Understanding Health Savings Accounts

1. Understanding Health Savings Accounts www.hsatrusteeservices.com 866-HSA-2010 hsainfo@hsatrusteeservices.com

2. What is an HSA? • Like an IRA for health care • Employees use their HSAs to pay for routine health care costs • Allows companies to save significant premium dollars by switching to high-deductible plans that cover major medical expenses (and preventive care) • Like Flexible Spending Accounts (FSAs), employees can have “pre-tax” dollars deducted from their paychecks and automatically deposited • Company can also make contributions to employees’ accounts and deduct as a business expense • Unused funds roll over automatically every year and can be invested • Accounts are owned by employees and go with them if they leave for a new job

3. HSA Overview HSAs offer triple tax savings • Tax-free or tax-deductible contributions • tax-free earnings through investment • tax-free withdrawals for qualified medical expenses HSAs have 2 parts: • A tax-free savings account for routine medical expenses • A health insurance policy (can be an HMO, PPO or indemnity plan) that covers major medical expenses and preventive care HSAs have been available since 2004

4. Advantages of HSAs • Flexibility – HSA funds can pay for current medical expenses, including expenses that insurance may not cover, or be saved for future needs, such as: • Health insurance or medical expenses if no longer working (unemployed or retired but not yet on Medicare) • Out-of-pocket expenses when covered by Medicare • Long-term care insurance and expenses • Portability – HSA accounts are completely portable, even if you: • Change jobs or become unemployed • Change your medical coverage or marital status • Move to another state • Ownership – Funds roll over automatically and remain in the account from year to year, just like an IRA • There are no “use it or lose it” rules for HSAs

5. Advantages of HSAs • Control – Patients can make choices that are best for them, and physicians can be more effective patient advocates, without intrusion from insurance companies • Affordability – HSAs make health insurance more affordable by lowering premiums • Security – Insurance policy and the HSA account provide protection against high or unexpected medical bills

6. Using HSA Account Funds • Account withdrawals are tax-free if taken for “qualified medical expenses” • IRS definition is broader than most insurance • Now includes over-the-counter drugs • Tax-free withdrawals can be taken for qualified medical expenses of: • Person covered by the HSA policy • Spouse or dependent of the individual (even if not covered by the HSA policy) • If funds are not used for qualified medical expenses • Amount withdrawn is included in income and 10% additional penalty applies, unless individual dies, becomes disabled, or is age 65+ • Receipts to not need to be submitted for “reimbursement” • Receipts must be kept in case of IRS audit

7. Using HSA Account Funds • “Qualified medical expenses” does not include other health insurance (including premiums for dental or vision care) • Exceptions: • COBRA continuation coverage • Any health plan coverage while receiving unemployment compensation (federal or state) • “Qualified medical expenses” does include: • Qualified long-term care insurance • For individuals enrolled in Medicare: • Medicare premiums and out-of-pocket expenses (Part A, Part B, Part D, Medicare Advantage) • Cannot pay Medigap premiums

8. HSA Accounts • Accounts are owned by the individual (not an employer), so 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 pay for medical expenses from the account or save the account for future use • Which company will hold the account • What type of investments to grow account • Employers cannot restrict • What distributions from an HSA are used for • Rollovers

9. HSA Accounts • Accounts can grow through investment earnings, just like an IRA • Same investment options and investment limitations as IRAs, including: • Stocks • Bonds • Mutual funds • Certificates of deposit • Other investments • Who can be an HSA Trustee or Custodian? • Banks, credit unions • Insurance companies • Entities already approved by the IRS

10. HSA Accounts • Estate Treatment of HSAs • If married: • the spouse inheriting the HSA is treated as the owner • If not married: • The account will no longer be treated as an HSA upon the death of the individual • The account will become taxable to the recipient (including the estate of the individual)

11. Who Is Eligible for HSAs? • Any individual who has HSA-qualified insurance and does not have other first-dollar coverage • Spouses can establish their own HSAs, if eligible • Children not eligible and coverage does not impact parents’ eligibility • No income limits on who may have an HSA • Do not have to be working or have earned income to have an HSA

