Provided Courtesy of UHA Health Insurance—February 05, 2018

The Hawaii Health Savings Account:A New Option for Hawaii Employers and Their EmployeesAn insurance plan that rewards you for being proactive about your health, provides triple tax deductions, and prepares you for the long term.

The Hawaii Health Savings Account (HSA) empowers you to take control over your health care dollars.

The better you take care of yourself, the healthier you can be and the more money you can save tax free for future medical needs. Plus, preventive care is covered at 100 percent and is not subject to the deductible.

With a Hawaii HSA plan you receive triple tax benefits for properly using your health savings account to pay medical expenses:

1. no income tax is paid on the portion deposited to your HSA, and2. when the funds in the HSA are withdrawn to pay for medical expenses, they are tax

exempt, and3. Interest earned on the HSA is tax-free.

Yes, the deductible is higher with an HSA-eligible plan, but your employer will contribute 80 percent or more of the deductible amount to your HSA.

For example, the HSA-eligible plan has a deductible of $1,500 for an individual employee and $2,700 for a family. To be approved, an employer would contribute a minimum of 80 percent to the employee’s HSA plan, which would be at least $1,080 for an individual employee and $2,160 for a family.

And yes, you will have coverage if you become ill.

After the deductible is met, your copayments and/or co-insurance will be similar to your current plan.

If you change jobs, your HSA funds go with you.

An HSA is not a “use it or lose it” account. At year’s end, the funds roll over into the next year, like an IRA, and can keep growing year over year.

You can build the funds in your account to pay for future health care needs, including long-term care insurance premiums.

SB385 and HB407

Provided Courtesy of UHA Health Insurance—February 05, 2018

• Aligns with coverage of preventive care and wellness initiatives and encourages employees to make more effort to adopt a healthy lifestyle

» Employees that do not spend HSA funds on the deductible allow employees to save more for their future medical costs

» Preventive care covered at 100%

• Promotes more medical care discussions and cost transparency which can promote better health care and reduce costs

» HSA funds belong to employees which employees want to save

» Employees may become better health care consumers when they are more careful and inquisitive about their health care purchases

• Improves attraction and retention of good employees by offering a competitive health care plan as part of their benefits package

» Employees receive triple tax benefits when HSA funds used for qualified health care expenses

» HSA funds go with employees if they change jobs

» Similar concept to a 401K and employees can make contributions if they wish up to IRS limits

» In case of illness, employees are financially protected in manner similar to their current plan

An HSA Helps You Become an Employer of Choice

SB385 and HB407

Provided Courtesy of UHA Health Insurance—February 05, 2018

The Hawaii HSA BillWhat is a Hawaii Health Savings Account plan or Hawaii HSA?

The Hawaii HSA bill proposes to allow employers to include an HSA option to offer to their employees. The Hawaii HSA would be a tax-exempt employee account funded by employer contributions that can be used by employees to pay for health care expenses. To receive approval to offer an HSA option, employers would be required to contribute about 80% or more of $1,350 (for individuals) or $2,700 (for families) to the Hawaii HSAs of their employees who are enrolled in HSA-eligible (high deductible) plans. Employees can also make contributions to their HSAs, but are not required to do so.

What does it mean when an HSA is described as tax-exempt?

Employer’s contributions and the money that’s deducted from an employee’s paycheck that goes into an HSA is not taxed. Much like when an employee enrolls in a 401K, the employer’s and employee’s money that’s contributed to the HSA is not counted as part of the employee’s gross income at the time of contribution. The funds are tax exempt when withdrawn to pay for medical expenses, and interest earned on the HSA are also tax free.

Why would an employee contribute to his or her HSA? Not only are contributions deducted from an employee’s gross income, which lowers the amount of income tax he or she must pay, but the contributions can also be invested and earn tax-free interest to increase the amount of funds in the account. Plus, when the funds are used for eligible medical expenses they can be withdrawn tax free.

Are you taxed when you withdraw funds from an HSA that are not used for medical expenses?

