefore, most plans do not allow fourth quarter carryover deductible credits. Plans can t have office visit, prescription or emergency room copays that apply before the deductible is met. Plans can embed the single deductible into the family deductible only if the single deductible is equal to or greater than the minimum family deductible ($2,600 in 2017). To embed the deductible simply means once one person in a family contract meets the single deductible, the plan will pay benefits for that person based on the coinsurance and copay requirements that apply when the single deductible is met. The ACA requires that certain plans embed the ACA single out-of-pocket maximum. If your plan s family out-of-pocket maximum is greater than the ACA single out-of-pocket maximum, then the ACA single out-of-pocket maximum must be embedded. No single person will have to meet more than the ACA outof-pocket maximum ($7,150 in 2017). This requirement applies to any health plan that has a family out-of-pocket maximum that exceeds the ACA single out-of-pocket maximum. Telemedicine and onsite clinics may cause concerns with HDHPs. Since the IRS has not yet issued guidance, the impact of onsite clinics and telemedicine is not yet clear. How onsite clinics are treated will depend on the type of care the clinics provide. If the care is limited to only work injuries or illnesses, there is no effect on the status of a qualifying HDHP. On the other hand, if the onsite clinic treats routine medical conditions (services a group health plan normally covers), the onsite clinic would likely disqualify the HDHP. Employers, however, could overcome this problem by covering onsite clinic visits under the medical plan, if their vendors recognize the clinic as a health plan provider. Any visit to the onsite clinic would then be billed to the health plan and the cost would apply to the deductible. Participants would have to pay the full cost of visits until they meet the deductible. Preventive care services the ACA requires could be provided with no cost sharing. Telemedicine benefits can also affect an HDHP although legal opinions on this issue differ. If an employer directly contracts with a telemedicine provider and covers telemedicine visits at 100% or with an office visit copay, the HDHP will likely be disqualified. Simply put, the plan is paying for medical services before the participant satisfies the deductible. Telemedicine could be offered alongside an HDHP if the full cost of the telephone visit is applied to the deductible. Continued on Page 3

3 Volume Twenty, Issue One January 2017, Page 3 Some employers are offering telemedicine programs as part of a larger discount card offering. The full cost of the telephone visit is funded as part of the discount card arrangement. The IRS does allow employers to offer discount cards along with a qualifying HDHP. The legal argument in this situation is that the telemedicine program is actually a discount program and, therefore, would be permitted. HDHP rules are complex. For the most part, health plan vendors should confirm a high deductible plan is a qualifying HDHP. Organizations need to take care if they add coverage outside the health plan benefits. Some coverage, such as qualifying hospital indemnity plans are permitted. Other arrangements, such as carving out prescription drug coverage and offering copays before the deductible is met, can disqualify an HDHP. HSA ELIGIBILITY RULES Eligibility rules for contributing to an HSA are different from the eligibility rules for an HDHP. In fact, an employee can be covered by an HDHP and yet not be eligible to contribute to an HSA. To be eligible to contribute to an HSA, accountholders must meet the following requirements: 1. They must be covered by an HDHP. 2. They cannot have other comprehensive health plan coverage except exempt or permitted insurance, which includes the following types of coverage: a. Coverage under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property. b. Coverage under a specific disease policy. c. Coverage under a hospital indemnity plan that pays a fixed amount each day. d. Coverage under a limited-scope FSA (dental, vision and post-deductible expenses). e. Coverage under a dental or vision plan. f. Coverage under a disability plan or long term care plan. 3. They can t be enrolled in any part of Medicare, including A, B, D or Medicare Advantage. Everyone who applies for Social Security is automatically enrolled in Medicare Part A. 4. They can t be claimed as tax dependents. Employees need to understand that if they are covered under a full-scope FSA, the comprehensive health coverage it provides will disqualify them from being eligible to contribute to an HSA. This is true even if their spouses elect a full-scope FSA though their employers. A medical FSA plan with a rollover or grace period can affect an employee s ability to contribute to an