Health Savings Accounts-HSA Health Reimbursement Arrangements-HRA Flexible Spending Accounts- FSA

1. Health Savings Accounts-HSA Health Reimbursement Arrangements-HRAFlexible Spending Accounts- FSA The HDH Group, Inc. 600 Grant Street, Suite 1100 Pittsburgh, PA 15219 412-391-7300

2. FSA Flexible Spending Accounts

3. Flexible Spending Accounts (FSAs) • A Flexible Spending Account (FSA) is a plan that operates under Section 125 of the Internal Revenue Code (IRC). • An FSA permits eligible employees to set aside pre-tax dollars for out of pocket medical expenses not covered through their medical program and dependent care expenses • Employees or employers may contribute to FSAs. • Employees save federal income tax, Social Security/Medicare and state and local taxes. • 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.

4. Flexible Spending Accounts (FSAs) • Funds are available to participating employees at anytime throughout the year. • 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. • 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.

5. Flexible Spending Accounts (FSAs) • Dependent Care Accounts permit reimbursement for baby-sitters, daycare, or the care of a parent. • 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. • 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.

6. 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.

7. Health Reimbursement Arrangements HRA

8. Health Reimbursement Arrangements (HRAs) • Employer only discretionary contributions. Employee contributions are not permitted. • No contribution limit (except employer’s budget). • Carry-forward of account balance is permitted indefinitely, however carry-forward may be capped or not carried forward at all. • 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.

9. Health Reimbursement Arrangements (HRAs) • No portability. Employees participating can only use the account after a qualifying event by paying COBRA premiums to continue coverage. • Employers contribution is not subject to FICA or FUTA. • Employees receive benefits for qualified expenses tax-free.

10. Health Reimbursement Arrangements (HRAs) • Permissible medical expenses include: qualified medical expenses under IRC Section 213(d), COBRA premiums, retiree health premiums, long term care premiums (NOT SERVICES) and over-the-counter drugs. • Employers can limit the expenses the HRA will pay. • If combined with an FSA, unless your Summary Plan Description specifies, the HRA pays first and FSA pays second.

11. Health Savings Accounts HSA

12. Health Savings Accounts (HSAs) Defined • Health Savings Account = special account owned by an individual where contributions are used to pay current and future medical expenses • Used in conjunction with a “High Deductible Health Plan” (HDHP) • Insurance that does not cover first dollar medical expenses (except preventive care) • Can be HMO, PPO or indemnity plan as long as it meets the requirements

13. Health Savings Accounts (HSAs) Eligibility • Any individual that: • 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 • Children cannot establish an HSA • Spouses can establish their own HSA No income limits on who may contribute No earned income requirement

14. Health Savings Accounts (HSAs) Other Permitted Health Coverage • 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

15. Health Savings Accounts (HSAs) 1st Dollar Medical Benefits Making Someone Ineligible for an HSA • Medicare • TRICARE Coverage • Flexible Spending Arrangements • Health Reimbursement Arrangements There are permitted HSA/HRA/FSA Combinations

16. Health Savings Accounts (HSAs) Permitted HSA/HRA/FSA Combinations • Limited purpose” FSAs and HRAs that reimburse certain benefits (i.e. vision, dental, or preventive care benefits) • “Post-deductible” FSAs or HRAs that only provide reimbursement after the minimum annual deductible has been exhausted under the HDHP • “Retirement” HRAs providing reimbursement after retirement • “Suspended” HRAs when employees have elected to forgo health reimbursements for the coverage period

17. Health Savings Accounts (HSAs) High Deductible Health Plan Defined (HDHP) • 2007 Minimum Deductible: • $1,100 (self-only coverage) • $2,200 (family coverage) • Annual out-of-pocket (including deductible and co-pays): • $ 5,500 (self-only coverage) • $11,000 (family coverage) • 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

18. Health Savings Accounts (HSAs) High Deductible Health Plan Defined (HDHP) • HDHPs can have: • First dollar coverage (no deductible) for preventive care (co-pays allowed) • Higher out-of-pocket (co-pays and coinsurance) for non-network services • All covered benefits must apply to the plan deductible, including prescription drugs • Prescription Drugs • Must apply costs to the annual deductible • May NOT contribute if drugs are separate plan or rider

