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									    New HSA Rules

Using An Cafeteria Can
 Help Boost Your HSA
HSA Comparability Rule

 How to Comply With The Final IRS Rules
HRA and HSA Discrimination Traps

• Tests Applicable to HSAs
  – Comparability
  – Application of the cafeteria plan exception

• Tests Applicable to HRAs
  – General 105(h) concepts
           HSA Comparability Rule

• What is the “Comparability Rule”?
   – If an employer makes contributions to an individual’s HSA, it
     must make contributions for all “comparable participating
     employees,” and the contributions must be
       • The same amount or
       • The same percentage of the HDHP deductible covering the
   – Comparable participating employees are employees with HSAs
     who have the same level of HDHP coverage (i.e., single, single
     plus one, employee plus two, employee plus three or more)
       • Part-time employees are measured separately
       • Employer may restrict HSA contributions to those who participate in
         the Employer’s HDHP
   – Failure to comply results in excise tax of 35% on the aggregate
     amount of contributions made by employer during the year
           HSA Comparability Rule

• Statutory and regulatory guidance
   – Section 4980G (via 4980E)
   – Final Regulations
• Employers are not required to make HSA contributions
• However, if the employer makes an HSA contribution to an
  employee’s HSA, the Comparability Rule requires employers
  to make “comparable contributions” during calendar year to all
  other “comparable participating employees”
   – Who are “comparable participating employees”?
   – What are “comparable contributions”?
• Comparability Rule does not apply to employer contributions
  “made through cafeteria plan”
   – When are contributions made through a cafeteria plan?
           HSA Comparability Rule

• Who is “comparable participating employee”?
   – An “employee” who is an “eligible individual” in the same
     “employment category” with the same “coverage category”
   – Only common law employees are considered
      • Comparability rule does not apply to:
          – Sole proprietors
          – Partners
          – More than 2% shareholders
   – Must consider employees of all employers in the same controlled
      • E.g. Company A owns 90% of Company B. Company A must
        consider Company B’s employees as his/her own for purposes of
        satisfying the comparability rule.
         HSA Comparability Rule

• Comparable Participating Employees (cont’)
  – Comparable Participating Employees are only those
    employees who are “eligible individuals” as defined in
    Code Section 223(c)(1)
  – Eligible individual status for a month is determined as
    of first day of the month
     • Employee is eligible individual on January 1 but quits
       January 2 and doesn’t pick up other coverage---Employee is
       “eligible individual” for the entire month
          HSA Comparability Rule

• Comparable Participating Employees (cont’)
   – What are the applicable employment categories?
      • Full-time
      • Part-time (less than 30 hours per week)
      • Former employees (excluding those receiving coverage by virtue of
        a COBRA election)
   – Each employment category may be treated separately
      • E.g. employer may contribute to HSAs of only full-time employees
        and/or different amount to part-time employees
   – Exemption for collectively bargained employees
             HSA Comparability Rule

• Comparable Participating Employees (cont’)
   – What are the applicable coverage categories?
       •   Single or self-only
       •   Employee plus one (child or spouse)
       •   Employee plus two
       •   Employee plus three or more
   – Each coverage category may be treated separately
       • E.g. Employer may contribute to the HSAs of full-time employees with
         employee plus one coverage and not the HSAs of full-time employees with
         self-only coverage.
   – Contribution for employee with three-or-more dependent coverage must
     be greater than employee with plus-two coverage; employee with plus-
     two coverage must be greater than employee with plus-one coverage;
     employee with plus-one coverage must be greater than employee only
           HSA Comparability Rule

• Comparable Participating Employees (cont’)
   – Employers may further restrict contributions to those employees
     who participate in the EMPLOYER’S HDHP
       • Thus, if an otherwise comparable participating employee is an
         eligible individual but is not covered under the employer’s HDHP,
         he/she is not entitled to any HSA contributions under the
         Comparability Rule
       • Special rule for married couples covered as “participants” under
         same plan
   – Can employer restrict contributions to a particular HSA
     custodian/trustee under the Comparability Rule?
       • Not specifically addressed in the Rule
       • Informal comments from IRS officials suggest that may be possible
        HSA Comparability Rule

• What are “comparable contributions”?
  – Contributions that are the same amount or same
    percentage of the deductible
  – There are three funding methods
     • Pay as you go
     • Look back
     • Pre-fund
  – Rule looks at actual contributions made during the
    calendar year; not contributions that were merely
    made available
            HSA Comparability Rule