HSA. Assuming the rollover or grace period coverage is for comprehensive medical services, the effect is as follows: Rollover: Accountholders with funds in comprehensive medical FSAs that roll into the next plan year cannot contribute to an HSA for that entire plan year. They can avoid being disqualified in a number of ways. One way is to waive their rights to the rollover before the beginning of the plan year. Another option would be to have an employer require any yearend balance to roll over into a limited scope FSA for employees that elect a qualifying HDHP. Grace period: Employees with funds available during the grace period cannot contribute to the HSA until the first of the month following the end of the grace period. If no funds are available in the grace period, the accountholder can contribute to the HSA as of the first day of the plan year. Eligibility to contribute to an HSA is based solely on the accountholder s status. A spouse s or dependent child s separate comprehensive coverage will not affect the accountholder s eligibility to contribute. An accountholder s spouse or dependent child can have Medicare and it will not affect the accountholder s ability to contribute. Continued on Page 4

4 Volume Twenty, Issue One January 2017, Page 4 HSAs are owned by their accountholders. Accountholders may lose eligibility to contribute at some point. However, they still own the funds already accumulated in the HSA and can use those funds to pay for eligible medical expenses tax-favored, even if they can no longer contribute. HSA CONTRIBUTION RULES The IRS indexes contribution limits annually. These limits are based on the accountholders coverage. Accountholders age 55 or older can contribute the catch up contribution in addition to their annual limit. The limits for 2016 and 2017 are as follows: Contribution Limit: Single Coverage 2016: $3, : $3,400 Family Coverage 2016: $6, : $6,750 Catch-Up Contribution (55 and older): 2016: $1, : $1,000 The maximum contribution depends on the accountholder s status and coverage. If the accountholder elects single coverage, single contribution limits apply. If the accountholder elects family coverage, the family contribution limit applies. If an accountholder has family coverage and the spouse and children have other comprehensive coverage, the accountholder can still contribute up to the family maximum. The dual coverage restriction applies solely to accountholders, not to their dependents. For example, if a spouse is eligible for Medicare, the accountholder can still make the full family contribution provided the accountholder is covered under a family contract. The limits apply to all funds contributed to the account. Employers can contribute on behalf of employees. In fact, anyone can contribute to an account on behalf of the accountholder. When employers contribute to an HSA, they must contribute a comparable amount to HSAs of all employees the HDHP covers. Employers allowing pre-tax contributions meet the comparability requirements if the employer passes Section 125 s nondiscrimination tests. If an employer does not allow pre-tax contributions to an HSA, comparability requirement details can be found on the IRS website at html. Employer contributions are tax-favored. The annual limits are pro-rated based on the number of months an accountholder is eligible to contribute during the year. Ability to contribute to an HSA is a monthto-month determination. To be eligible to contribute to an HSA for a given month, the accountholder must be covered as of the first of that month. There is an exception if an employee first elects an HDHP mid-year. Accountholders may be able to make the full annual contribution, even though they are only covered part of that first year. Those eligible to contribute in December that year and remain eligible to contribute during the testing period can make the full annual contribution ($3,400 in 2017). The testing period is the 12-month period following December of that year. For example, Jon Doe enrolled in an HDHP on July 1, 2017, and is eligible to contribute to his HSA as of that date. The pro-rated maximum he could contribute in 2017 is $1,700. Jon may be able to contribute the full $3,400 for 2017 if he remains eligible to contribute on December 1, 2017, and continues to be eligible to contribute for the 2018 calendar year. If a person does not remain eligible to contribute through the testing period, the maximum contribution would be the pro-rated amount. Accountholder contributions to HSAs are federally tax-favored. If an employer allows pre-tax HSA contributions through a Section 125 plan, tax savings are immediate. In addition, taxable income is reduced for FICA purposes. Accountholders could also send a post-tax check directly to the HSA trustee. If this is done, they can make an above the line deduction when they file their taxes. Contributing by transferring funds from other HSAs is permitted. Transfers involve an HSA trustee transferring funds to another HSA trustee directly. The accountholder must own both accounts to make a transfer. An HSA transfer of balances accumulated in previous tax years does not affect the current year s contribution limits. There is no law limiting the number of trustee-to-trustee transfers an accountholder can make within a 12-month period. Continued on Page 5

