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HEALTH SAVINGS ACCOUNTS New Planning Opportunities For Employer Health Plans . By Jim Griffin Jackson Walker L.L.P. 214-953-5827 Jgriffin@jw.com. Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Pub. L. No. 103-173 December 8, 2003

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health savings accounts new planning opportunities for employer health plans

HEALTH SAVINGS ACCOUNTSNew Planning Opportunities For Employer Health Plans

By

Jim Griffin

Jackson Walker L.L.P.

214-953-5827

Jgriffin@jw.com

medicare prescription drug improvement and modernization act of 2003

Medicare Prescription Drug, Improvement, and Modernization Act of 2003

Pub. L. No. 103-173

December 8, 2003

Effective beginning January 1, 2004

new law
NEW LAW
  • New Code Section 223
  • New Code Section 4980G
legislative policy
LEGISLATIVE POLICY
  • Allows employees to save for health needs in retirement
  • Contain medical inflation by giving employees incentive to forego unneeded care
  • Reduce waste and bureaucracy by giving patients a stake in the savings
what is an hsa
WHAT IS AN HSA?
  • Tax - exempt trust or custodial account
  • Qualified medical expenses
  • Eligible account beneficiary
  • High–deductible health plan
contributions
CONTRIBUTIONS
  • Employee
  • Employer
  • Both
  • Cafeteria Plan
carriers and products
CARRIERS AND PRODUCTS
  • Aetna
  • Fortis Health
  • United Health Group
  • Lumenos
improvement over msas
IMPROVEMENT OVER MSAs
  • First introduced in 1996
  • Expand availability
    • No “small employer” requirement (50 or fewer)
    • No distinction between corporations, L.L.C.s, partnerships and self employed
    • No employer involvement required
  • Make permanent in the tax code
  • Loosen MSA restrictions
who is an eligible account beneficiary
WHO IS AN ELIGIBLE ACCOUNT BENEFICIARY?
  • Monthly Determination
  • Covered by HDHP
  • Not covered by any other plan
  • Not entitled to Medicare
  • Not a dependent of someone else
high deductible health plan
HIGH – DEDUCTIBLE HEALTH PLAN

In – Network Amounts

Indexed in $50 increments

exclusions from the deductible
EXCLUSIONS FROM THE DEDUCTIBLE
  • Preventive care services
  • Accident coverage
  • Disability coverage
  • Dental care
  • Vision care
  • Long term care
out of pocket expenses
OUT – OF – POCKET EXPENSES
  • Deductible
  • Co-payments
  • Other amounts
tax treatment of contributions
TAX TREATMENT OF CONTRIBUTIONS
  • Contributions are tax – deductible
  • Above the line
  • Not an itemized deduction
  • Amounts paid from an HSA are not also deductible as Section 213 medical expenses
  • Employer contributions are excludable from the employee’s income
    • Not subject to FICA taxes
tax benefit chart
TAX BENEFIT CHART

Here are the tax savings for a $2,000 contribution to an HSA for families* of various income levels:

  • Married couple with two children in tax year 2004
  • ** No tax benefit because at this income level all tax liability would be eliminated by the child tax credit
high deductible health plan1
HIGH – DEDUCTIBLE HEALTH PLAN
  • Fully insured
  • Self - funded
high deductible health plan permitted insurance
HIGH – DEDUCTIBLE HEALTH PLAN PERMITTED INSURANCE
  • Workers Compensation
  • Tort Liabilities
  • Property Insurance (for example, car insurance)
  • Specific disease or illness (for example, cancer insurance)
  • Fixed amount per day of hospitalization
embedded deductibles
EMBEDDED DEDUCTIBLES

The XYZ Company health plan has an individual deductible of $750 and a family deductible of $2,250. If Employee A incurs covered medical expenses in a year of $1,500, the Plan would pay $750, even if the family’s covered medical expenses do not exceed $2,000. The Plan is NOT a HDHP.

catch up contribution
CATCH-UP CONTRIBUTION
  • Eligibility: Ages 55 to 65
  • Catch-up Limit:
contribution limit co ordination with other plans
CONTRIBUTION LIMIT: CO-ORDINATION WITH OTHER PLANS
  • Reduced by amount paid to MSAs
  • Reduced by employer contributions
contribution limit
CONTRIBUTION LIMIT
  • Computed monthly
  • Spouses
    • If either spouse has family coverage, then both spouses are treated as having family coverage
    • If both spouses have family coverage under different plans, both spouses are treated as having family coverage with the lowest annual deductible
    • Both spouses may make catch-up contributions, if age 55 but not 65
contribution limit1
CONTRIBUTION LIMIT
  • Excess contributions are subject to a 6% excise tax, unless removed from the HSA
contribution limit spouses
CONTRIBUTION LIMIT: SPOUSES

H and W are married. H is 58 and W is 53. Both work and have separate HDHP family coverage. H’s deductible is $3,000. W’s deductible is $2,000.

