Consumer Driven Health Care, HRAs & HSAs ECFC 22 nd Annual Administrators Symposium

Transcription

1 Consumer Driven Health Care, HRAs & HSAs ECFC 22 nd Annual Administrators Symposium Session: Thursday, July 30, 2009, 3:45 pm Sue Sieger, CFCI General Manager, Benefits Design Group, Inc. I. GENERAL INFORMATION A. What You Will Learn 1. What is consumer driven health care 2. Potential ways to cut health plan cost 3. What is a Health Reimbursement Arrangement 4. What is a Health Savings Account 5. HRA vs. HSA 6. How traditional benefits interact with newer benefit plan designs B. Health Care Statistics C. What Is Consumerism? II. WHAT IS A HEALTH REIMBURSEMENT ARRANGEMENT (HRA)? A. Background B. Compliance Issues For HRAs 1. Written plan document required 2. ERISA 3. Form 5500 filing 4. COBRA 5. HIPAA portability and nondiscrimination 6. Medicare issues C. Who Is Eligible To Participate? D. Who Cannot Participate In HRA? E. HRA Design Restrictions F. Why Have A HRA? G. HRA Design Considerations 1. What type? a. Stand Alone HRA b. HRA with High Deductible Health Plan c. HRA in correlation with Cafeteria Plan d. HRA in correlation with Cafeteria Plan (FSA) that includes a HSA Limited Purpose Medical HRA Post Minimum HDHP Medical HRA 2. Who will be eligible? 3. What expenses will be eligible? 4. Maximum limit(s) on Employer contributions. 5. How will HRA be funded? 6. Permit Carryovers? 7. Permit Spend downs? 8. Ordering Rules. Session: Thursday, July 30, 2009, 3:45 pm 1

2 H. Eligible For HRA Reimbursement I. Permissible Reimbursement Models J. HRA Funding Options 1. Lump sum vs. Pro rata each payroll 2. No Uniform Coverage Rules* 3. Promise to Pay vs. Trust Account 4. Carryover permitted* but not required. K. Sample HRA Analysis L. How Does The Money Flow? M. Employer Optimism About CDHP 1. Main reasons Employers offer CDHP 2. Main reasons employers don t offer CDHP in a dual choice arrangement 3. Employers who plan to offer CDHP in near future will III. WHAT IS A HEALTH SAVINGS ACCOUNT (HSA)? A. Background B. HSA Basics Requirements C. HSA Ineligible HDHP Plan Designs D. Definition Of Preventative Care E. HSA Limits 2009 F. HSA Limits 2010 G. Repeal Of Annual Deductible Limits H. HSA Contributions 1. Employee only direct to the HSA custodian. 2. Can be made via salary reduction inside a cafeteria plan* 3. Employer contributions (optional) and Employee contributions through the cafeteria plan. I. Avoiding The HSA Comparability Rules J. Rules For Using Your HSA K. Qualified HSA Distributions 1. Two categories of expenses qualify for tax free treatment of distributions. 2. Out of pocket medical expenses 3. Certain insurance expenses L. HSA Advantages M. HSA Disadvantages N. How To Avoid HSA Headaches O. HSA Rollover Rules 1. One Time Rollover from an IRA to an HSA 2. Rollover from an HRA to an HSA or a FSA to an HSA. P. HSAs At Income Tax Time Q. Additional HSA Resources IV. WEIGHING YOUR OPTIONS Session: Thursday, July 30, 2009, 3:45 pm 2

3 Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA) References Relevant Code Sections Internal Revenue Code 125 Cafeteria Plan Internal Revenue Code 105 Medical Reimbursement Internal Revenue Code 152 Definition of Tax Dependent Internal Revenue Code 223 Health Savings Accounts Employee Benefits Publications Employee Benefits Institute of America (EBIA) Consumer Driven Health Care Manual Employee Benefits Institute of America (EBIA) Cafeteria Plan Manual Proposed Cafeteria Plan Regs: [Prop. Treas. Reg , , , and Fed. Reg (Aug. 6, 2007)] For a copy: Medical Reimbursement/Health Reimbursement Arrangements: Eligible Medical Expenses IRS Code 213(d) IRS Publication 502 Medical and Dental Expenses pdf/p502.pdf IRS Rev Rul IRS Notice Health Savings Accounts: IRS Publication 969 Health Savings Accounts and other Tax Favored Health Plans pdf/p969.pdf IRS Publication 502 Medical and Dental Expenses pdf/p502.pdf IRS Notice (June 25, 2008) HSA Grab Bag Guidance DOL Field Assistance Bulletins affairs/hsa/dol_guidance.shtml HSA Road Rules for Employers and Employees Miscellaneous Bureau of Labor Statistics March 28, 2007 Employee Benefit Plan Statistics Trends in Account Based Health Plans HSAs, HRAs, and FSAs Benefits & Compensation Solutions May/June 2007 Aon Consulting/ISCEBS Survey Employers More Optimistic about CDH Plans October 2008 Session: Thursday, July 30, 2009, 3:45 pm 3

