Download HEALTH SAVING ACCOUNTS New Planning

HEALTH SAVINGS ACCOUNTS
New Planning Opportunities For
Employer Health Plans
By
Jim Griffin
Jackson Walker L.L.P.
214-953-5827
[email protected]
Medicare Prescription Drug, Improvement,
and Modernization Act of 2003
Pub. L. No. 103-173
December 8, 2003
Effective beginning January 1, 2004
NEW LAW
• New Code Section 223
• New Code Section 4980G
LEGISLATIVE POLICY
• Allows employees to save for health needs in
retirement
• Contain medical inflation by giving employees
incentive to forego unneeded care
• Reduce waste and bureaucracy by giving patients a
stake in the savings
WHAT IS AN HSA?
• Tax - exempt trust or custodial account
• Qualified medical expenses
• Eligible account beneficiary
• High–deductible health plan
CONTRIBUTIONS
• Employee
• Employer
• Both
• Cafeteria Plan
CARRIERS AND PRODUCTS
• Aetna
• Fortis Health
• United Health Group
• Lumenos
IMPROVEMENT OVER MSAs
• First introduced in 1996
• Expand availability
• No “small employer” requirement (50 or fewer)
• No distinction between corporations, L.L.C.s,
partnerships and self employed
• No employer involvement required
• Make permanent in the tax code
• Loosen MSA restrictions
WHO IS AN ELIGIBLE ACCOUNT
BENEFICIARY?
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Monthly Determination
Covered by HDHP
Not covered by any other plan
Not entitled to Medicare
Not a dependent of someone else
HIGH – DEDUCTIBLE HEALTH PLAN
In – Network Amounts
Annual Deductible Out of Pocket 2004 Contribution Limit
Self Only
At least $1,000
Not more
than $5,000
Lesser of annual
deductible or $2,600
Family
At least $2,000
Not more
Lesser annual
than $10,000 deductible or $5,150
Indexed in $50 increments
EXCLUSIONS FROM THE
DEDUCTIBLE
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Preventive care services
Accident coverage
Disability coverage
Dental care
Vision care
Long term care
OUT – OF – POCKET EXPENSES
• Deductible
• Co-payments
• Other amounts
TAX TREATMENT OF CONTRIBUTIONS
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Contributions are tax – deductible
Above the line
Not an itemized deduction
Amounts paid from an HSA are not also deductible
as Section 213 medical expenses
• Employer contributions are excludable from the
employee’s income
• Not subject to FICA taxes
TAX BENEFIT CHART
Here are the tax savings for a $2,000 contribution to an HSA for
families* of various income levels:
INCOME (AGI)
TAX BENEFIT
$25,000
$35,000
$50,0000
$150,000
$500,000
$1,000,000
$0**
$200
$300
$615
$721
$721
* Married couple with two children in tax year 2004
** No tax benefit because at this income level all tax liability
would be eliminated by the child tax credit
HIGH – DEDUCTIBLE HEALTH PLAN
• Fully insured
• Self - funded
HIGH – DEDUCTIBLE HEALTH PLAN
PERMITTED INSURANCE
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Workers Compensation
Tort Liabilities
Property Insurance (for example, car insurance)
Specific disease or illness (for example, cancer
insurance)
• Fixed amount per day of hospitalization
EMBEDDED DEDUCTIBLES
The XYZ Company health plan has an individual
deductible of $750 and a family deductible of
$2,250. If Employee A incurs covered medical
expenses in a year of $1,500, the Plan would pay
$750, even if the family’s covered medical
expenses do not exceed $2,000. The Plan is NOT
a HDHP.
CATCH-UP CONTRIBUTION
• Eligibility: Ages 55 to 65
• Catch-up Limit:
2004
2005
2006
2007
2008
2009 and later
$500
$600
$700
$800
$900
$1,000
CONTRIBUTION LIMIT:
CO-ORDINATION WITH OTHER
PLANS
• Reduced by amount paid to MSAs
• Reduced by employer contributions
CONTRIBUTION LIMIT
• Computed monthly
• Spouses
• If either spouse has family coverage, then both spouses
are treated as having family coverage
• If both spouses have family coverage under different
plans, both spouses are treated as having family
coverage with the lowest annual deductible
• Both spouses may make catch-up contributions, if age
55 but not 65
CONTRIBUTION LIMIT
• Excess contributions are subject to a 6% excise tax,
unless removed from the HSA
CONTRIBUTION LIMIT: SPOUSES
H and W are married. H is 58 and W is 53. Both
work and have separate HDHP family coverage.