• Comparable Contributions (cont’)
   – Pay as you go
       • Contributions made at one or more times during the year (generally for each month)
       • Contributions made at employer’s usual payroll intervals are deemed made at the same
            – E.g. Assume that salaried employees are paid twice monthly and hourly employees are
              paid weekly. Employer may make weekly contributions for hourly and twice monthly
              contributions for salaried
            – Alternatively, employer may make one contribution during the month for all eligible
              individuals for whom a contribution is made
       • Comparable contributions for the year determined on a monthly basis for each month
         that the employee was a “comparable participating employee” during the year
            – If employee was comparable participating employee for full year and receives $1200,
              then employee who was comparable participating employee for 3 months must receive
            – Employer may change contribution amount (or even stop) at any time on a prospective
                  » Employees who are comparable participating employees for months after
                    employer ceases to make contributions are not entitled to any contributions for
                    months after employer ceases to make contributions
          HSA Comparability Rule

• Comparable Contributions (cont’)
   – Example of Pay-as-You-Go Method: Employer contributes $100 a
     month to the HSA of each full-time employee with single HDHP
     coverage and $200 per month to the HSA of each full-time
     employee with family HDHP coverage. Employer contributes
     January through May (5 months). Employee A is a full-time
     employee with single HDHP coverage from January through
     December. Employee B has family HDHP coverage from February
     through May 15 when he terminates employment. Employee C is
     hired in November and has single HDHP coverage.
   – Employer must contribute:
      • Employee A = $500 (5 months)
      • Employee B = $800 (4 months)
      • Employee C = $0
           HSA Comparability Rule

• Comparable Contributions (cont’)
   – Look-Back Basis (as of last day of calendar year)
       • A single contribution made for all individuals who were comparable
         participating employees for any month during the calendar year
       • Must employer track down former employees who were comparable
         participating employees at any time during the year?
           – YES
           – What if former employee no longer has HSA? What if no longer has
             HSA with partner custodian?
       • Comparable contributions determined on monthly basis
           – If employee was comparable participating employee for entire year and
             receives $1200, then employee who was only comparable participating
             employee for 3 months must receive $300
          HSA Comparability Rule

• Comparable Contributions (cont’)
   – Example of Look-Back Basis: Employee A was a comparable
     participating employee with single coverage from January
     through March. Employee B was a comparable participating
     employee with single coverage from July through November.
     Neither is employed by Employer on December 31
   – Employer contributes $300 to Employee A’s HSA
   – How much must Employer contribute to B’s HSA?
      • $500
          HSA Comparability Rule

• Comparable Contributions (cont’)
   – Pre-funding
      • Employers may make annual contribution amount on first day of
        calendar year (or if a comparable participating employee after January
        1, then on first day of month that he/she is comparable participating
          – Does not violate Comparability Rule that those who terminate
            employment/cease to be a comparable participating employee before end of
            the year will receive more per month than full-year employees
          – Cannot recoup funds contributed to HSA if employee leaves before end of
      • Employer may change method of funding for all who become
        comparable participating employees after initial funding
          – Must use the same method (pre-fund, look back, or pay as you go) for all
            who are hired after initial funding date
          – Must make contribution for all comparable participating employees
           HSA Comparability Rule

• Effect of comparability rule on...
   – Matching contributions
       • E.g., Employer agrees to make an HSA contribution equal to the
         employees’ HSA contributions (up to a specified amount)
       • Impermissible generally
           – Comparable employees will receive different matching amounts if the
             elect to contribute different amounts
       • Permissible if “made through the cafeteria plan”
           – E.g., Employer agrees to make an HSA contribution equal to the
             employees’ pre-tax salary reduction HSA contributions
   – HSA as bonus or incentive for participating in disease
     management or health assessment
       • Impermissible generally under comparability rule
       • Permissible if made through the cafeteria plan
         HSA Comparability Rule

• Comparability rule DOES NOT APPLY to HSA
  contributions “made through the cafeteria plan”
  – When are contributions “made through the cafeteria
     • Matching contributions-amounts that match all or a portion
       of the employee’s pre-tax HSA contributions
     • What if no cash option (e.g. Wellness incentives)?
        – Arguably, employer HSA contributions are made through
          the cafeteria plan if employees have the option to contribute
          to the HSA with pre-tax dollars (without regard to whether
          they do or not)
  Highlights of Final Comparability Rule