4 CONSUMER DRIVEN HEALTH CARE HRAs & HSAs Presented by: Sue Sieger, CFCI WHAT YOU WILL LEARN 2 What is consumer-driven health care. Potential ways to cut health plan cost. What is a Health Reimbursement Arrangement. What is a Health Savings Account. HRA vs. HSA How traditional benefits interact with newer benefit plan designs USEFUL TERMS 3 CDHP: Consumer Driven Health Plans HDHP: High Deductible Health Plan HRA: Health Reimbursement Arrangement HSA: Health Savings Accounts FSA: Flexible Spending Accounts MSA: Medical Savings Accounts 1

5 HEALTH CARE STATISTICS 4 A person with employer-based coverage paid an average of $1,522 on health care (not including premiums) in 2006, compared with $1,260 in When including the added burden of higher premiums, out-of-pocket costs rose even more sharply, with a 30 percent increase from an average of $2,827 in 2001 to $3,744 in Employer-sponsored p health insurance premiums have nearly doubled since 2000, a rate three times faster than wages. In 2008, the average premium for a family plan purchased through an employer was $12,680, nearly the annual earnings of a full-time minimum wage job. Hidden Costs of Health Care: Why Americans are Paying More but Getting Less. HHS Secretary Kathleen Sebelius 6/23/09 HEALTH CARE STATISTICS (cont.) 5 For preferred provider organization (PPO) plans purchased through an employer, the average family deductible increased 30 percent in just two years, from $1,034 to $1,344. This effect is more pronounced for small firms, where PPO deductibles increased from $1,439 to $2,367 a rise of 64 percent. In 2004, only one in five people with health insurance through an employer had a co-payment of more than $25, but by 2008 the number jumped to one in three. Hidden Costs of Health Care: Why Americans are Paying More but Getting Less. HHS Secretary Kathleen Sebelius 6/23/09 WHAT IS CONSUMERISM? 6 Role of individuals in the health care system Engage employees Stimulate cost conscious behavior Become better stewards of health care Shopping for health care services Become informed about our health care Ask doctors about options and alternatives Wellness initiatives Promote healthy lifestyles 2

6 WHAT IS A HEALTH REIMBURSEMENT ARRANGEMENT (HRA)? 7 Internal Revenue Code Section % Employer funded Medical Expense Reimbursement. No Employee contributions allowed. IRS Notice and Revenue Ruling May permit (not required) carryovers of unused amounts and/or spend down of unused balances at termination. Also may be known as 105 plans, MERPS, Personal Care Accounts, Individual Healthcare Accounts, etc. WHAT IS A HEALTH REIMBURSEMENT ARRANGEMENT (HRA) cont.? 8 Internal Revenue Code 213(d) expenses (health, dental, and vision) may be eligible for reimbursement. HRA may be limited to certain expenses or certain categories of expenses. Restricted by plan design. Claims substantiation required. Claims police. Unused balances cannot be converted to cash. Cannot name a beneficiary. Account is not portable. COMPLIANCE ISSUES FOR HRAs 9 Written plan document required. HRAs are group health plans subject to ERISA. If ERISA claims procedures and information disclosures. Form 5500 filing (if funded and/or if over 100 participants.) COBRA applies because HRA is a group health plan. (Possible to offer spend down in lieu of COBRA. Eligible for ARRA subsidy.) 3

