Health Savings Accounts Overview

1

Health Savings Accounts Overview

Presented by: Molly SnodyDirector of Business Advisory Services

The Pennsylvania Credit Union Association

2

Health Savings Account

Definition: A tax exempt trust or custodial account

established for paying qualified medical expenses of the account beneficiary

Accounts may be established with banks and insurance companies or with other entities approved by the IRS to hold IRA’s or MSA’s.

Other entities may request approval to be an HSA trustee or custodian

3

Origin

HSAs were first authorized in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

(MMA, P.L. 108-173)

4

Rules and Governance

Rules are primarily laid out in Section 223 of the Internal Revenue Code and guidance issued by the Internal Revenue Service (IRS); and

Section 213(d) of the Internal Revenue Code and IRS guidance dictates qualified medical expenses

NCUA Regulations Parts 721 and 724

5

What’s NCUA View on HSAs?

“Health Savings Accounts will grant credit union members a stake in their own health and well being by assigning members the responsibility of health care purchasing decisions as well as the opportunity to prioritize and budget their health expenses,” said NCUA Vice Chair Rodney Hood.

“I can not think of a better way for a credit union to illustrate the ‘people helping people’ philosophy than by offering their members the opportunity to have ownership of quality health care for their families and employees.”

NCUA Press Release October 12, 2006

6

NCUA Rules & Regulations

721.3(l) Gives incidental powers of trustee or custodial

services to tax advantaged savings plans that are authorized by the IRS, including HSA’s

724.1 Credit unions may receive reasonable

compensation for servicing

7

IRS Forms Referenced in NCUA Regulations

To serve as Trustee IRS Form 5305 B

To serve as Custodian IRS Form 5305 C

8

What is a Qualified Health Plan?

Plan must: Have a deductible above a certain minimum

2009 minimum deductibles $1,100 Single $2,300 Family

Limit out-of-pocket expenditures for covered benefits to no more than a certain maximum level

2009 maximum out-of-pocket expense limits $5,800 Single $11,600 Family

Provide general coverage; substantially all of its coverage cannot be through “permitted insurance”- coverage for a particular disease or specific service such as vision care.

9

2009 Requirements

Single Family

Minimum Deductible $1,150 $2,300

Maximum Out of Pocket Expenses $5,800 $11,600

Maximum Contribution Limits $3.000 $5,950

10

Credit union has only: IRS year end reporting requirements

Distributions Withdrawals

Statement reporting requirements to the member Individual must:

Be certain his/her insurance coverage complies Be certain withdrawals comply Be certain contributions limits are not exceeded

(although CUs can place internal system limits) Keep adequate records of expenses

What’s the appeal to a credit union?

11

What’s the appeal to a credit union?

Access new markets Small businesses Self employed members

Create or strengthen member loyalty Create new source of deposits Generate non interest income

12

How Are They Administered?

Must be opened and held in the name of an individual Must be invested in vehicles approved for IRAs

There is no requirement that funds be invested in vehicles that do not lose value

Funds may not be invested in life insurance contracts or most tangible property

Some credit unions offer numerous investment options At varying interest rates Some tied to minimum account balance requirements Some without administration fees

13


The IRS has proposed model agreements for use by account trustees and custodians: Use of these forms is not mandatory but:

They provide a safe harbor definition of the institutions’ responsibilities

They clarify that trustees and custodians may rely on account owner’s representation about:

Their age Their covered HDHP

They place the burden of determining medical expense qualification on the owner

14


Credit Unions may place reasonable restrictions on distributions Frequency (How often can your member withdrawal?)

Minimum amount (How much can your member withdrawal?)