H’s HSA contribution limit is $1,500

W’s HSA contribution limit is $1,000

additional contribution requirments
ADDITIONAL CONTRIBUTION REQUIRMENTS
  • Must be made in cash
  • Not stock or other property
  • April 15 deadline
  • Entire contribution amount may be made on 1st day of the year
employer contributions discrimination rerquirements
EMPLOYER CONTRIBUTIONS DISCRIMINATION RERQUIREMENTS
  • Comparable contributions
    • Same dollar amount
    • Same percentage
  • Comparable participating employees
    • Applied separately to part time employees (<30 per week)
  • 35% excise tax
distributions
DISTRIBUTIONS
  • May be made at anytime
  • If used for qualified medical expenses, distributions are excluded from gross income and are not subject to penalty tax
distributions1
DISTRIBUTIONS
  • Other distributions are includable in income and are also subject to a 10% penalty tax unless the account holder has
    • Attained age 65;
    • Becomes disabled; or
    • dies
qualified medical expenses
QUALIFIED MEDICAL EXPENSES
  • For account beneficiary, that person’s spouse and dependents
  • Defined in Internal Revenue Code Section 213(d)
  • Includes over-the-counter drugs as permitted by Revenue Ruling 2003-102
qualified medical expenses1
QUALIFIED MEDICAL EXPENSES
  • Other insurance premiums:
    • Qualified long-term care insurance
    • Cobra premiums
    • Health coverage while receiving unemployment benefits
    • Medicare premiums, if over 65
    • Not Medigap
    • Retiree health insurance premiums after account holder reaches age 65
distributions2
DISTRIBUTIONS
  • Debit, credit or stored-value cards are ok
  • HSA may be divided in connection with the account holder’s divorce
disposition of hsa upon death of account holder
DISPOSITION OF HSA UPON DEATH OF ACCOUNT HOLDER
  • Spousal beneficiary – account continues tax-free for spouse
  • Non spousal beneficiary – account terminates and is taxed as income to the recipient
    • Taxable amount is reduced by amounts incurred before the account holder’s death and paid within 1 year after date of death
hsa trustee custodian
HSA TRUSTEE/ CUSTODIAN
  • Insurance company
  • Bank
  • Similar financial institution
  • Any trustee or custodian for
    • IRAs
    • MSAs
  • Not required to be connected to institution that provides HDHP
hsa investments
HSA INVESTMENTS
  • NOT life insurance
  • No commingled ownership, except
    • Common trust fund
    • Common investment fund
  • Held in U.S.
  • Non forfeitable; not subject to “use it or lose it”
  • Subject to UBTI
rollovers
ROLLOVERS
  • MSA to HSA: OK
    • Need not be in cash
    • Not subject to contribution limits
  • IRA: Not OK
  • HRA: Not OK
  • 125 Account: Not OK
  • HSA to HSA: OK
    • 60 day rule
    • 1 time per year
recordkeeping
RECORDKEEPING
  • Burden is on employee
  • Not employers
  • Not HSA trustee or custodian
similarities between hsa hra and fsa
SIMILARITIES BETWEEN HSA, HRA AND FSA
  • Pre tax
  • Employee and employer contributions permitted
  • Unused balances may be carried over to later years (except for FSA)
differences between hsa hra and fsa
DIFFERENCES BETWEEN HSA, HRA AND FSA
  • HSA assets must be held in trust
  • HSAs are completely portable
  • HSA limits are subject to inflation adjustments
  • HSA have more liberal distribution rules
  • HRA do not have to be combined with HDHP
first round of guidance irs notice 2004 2
FIRST ROUND OF GUIDANCE IRS NOTICE 2004-2

Issued December 22, 2003

  • HDHP requirements
  • Trustee requirements
  • Tax Treatment
    • Contributions
    • Distributions
  • Transfers
    • MSAs
    • others
further guidance
FURTHER GUIDANCE
  • Relationship between HSAs, HRAs, and 125 plans
  • Definition of preventive care
  • Corrective procedures
  • HDHP requirements
  • IRS Notice 96-53 regarding MSAs
  • Interplay between HDHP and state mandated coverage
co ordination with cafeteria plans
CO-ORDINATION WITH CAFETERIA PLANS
  • Is FSA coverage considered other disqualifying coverage?
  • FSA coverage for dental or vision benefits
  • Applicability of nondiscrimination rules
  • Ability to fund long term care through HSA funded through FSA
  • Election changes
some observations
SOME OBSERVATIONS
  • Boost for consumer driven health plans
  • Equalizer for self-employed individuals
  • New retirement savings vehicle
  • Cost control technique
  • Impact on current plan designs and premiums
  • Impact on low deductible plans
  • Predictability in employer costs
some observations1
SOME OBSERVATIONS
  • Cap on employer expenses
  • Impact on Health Reimbursement Accounts
    • IRS Notice 2002-45
    • Rev. Rul 2002-41
  • Applicability of ERISA, COBRA, HIPAA
  • Substantiation requirements
target markets
TARGET MARKETS
  • Individuals
    • Younger, healthier people
    • Upper income people
    • Middle aged, middle class (?)
  • Small groups
  • Large groups (?)