7 COMPLIANCE ISSUES FOR HRAs (cont.) 10 HIPAA portability and nondiscrimination. Medicare Part D HRA creditable coverage if meet actuarial equivalence test. HRA claims eligible for Retiree Drug Subsidy Certificates of Creditable Coverage (HIPAA and Medicare) NEW: HRA Reporting to CMS (effective last quarter 2010). WHO IS ELIGIBLE TO PARTICIPATE? 11 Current and Former Employees and their dependents. Retirees. Participants in Employer-sponsored HDHP. Employees without a specific insurance plan. Full-time or Part-time Employees. Note: Eligibility subject to plan design. WHO CANNOT PARTICIPATE IN HRA? 12 Sole proprietors Partners in a partnership Members of a LLC 2% or greater shareholders of S Corporation Note: Unlike sole proprietors, the family members of partners or 2% or more shareholders cannot participate in a cafeteria plan maintained by the partnership or S Corporation due to the stock attribution rules contained in IRS Code

8 HRA DESIGN RESTRICTIONS 13 HRA must pass the non-discrimination rules under Section 105(h) that prohibit plan design in favor of highly compensated and key employees. Note: Possible to offer HRA only to those that have Employer sponsored HDHP. HRA cannot base the maximum reimbursement amount on compensation, age or years of service. No indirect Cafeteria Plan Funding of HRA HRA Accrual Amounts may not correlate to salary reduction amounts. WHY HAVE A HRA? 14 Lower overall premium cost by opting for a HDHP. Soften the blow of increased medical costs if paired with HDHP. No IRS imposed minimum amount required. Unlike on personal income tax returns where you are required to meet the 7.5% of income threshold. Deduct most dental and optical expenses even if you do not have specific insurance coverage. Flexibility of providing medical benefits on a tax-free basis with carryovers (claims and balances) and spend downs. HRA DESIGN CONSIDERATIONS 15 What type? Who will be eligible? What expenses will be eligible? What are Maximum limits on Employer contributions? tib ti One level lor tiered? How will HRA be funded? Permit Carryovers? Permit Spend-downs? Ordering Rules. Will HRA pay 1 st or 2 nd? 5

9 HRA PLAN TYPES 16 Stand Alone HRA -First dollar reimbursement? -What expenses are eligible? HRA with High Deductible Health Plan -First dollar reimbursement? -What expenses are eligible? HRA PLAN TYPES (cont.) 17 HRA in correlation with Cafeteria Plan -First dollar reimbursement? -What expenses are eligible? -Which plan pays first? HRA in correlation with Cafeteria Plan (FSA) that includes a HSA -Limited-Purpose Medical HRA -Post-Minimum HDHP Medical HRA ELIGIBLE FOR HRA REIMBURSEMENT 18 ONLY claims that trigger the deductible under the employer-sponsored HDHP. Health benefits that have been carved out of the traditional health plan. (i.e. Wellness benefits, Rx costs, etc.) IRC 213(d) expenses (health, dental, and vision) that have not been reimbursed elsewhere. Design HRA to replace traditional dental and vision plans. Health insurance premiums* *Caution: Raises HIPAA and other concerns. 6

10 PERMISSIBLE REIMBURSEMENT LIMITS 19 Offer employee only reimbursement. Offer same flat dollar per Employee to cover an aggregate of expenses for Employees and/or any eligible tax dependents. Offer separate schedule of reimbursement in correlation with different tiers of insurance coverage. For example: $500 x 1 = $500 Single $500 x 2 = $1000 Limited Family $500 x 3= $1500 Family Retiree Only reimbursement. You can order the HRA or the FSA to pay first. HRA FUNDING OPTIONS 20 Lump sum vs. Pro rata each month Possible to Reimburse full annual contribution up front but not required. No Uniform Coverage Rules* Promise to Pay vs. Trust Account Use or Lose Carryover permitted* but not required. *Different than Medical FSA CARRYOVER OR NOT TO CARRYOVER 21 Disadvantages: Department of Labor may implement funding restrictions in the future (i.e. Trust account, audits, etc.) If you are expensing the promise to pay and segregating g g funds as you go along trust account required. Employer may be pressured to offer investment vehicles which complicates plan administration. Employer carries potential liabilities from year to year. Additional bookkeeping responsibility. 7