Yes, if you withdraw funds for non-medical expenses then you will pay a 20% penalty. At age 65, you can take penalty-free distributions from the HSA for any reason but non-medical expense withdrawals may be subject to ordinary income taxes.

Why would an employee want to build up the funds in an HSA?

The HSA fund can be a way to save tax-free for future medical costs, or on premiums for COBRA, long-term care insurance, Medicare premium (not Medigap policies), and supplemental insurance premiums for things like dental care, vision care, certain diseases and insurance that pays a fixed amount per day (or other stipulated period) for hospitalization. HSA account funds can also be used to pay for medical devices, such as hearing aids.

EligibilityHow do you enroll in an HSA?

An employee must work for a company that offers an HSA-eligible plan. Once enrolled in an HSA-eligible plan, an employee may open an HSA and the employer and employee may begin making contributions to the HSA.

Frequently Asked Questions About The Hawaii Health Savings Account (HSA) Bill

Frequently Asked Questions about the Hawaii Health Savings Account (HSA) BillSB385 and HB4071Page

Provided Courtesy of UHA Health Insurance—February 05, 2018

What is an HSA-eligible plan?

To qualify as an HSA-eligible plan under federal regulations it must have an annual deductible of at least $1,350 for individual coverage or $2,700 for family coverage, and the plan’s out-of-pocket maximum may not be greater than $6,650 for individual coverage or $13,300 for family coverage, with the deductible counting toward this limit. Under the Hawaii Prepaid Health Care Act, the HSA plan is expected to have an out-of-pocket maximum not to exceed about $3,000 for individuals and about $9,000 for families.

Are any medical services exempt from the deductible and covered in full by an HSA-eligible plan?

Yes, primary preventive services designed to prevent the onset of diseases are often exempt, as well as preventive services required by the Affordable Care Act.

Are there any other restrictions on enrollment in an HSA?

Yes, an individual may not be enrolled:

•  In other health coverage, such as a spouse’s plan, unless that plan is also an HSA-eligible plan.

•  In an HSA plan if they are claimed as a dependent on another person’s tax return.

•  In Medicare.

ContributionsCan both individual employees and employers contribute to HSAs?

Yes, and it provides the employee with three possible tax benefits: (1) contributions are excluded from the employee’s gross income when employers pay their portion of the health care deductible into the employee’s HSA, (2) withdrawals from the HSA for eligible medical expenses are tax-free, and (3) interest earned in the HSA is tax-free.

How much can a worker with individual coverage be allowed to contribute to an HSA?

For 2018, the IRS allows up to $3,450 for an individual and for an employee with family coverage the IRS allows up to $6,900. These limits include contributions made by your employer. These contribution amounts are indexed to inflation and are recalculated periodically. Workers over the age of 55 who are not enrolled in Medicare may make an additional $1,000 catch-up contribution.

InvestmentsHow can the funds in an HSA be invested?

HSA funds can be invested in the same kinds of financial instruments approved for individual retirement accounts (IRAs), such as bank accounts, certificates of deposit (CDs), money market funds, stocks, bonds and mutual funds.

Eligibility (continued)

Frequently Asked Questions about the Hawaii Health Savings Account (HSA) BillSB385 and HB4072Page

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ERISA ComplianceAre any provisions in this bill directed to employee welfare benefit plans?

No. All provisions are directed to insurers.

Would the proposals in the bill violate federal ERISA by imposing requirements on employers?

No. The proposed HSA bill does not impose requirements on employers.

Does this legislation violate ERISA by requiring an employer to offer a non-HSA plan to employees, as well as an HSA plan?

No. Under the Hawaii Prepaid Health Care Act, employers are already required to offer a non-HSA plan (i.e., the prevalent plan) to employees. This requirement is part of the Hawaii Prepaid Health Care Act, which is exempted from ERISA under federal law.