H’s deductible is $3,000. W’s deductible is $2,000.
H’s HSA contribution limit is $1,500
W’s HSA contribution limit is $1,000
ADDITIONAL CONTRIBUTION
REQUIRMENTS
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Must be made in cash
Not stock or other property
April 15 deadline
Entire contribution amount may be made on 1st day
of the year
EMPLOYER CONTRIBUTIONS
DISCRIMINATION RERQUIREMENTS
• Comparable contributions
• Same dollar amount
• Same percentage
• Comparable participating employees
• Applied separately to part time employees (<30 per
week)
• 35% excise tax
DISTRIBUTIONS
• May be made at anytime
• If used for qualified medical expenses, distributions
are excluded from gross income and are not subject
to penalty tax
DISTRIBUTIONS
• Other distributions are includable in income and are
also subject to a 10% penalty tax unless the
account holder has
• Attained age 65;
• Becomes disabled; or
• dies
QUALIFIED MEDICAL EXPENSES
• For account beneficiary, that person’s spouse and
dependents
• Defined in Internal Revenue Code Section 213(d)
• Includes over-the-counter drugs as permitted by
Revenue Ruling 2003-102
QUALIFIED MEDICAL EXPENSES
• Other insurance premiums:
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Qualified long-term care insurance
Cobra premiums
Health coverage while receiving unemployment benefits
Medicare premiums, if over 65
Not Medigap
Retiree health insurance premiums after account holder
reaches age 65
DISTRIBUTIONS
• Debit, credit or stored-value cards are ok
• HSA may be divided in connection with the account
holder’s divorce
DISPOSITION OF HSA UPON DEATH
OF ACCOUNT HOLDER
• Spousal beneficiary – account continues tax-free for
spouse
• Non spousal beneficiary – account terminates and
is taxed as income to the recipient
• Taxable amount is reduced by amounts incurred before
the account holder’s death and paid within 1 year after
date of death
HSA TRUSTEE/ CUSTODIAN
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Insurance company
Bank
Similar financial institution
Any trustee or custodian for
• IRAs
• MSAs
• Not required to be connected to institution that provides
HDHP
HSA INVESTMENTS
• NOT life insurance
• No commingled ownership, except
• Common trust fund
• Common investment fund
• Held in U.S.
• Non forfeitable; not subject to “use it or lose it”
• Subject to UBTI
ROLLOVERS
• MSA to HSA: OK
• Need not be in cash
• Not subject to contribution limits
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IRA: Not OK
HRA: Not OK
125 Account: Not OK
HSA to HSA: OK
• 60 day rule
• 1 time per year
RECORDKEEPING
• Burden is on employee
• Not employers
• Not HSA trustee or custodian
SIMILARITIES BETWEEN HSA, HRA
AND FSA
• Pre tax
• Employee and employer contributions permitted
• Unused balances may be carried over to later years
(except for FSA)
DIFFERENCES BETWEEN HSA, HRA
AND FSA
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HSA assets must be held in trust
HSAs are completely portable
HSA limits are subject to inflation adjustments
HSA have more liberal distribution rules
HRA do not have to be combined with HDHP
FIRST ROUND OF GUIDANCE IRS
NOTICE 2004-2
Issued December 22, 2003
• HDHP requirements
• Trustee requirements
• Tax Treatment
• Contributions
• Distributions
• Transfers
• MSAs
• others
FURTHER GUIDANCE
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Relationship between HSAs, HRAs, and 125 plans
Definition of preventive care
Corrective procedures
HDHP requirements
IRS Notice 96-53 regarding MSAs
Interplay between HDHP and state mandated
coverage
CO-ORDINATION WITH CAFETERIA
PLANS
• Is FSA coverage considered other disqualifying
coverage?
• FSA coverage for dental or vision benefits
• Applicability of nondiscrimination rules
• Ability to fund long term care through HSA funded
through FSA
• Election changes
SOME OBSERVATIONS
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Boost for consumer driven health plans
Equalizer for self-employed individuals
New retirement savings vehicle
Cost control technique
Impact on current plan designs and premiums
Impact on low deductible plans
Predictability in employer costs
SOME OBSERVATIONS
• Cap on employer expenses
• Impact on Health Reimbursement Accounts
• IRS Notice 2002-45
• Rev. Rul 2002-41
• Applicability of ERISA, COBRA, HIPAA
• Substantiation requirements
TARGET MARKETS
• Individuals
• Younger, healthier people
• Upper income people
• Middle aged, middle class (?)
• Small groups
• Large groups (?)