Health Savings Accounts _HSAs_

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					Health Savings Accounts

    Health Savings Accounts
What is an HSA?

     HSAs were created by the Medicare bill signed in December 2003

     Designed to help individuals save for qualified medical and retiree
      health expenses on a TAX-FREE basis

     An HSA combines a savings account with a High Deductible Health
      Plan (HDHP)

     The money deposited is not taxed if used to pay for current and
      future qualified medical expenses

 Any individual covered under a qualified High Deductible
  Plan (HDHP)

 Individuals covered by Medicare
 Individuals covered by another health plan that is not a
  High Deductible Health Plan
 Dependents listed as dependents on someone else's taxes

  What is defined as a High
Deductible Health Plan (HDHP)?

 Minimum of $1,000 Individual Annual Deductible

 Minimum of $2,000 Family Annual Deductible

 Maximum of $5,000 Individual Annual Out-of-Pocket

 Maximum of $10,000 Family Annual Out-of-Pocket

 What are eligible expenses?

All services and    Premiums for    Health insurance
products covered   Long Term Care   premiums for
by IRC 213 (d),                     individuals
except Health                       receiving
insurance                           unemployment
premiums              COBRA         benefits

Are there limitations to the
 amount of contribution?

   $2,600 per individual or $5,150 per family

  Account holders age 55 and older are allowed
    to contribute an additional $500 in year
   2004, increasing in increments of $100 per
        year, until 2009 reaching $1,000
    Who can contribute?
   The Employer
   The Employee
      Post-tax payroll deduction

      Pre-tax payroll deduction (Flex)

      Direct deposit

   Family members may also make
    contributions to an HSA on behalf
    of another family member
    How may contributions
         be funded?
Annual contributions may be funded on a monthly basis,
which is 1/12 of 100% of the annual deductible or $2,600,
whichever is less. (Deductibles are a minimum of $1,000,
maximum of $2,600 for individual coverage).
Deductible                         $5,000.00

Allowable contribution             $2,600.00
Divided by 1/12                         12
Total monthly contribution limit   $ 216.67

Allowable contribution amounts must be prorated based on
when the policy becomes effective.
                   Health Savings
                    Account Plan

    Savings                         Deductible
    Account                         Insurance

    Helps Pay Your
   Medical Expenses
                                Protects You From Big
                                     Medical Bills
Tax-Deductible Deposits

  Tax-Deferred Growth

Tax-Free for Medical Care                          9
What funds can be withdrawn?
 Tax-Free withdrawal to pay for qualified medical expenses
 Non-qualified withdrawal of funds will be taxed
 accordingly, included as gross income, and a 10% penalty will
 be applied except in the case of:
              Medicare eligibility
 Tax-Free transfer of funds to a spouse can occur in the case of
 death or divorce

                      Qualified Medical Expenses
        A qualified medical expense is defined as an expense paid for care as described in
  Section 213 (d) of the Internal Revenue Code. Below are two lists which can serve as a guide in
                  determining whether an expense is eligible for reimbursement.

               Examples of Qualified Medical Expenses
 Alcoholism Treatment                                 Nursing Homes and Services
 Ambulance                                            Ophthalmologist
 Birth Control Pills (by prescription)                Optician/Optometrist
 Chiropractor                                         Organ Transplant (Including Donor‟s Expenses)
 Contact Lenses and Cleaning Solutions                Oxygen and Oxygen Equipment
 Crutches                                             Podiatrist
 Dental Treatment                                     Prescription Medications
 Dermatologist                                        Psychiatrist/Psychologist
 Drug Addiction Treatment                             Stop Smoking Programs
 Eyeglasses                                           Telephone or TV Equipment To Assist Hearing Impaired
 Hospital Services                                    Transportation Expenses Relative to Healthcare
 Lab Fees                                             Vasectomy
 Laser Eye Surgery                                    Weight Loss Programs To Treat An Existing Disease
 Long-Term Care (certain limits apply)                Wheelchairs
 Non-prescription Medications                         X-Rays

                                     This is not a complete list
Examples of Non-Qualified Medical

             Athletic or Health Club Memberships

                        Bottled Water

        Cosmetics, Hygiene Products, and Similar Items

    Cosmetic Surgery and Procedures (Unless for Deformity)

                        Diaper Service

                        Domestic Help

                 Electrolysis or Hair Removal

            Funeral, Cremation or Burial Expenses

                       Hair Transplant

              Illegal Operations and Treatments

                      Maternity Clothes

                   Nutritional Supplements
        How will an HSA work
         in a Cafeteria Plan?
 Unused contributions to the HSA are not forfeited at the end of
  the plan year, instead they rollover from year to year (even if
  offered under a Cafeteria Plan).

 In addition, the contributions are not lost when an employee
  moves from one employer to another. In another change from
  FSAs, contributions are not subject to the Uniform Coverage

 Distributions can be made only for the amount in the HSA at the
  time of the request for reimbursement. HSAs will be subject to a
  set of non-discrimination rules, as yet not defined clearly. And
  although further guidance may come, it appears that a third
  party need not review expenses. Self-substantiation may be
  allowed under HSAs. “Between taxpayer, God and the IRS”
   Can HSAs and FSAs
Interact With Each Other?
Per Revenue Ruling 2004-45 issued on May 11, 2004,
  FSAs can operate with an HSA; however, the FSA
  must be:

   a „Post Deductible‟ FSA which provides reimbursements
    after the minimum annual deductible has been satisfied;

   a „Limited Purpose‟ FSA which restricts reimbursement to
    certain permitted benefits such as vision, dental or
    preventive care benefits.