(Savings accounts subject to Regulation D)

Credit Unions DO NOT have to determine: Whether member is qualified to contribute Whether a requested distribution is a qualified expense

Credit Unions must report account activity annually to IRS Form 5498 SA (Contributions) Form 1099-SA (Distributions)

15


Depending on the type of underlying investment vehicle, withdrawals can be made via: Check/Share Draft

Submitted via mail or in person Savings Accounts (Reg D rules Apply) Debit Card

VISA has specific requirements Must say “Health Savings Account” Suggest obtaining separate BIN

Contributions can be made via: Check/Share Draft Cash Electronically

Health Savings Account

16


Administrative and Account Maintenance Fees can be withdrawn from the HSA Will not be considered taxable income

Administrative and Account Maintenance Fees can be paid separately Will not be taken into account when calculating

contribution limits Can be paid by employer

Cash contributions can be offered by credit unions as incentive to establish an HSA

Can be administered by third party such as CMG

17

What’s the appeal to an individual?

Complete control over where HSA accounts will be established

Complete control over how and when funds will be used to pay medical expenses

Likely lower insurance premiums on High Deductible Health Policy (HDHP)

Balance can be rolled over year to year Balance is portable…can follow from job-to-job Contributions can be made any time during the

year

18

What’s the appeal to an individual?

Tax Benefits Contributions made by employer are not taxable to the

employee Contributions made by individual through employer’s

“cafeteria plan” or salary deduction plan are pre-tax Contributions made by individual are tax deductible on

personal return Withdrawals for qualified expenses are tax free Earnings (interest) is tax deferred

Savings can build while healthy and young for use later as you age and healthcare problems increase

Savings can be withdrawn for non-health care reasons, but are then subject to tax and penalty

19

What’s the Appeal to the Employer?

Reduce overall employee health care costs carried by employer

Offer employees choices in health care coverage

In a sense pass “tax-free” income to employees via employer paid contributions Contributions are not considered wages by IRS

Better than some alternatives, because Employees contribute Employees in control

20

Who Can Have an HSA?

Individuals with a qualifying High Deductible Health Plan (HDHP) and no disqualifying coverage Insurance providers make determination if a HDHP is

qualifying coverage Determinations are effective as of the first of each

month

21

Who Can Have an HSA?

Individual members of a family May have individual HSA; or Be covered through the HSA of someone else

in the family Example-Husband can use his HSA to pay

for wife’s medical expenses even though she has her own HSA

Individuals may have more than one HSA account.

22

Who Can Not Have an HSA?

Individuals enrolled in Medicare May still qualify if only entitled to Medicare, provided

they are not enrolled in Part A or Part B Individuals who have received Veterans

Administration medical benefits within the past three months

23

Who Can Not Have an HSA?

Individuals who have been claimed as a dependent on another’s personal tax return Determined yearly

Individuals with simultaneous coverage under a spouses low-deductible plan

24

Other Permitted “Health Accounts”

Flexible Spending Accounts (FSAs) Heath Reimbursement Accounts (HRAs)

Both “Permitted” as long as these accounts are

Used for limited purposes (ex. dental services or preventive care)

Provide reimbursement for services covered by the HDHP only after the qualifying deductible is met

Used in retirement

25

Other Permitted “Programs”

Having or participating in any of the following will not disqualify individuals from meeting their minimum deductible requirement: A prescription or discount drug card Employee Assistance Program (EAP) Disease Management Program Wellness program

As long as there is no medical care or treatment involved in program

26

Bouncing in and out of Qualification

Individuals may keep their HSAs once they become ineligible. But contributions can not be made until they turn eligible once again.

Events which may trigger ineligibility Turn 65 Obtain Low Deductible Insurance

27

All qualification requirements

are the compliance burden of the individual, not the credit union!

28

Who Can Contribute to an HSA?

Eligible individuals; and Any other individual or entities on their behalf

Including eligible family members and employers and state governments

29

When are Contributions are Made?

Contributions permissible Any time through out the year Up until the April 15 of the following year end…the

typical deadline for federal income tax return filing

30

How are Contributions Made?

Only Monetary contributions are accepted-Not Property Can be made through cafeteria plan salary reduction

agreements IRS requires that salary reduction agreements allow

employees to stop, increase or decrease contributions throughout the year

Employers can contribute amounts to cover medical expenses that exceed employees’ current HSA balances (if the employee has contributed the maximum limit) provided the employees repay the accelerated contributions before the end of the year

31

Types of Contributions

Two types of contributions: Regular Catch Up

Catch Up Contribution Limits Increase $100 each year through 2009

2009 limit is equal to $1000 Can be made by individuals who are at least 55

years of age, but not yet eligible for Medicare.