11 CARRYOVER OR NOT TO CARRYOVER 22 Advantages: Encourages employee to spend health care dollars more wisely if they know that they will not lose them at the end of each year. May accumulate balances to use at retirement, if plan design permits. You can carry forward unpaid expenses and balances. Helps with larger expenses. Tax planning for smaller employers. Account balances could be used for long-term care insurance premiums or future medical expenses. SAMPLE HRA ANALYSIS 23 Employer A has 22 Employees on the health plan. The deductible is $250 per person and 3- $250 deductibles per family. There is a $20 office visit co-pay and a drug card with co-pays of $5/$20/$40. The insurance rates are as follows: Rate/Mo Total/Mo Total/Yr 12 Single $ $ $59, Ltd Family $ $ $50, Family $ $ $70, $15, $180, SAMPLE HRA ANALYSIS 24 Employer A has 22 Employees on the health plan. The deductible is $250 per person and 3- $250 deductibles per family. There is a $20 office visit co-pay and a drug card with co-pays of $5/$20/$40. The renewal insurance rates are as follows: Rate/Mo Total/Mo Total/Yr 12 Single $ $ $ 69, Ltd Family $ $ $ 59, Family $ $ $ 82, $17, $212,

12 SAMPLE HRA ANALYSIS 25 Employer A still has 22 Employees on the health plan. Employer A has elected to increase the deductible to $1000 per person and a maximum of 2-$1000 deductibles per family. The $20 office visit co-pay and a drug card with co-pays of $5/$20/$40 remains part of the plan design. Employer A implements an HRA and will require the Employee to pay the first $250 on each deductible and will then reimburse them the remaining $750 ($251-$1000) per person from the HRA. The Employee will be required to submit an Explanation of Benefits (EOB) for reimbursement from the HRA. (Manual vs. Automatic) SAMPLE HRA ANALYSIS 26 The high deductible insurance rates are as follows: Rate/Mo Total/Mo Total/Yr 12 Single $ $ $ 47, Ltd Family $ $ $ Family $ $ $ 56, $12, $145, SAMPLE HRA ANALYSIS 27 High deductible health plan rates save the Employer as follows: Renewal HDHP Savings/Yr Rate/Yr Total/Yr 12 Single $ 69, $ 47, $22, Ltd Family $ 59, $ 40, $18, Family $ 82, $ 56, $26, $212, $ 145, $67,

13 SAMPLE HRA ANALYSIS 28 HRA uses savings generated by HDHP for HRA claims: Max HRA Pay* HDHP Savings/Yr Net Savings 12 Single $9,000 ($750 x 12) $22, $13, Ltd Family $7500 ($1500 x 5) $18, $11, Family $7500 ($1500 x 5) $26, $18, $24,000 $67, $43, *Worst Case Scenario: Assumes all participants file maximum claims. HOW DOES THE MONEY FLOW? Employee gets sick and goes to the doctor. 2. Doctor files claim with insurance carrier. 8. Employee pays the doctor with HRA reimbursement. HRA REIMBURSEMENT MADE SIMPLE! 3. Employee gets Explanation of Benefits (EOB) from insurance carrier. 7. If claims are eligible for payment, HRA payment sent to Employee. 4. Employee completes and signs claim Form. 6. TPA processes the HRA claim. 5. Employee submits claim form and EOB to TPA. EMPLOYER OPTIMISM ABOUT CDHP employers of all types and sizes for views on consumer-driven health plans. 45% currently offer HDHP. Increase of 37% compared to year before. 40% say they plan to offer one in the near future. Aon Consulting/International Society of Certified Employee Benefit Specialists (ISCEBS) Survey October

14 MAIN REASONS EMPLOYERS OFFER CDHP 31 Introduce Consumerism for long term change 36% Control health plan costs 35% Encourage better use of health care services 12% Expand Employee plan choices 10% Provide a vehicle for retiree medical savings 3% Don t know 3% Improve Health and Well Being 2% Aon Consulting/International Society of Certified Employee Benefit Specialists (ISCEBS) Survey October 2008 MAIN REASONS EMPLOYERS DON T OFFER CDHP IN A DUAL CHOICE ARRANGEMENT 32 27% satisfied with traditional plan design. 17% don t believe employees will enroll in a CDHP if offered as an option. 17% think the plan will siphon off healthy employees from traditional plan (adverse selection). 17% think concept is too new-wait and see approach. 10% don t want to expose employees to potentially high claim costs. 7% don t believe consumerism will change purchasing behavior. 6% don t know Aon Consulting/International Society of Certified Employee Benefit Specialists (ISCEBS) Survey October 2008 EMPLOYERS WHO PLAN TO OFFER CDHP IN NEAR FUTURE WILL 33 38% plan to offer an HSA 37% plan to offer an HSA as an option 19% plan to offer HRA 12% plan to offer HRA as an option 7% plan to offer HRA to replace existing plan 14% plan to offer both HRA and HSA 28% undecided Aon Consulting/International Society of Certified Employee Benefit Specialists (ISCEBS) Survey October