• Clarification on cafeteria plan exception
  – Simply stated, if additional salary reduction HSA
    contributions can be made under written cafeteria
    plan, exception applies
  – Additional coverage category for employee plus one,
    plus two, etc.
  – Part year employees
  – New exception for collectively bargained groups
  – Affirmative obligation to find missing participants
  – Interest obligation for late contributions
     HRA Nondiscrimination Rules

• Self-insured benefits cannot discriminate in favor of
  highly compensated employees (HCEs) as to eligibility
  and benefits
• Two tests:
   – Eligibility Test
       • Could be an issue if HRA offered only to a limited group
         consisting substantially of HCEs (top 25% in pay)
   – Contributions and Benefits Test
       • Pass test if same HRA accrual is made available to all
         participants for same contribution
          No Direct or Indirect HRA Funding
             with Pre-Tax Contributions

• HRA cannot be funded by pre-tax salary
  reduction (including cashable Flex Credits)
  under a cafeteria plan

• An HRA may be offered “in conjunction” with
  major medical plan under a cafeteria plan
  provided it is not funded directly or indirectly with
  pre-tax salary reductions
 HRA Prohibition Against Direct Funding

• Employees cannot elect to pay for HRA with pre-
  tax contributions
  – Salary reduction agreement should indicate that pre-
    tax contributions do NOT fund HRA
• Salary reduction (and otherwise cashable
  credits) attributable to medical coverage cannot
  exceed applicable premium for non-HRA
  medical coverage
  – Applicable premium is determined using COBRA
    criteria (not including 2% admin charge)
HRA Prohibition Against Indirect Funding

• No Positive correlation between salary reduction
  for medical plan and HRA amount
  – Impermissible practices
     • HRA and salary reduction amount cannot increase or
       decrease in tandem
        – Option 1: HRA=$500/Salary Reduction=$300
        – Option 2: HRA=$800/Salary Reduction=$500
     • Cannot allow employees to elect to use HRA funds to pay for
       employer coverage in lieu of funding coverage via salary
     • Cannot allow FSA forfeitures to fund HRA
HRA Prohibition Against Indirect Funding

• Permissible practices
  – Variation between individual/family coverage
     • Single coverage/HRA of $500/Salary Reduction $300
     • Family Coverage/HRA of $700/Salary Reduction $500
  – Threshold correlation (in/out HRA option)
  – Inverse Correlation
     • HRA amount for multiple options decrease (or
       increases) as salary reduction amount for multiple
       options increases (or decreases)
        – Option 1: HRA=$500/Salary Reduction=$300
        – Option 2: HRA=$800/Salary Reduction=$200
HRA Discrimination Testing Problem Areas

• Disease Management and wellness incentives
• Varied accruals
  – Clearly impermissible: age, years of service,
  – Analysis required: business classification, location,
    FLSA status
Creative Strategies for Voluntary
       HDHP Participation

            Dual Option Offerings

Experience so far
  • Little evidence of adverse selection based on post-enrollment
  • First-year take-up rates for HDHP/HSA range from 4% to 50%
  • Biggest driver of employee HDHP/HSA enrollment was employer
    HSA contribution
  • Largest cost reductions seen in previously rich plans
  • Poor enrollment results when employees perceive the change as
    continued cost-shifting
  • 2005 employer contribution strategies were generally developed
    prior to regulatory guidance
         The CDHC Marketplace

What’s next?
  • Large employers will provide incentives for voluntary
    CDHP enrollment
  • CDHP growth rate will increase accelerate
  • New hires will arrive with HSA balances, and multiple
    HDHP options will be necessary
  • Employee/employer contribution-matching will be
  • The juice will have to be worth the squeeze
              Comparability Rule

“It is a simple tool, and, like most simple tools, it is
   also a crude tool.” -Treasury spokesperson

   • Comparability should be like a party no one attends
      – Most employers are not charitable institutions
      – Why give money away without getting something of value in
         – Ownership mindset
         – Engagement
         – Behavior change
 Cafeteria Non-discrimination Plan Rules

• Eligibility test
   (classification, length of service, participation)

• Contributions and benefits test
   (facts and circumstances)