The proposed Hawaii HSA legislation does not require an employer to offer an HSA plan. However, if an employer wishes to offer a Hawaii HSA to their employees, then the Hawaii HSA legislation requires insurers to continue to offer the prevalent non-HSA plan (which the insurer offers now) to the employer. In other words, the Hawaii HSA bill does not allow an insurer to offer the Hawaii HSA as the only option to employers.

Could this legislation be preempted by ERISA?

No. The bill proposing the creation of an HSA would not be affected by ERISA, because it does not contain mandates directed to employers.

Custodianship of Health Savings Accounts

Does the bill require a health insurance plan, not a financial institution, to be the primary custodian or trustee of the HSA accounts?

No. Hawaii’s health insurers would prefer not to be HSA custodians or trustees. In other words, Hawaii’s health insurers would prefer to focus on insurance (the HSA-eligible insurance plan), not the HSA trust accounts, which would be handled by financial institutions.

Wouldn’t a financial institution be better able to accommodate the trust account provisions of this legislation than an insurance provider?

Yes. The IRS provides the specific requirements regarding who may be an HSA custodian or trustee. This is a role financial service companies, not Hawaii insurers, are seeking. HSAs are like IRAs, for which financial service companies are the custodians.

If the health plan has the fiduciary responsibility, during open enrollment if an employee already covered by an HSA plan decides to select a plan offered by another issuer, wouldn’t the issuers be required to establish a secured system of transferring trust accounts?

Responses to Issues Raised About the Hawaii HSA Legislation

SB385 and HB407Responses to Issues Raised About HSA Legislation

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Provided Courtesy of UHA Health Insurance—February 05, 2018

No. Insurers would not have the fiduciary duty for Hawaii health savings accounts. The Hawaii health insurer will only be managing the HSA-eligible plan (i.e., the high-deductible health plan), not the health savings account. Custody of HSA trust accounts would be like that of 401K trust accounts, which are set up with a financial institution.

If the employee transfers to a new job wouldn’t the issuer be faced with a trust account transfer problem?

No, the HSA account, like a 401K account, belongs to the employee, not to the employer or the insurer. The HSA account goes with the employee if he or she changes jobs.

HSAs Do Not Jeopardize the Prevalent PlanCould the quality of benefits in the prevalent plan be jeopardized if HSA-eligible plans and HSA accounts are offered? If fewer people enroll in the plan with better benefits, won’t the standard be eroded, resulting in the prevalent plan becoming the one with lesser benefits?

No. Not everyone would be eligible for an HSA plan, so an HSA plan can never become the prevalent plan. The Hawaii HSA legislation supports the prevalent plan’s better benefits with a provision requiring that a Hawaii HSA not have lower benefits than the prevalent plan. In other words, the benefits provided through a Hawaii HSA would have to be on par with the better benefits of the prevalent plan and could not have lesser benefits. As a result, there can be no erosion of the prevalent plan benefits.

While high-deductible plans mean lower premiums, could an unintended consequence be that more people will avoiding getting health care, unless they are seriously ill because they can’t afford the deductible?

No, because the Hawaii HSA legislation meets the same requirements found in any plan offered by Hawaii employers to employees: the employer must contribute the same amount to the employee’s HSA account as they would provide to an employee with a prevalent plan. In other words, the employer contribution to the employee’s HSA account must cover 80 percent or more of the high deductible. Therefore, the employee will have the same amount of funds to cover the HSA-eligible plan deductible as they would with a conventional plan. And the funds contributed by the employer to the employee’s HSA account should cover most, if not all, of the deductible. As a result, there would be no financial incentive for an employee to defer receiving treatment.

For example, the HSA-eligible plan has a deductible of $1,300 for an individual employee and $2,700 for a family. To be approved under Hawaii’s current laws, an employer would contribute a minimum of 80 percent of the deductible to the employee’s HSA, or at least $1,080 for an individual employee and $2,160 for a family.

The high-percentage contributed by the employer toward the cost of the deductible is the single biggest difference between the mainland HSAs and the proposed Hawaii HSA.

In addition, an HSA-eligible plan will cover preventive care, like well-baby checkups and cancer screenings, which are not subject to the deductible (just like the current prevalent plans).