15 WHAT IS A HEALTH SAVINGS ACCOUNT (HSA)? 34 Internal Revenue Code Section 223 IRA-type accounts that individuals, covered by high deductible health plans (HDHP), can establish after January 1, 2004 to pay for medical expenses. IRS Code 223 enacted as part of the Medicare Prescription Drug and Modernization Act (Dec. 8, 2003). Replaces the Medical Savings Account (MSA), IRS Code 220. (Archer MSA pilot project ended 12/31/07.) Individually owned HSA accounts are required to rollover unused balances from year to year and may earn interest tax-free. HSA BASICS 35 REQUIREMENTS Must be covered under a qualified High Deductible Health Plan (HDHP). HSA eligibility is determined on a monthly basis. A HSA must be set up in a medical trust. A trustee can be a bank or an insurance company, or any other person or organization approved as a non-bank trustee by the IRS. An eligible individual is any taxpayer including sole proprietors, partners, members of LLC, and S Corp shareholders. HSA not required to be an employer-sponsored. Note: Employers don t want to sponsor HSA. Sponsorship would make HSA subject to ERISA. HSA: INELIGIBLE HDHP PLAN DESIGNS 36 HDHP cannot pay out on an individual deductible that is embedded, prior to the entire family hitting the $2,300 family deductible. ( NOTE: You may need to purchase at least a $2,300 individual deductible and $4,600 per family IN 2009 to avoid this potential problem.) Eligible Individuals cannot be covered by another low or no-deductible plan, including flexible spending accounts, MSA, and HRA plans. (Exception: Coverage for accident, disability, dental, vision, and long-term care, or for specified diseases are permissible.) No first dollar coverage (i.e. RX drug plans with co-pays) permitted for anything other than preventative care. Preventative care includes items such as annual physicals and wellness type tests and visits. No Drug Card. 12

16 DEFINITION OF PREVENTATIVE CARE 37 IRS Safe Harbor Definition: IRS Notice Periodic health evaluations (physicals) Routine pre-natal and well-child care Immunizations for adults and children Tobacco cessation and obesity weight-loss programs (doctor diagnosis of obesity) Screening devices (i.e. mammograms, pap smears, etc.) HSA LIMITS Annual HSA Contribution Limit: Self-only: $3,000 Family: $5,950 HDHP Limits: Minimum Deductible: Self-only: $1,150 Family: $2,300 Maximum Out-of-pocket: Self-only: $5,800 Family: $11,600 Catch Up Contribution: $1,000 per year (Individual over the age of 55) HSA LIMITS Annual HSA Contribution Limit: Self-only: $3,050 Family: $6,150 HDHP Limits: Minimum Deductible: Self-only: $1,200 Family: $2,400 Maximum Out-of-pocket: Self-only: $5,950 Family: $11,900 Catch Up Contribution: $1,000 per year (Individual over the age of 55) *Indexes for COLA due by June 1 st for next year. 13

17 REPEAL OF ANNUAL DEDUCTIBLE LIMITATIONS 40 Effective with Tax Relief and Health Care Act of 2006 Individuals who are eligible individuals on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution based on the coverage they have December 1 (plus catch up contribution, if 55 or older by year end), regardless of the number of months the individual was an eligible individual in the year. CATCH: Must remain HSA eligible for the following 12 months after the tax year ends (testing period). For individuals who are no longer eligible individuals on the first day of the last month of the taxable year or do not remain HSA eligible for the entire 12 months following the tax year, both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual. HSA CONTRIBUTIONS 41 Employee only-direct to the HSA custodian. Can be made via salary reduction inside a cafeteria plan*. *Avoid HSA comparability rules. *Plan Document requirement. *Gain FICA and Medicare Tax savings. *State Tax savings subject to State Tax rules (2009: WI, CA no State HSA) *Not subject to Change of Election Rules. *Can change as frequently as once per month. Employer contributions (optional) and Employee contributions through the cafeteria plan. HSA CONTRIBUTIONS (cont.) 42 Contributions can be made up until April 15 TH for the previous calendar year. Contributions may be made in a lump sum or periodically during the year. Anyone can contribute to your HSA. All contributions to the HSA are tax deductible in the year they are deposited d into the HSA, regardless of whether your withdraw the funds or incur medical expenses in that year. Contributing more to the HSA than allowed is subject to 6% excise tax penalty plus income tax consequences. Growth on account is tax free. May have investment options. 14