19. Health Savings Accounts (HSAs) Preventive Care - Defined: • Excludes any benefit or service intended to treat an existing illness, injury or condition • 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 • Be aware of state mandated 1st dollar coverage – it is possible to lose HDHP status • Safe harbor list - Defining Preventive Care: • Periodic health evaluations (e.g. annual physicals) • Screening services (e.g. mammograms) • Routine pre-natal and well-child care • Child and adult immunizations • Tobacco cessation programs • Obesity weight loss programs

20. Health Savings Accounts (HSAs) HSA Contribution Rules Contributions to an HSA can be made by the employer or the individual or both • 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.

21. Health Savings Accounts (HSAs) HSA Contribution Rules • Contributions can be made at any time during the year in one or more payments • Deadline for contributions is April 15th • Excess contributions must be withdrawn by the individual/owner or be subject to an excise tax • 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

22. 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) • Elections can change on a month-by-month basis • Pre-tax contributions to the HSA are not subject to individual and employment taxes • Employer can automatically make cafeteria plan contributions on behalf of individuals unless the individual affirmatively elects not to have contributions made (“negative elections”) • Employer matching contributions through a cafeteria plan are permitted • Cafeteria plan nondiscrimination rules apply

23. Health Savings Accounts (HSAs) HSA Contribution Rules - Employer Contributions • Are always excluded from employees’ income (pre-tax) • 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. • 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

24. 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

25. 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)

26. Health Savings Accounts (HSAs) HSA Contribution Rules -Employer Contributions – “Comparable” • Comparability rules apply to a category of employees only if an employer contributes to the HSA of any employee within the category. • Other categories based on employment status, such as collectively bargained/non-collectively bargained or salaried/hourly are not permitted • 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)

27. Health Savings Accounts (HSAs) HSA Distribution Rules • Tax-free distributions for “qualified medical expenses”, including over-the-counter drugs • Must be incurred on or after the HSA was established • If HDHP coverage effective on first on month, HSA can be established as early as first day of same month • 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

28. 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

29. Health Savings Accounts (HSAs) HSA Distribution Rules • Individuals must keep track of HSA activity (including employer contributions) – Account holders should keep receipts: • May need proof for IRS for claims substantiation • May be required by insurance company to prove that HDHP deductible was met • Not all medical expenses paid out of the HSA have to be charged against deductible • Distributions can be used to reimburse prior years’ expenses as long as they were incurred on or after the date the HSA was established: • No time limit on when distributions occur • Keep receipts to prove that expenses were incurred and were not paid for or reimbursed by another source or taken as an itemized deduction

30. Health Savings Accounts (HSAs) HSA Distribution Rules Mistaken distributions from an HSA can be returned to the HSA: • Individual must produce clear and convincing evidence that the distribution was a mistake of fact • 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

31. 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: • 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.

32. 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.

33. 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.

34. Health Savings Accounts (HSAs) HSA Accounts - Beneficiaries • 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. • 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. • 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.

35. Health Savings Accounts (HSAs) HSA Accounts – Investments Accounts can grow through investment earnings with the same investment options and investment limitations as an IRA • Permitted investment options: • Cash; • Stocks; • Bonds; • Options (some trustees may limit); or • Gold, silver, platinum, or palladium bullion. • Prohibited investment options: • 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.

36. Health Savings Accounts (HSAs) HSA Accounts -Taxes • 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. • Employer contributions to an HSA must be reported on the employee’s Form W-2. • Form 1099-SA will be required to be filed by the trustee. • 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.

37. Health Savings Accounts (HSAs) HSA Treasury Assistance • Website – www.treas.gov • Click on “Health Savings Accounts” • All Treasury guidance • Frequently asked questions • IRS forms and publications • HSA statute • Examples of tax savings from HSA contributions • Links to other useful sites • E-mail address: HSAInfo@do.treas.gov • Voice mailbox: (202) 622-4HSA