Embed Size (px)
Citation preview
2
The Problems:The Problems:
Employers want to reduce health plan costs Employees do not want health care choices restricted Perceived overuse of medical care because employer
pays cost Lack of federal income tax deduction for out-of-pocket
expenses because of IRC § 213(a) 7.5% “floor” under deductible expenses.
Employers want to provide employees with feeling of “empowerment”
Medicare inadequate and facing long-term funding issues, while employers have withdrawn from providing retiree medical benefits
3
Why you can’t fix the problems with an IRC § 125 cafeteria plan:
Why you can’t fix the problems with an IRC § 125 cafeteria plan:
“Use it or lose it” rule
“Uniform coverage” rule
Unavailability of cafeteria plan to retirees and other former employees
Can’t cover sole proprietors and partners
4
Enter HSA’sEnter HSA’s
Medicare Prescription Drug Improvement and Modernization Act of 2003 introduced a new type of health savings arrangement, the “Health Savings Account,” or HSA
HSA’s are similar to the old Medical Savings Accounts (“MSA’s”), but simpler and less restrictive
5
What HSA’s areWhat HSA’s are Technically, an HSA is an account, very similar to an IRA
– Contributions are deductible if made by employee, excludable if made by employer– Accumulated contributions in account are invested on a tax-deferred basis, just like
an IRA– Distributions are tax-free if spent on IRC § 213(d) medical expenses at any age,
taxable if spent on non-medical expenses, with a 10% penalty added if recipient not yet Medicare eligible
Contributions may not be made to an HSA, by either the employer or the employee, unless the employee is covered exclusively by a high deductible health plan (“HDHP”)
An HSA funded by the employer is similar to an HRA except that the employee gains true ownership of the contributions, while an HSA funded by employee contributions is like an individually funded IRC § 125 “cafeteria plan” with no use it or lose it rule, tax deferred investments, and an unlimited carryover of unused amounts
Unlike both IRC § 125 cafeteria plans and HRA’s, partners and other self-employeds are fully eligible for HSA’s
6
What Is a High Deductible Health Plan (“HDHP”) for Purposes of HSA Eligibility?
What Is a High Deductible Health Plan (“HDHP”) for Purposes of HSA Eligibility?
An HDHP must meet specific deductible and out-of-pocket limit requirements– Self-coverage:
• Deductible of at least $1,100• Out-of-pocket maximum of no more than $5,500
– Family coverage:• Deductible of at least $2,200• Out-of-pocket maximum of no more than $10,100
Higher deductibles and lower out-of-pocket expense limits are permissible
7
Basic Notion of an HDHP is Simple, but Some Details Devilish
Basic Notion of an HDHP is Simple, but Some Details Devilish The requirement for a minimum annual deductible
($1,100 for self-coverage, $2,200 for family coverage) is strictly interpreted:– With exceptions noted below, HDHP may not cover any expenses until
deductible met– Exceptions:
• Preventive care• Special insurance coverages:
– Workers’ Compensation– Insurance for a specified disease or illness– Insurance paying fixed amount per day for hospitalization
– N O T exceptions:• Prescription drug co-payment arrangements under which employee pays less
than 100% of discounted cost before deductible is met• So-called “stacked” or “embedded” individual deductibles within a family
deductible, where plan pays medical expenses of individual included in family coverage once individual has reached deductible
8
HDHP Must Be Only CoverageHDHP Must Be Only Coverage
Except for permitted insurance coverages, as explained above, employee cannot be covered by a non-HDHP health plan at same time as he or she is covered by an HDHP– E.g., employee and covered dependents cannot have
coverage under spouse’s non-HDHP plan– Allocation rules apply where both spouses covered by
HDHP’s
Cannot be covered by an IRC § 125 cafeteria plan for any part of HDHP’s deductible– Can have IRC § 125 cafeteria plan coverage for medical
expenses not covered by HDHP, e.g., dental, vision, etc.
9
Tax Treatment of HSATax Treatment of HSA Contributions deductible/excludable Investment earnings on accumulations tax-free or at least tax-
deferred Distributions of contributed amounts and earnings tax-free if used
for IRC § 213(d) medical expenses of self, spouse, or dependents Distributions not used for IRC § 213(d) medical expenses includable
in gross income 10% penalty applies to distributions not used for IRC § 213(d)
medical expenses if recipient not eligible for Medicare (age 65, or earlier if disabled)
HSA’s can be split tax-free in divorce At death, HSA tax benefits continue if surviving spouse is
beneficiary If at death the beneficiary is someone other than surviving spouse,
then entire account subject to federal income tax
10
Reporting and Disclosure for HSA’sReporting and Disclosure for HSA’s
Custodian must be a bank, trust company, or brokerage with permission from IRS, just like an IRA
Distributions are as directed by the HSA owner; there are no third-party substantiation requirements
Medical expense debit cards may be used
11
How Much Can Be Contributed to HSA’s Annually?
How Much Can Be Contributed to HSA’s Annually?