12. Who Is Eligible for HSAs? • Other health coverage allowed: • Hospital indemnity policies • Insurance for specific diseases or illnesses, accidents, disability, dental care, vision care • Long-term care insurance • Employee Assistance Programs, disease management programs, and wellness program • These programs must not provide significant benefits in the nature of medical care or treatment • Drug discount cards • Flexible Spending Accounts and Health Reimbursement Arrangements can be problematic but certain combinations allowed

13. Who Is Eligible for HSAs? • Permitted (HSA-compatible) FSA & HRA plans: • “Limited purpose” FSAs and HRAs that restrict reimbursements to vision, dental or preventive care benefits • “Post-deductible” FSAs or HRAs that only provide reimbursement after the minimum annual deductible has been satisfied under the HDHP • “Retirement” HRAs that only provide reimbursement after an employee retires • “Suspended” HRAs where the employee has elected to forgo health reimbursements for the coverage period

14. What Is HSA-Qualified Insurance? • Health insurance plan with minimum deductible of: • $1,100* (self-only coverage) • $2,200* (family coverage) • Annual out-of-pocket expenses (including deductibles, co-pays and coinsurance) cannot exceed: • $5,500* for 2007 (self-only) & $5,600 for 2008 • $11,000* for 2007 (family) & $11,200 for 2008 * These amounts are indexed annually for inflation

15. What Is HSA-Qualified Insurance? • Can be an HMO, PPO, POS, or indemnity plan as long as requirements are met • Plan must pay 100% of covered benefits after reaching out-of-pocket limit • All covered benefits must apply to the plan deductible (including prescription drugs) • Exception - Preventive care • All out-of-pocket expenses (deductibles, copays, coinsurance) must count towards satisfying the out-of-pocket limits

16. HSA Contributions • Contributions to an HSA can be made by the individual, their employer, or both • Personal contributions are tax-deductible • Company contributions are deductible by the company as a business expense and are “pre-tax” to the employee • Employee contributions made through payroll deduction are “pre-tax” • Maximum amount that can be contributed to (and deducted from taxes for) an HSA • $2,850* for 2007 (self-only) & $2,900 for 2008 • $5,650* for 2008 (family) & $5,800 for 2008 * These amounts are indexed annually for inflation

17. HSA Contributions • Individuals age 55 and older can make additional “catch-up” contributions to HSA each year • 2007 - $800 • 2008 - $900 • 2009 and after - $1,000 • Contributions must stop once an individual enrolls in Medicare • One-time transfer from an IRA is allowed • Helps “jump start” account funding • Amount limited to annual contribution amount

18. HSA Contributions • Partial year coverage • Can make full contribution even if coverage begins in the middle of the year • Must maintain HSA-qualified coverage for at least one full year after the end of the year in which partial year coverage begins • If coverage ends before end of the year, contributions must be pro-rated for the number of months that the individual is covered by an HSA plan as of the first day of the month • “Catch-up” contributions must also be pro-rated

19. Rules for Employer Contributions • Employer contributions to an HSA • Are always excluded from employees’ income (pre-tax) • Must be “comparable” for employees participating in HSA • “Comparable” = the same $ amount or the same percentage of the employee’s annual deductible • May count only employees who are “eligible individuals” • Can exclude collectively bargained employees • Can exclude employees enrolled in traditional (not HSA-qualified) plans

20. Rules for Employer Contributions • Employer contributions must be comparable across employees that have the same “category of coverage” (i.e. self-only or family) • Part-time employees can be tested separately (customarily employed fewer than 30 hours per week) • Employers can discriminate in favor of lower-paid employees • No other classifications of employees are permitted

21. Rules for Employee Contributions • Employee contributions to an HSA can also be made on a pre-tax basis • Can only be made if employer offers a salary reduction arrangement through a cafeteria plan (125 plan) • Employers can make matching contributions to employees’ HSAs through a cafeteria plan • Non-discrimination rules (not comparability rules) apply: • Employers can make contributions to an HSA based on an employee’s participation in health assessments, disease management program or wellness program