32

Rollovers

Can rollover balances from one HSA to another without: Affecting new/or current year contribution

limits Thru 2011, can now rollover balances from:

Health Reimbursement Accounts (HRAs) Flexible Spending Accounts (FSAs) Medical Savings Account Balances (MSAs)

33

Rollovers

Only one rollover is permitted per year by owner Deposits must be made within 60 days in order for the

transfer to be considered a rollover Limitless number of rollovers per year if transferred

by HSA Trustee HSA Trustees are not obligated to accept either owner

or trustee rollovers One time transfers from IRAs to HSAs are now

permitted IRA transfers must be trustee-to-trustee transfers Limited to yearly maximum contribution limits

34

What Happens to HSAs at Death?

Account balance goes to surviving spouse tax free if designated beneficiary

If someone other than the surviving spouse is the designated beneficiary: The HSA is terminated as of the date of death The fair market value becomes taxable income to that

designated beneficiary Reduced by qualified expenses

If there is no designated beneficiary: The account become part of the estate

Reduced by qualified expenses

35

Steps to Establish An HSA Program

Fiserv/IntegraSys suggest: Determine account types

Share drafts and certificates most popular

Make preparations to follow IRS Requirements Provide access and unrestricted usage of funds Complete required agreements and legal documents Establish appropriate reporting mechanisms

36

Steps to Establish An HSA Program

Fiserv/IntegraSys suggest: Establish Target Marketing Plan

Three types of members Transactional account active users Local business owners

Provide insurance to employees and themselves Consumers planning for an elective surgery at a later date

or health benefits during retirement years Educate employees and members

Misconception that employers dictate where accounts can be established

Consider technology support needs Statement and report presentment to members IRS reporting requirements (If more than 250, filing must be

electronic) to maintain compliance

37

Future Landscape of HSAs

Because they are relatively new, expect frequent regulatory updates (most recent 12/20/08)

Operational or administrative information is not readily available from the IRS But is becoming available from CMG and core

processors Many insurance providers will also begin to

administer HSAs Likely packaging reduced insurance coverage and

reduced administration costs. Balance transfers will likely occur

38

What do the opponents say?

General Accountability Office study 1

Higher income individuals using for tax shelter

Less expensive to individual annually only if healthy

1 “Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans”

39

Major Flaws of the HSA Program

Few health insurance companies offer qualified plans Some don’t meet the IRS requirements of a qualified

plan Many qualified plans are inferior Not many financial institutions offer trust or

administrative services (opportunity?) Administrative rules vague and subject to change HSAs don’t help if the individual can’t afford the

HDHP premium Room for fraud and abuse General public does not yet fully understand them

40

Reasons Consumers Did Not Open HSAs

Reason unknow n 8%

Did not have the money to fund 30%

Did not like high out of pocket costs 15%

More familiar w ith the plan already slected 18%

Too much trouble to open and/or manage 19%

Too complicated or did not undertand option 10%

CU Times, April 5, 2006 Employee Benefit Research Institute

41

Resources

PCUA (800-932-0661 www.pcua.coop) InfoSight

CUNA Mutual Group (800-356-2644 or 800-356-9140 www.cunamutual.com) HSA Program

Training Documents/Forms Toll free support Marketing tools

CUNA (www.cuna.org) Training Compliance

NCUA Regulatory Information (www.NCUA.gov) Parts 721 and 724

42

Resources

Federal www.treas.gov/press/realease/reports/hsanoti

ce200450072304.pdf www.irs.gov/pub/irs-dft/d5305b.pdf www.irs.gov/pub/irs-dft/d5305c.pdf

State www.revenue.state.pa.us/revenue/lib/revenue/

pit_2006-06.pdf http://www.revenue.state.pa.us/revenue/

CWP/view.asp?A=238&QUESTION_ID=258849

43

Molly Snody, Director of Business Advisory Services The Pennsylvania Credit Union Association

800-932-0661, ext 5209