5 Volume Twenty, Issue One January 2017, Page 5 Rollovers are also permitted. HSA trustees distribute funds directly to the accountholder. To rollover the distribution, the accountholder must deposit the funds in a new HSA within 60 days to avoid taxes and penalties. The accountholder must own both HSAs to permit the rollover and can rollover funds only once every 12 months. Previous years rollover amounts don t count toward current year contribution limits. The tax-favored status of HSA contributions at the state level varies depending on state law. Most states exclude HSA contributions from state tax. However, Alabama, California, and New Jersey do tax HSA contributions. In order to receive tax-favored status for HSA contributions, accountholders must file taxes using the 1040 Form and not the E-Z Form. HSA accountholders need to understand the HSA administrator is not required to verify HDHP coverage. Accountholders themselves are responsible for proving they have a qualifying HDHP in case of an IRS audit. Employers do not have a lot of control over HSAs. The IRS dictates the rules for qualifying HDHPs. Employers do manage the process of deducting contributions pre-tax. They then forward the contributions to their HSA vendors. In general, HSAs are not considered an ERISA health benefit plan, even if an employer contributes to the account. However, employers need to limit their control of the plan to avoid ERISA implications: Employers can select vendors and may have an impact on investment options. Employers cannot limit distributions to specific expenses. Employers have no control of funds once they are deposited in an account. Employers must allow HSA transfers. Employers can t receive considerations from vendors. Since these accounts are not considered group health plans, they are not subject to COBRA or many other federal benefit laws that affect group health plans. HSA DISTRIBUTION RULES Employers also don t get to decide which expenses the HSA will cover. The government determines the types of expenses that can be considered tax-favored. These expenses include: Section 213 (d) qualified medical expenses. Premiums for health insurance when the person is not employed, including COBRA premiums. Over age 65, the following are tax-favored; they are not qualified if you became eligible for Medicare before age 65: Medicare premiums (Part A, B or D). Medicare Advantage plan premiums. Retiree contributions for employer-sponsored retiree health plans. Medigap plan premiums are not tax-favored. Section 213(d) medical expenses are generally the same expenses reimbursed under a Section 125 medical FSA. The accountholder or a Section 152 tax dependent has to incur the expenses. Spouses (opposite sex and same sex) are considered Section 152 tax dependents. Adult dependent children can be tricky. The ACA requires health plans to cover children up to age 26. Plans can no longer limit eligibility because the child is a student, for financial support issues, and so on. However, ACA changes do not apply to HSA dependent eligibility. Just because adult dependents can be covered under the HDHP does not mean their expenses can be reimbursed pre-tax under the HSAs. A definition of a Section 152 tax dependent can be found at CODE-2011-title26/pdf/USCODE title26-subtitleA-chap1-subchapB-partV-sec152.pdf. HSA vendors sometimes offer debit cards along with HSAs so accountholders can access funds immediately. Vendors do not track expenditures. Employees, not vendors, are responsible for proving their HSA funds were spent for qualified medical expenses if the IRS decides to audit them. Continued on Page 6

6 Volume Twenty, Issue One January 2017, Page 6 HSA funds can be spent on non-qualified expenses; however, non-qualified distributions are included in gross income and are taxable. A 20 percent excise penalty will apply in many situations. The excise penalty does not apply if: The accountholder is over age 65. If a distribution is made after the accountholder dies, the following special rules apply: The accountholder must have named a beneficiary If the beneficiary is a legal spouse, the spouse owns the account and can continue to use it for eligible services. If the beneficiary is not a legal spouse, account funds distributed will become taxable income to beneficiary. The accountholder becomes disabled. HSA distributions increase accountholder responsibility in case of an IRS audit. HSA vendors do not need to