1

Health Savings Accounts(HSA)

2

Health Savings Accounts (HSAs)

HSAs were created by the Medicare bill signed in December 2003

Designed to help individuals save for qualified medical and retiree health expenses on a TAX-FREE basis

An HSA combines a savings account with a High Deductible Health Plan (HDHP)

The money deposited is not taxed if used to pay for current and future qualified medical expenses

What is an HSA?

3

WHO IS ELIGIBLE? Any individual covered under a qualified High Deductible

Plan (HDHP)

WHO IS NOT ELIGIBLE?

Individuals covered by Medicare

Individuals covered by another health plan that is not a High Deductible Health Plan

Dependents listed as dependents on someone else's taxes

Eligibility

4

What is defined as a High Deductible Health Plan

(HDHP)?

Minimum of $1,000 Individual Annual Deductible

Minimum of $2,000 Family Annual Deductible

Maximum of $5,000 Individual Annual Out-of-Pocket

Maximum of $10,000 Family Annual Out-of-Pocket

5

What are eligible expenses?

All services and products covered by IRC 213 (d), except Health insurance premiums

Premiums for Long Term Care

COBRA Premiums

Health insurance premiums for individuals receiving unemployment benefits

6

Are there limitations to the amount of contribution?

$2,600 per individual or $5,150 per family

Account holders age 55 and older are allowed to contribute an additional $500 in year 2004, increasing in increments of $100

per year, until 2009 reaching $1,000

7

The Employer

The Employee

Post-tax payroll deduction

Pre-tax payroll deduction (Flex)

Direct deposit

Family members may also make contributions to an HSA on

behalf of another family member

Who can contribute?

8

How may contributionsbe funded?

Annual contributions may be funded on a monthly basis, which is 1/12 of 100% of the annual deductible or $2,600, whichever is less. (Deductibles are a minimum of $1,000, maximum of $2,600 for individual coverage).

Example:

Deductible $5,000.00

Allowable contribution $2,600.00

Divided by 1/12 12

Total monthly contribution limit $ 216.67

Allowable contribution amounts must be prorated based on when the policy becomes effective.

9

Health Savings

Account Plan

Savings Account

Helps Pay Your Deductible/Out-of-

Pocket Medical Expenses

Tax-Deductible Deposits

Tax-Deferred Growth

Tax-Free for Medical Care

High Deductible Insurance

Protects You From Big Medical Bills

10

What funds can be withdrawn?

Tax-Free withdrawal to pay for qualified medical expenses

Non-qualified withdrawal of funds will be taxed

accordingly, included as gross income, and a 10% penalty will

be applied except in the case of:

Death

Disability

Medicare eligibility

Tax-Free transfer of funds to a spouse can occur in the case of

death or divorce

11

Qualified Medical ExpensesA qualified medical expense is defined as an expense paid for care as described in

Section 213 (d) of the Internal Revenue Code. Below are two lists which can serve as a guide in

determining whether an expense is eligible for reimbursement.

Examples of Qualified Medical Expenses Alcoholism Treatment Nursing Homes and Services

Ambulance Ophthalmologist

Birth Control Pills (by prescription) Optician/Optometrist

Chiropractor Organ Transplant (Including Donor’s Expenses)

Contact Lenses and Cleaning Solutions Oxygen and Oxygen Equipment

Crutches Podiatrist

Dental Treatment Prescription Medications

Dermatologist Psychiatrist/Psychologist

Drug Addiction Treatment Stop Smoking Programs

Eyeglasses Telephone or TV Equipment To Assist Hearing Impaired

Hospital Services Transportation Expenses Relative to Healthcare

Lab Fees Vasectomy

Laser Eye Surgery Weight Loss Programs To Treat An Existing Disease

Long-Term Care (certain limits apply) Wheelchairs

Non-prescription Medications X-Rays

This is not a complete list

12

Examples of Non-Qualified Medical Expenses

Athletic or Health Club Memberships

Bottled Water

Cosmetics, Hygiene Products, and Similar Items

Cosmetic Surgery and Procedures (Unless for Deformity)

Diaper Service

Domestic Help

Electrolysis or Hair Removal

Funeral, Cremation or Burial Expenses

Hair Transplant

Illegal Operations and Treatments

Maternity Clothes

Nutritional Supplements

13

How will an HSA workin a Cafeteria Plan?

Unused contributions to the HSA are not forfeited at the end of the plan year, instead they rollover from year to year (even if offered under a Cafeteria Plan).

In addition, the contributions are not lost when an employee moves from one employer to another. In another change from FSAs, contributions are not subject to the Uniform Coverage Rule.

Distributions can be made only for the amount in the HSA at the time of the request for reimbursement. HSAs will be subject to a set of non-discrimination rules, as yet not defined clearly. And although further guidance may come, it appears that a third party need not review expenses. Self-substantiation may be allowed under HSAs. “Between taxpayer, God and the IRS”

14

Can HSAs and FSAs Interact With Each

Other?Per Revenue Ruling 2004-45 issued on May 11, 2004,

FSAs can operate with an HSA; however, the FSA must be:

a ‘Post Deductible’ FSA which provides reimbursements after the minimum annual deductible has been satisfied; or,

a ‘Limited Purpose’ FSA which restricts reimbursement to certain permitted benefits such as vision, dental or preventive care benefits.

15

Advantages of HSAs Disadvantages of HSAs

An HSA is the only account which employees can fund on a pre-tax basis through a cafeteria plan and have unused funds carryover to future years.  An HSA is also the only account that can pay amounts for non-qualified medical purposes, though the distributions are taxed.  HSAs have the potential to materially reduce employer health care costs by building employee consumerism into plan offerings.  HSAs favorably transfer more control and power to employees encouraging better health care planning and decision making.  HSAs may be a potential vehicle for providing retiree medical coverage.

An HSAs funds must be set aside in a trust and cannot be forfeited, resulting in a direct expense to the employer.  The fact that making or receiving tax-free HSA contributions means the employee cannot have any health coverage other than the high deductible plan may initially present challenges. Some employees might be reluctant to forego other health coverage to be able to participate in the HSA.   Employers considering whether to provide retiree coverage through HSAs might find it difficult for some employees to accumulate significant funds.  IRS Revenue Ruling 2004-45 places administrative and communication challenges on operating FSAs alongside HSAs.

16

HSA/HRA Comparison

17

HSA/HRAComparison Chart

Health Savings Account(HSA)

Health Reimbursement Arrangement(HRA)

Availability  

Individuals and any size group Any size group

(not available to partners in a partnership, shareholders who own more than 2% stock in

a Sub S corp and members of an LLC)

Maximum Contributions The lesser of deductible or $2,600 for

singles and $5,150 for families (amount increased annually based on CPI)

Maximum reimbursement determined by employer

Additional Contribution Allowance Additional contributions allowed for age 55

and older ($500 in 2004)NOT APPLICABLE

Eligible Contributions Individuals, employers and/or employees Employers ONLY

Tax-Deductibility – Employer Contributions are tax-deductible Reimbursements are tax-deductible

Tax-Deductibility – Employees Contributions may be either pre-tax, if

offered, through a cafeteria plan or tax- deductible (no need to itemize)

No employee tax-deduction (employer sponsored)

Fund or Account Ownership Employee Employer

Portable Yes No

Rollover of Funds Yes Employer determines if allowed and can set

caps

Funding Required Yes No Pre-funding necessary

Plan Type High deductible plan required as defined by

HSA laws; no copay plans No plan restrictions

Deductible: Singles/Families – 2004 $1,000/$2,000 minimum No Limits

Out-of-Pocket Maximum: Singles/Families – 2004

Up to $5,000/up to $10,000(includes ded. but not out-of-network costs) No Limits

Rx Copay Allowed No Yes

Administration Insurance company, TPA or bank Self-administered, insurance company or TPA

Withdrawals for non-qualified medical expenses

Taxable and subject to 10% penalty (no penalty for over 65)

Reimbursements only for qualified eligible expenses; employer determines whether to

pay after age 65

HSA deductibles and out-of-pocket maximums are subject to annual cost of living adjustments.

18

Ok. So now you are an expert on HSAs.

Key Issues to consider:

Retiree medical: You may want to consider how HSAs can serve as a retiree medical funding vehicle.

Vendor Selection: You will need to select an appropriate vendor if you decide to sponsor an HSA. The vendor landscape is rapidly changing as the market reacts to the availability of these new accounts.

Communications: You will want to effectively communicate any changes that you make to your active or retiree plans to take advantage of these newly available accounts, as well as accurately describing the rules that apply to them. Because HSAs have been the focus of recent press coverage, employees – including senior executives – may approach you in the near term with questions about their feasibility.

19

Ok. So now you are an expert on HSAs. (Continued)

Redefining the employer’s roles: Employers are redefining their role from health care purchaser to health care financer (e.g., defined contribution approach or exit strategy) and may now have a more logical path to this end via the use of HSAs.

Timing: While HSAs are available under the tax rules in 2004, you should consider how soon you could realistically offer HSAs. Most employers will need time to consider how HSAs might fit within their overall health plan and retiree medical strategies, make design decisions, gauge employee interest, implement decisions, and develop communication materials. All HSAs are prohibited from accepting rollover funds from flexible spending accounts or health reimbursement arrangements, making mid-year transitions less appealing.