18 HSA CONTRIBUTIONS (cont.) 43 Spousal catch up contributions must be made to their own separate HSA. (Individual owned health care accounts.) Special rule for married couples. No longer eligible to contribute to HSA once you become entitled to Medicare. TRICARE and Medicaid will prevent HSA eligibility too. Name beneficiary. Transfers to spouse tax free upon death. Non-spouse beneficiary upon death pays tax on fair market value of account. EMPLOYER CONTRIBUTIONS TO THE HSA 44 Employer contributions to the HSA must be coordinated with any employee contributions. Annual limit. Carefully consider the frequency of the Employer contributions to the HSA. Lump Sum Prorata Only Participants of employer-sponsored HDHP All HSA Eligible Individuals Once an Employer contribution is made it CANNOT be reversed. Only 2 exceptions (HSA Grab Bag Guidance 2008): Contribution was for someone who was NEVER eligible. Contribution made exceeds statutory max for the year. EMPLOYER CONTRIBUTIONS TO THE HSA (cont.) 45 Employer contributions made outside a cafeteria plan are subject to the HSA comparability rules. Permissible contribution methods: Same dollar amount or same percentage of the HDHP deductible. Permit differences based upon tiers of coverage as long as everyone in the tier is treated the same. Exclude collectively bargained employees. Permit more generous treatment of Non-HCE 15

19 EMPLOYER CONTRIBUTIONS TO THE HSA (cont.) 46 Employer contributions made outside cafeteria plan, not in compliance with comparability rules are subject to 35% excise tax penalty on its contributions for the calendar year. Impermissible differences: Differences between Salaried and Hourly Employees Matching contributions Geographic locations Linked to Health Assessments or Disease Mgmt Differences in age or years of service Differences in wages AVOIDING THE HSA COMPARABILITY RULES Make Employer contributions through a Code 125 cafeteria plan. Subject to cafeteria plan nondiscrimination testing rules. Small groups with potential testing problems should be cautious about lump sum contributions o made at the beginning of the plan year. Ability to do matching contributions to encourage employee contributions. 2. Make same Employer contributions for all HSA eligible employees outside the cafeteria plan. RULES FOR USING YOUR HSA 48 No third party claims adjudication requirement. No claims police. SHOE BOX RULE: Taxpayer must retain all records to prove tax deductible status of withdrawals in the event of an IRS audit. Withdrawals are tax-free for qualified medical expenses. Any use of HSA funds in a non-qualified way are subject to 10% penalty and will be considered taxable income in the year it is withdrawn. 16

20 RULES FOR USING YOUR HSA (cont.) 49 HSA works like a regular checking or savings account. Dollars must be in the medical trust in order to draw them out to pay for medical expenses. You can withdraw funds to pay for medical expenses as they occur or at a later time. Large expenses can carry forward into future years if they occurred after the HSA account was established. Pay provider directly from the HSA or reimburse yourself for expenses previously paid through other means. QUALIFIED HSA DISTRIBUTIONS 50 Two categories of expenses qualify for tax-free treatment of distributions. 1. Out-of-pocket medical expenses Amounts paid for medical care as defined in Code 213(d). Amounts must be incurred after the HSA is established. Once the HSA exists, tax-free distributions can be used for qualified medical expenses even after the HSA account holder is no longer eligible to make contributions. QUALIFIED HSA MEDICAL EXPENSES (cont.) Certain insurance expenses Generally, health insurance premiums are not qualified except the following categories: COBRA coverage Health Insurance while receiving unemployment Qualified Long-Term Care Contracts For Individuals age 65 and over (still HSA eligible) Any health insurance other than a Medicare Supplement Medicare premiums Premiums for individual health insurance policies (not Medigap policies) Retiree medical premiums under an employer plan 17