prove a distribution was made for a tax-favored expense. Accountholders, on the other hand, do need to verify the distributions were made for a qualified medical expense. KEY EMPLOYER CONSIDERATIONS Employers need to consider offering HDHPs paired with HSAs carefully. Without a doubt, HSAs have a number of benefits. However, HDHPs increase employees financial liability and responsibility. Employers should consider the following issues carefully: Employer financial commitment Employee financial liability Educational commitment Employer Financial Commitment Most employers think about launching HDHPs with HSAs to save money and control health plan costs. They also need to think about how they structure their HDHPs. HDHPs usually accompany other plan options such as a PPO or HMO. Employers will save on the HDHP because presumably more cost will be shifted to employees. However, employers need to be careful with the incentives they offer employees to select the HDHP. Most employers will set employee contributions much lower for the HDHP. Some employers will offer to fund a portion of the HSA. If the only employees that select the HDHP are low-health plan utilizers, employers could end up with higher net cost than expected. First, employers lose contributions from those that elect the HDHP. Second, employers fund the HSA. Third, employers may not see claim savings because the employees that elect the HDHP are not using the plan. Make sure to consider these factors when you determine your incentives. Employers need to create a policy on how to fund these accounts. Key items to include: Reserve the right to change or discontinue contributions at any point. Set a schedule for when contributions will be deposited in the account. Employers can fund as of first day of plan year, per pay, monthly or quarterly. Require employees to establish an HSA with your HSA vendor to receive employer contributions. Decide whether contributions will be pro-rated for new hires. Consider leaves of absence. How will employer funding be handled for various leaves (FMLA, personal, and so on). Remember, HSAs are not considered medical plans and your organization is not required to continue funding them during an FMLA. Employers should consider funding the accounts at various points during the year. Once the HSA is funded, the accountholder owns those funds. If the employee quits mid-year, the employer can t get a refund. If employees can make pre-tax contributions to HSAs through the Section 125 plan, make sure to amend the plan to allow these contributions. Mid-year change rules for HSA contributions are Continued on Page 7

7 Volume Twenty, Issue One January 2017, Page 7 more flexible. Employers can allow changes as frequently as each payday. Section 125 requires that employers allow changes at least once a month. Changes to pre-tax HSA deductions must be made prospectively. Employee Financial Liability Employees take on additional financial liability with an HDHP as well. Thus they may not see health care as an affordable option. Employers that make HSAs available and offer funding can help employees save for their higher medical costs. Employees do have to set up the HSA and employers should encourage them to set aside some funds for future medical expenses. Employers can also choose to offer worksite benefit options that may help employees faced with higher out-of-pocket costs. One worksite option an employer could offer is a hospital indemnity plan. These plans pay a flat dollar amount for each day an employee is admitted to a hospital as an inpatient. The funds could help pay the deductible under the HDHP. It is critical your worksite vendor confirms its hospital indemnity plan is HSA-compatible. Critical illness coverage is another popular work site benefit. These plans pay a flat dollar amount if the employee is diagnosed with or is faced with a specific critical illness. For example, the plan s benefit might provide a $10,000 benefit if an individual is diagnosed with breast cancer or has a heart attack. This benefit payout can be used to pay out-of-pocket costs under a high deductible health plan. Again, it is important to confirm with the worksite vendors the critical illness plan is HSA-compatible. Finally, employers could offer accident coverage. For example, the plan would pay set dollar amounts for an initial doctor visit, x-rays, surgery and physical therapy if an employee has a bike accident and requires knee surgery. These payments can be used to pay out-ofpocket medical costs. Employees would have to pay premiums for these types of coverage. Some employees would rather pay the predictable premiums so that they re covered in case a serious health condition occurs than worry about tackling the deductible without assistance. Educational Commitment Employers need to offer a straightforward, upfront, clear explanation of a number of issues to help