Custodianship of Health Savings Accounts (continued)

SB385 and HB407Responses to Issues Raised About HSA Legislation

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Because the Hawaii Prepaid Health Care (PHC) Act only requires an employer to offer one approved health plan, would the Department of Labor and Industrial Relations (DLIR) be unable to explore demand for employers offer a second, conventional, non-HSA primary health care plan to cover employees who are ineligible for an HSA plan (e.g. Medicare enrollees, individuals claimed as a dependent on the prior year’s taxes, individuals covered by another policy)?

No. If the Hawaii PHC Act were interpreted to only allow the DLIR to require one plan, that plan would be the approved prepaid health care plan. The proposed HSA legislation proposes an insurer be allowed to sell one approved prepaid health care plan, as well as an additional Hawaii HSA- eligible plan. The two plans would be offered side by side. If an employee could not enroll in the Hawaii HSA, then the employee could enroll in the approved PHC Act plan – the same plan that was always available to the employee.

If an employer offers only the high deductible HSA program plan to all employees eligible for it, would that require all eligible employees to choose the HSA plan? And, if so, could the HSA-eligible plan become the prevalent plan (i.e., the standard-bearing plan for the state)? In addition, If the HSA plan were to become the prevalent plan, could the out-of-pocket maximum that employees pay per year possibly rise from the current level of $1,000 per year to $6,650 per year?

The short answer to all these questions is “No.” None of these scenarios could occur. But before explaining why, it’s important to note that the 2018 minimum annual deductible of $1,350 and the out-of-pocket maximum of $6,650 aren’t related. The annual deductible and the out-of-pocket maximum are two entirely different components of the HSA plan. The above scenarios could not occur for two reasons:

•  Not every employee may be eligible for an HSA plan, therefore an HSA plan can never be the prevalent plan.

•  The insurer must always sell the employer Hawaii’s prevalent plan, the one that insurers currently provide to the employer. As a result, if an employer wants to offer employees the Hawaii HSA, the employer may only do so if the current prevalent plan is offered to employees. In other words, an employer that offers the Hawaii HSA plan will always offer at least two options to employees: (1) the plan the employer currently offers (i.e., the prevalent plan) and (2) the Hawaii HSA plan.

Employer and Employee Responsibilities Under section 12-12-12, Hawaii Administrative Rules, an employer is only responsible for the cost of the least expensive plan. Any cost differential may be borne by the employee selecting the more expensive plan. Because the cost of a high-deductible plan is less than an approved PHC Act plan, wouldn’t the employee be responsible for paying not only 1.5 percent of the employee’s wage as permitted by current law, but also the difference in the cost of the two plans, thereby adversely affecting employees financially?

Introducing the Hawaii HSA plan would change nothing because the situation described already exists. Many employers currently offer a UHA or HMSA plan and a Kaiser plan which are priced differently. The employer may only pay the cost for the Kaiser plan and the employee may have to pay the difference for the UHA or HMSA plan.

Not every employee may be eligible for an HSA plan, therefore an HSA plan cannot be the prevalent plan.

HSAs Do Not Jeopardize the Prevalent Plan (continued)

SB385 and HB407Responses to Issues Raised About HSA Legislation

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Provided Courtesy of UHA Health Insurance—February 05, 2018

Employer contributions to the HSA are intended to be used by the employee to pay for qualified medical expenses. If the employee uses that money for non-medical purposes, would the employee may face federal tax penalties (currently 20 percent and withdrawn money is taxable income)? And could that result in the money not being available for its intended use when a medical need arises?

Even though the facts stated regarding qualified expenditures and penalties are correct, it’s highly unlikely an employee would withdraw funds for something other than health care payments because of the tax penalty.

The Hawaii HSA puts the employee in more control over their health care dollars and the IRS gives the employee tax benefits for properly using those health care dollars for the employee’s medical needs. For doing this, employees receive three tax benefits: (1) no income tax is paid on that portion of an employee’s earnings contributed to the HSA, (2) when the funds in the HSA are taken out to pay for health care needs, they are again exempt from taxes, and (3) interest earned in the HSA is tax-free. It makes sense that if the IRS is going to give tax benefits for the proper use of health care dollars, then the IRS will penalize those who choose not to use their health care savings as intended.