Before 2007 HSA contribution limits were the lesser of the HDHP deductible or a specified dollar limit. After 2006, only limits are specified dollar amounts:– Self-coverage: $2,850 for 2007– Family coverage: $5,650 for 2007
Additional contributions may be made for individuals who are at least age 55, similar to “catch up” 401(k) contributions– $800 for 2007– Goes up by $100 per year until $1,000 is reached in 2009
12
Typical HDHP/HSA ArrangementTypical HDHP/HSA Arrangement
High Deductible Health Plan (“HDHP”) for non-routine medical care
Health Savings Accounts (“HSA’s”) for - Routine medical expenses- Deductibles and co-payments- Expenses not covered by HDHP- Savings for retiree medical
IRC § 125 “cafeteria plan”- Employee premiums for HDHP- Expenses not covered by HDHP
Employer contributions
Employee pre-tax salary reduction
contributions
Employer or Employee pre-tax
contributions
$
$
$
13
Must Employers Contribute to HSA’s?Must Employers Contribute to HSA’s? No. If individual is covered by an HDHP, either employer or
employee may contribute to employee’s HSA; no requirement for employer contributions
Thus, if it wants, employer can restrict its role to providing an HDHP and an HSA-friendly cafeteria plan to enable employees to do HSA’s if they want
Employer does not need to get involved in establishing HSA’s, making contributions and monitoring contribution levels, or monitor the payment and substantiation of medical expenses paid from employees’ HSA’s
However, if employer does choose to contribute to employees’ HSA’s, then employer must make “comparable” contributions to all employees covered by HDHP
– “Comparable” means that contributions must be same amount per employee or same percentage of deductible
– “Comparable” contributions do not need to be made for employees not covered by employer’s HDHP
14
Who is Eligible to Make Contributions to an HSA or Have Employer Make Contributions?Who is Eligible to Make Contributions to an HSA or Have Employer Make Contributions?
Any individual who is not Medicare eligible (i.e., who has not attained age 65 and who is not Medicare disabled)
Includes sole proprietor and partners
15
HSA’s Are “No Brainer” for Professional Partnerships
HSA’s Are “No Brainer” for Professional Partnerships
Partners are not able to participate in IRC § 125 cafeteria plans, and therefore before HSA’s they had to pay deductibles and co-payments with after-tax $
By raising deductibles for partners to HDHP thresholds, partners gain ability to have HSA’s, which they can either use to pay deductibles and co-payments with pre-tax dollars, or treat like deductible Roth IRA’s for future medical or post-65 retirement expenses
Aggregate increase in deductibles for partners should be 100% offset by decrease in aggregate partner premiums, so deductibility is gained at zero out-of-pocket cost
HDHP does not need to be offered to non-partners Similar principles may make HSA’s attractive to ‘carved out”
executive and managerial groups at incorporated businesses
16
Transition IssuesTransition Issues If employer attempts to force rank and file employees into
HDHP/HSA arrangement, employees may view new deductible levels as a take-away
Rank and file employees may see little benefit to HSA’s because could already use pre-tax dollars in IRC § 125 cafeteria plans for deductibles and co-payments and are not able to accumulate carryover balances
Permitting employees to choose between conventional low-deductible health plan and HDHP/HSA arrangement may result in adverse selection
When they transition from conventional low-deductible plan to HDHP/HSA arrangement, smaller self-insured plans may lack data to determine with confidence the amount by which HDHP premiums may be less than premiums for prior coverage with conventional deductible levels
17
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”HSA Changes for 2007 under “Tax
Relief and Health Care Act of 2006” HSA contribution maximums no longer limited by
HDHP deductibles
Partial-Year Enrollees (even just one month) can make full HSA contribution for year– Recapture of tax deduction and imposition of additional 10%
tax if HDHP only coverage does not continue for remainder of year plus following year
18
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”
(cont’d)
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”
(cont’d) Before January 1, 2012, employees may make one-
time transfers of residual FSA or HRA balances to HSA’s– Transfer not counted against annual contribution limit– Mainly useful where employer wants to switch from HRA to
HSA, or add HSA to menu of employee choices– Amount that can be transferred generally fixed at 9/21/2006
FSA or HRA account balance– 13-month “recapture” rule if does not maintain HDHP-only
coverage– Employer may not discriminate if it permits transfers
19
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”
(cont’d)
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”
(cont’d) Individuals who are otherwise HSA-eligible (i.e., have
HDHP coverage only) may fund HSA contributions by transferring funds into HSA from IRA– Uses up deduction limit – Recapture tax (ordinary income plus 10%) if don’t remain
HSA-eligible for 12 months after transfer month– Doesn’t make sense unless no other source of funding for HSA
available
IRS required to publish indexing of HSA amounts by June 1 of each year for following year
20
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”
(cont’d)
HSA Changes for 2007 under “Tax Relief and Health Care Act of 2006”
(cont’d) Where employer contributes to employees’ HSA’s,
HCE’s no longer required to receive “comparable contributions”
FSA “grace period” will not disqualify an otherwise HSA-eligible individual for first three months of year (e.g., January-March) if either (a) employee had no FSA carryover balance or (b) carryover balance transferred to HSA in “qualifying transfer” (see below)