employees understand their responsibilities with HDHPs and HSAs. They need to explain that the plan will not pay for covered services until the employee meets the deductible. The only exceptions are the qualified preventive care services now required to be covered without cost-sharing under the ACA. Employers should also inform employees of their responsibilities and make it clear that employees can contribute to an HSA only if they meet the eligibility requirements. Employees covered under a second comprehensive health plan, for example, cannot contribute to an HSA. What s more, employees need to know that when they use HSA funds, they must keep records proving the funds were used for eligible expenses. Employees will certainly have extra steps related to contributions and distributions when they file their tax returns. Most employees won t understand HSAs at first. Employers should continue explaining using single page bulletins or HSA reminders throughout the year. Some employers may even choose to have optional HSA only meetings near open enrollment to inform and remind employees of HSA rules. Employers should also explain how to lower the costs of medical services. Most employees have always had more comprehensive coverage. Their only involvement in considering cost has been understanding which drugs were generic, preferred brand and non-preferred brand under their health plan. When employees are responsible for more of the cost under an HDHP, they should become more discerning about how they use health care services. Share any transparency tools your vendor offers. Most major health insurance carriers have transparency tools to inform members of cost and quality of various health care provider and venue options. Employers could go a step further and buy transparency services from vendors directly. Castlight and Healthcare Blue Book are two services that have become more affordable to middle market organizations in the past few years. Continued on Page 6

8 Volume Twenty, Issue One January 2017, Page 8 Patient Advocate, another of these services, has added modules for cost transparency. The nurses staffing its call lines can help employees looking at treatments and care venues. If your organization does not have the budget to purchase transparency services from vendors directly, free services are still useful. The health plan transparency tools are free to members. Be sure to explain clearly how to use them. You should also remind employees that certain medications are either free or have a very low copay from various pharmacies. Meijer, Walgreens and Target have discount medication programs. The amount pharmacies charge for various medications varies from pharmacy to pharmacy. Your employees may want to download the app Good Rx to a smartphone. It finds the cost of a given drug at all the area pharmacies. HDHPs require employers to spend more time and effort keeping employees informed. Your employees may be less anxious about the HDHP option if they feel they can review cost data. Your organization will benefit if your employees become more engaged in purchasing health care. CONCLUDING THOUGHTS The increase in HDHPs paired with HSAs is the result of a number of market issues. Marketplace plans offer significantly lower level benefit plans than benchmark employer plans. These low benchmarks give employers a little room to move. The employer mandate prompted some employers to add HDHPs with HSAs. These plans minimize potential penalties and can be an affordable, minimum value option for all full-time employees. Other employers have added them to foster a consumer approach to health care. Since the employer-sponsored plan shoulders much of the cost of health care, it benefits when members purchase health care wisely. Unless employees are responsible for a greater amount of the cost, they will not look for less expensive health care. The move to CDHPs is not easy. Employees are not used to considering cost when it comes to health care. A number of your employees will be wary. However, with useful tools and education, employees will become more comfortable. These complex plans place significantly more responsibility on employees. It is critical that they understand their responsibilities. For example, no vendor substantiates HSA distributions were for medical expenses. Employees need to save receipts with tax records to prove they used their HSA funds for medical expenses. Employees may also have to prove they were eligible to contribute to the HSA. If you have any questions about HDHPs paired with HSAs, please contact your Marsh & McLennan Agency Michigan Account Director. MMA Copyright Marsh & McLennan Agency LLC company. This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change. Marsh & McLennan Agency LLC 3331 West Big Beaver Road, Suite 200 Troy, MI Telephone: Fax: Monroe Ave. NW, Suite 400 Grand Rapids, MI Telephone: Fax: