The content provided in this presentation is for informational purposes only. For information regarding specific policy information, including regulations, limitations and exclusions, refer to your contract and/or benefit booklet.

CDHP Health Savings Accounts

Your Guide to Understanding How HSA’s Work

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These simple steps serve as the framework

Start with a high deductible health plan that delivers an array of choices and high-performing providers

Health Plans &

Providers

Add a health savings account and investment services, to help employees pay for medical expenses, save, and invest

Health Savings Account

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Preventive quality care programs are the key to making CDHP’s and HSA’s work and empowers consumers to make more informed decisions on their health

Care & Service

Programs

CDHPs – More than just Health Plans

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HSA Quick Facts

Description Tax exempt trust or custodial account established for the purpose of paying qualified medical expenses (QME) in conjunction with a IRS defined High Deductible Health Plan.

Program Sponsor Individuals & Employers

Health Plan Requirements IRS qualified HDHP required

Account Type Employee trust or custodial

Contributions Employers and / or individuals, up to IRS limits. Contributions and investment earnings are tax-free

Distributions Tax exempt for QMEs. Taxable + 10% penalty for all other withdrawals.

Rollover/Portability Yes

Validate Expenses Individual’s responsibility

Administration Provided by a qualified financial institution

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Health Savings Account Details

• Build funds with tax breaks– Similar to Individual Retirement Account

(IRA) – Money contributed used to build savings

for future medical costs– Account deposits and interest earnings

receive tax-favored treatment– Money contributed to HSA can be

withdrawn tax-free to pay for qualified medical expenses (QME)

• Move it, keep it!– Completely portable, even if employees

move – Funds rollover from year to year

• Calculating contributions– Deposit either health plan deductible

amount or amount specified annually by IRS—whichever is less

• Peace of Mind– Accumulated money for health expenses – Pay insurance premiums (I.e., long-term

care, COBRA, or health premiums while unemployed)

• Retirement at age 65– Pay for Medicare or

employees’ share of any medical insurance premiums

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HSAs - Benefits to Employers

• Health plans cost less – helping employers avoid health insurance premium increases

• Spending less on health care coverage cuts overhead, taxes and administration

• Cost of insurance premium and any contribution to employees’ HSAs are tax-deductible

• Attract and retain valuable employees

• An opportunity to invest when coupled with financial accounts

• Valuable for spenders, savers and investors

CDHPs: Add up the individual advantages

Combining a CDHP with an HSA offers:• Flexibility• Control over rising cost of benefits• Lower health care premiums• Tax-saving advantages

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• Tax-exempt trust/savings vehicle

• “Triple Tax Free Benefit” Tax savings on the account up to the deductible Interest on the account Earnings on the investment

• Employer and/or employee cash contributions • Belongs to individual — not employer

What is an HSA?

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Who is eligible?

• Open to everyone enrolled in a qualified high-deductible health plan

• Individuals cannot be covered under another health plan that is not a qualified high-deductible plan

• Individuals must not be eligible and enrolled in Medicare

• Individuals must not be eligible to be claimed as a dependent on another person’s tax return

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High Deductible Health Plan Design

• Premiums generally costs less than what traditional health care coverage cost

• Deductibles are higher than traditional coverage

• IRS has defined HDHP requirements • Embedded or aggregate deductibles

are allowed• Preventive care services may be

covered on a first dollar basis including Rx

• Copays are not allowed, unless for preventive care services

• Prescription drugs must be covered under the medical plan, not under a separate plan (e.g. no co-pay plans)

2009 Deductibles$1,250 Self-only Coverage$2,500 Family Coverage

Annual Out-of-Pocket$5,000 Self-only Coverage$10,000 Family Coverage

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Contributions to an HSA

• Contributions must be made in dollars

• Account holder must be enrolled in a qualified CDHP to contribute

• Employer, employee and family member of employee can contribute

• Account holder may no longer contribute once they become entitled to Medicare

• Maximum yearly contributions in 2009– lesser of the deductible or $3,000 for individual or $5,950 for family

• Contributions may be made any time of year in one or more payments

• Individuals age 55 and older can make an additional “catch-up” contribution of $1,000 in 2009

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HSAs Contribution Schedule

Maximum HSA Deposit

Deductible

2009Self-only Coverage $3,000 $1,250

Family Coverage $5,950 $2,500

2009Catch-up Provision (for aged 55+)

$1,000

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Tax Treatment of Contributions

• Employer Contributions– not taxable income to employee and not subject to FICA – not tax deductible by the individual– tax deductible to the employer up to certain limits in the year in which

the contribution is made

• Employee/Family Member Contributions– tax deductible by the eligible individual on an “above-the-line” basis– cannot take a deduction on tax return for medical expenses if the

expenses were reimbursed under an HSA– interest and investment earnings on contributions are not taxable

while in the HSA

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Features of HSAs

• Members personal HSA contributions are tax-deductible • Interest earned on your account is tax-free• Withdrawals for qualified medical expenses are tax free • Unused funds and interest are carried over, without limit, from year to

year• Members own the HSA and it is theirs to keep — even when they

change plans or retire• Accumulated funds in the account can be invested in stocks and

bonds.

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HSAs may save a member money through lower premiums, tax savings. Plus, the money deposited in an account can be used now or in future years!

Security

Affordability

Flexibility

Savings

Control

Portability

Ownership

Tax Savings

HSA Advantages

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Qualified Medical Expenses

The most common allowable health care expenses are….

Coinsurance and deductible amountsPrescriptionsBracesLASIK eye surgeryDental CareContact lenses

Hearing aidsLong-term care premiumsOver-the-counter drugsMedicare premiumsCOBRA premiums

And much more!!!

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HSA Savings Scenario

• Conservatively, if member saves $1,500 each year starting at age 35– Assuming they still spend $500 in health care

each year under a $2,000 total deductible– After 30 years, member would have

$185,019 in HSA!• Assumes member took advantage of

investment options and received average 8% return

• Does not include 30 years of premium savings!

$185,019 at age 65

$1,500 each year starting at age 35

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Distributions from an HSA

• Only funds available (deposited) in the account may be used

• Funds the HSA can still be used for qualified medical expenses, even if a person is no longer enrolled in a qualified high-deductible health plan

• Amounts distributed, which are not used to pay for qualified medical expenses, are subject to income taxes and an additional 10% excise tax

• Account holder is responsible in for ensuring that expenses paid from the account are qualified medical expenses — Banks or the Health Plan does not substantiate in any way

• Balances remaining in an HSA at the end of a year roll to the next year

• Beneficiary rules apply upon death

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Pros and Cons

• Lower premiums• Tax deductible contributions• Portability of account• Account balance rolls over annually• Earnings grow tax free• Withdrawals for healthcare

expenses incur no tax• Wide range of investment options• Employer can contribute to

premiums

• Higher deductibles• May pay more for routine expenses

and prescriptions• May not be suited for those with

chronic conditions• Non-medical use withdrawals for

people under 65 will be taxed and assessed a 10% penalty

• Some accounts incur extra fees• Can’t use funds to cover premiums• Must continue health plan

enrollment in order to make account contributions.

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Legislation changes that improve HSA

• Eliminates lesser of the deductible allows the full amount of the contribution limit without regard to the individuals deductible amount

• Allows full year contributions for those who enroll mid year

• Allows a one time tax fee rollover of health FSA or HRA

• Allows a one time tax free trustee to trustee transfer of IRA funds

• Allows the employer to contribute greater contributions for non highly compensated employees without violating comparability rules

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How to Decide?

Only you can determine if a high deductible health plan and health savings account is right for your or your employees.

Know the facts to make the best decision.

Questions?