21 HSA ADVANTAGES 52 HSA can be invested and growth is tax free. Balances rollover at the end of each year. Portable because they are individually owned accounts. Not subject to ERISA and COBRA. No claims police. Self adjudicated. Accumulated balances could be used for nonmedical reasons (subject to tax penalties). Both Employer and Employee can contribute. HSA DISADVANTAGES 53 Employer has no control over what the HSA money will be used for. Conflict with traditional FSA and HRA models that may exist at time of implementation. Need qualified HDHP to establish a HSA. Incompatible with some disease management programs and some on-site medical clinics. Bank fees often charged for account set up and maintenance. HOW TO AVOID HSA HEADACHES 54 Make sure you have the appropriate HSA compatible High Deductible Health Plan (HDHP). Not all HDHP are HSA compatible. Spousal benefit plans may disqualify you! Make sure employees understand that there is no first dollar coverage on office visits and Rx. All expenses go towards satisfying the HDHP deductible. Note: Paying your medical premiums pre-tax through a cafeteria plan DOES NOT effect HSA eligibility. 18

22 HOW TO AVOID HSA HEADACHES (cont.) 55 TIMING IS EVERYTHING! Set your Section 125 Plan renewal to coincide with the health insurance plan renewal or amend at renewal to sync up. Changes made to a health insurance plan during an active Section 125 Plan year will not constitute a qualifying event that permits changes to the Medical FSA. If you are planning to fund the HSA pre-tax through the cafeteria plan, the plan document must be amended to add language. 2 ½ month Grace Period adopted as part of cafeteria plan may cause HSA eligibility problems. HOW TO AVOID HSA HEADACHES (cont.) 56 Caution: General-Purpose FSA and HRA participation may disqualify employees from receiving or contributing amounts to the HSA. Work Around: Limited-Purpose Medical FSA (dental, vision, preventative care) Post Minimum HDHP Deductible Medical FSA (expenses limited to dental, vision, preventative care until the minimum required HDHP deductible has been satisfied, then general expenses are eligible.) Possible to suspend HRA coverage. Individuals cannot elect to convert to Limited-Purpose Medical FSA mid-plan year. Possible to convert entire plan. Any plans written prior to 1/1/04 will not have proper plan language. Amendments may be required. HSA ROLLOVER RULES 57 One Time Rollover from a IRA to a HSA Trustee to Trustee transfer Counts against maximum annual contribution No current year tax benefit Helpful if HSA accountholder needs to fund HSA for medical bills and does not have any other funds readily available. 19

23 HSA ROLLOVER RULES (cont.) 58 Rollover from a HRA to a HSA or a FSA to a HSA Once per account. Does not count against annual maximum. Plan Document must permit rollover. Must declare intent to rollover before the end of the FSA or HRA plan year. Rollover lesser of the balance on September 21, 2006 or the balance at the time of the transfer. Transfer must result in a zero balance. Transfer must be directly from employer to the HSA trustee. Once plan document permits a rollover, the door is open for others to elect to rollover balances up to January 1, 2012 (sunset provision). HSAs AT INCOME TAX TIME 59 Payroll deductions for HSA contributions AND actual employer contributions to the HSA must be reported as employer contributions on the W-2 in Box 12. Note: Both are reported as employer contributions on the W-2 so the IRS knows that the federal tax benefit has already occurred. Employee will need to file Schedule 8889 with their personal Federal income tax return. Schedule 8889 is used to: 1. Report employer contributions. 2. Take tax deductions for contributions made outside a cafeteria plan arrangement. 3. Figure excise tax penalties on excess contributions and tax penalties on non-qualified distributions. HSAs AT INCOME TAX TIME (cont.) 60 HSA deductions made as a salary reductions under a cafeteria plan arrangement are exempt from Federal and FICA payroll tax. HSAs are not tax exempt in all states. For example, (as of 2009) Wisconsin is one of few states that has not passed legislation to permit the HSA as tax deductible at the state level. For these states, you may need to add the HSA contributions that your employer provides back into your state income before calculating your state tax responsibility when you file your return. 20

24 ADDITIONAL HSA RESOURCES 61 IRS HSA Grab Bag Guidance IRS HSA Comparability Rulings HSA Road Rules FAB and FAB ERISA Status of HSA WEIGHING YOUR OPTIONS 62 Review the current insurance plan options. Analyze the premium savings that may be available by switching to a HDHP or by changing plan options all together. Is HSA an option? Determine the cost of adding a HRA and review the potential risk of additional expenses if HRA claims are paid. Review your current Section 125 or HRA plans and look for any conflict with plan years or plan definitions. QUESTIONS? 63 Please contact Sue Sieger, CFCI if you have any questions. Thank you for attending today s seminar. Sue Sieger, CFCI General Manager Benefits Design Group, Inc. PO Box 370 Onalaska, WI (608) direct ssieger@bdgflex.com 21