     Advantages of HSAs                      Disadvantages of HSAs

 An HSA is the only account which         An HSAs funds must be set aside in a
employees can fund on a pre-tax basis     trust and cannot be forfeited, resulting in
through a cafeteria plan and have         a direct expense to the employer.
unused funds carryover to future years.
                                           The fact that making or receiving tax-
 An HSA is also the only account that    free HSA contributions means the
can pay amounts for non-qualified         employee cannot have any health
medical     purposes,    though    the    coverage other than the high deductible
distributions are taxed.                  plan may initially present challenges.
                                          Some employees might be reluctant to
 HSAs      have   the    potential to    forego other health coverage to be able to
materially reduce employer health care    participate in the HSA.
costs     by     building     employee
consumerism into plan offerings.           Employers considering whether to
                                          provide retiree coverage through HSAs
 HSAs      favorably   transfer   more   might find it difficult for some employees
control and power to employees            to accumulate significant funds.
encouraging better health care planning
and decision making.                       IRS Revenue Ruling 2004-45 places
                                          administrative   and    communication
 HSAs may be a potential vehicle for     challenges on operating FSAs alongside
providing retiree medical coverage.       HSAs.


                     HSA/HRA                                                 Health Savings Account                  Health Reimbursement Arrangement
                  Comparison Chart                                                    (HSA)                                        (HRA)

                                                                                                                                   Any size group
                      Availability                                        Individuals and any size group            (not available to partners in a partnership,
                                                                                                                  shareholders who own more than 2% stock in a
                                                                                                                       Sub S corp and members of an LLC)

                                                                 The lesser of deductible or $2,600 for singles     Maximum reimbursement determined by
              Maximum Contributions                                         and $5,150 for families                              employer
                                                                  (amount increased annually based on CPI)

                                                                  Additional contributions allowed for age 55                   NOT APPLICABLE
       Additional Contribution Allowance                                   and older ($500 in 2004)

               Eligible Contributions                              Individuals, employers and/or employees                      Employers ONLY
           Tax-Deductibility – Employer                                  Contributions are tax-deductible              Reimbursements are tax-deductible

                                                                     Contributions may be either pre-tax, if          No employee tax-deduction (employer
          Tax-Deductibility – Employees                              offered, through a cafeteria plan or tax-                    sponsored)
                                                                          deductible (no need to itemize)

            Fund or Account Ownership                                                 Employee                                      Employer

                        Portable                                                          Yes                                          No

                                                                                          Yes                      Employer determines if allowed and can set
                  Rollover of Funds                                                                                                 caps
                  Funding Required                                                        Yes                               No Pre-funding necessary

                                                                  High deductible plan required as defined by                  No plan restrictions
                       Plan Type                                          HSA laws; no copay plans

      Deductible: Singles/Families – 2004                                    $1,000/$2,000 minimum                                  No Limits

                                                                          Up to $5,000/up to $10,000
Out-of-Pocket Maximum: Singles/Families – 2004
                                                                  (includes ded. but not out-of-network costs)                      No Limits
                  Rx Copay Allowed                                                        No                                           Yes

                    Administration                                      Insurance company, TPA or bank            Self-administered, insurance company or TPA

                                                                    Taxable and subject to 10% penalty (no          Reimbursements only for qualified eligible
Withdrawals for non-qualified medical expenses
                                                                             penalty for over 65)                 expenses; employer determines whether to pay
                                                                                                                                  after age 65

 HSA deductibles and out-of-pocket maximums are subject to annual cost of living adjustments.
 Ok. So now you are an expert
          on HSAs.
Key Issues to consider:
Retiree medical: You may want to consider how HSAs can serve
as a retiree medical funding vehicle.
Vendor Selection: You will need to select an appropriate vendor
if you decide to sponsor an HSA. The vendor landscape is rapidly
changing as the market reacts to the availability of these new
Communications: You will want to effectively communicate any
changes that you make to your active or retiree plans to take
advantage of these newly available accounts, as well as accurately
describing the rules that apply to them. Because HSAs have been
the focus of recent press coverage, employees – including senior
executives – may approach you in the near term with questions
about their feasibility.                                     18
 Ok. So now you are an expert
     on HSAs. (Continued)
Redefining the employer’s roles: Employers are redefining their
role from health care purchaser to health care financer (e.g.,
defined contribution approach or exit strategy) and may now have
a more logical path to this end via the use of HSAs.

Timing: While HSAs are available under the tax rules in 2004,
you should consider how soon you could realistically offer HSAs.
Most employers will need time to consider how HSAs might fit
within their overall health plan and retiree medical strategies,
make design decisions, gauge employee interest, implement
decisions, and develop communication materials. All HSAs are
prohibited from accepting rollover funds from flexible spending
accounts or health reimbursement arrangements, making mid-
year transitions less appealing.