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Health Care Savings Accounts
Presented by
Linda A. Meyerhoffer, CPA
June 6, 2006
www.yourflex.com
Benefit Solutions, Inc.
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Consumer Driven Health Care Vehicles
High-Deductible Health Insurance MERP’s – employer & employee funded HRA’s – ER funded, carry over & spend
down features Health FSA’s MSA’s HSA’s
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Medicare Reform Legislation
Most significant change to Medicare since it’s inception
Also helps those not eligible for Medicare by adding HSA’s, effective January 1, 2004
Legislation is hailed as “historic breakthrough” by some, criticized as flawed and limited by others
While new law provides framework for change, details will emerge over time.
Implementation of programs scheduled from 2004 to 2010+
Benefit Solutions, Inc.
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HSA Eligibility Requirements
An individual is eligible only if Covered by a qualifying HDHP Not covered by another disqualifying coverage
• General purpose health FSA or HRA• Impact of new FSA 2 ½ month rule
Pharmacy benefits must be under the HDHP – no card program below the deductible unless 100% paid for by employee
Not eligible to be claimed as a dependent (Code Sec 152)
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HSA Eligibility Requirements
An individual is eligible only if Not ENTITLED TO Medicare
Have attained age 65 and - have applied for and are receiving retirement benefits
from Social Security or the Railroad Retirement Board; or
is eligible for monthly retirement benefits from Social Security or the Railroad Retirement Board (but is not receiving such benefits because he or she has not applied for them) and has filed an application for Medicare Part A.9
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HSA Eligibility Requirements
Other Types of Insurance Permitted Insurance associated with a specific disease Hospitalization that pays a fixed amt/day Vision Dental Limited FSA - covering vision, dental and preventive
care (Not OTC meds) Suspended HRA – elect forgoing coverage before
coverage period begins Many EAP’s and Wellness Mgmt Programs
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HSA Eligibility Requirements
Other Types of Insurance Not Permitted Va Benefits within 3 months before month of
eligibility (preventive excluded) TRICARE – Health care for active-duty &
retired members of uniformed service/family On-site clinic – if it provides more than
nominal medical services and preventive/permissible care.
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HSA Eligibility Requirements
The following can also establish an HSA and contribute but not under a 125 plan. Therefore any contributions by the employee can not be pre-taxed. Since they are not employees, any ER contribution is not tax deductible either.
More than 2% shareholder of an S Corp Partners in a Partnership Self-employed individuals
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HSA Eligibility Requirements
Eligibility is determined on the 1st of each month
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HSA Eligibility Requirements
Once a participant becomes ineligible, they can not contribute but they can take distributions
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HSA Coverage Requirements
Employee must have plan with deductible of $1,050 or more in 2006 ($2,100 for family) Plan out-of-pocket maximum cannot be greater
than $5,250 ($10,500 family) OK if plan imposes no deductible for preventive
care or has higher OOP limit for out-of-network benefits
Deductible and OOP maximums are indexed annually
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HSA Contribution Requirements
• Maximum annual contribution is lesser of deductible or $2,700 ($5,450 family) for 2006 – $225/month Additional contributions allowed for 55+ : $700
($1,400 family) increasing to $1,000 ($2,000 family) in 2009+
Roll over contributions not subject to limits (HSA to HSA)
Maximum annual contributions are indexed Cannot rollover HRA or FSA funds in to HSA
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ER Contributes to HSA
Outside of a 125 plan –
then comparable contributions must be made for all employees with comparable coverage – same $ or % of deductible. Employees don’t have a choice of what to do with the money.
Inside of a 125 plan –
comparability does not apply, only discrimination testing regs. More flexibility on allocating funds, matching, etc.
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Special Rule for Married Couples
If either spouse has family coverage, then both spouses are treated as having only that family coverage.
If both spouses have family coverage, then the lower annual deductible is used for purposes of determining both eligibility and the combined monthly contribution limit.
Separate Trusts – no joint HSA
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Tax Treatment
Contributions (subject to limits) Employer contributions excluded from income and
wages Individual after-tax contributions deductible “above the
line” Contributions can be made until April 15 of the following
year Pre-tax contributions allowed through Section 125
“cafeteria plan” if limited to permitted coverage
Earnings Trust earnings grow tax-free
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Tax Treatment
Distributions Distributions for qualified medical expenses are tax-free Other distributions are permitted but are included in
income and subject to 10% penalty tax (no penalty if eligible for Medicare)
Special rules for distributions upon death and divorce Can be used for self, spouse and dependents even
though they may not be eligible for HSA Self-adjudicating – keep those receipts
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What Happens at Death
If beneficiary is spouse, transfer to spouse is non-taxable
If non-spouse, the account ceases to be an HSA and the fair market value of the account is given and taxed then
Claims for qualified medical expenses of the decedent can be deducted first if done within a year
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Tax Treatment
Only approach where contribution, investment earnings and withdrawals for health-related expenses are all free from taxation
Expenses must be incurred after an HSA is established
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What Expenses Will HSA’s Cover
Most insurance not covered except:– COBRA, – LTC within Code § 213(d)(10) limit– any received while unemployed, – any health insurance when 65 or over except for
Medicare Supplement
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Investing Options
No life insurance No co-mingling with other property No collectibles Yes - Same investment options of an IRA Yes Bullion or coins No borrowing against it
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Special Considerations
HSA’s offered through 125 plans– Irrevocable election rules do not apply– Changes are prospective– Uniform coverage rule does not apply– No required 12 month coverage– No comparability rules– Include when running Key Man Test (25% rule)– Can still fund LTC through HSA
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Special Considerations
COBRA does not apply ERISA does not apply as long as
– Establishment of the account is voluntary– Limit the ability for the employee to move the $– Must not impose conditions on utilization – Must not make or influence investment decision– Must not represent that the HSA is established or
maintained by the employer– must not receive any payment or compensation in
connection with the HSA. HIPAA not sure if “health plan” yet
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Employer Options
Do nothingAdopt a HDHP (HSA compliant)
With or without employer-sponsored HSA With or without employer contribution to HSA Convert
existing CDHC from HRA to HSA
Adopt an HSA Convert existing Archer MSA to HSACommunicate changes in conjunction with future reductions in retiree subsidies
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Employer Options - HDHP
Offer an HSA-compliant HDHP Employees have option of setting up HSA of their own No cost to employer for HSA
Offer HDHP and sponsor an HSA for eligible employees Employees can contribute through employer or set up HSA on
their own Administrative cost for employer unless employees pay cost
Offer HDHP, sponsor HSA and make contributions to the HSA Employer plus employee contribs cannot exceed limits Employer pays HSA cost plus administrative cost (unless paid by
employees) Funding HSA’s by employer is not a long-term liability but has a
cash cost
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Employer Options - CDHC
Consumer Driven Health Care – Implement HSA compliant plan, or convert current HRA based plan to an HSA
Disadvantages: Contraints on insurance protection provided No employer control over savings account qualified expenses and
carryover provisions Greater risk that employees will not use savings account wisely Employees less bound to employer Cash funding required Cannot roll “unused” HRA funds into HSA
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Vendor Overview
Vendor landscape is morphing Stay alert Many not certain what final shape will be
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Questions & Answers