This concept is similar to non-retirement or early withdrawals from a 401K plan. Employees pay tax penalties if the withdrawal from their 401K is not for an allowable withdrawal.

Employers choosing to use HSA accounts must fully understand the financial commitment required, including the annual expense to fund the account. With Hawaii’s transitory nature of employment, isn’t it likely that employers may not realize the impacts on the HSA program resulting from the employee turnover?

It is correct that employers must understand the nature of the Hawaii HSAs before they offer it as an option to their employees. This should not be a problem, however, given that the process for an employer receive approval to offer a Hawaii HSA option is quite rigorous and requires a thorough understanding of the HSA and HSA-eligible plans. First, the employer must submit their request for approval of their Hawaii HSA option to the Hawaii Prepaid Health Care Advisory Council. This requires documentation about the Hawaii HSA option be provided and the possibility the employer may be questioned by the Council. The Council will then make a recommendation to the Director of the Department of Labor and Industrial Relations (DLIR).

The Director of the DLIR may consider the Council’s recommendation and then approve or disapprove of the employer’s request to offer a Hawaii HSA option. This approval process will help ensure that employers understand the Hawaii HSA option.

As business people, it is likely employers will know their employee turnover rate and whether it makes sense to offer the Hawaii HSA option to their employees. In addition, many employers have insurance consultants assisting them in the decision-making process, with regard to what plans are the best fit for their company and their employees.

Most importantly, should the employer for some reason find the Hawaii HSA option is not a good option, the employer could then discontinue offering the Hawaii HSA option at the next renewal period.

Employer and Employee Responsibilities (continued)

SB385 and HB407Responses to Issues Raised About HSA Legislation

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Coverage and Benefit QuestionsIs it correct to say that the spouse of an individual with an HSA-eligible plan must also have an HSA-eligible plan and cannot have another health plan, unless he or she is not covered by the HSA-eligible plan?

That’s correct.

With regard to benefits, under the proposed Hawaii HSA-eligible plan, wouldn’t additional benefits be limited to workers’ compensation laws, tort liabilities, or liabilities related to property ownership or usage; specific diseases or illnesses, or a fixed amount per day (or other period) for hospitalization?

Yes, but if an employee is concerned about losing the additional benefits he or she is currently receiving, the employee can simply remain in the existing prevalent plan offered by the employer. An employee does not have to take the HSA-eligible plan if one is available.

What’s the difference between the HSAs offered on the mainland and the Hawaii HSA proposed in the legislation?

The single biggest difference is the rule that the proposed Hawaii HSA-eligible plan must go through the approval process that will require the employer to contribute about 80 percent or more of the deductible to the employee’s HSA account. The employer contribution on the mainland is typically less, often much less, than 80 percent of the deductible.

How much of the deductible is paid by the employer contribution in the proposed Hawaii HSA legislation?

As a result of the insurer’s approval process for an HSA-eligible plan, the employer will contribute about 80 percent of the deductible to the employee’s HSA-eligible plan.

For example, the HSA-eligible plan has a 2018 deductible of $1,350 for an individual employee and $2,700 for a family. To be approved, an employer would contribute a minimum of about 80 percent to the employee’s HSA plan, which would be at least $1,080 for an individual employee and $2,160 for a family.

SB385 and HB407Responses to Issues Raised About HSA Legislation

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• Aligns with coverage of preventive care and wellness initiatives and encourages employees to make more effort adopt a healthy lifestyle

• Promotes more medical care discussions and cost transparency which can promote better health care and reduce costs

• Improves attraction and retention of good employees by offering a competitive health care plan as part of their benefits package

A Hawaii HSA Helps You Become

an Employer of Choice

Ask me how you can support this proposed state bill.

A Hawaii HSA...