• Key employee concentration test
         Fundamental Questions

• What is a cafeteria plan?
  – A written plan under which all participants are
    employees and participants may choose among two
    or more benefits consisting of cash and qualified
• What is cash?
  – Important distinction between “salary deduction” and
    “salary reduction”
              Cafeteria Plan Rules

• Modified election rules
   – HSA salary reduction election may be changed
     prospectively during year
   – Cafeteria plan election allowed mid-year to add HSA
   – Negative elections permitted
• Non-discrimination rules
   – Eligibility test – classification, length of service,
   – Contributions and benefits test – facts and
   – Key employee concentration test
  What’s Next in the CDHP Marketplace?

• Employers provide incentives for voluntary enrollment
• CDHP Growth rate accelerates (15-25 million HSAs by 2010)
• Creative employee/employer contribution-matching tailored to
  the needs of specific employee population segment
• If you’re depending on voluntary enrollment, making the
  offering as sweet as possible becomes essential

   “A drop of honey catches more flies than a gallon of gall.”
              -Abraham Lincoln
          A Couple of Caveats

• IRS has requested comments whether the
  ratio of an employer’s matching HSA
  contributions to an employee’s salary
  reduction HSA contributions should be
• Cafeteria Plan non-discrimination rules are
  expected to be re-visited by the IRS during
  the 2006
           And the Survey Says...

• Employers offer CDHPs to reduce costs (85%) and
  expose employees to the true cost of health care (56%)
• Confidence is rising that CDHPs drive participant
• Employers believe HSAs do a better job at controlling
  costs than HRAs (4:1)
• Employers subsidize 12%-15% less of the cost per
  employee than traditional medical options
• Large employers rely on voluntary enrollment and
  gradual migration
  Consumer-Driven Health Plans So Far...

• First-year take-up rates typically from 1% to
• Employer HSA contribution is biggest driver
  of enrollment
• Many plan offerings to date have led to the
  “sour grapes” phenomenon
• The juice must be worth the squeeze
Why is Voluntary Contribution Important?

• Results in engagement

• Provides motivation for education

• Generates active involvement

• If you get their money, their hearts and minds will follow
         Tiered Match Examples

Challenge / Objective:   Base match on:

     Encourage                Employee
    participation            contribution

                            3:1 on $0 - $250
                           2:1 on $251 - $500
                             1:1 on > $500
         Tiered Match Examples

Challenge / Objective:   Base match on:

   Engage employees
    less able to meet         Employee
       deductible              salary

                             2:1 for <$30k;
                             1:1 for >$30k
         Tiered Match Examples

Challenge / Objective:   Base match on:

  Direct more vested
  $$ to longer service        Employee
       employees               service

                             1:1 for <1 year;
                             2:1 for 1-2;
                             3:1 for 3 or more
         Tiered Match Examples

Challenge / Objective:   Base match on:

  Engage employees
   in understanding          Employee HRA
  health risk factors         completion

                           $50 for employee;
                            $50 for covered
          Tiered Match Examples

Challenge / Objective:    Base match on:

    Increase disease
  program participation        Participation

                           $100 upon Enrollment;
                            $200 at Completion
  Address the Biggest Impediments

 Membership       Eligibility            Benefits
Silver        HSA contributions    $1,000 in first dollar
              from $250 - $499     accident coverage

Gold          HSA contributions    Hospital income
              from $500 - $1,499   coverage paying
                                   $1,000 per day
Platinum      HSA contributions    Silver plus Gold
  Possible Contribution Formulas Clarified by the
        Treasury Comparability Guidance

Flat Employer   Defined dollar amount or % of deductible

Simple Match:   Employer matches 50% of every $1 employee
                contributes up to max of $X

Tiered Match:   Variable employer match

Incentive       Financial reward for a specific action or
Contribution    behavior
     If done right, the savings are REAL

           Savings Activities                     Trend Savings - %
Reduce utilization: Broad change in employee
                                                          3% - 6%

Better utilization: Disease management                    3% - 6%
Redirect to more effective providers and/or
                                                         8% - 12%

Shift from insurance to other payments forms              1% - 6%
TOTAL ANNUAL SAVINGS FROM TREND                          15% - 30%
                                               Reduced absenteeism;
                                               Reduced turnover;
Additional Savings from
                                               Improved productivity;
                                               Improved value perception

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