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Health Savings Accounts Overview

Health Savings Accounts Overview. Presented by: Molly Snody Director of Business Advisory Services The Pennsylvania Credit Union Association. Health Savings Account. Definition:

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Health Savings Accounts Overview

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  1. Health Savings Accounts Overview Presented by: Molly Snody Director of Business Advisory Services The Pennsylvania Credit Union Association

  2. Health Savings Account • Definition: • A tax exempt trust or custodial account established for paying qualified medical expenses of the account beneficiary • Accounts may be established with banks and insurance companies or with other entities approved by the IRS to hold IRA’s or MSA’s. • Other entities may request approval to be an HSA trustee or custodian

  3. Origin • HSAs were first authorized in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173)

  4. Rules and Governance • Rules are primarily laid out in Section 223 of the Internal Revenue Code and guidance issued by the Internal Revenue Service (IRS); and • Section 213(d) of the Internal Revenue Code and IRS guidance dictates qualified medical expenses • NCUA Regulations Parts 721 and 724

  5. What’s NCUA View on HSAs? “Health Savings Accounts will grant credit union members a stake in their own health and well being by assigning members the responsibility of health care purchasing decisions as well as the opportunity to prioritize and budget their health expenses,” said NCUA Vice Chair Rodney Hood. “I can not think of a better way for a credit union to illustrate the ‘people helping people’ philosophy than by offering their members the opportunity to have ownership of quality health care for their families and employees.” NCUA Press Release October 12, 2006

  6. NCUA Rules & Regulations • 721.3(l) • Gives incidental powers of trustee or custodial services to tax advantaged savings plans that are authorized by the IRS, including HSA’s • 724.1 • Credit unions may receive reasonable compensation for servicing

  7. IRS Forms Referenced in NCUA Regulations • To serve as Trustee • IRS Form 5305 B • To serve as Custodian • IRS Form 5305 C

  8. What is a Qualified Health Plan? • Plan must: • Have a deductible above a certain minimum • 2009 minimum deductibles • $1,100 Single • $2,300 Family • Limit out-of-pocket expenditures for covered benefits to no more than a certain maximum level • 2009 maximum out-of-pocket expense limits • $5,800 Single • $11,600 Family • Provide general coverage; substantially all of its coverage cannot be through “permitted insurance”- coverage for a particular disease or specific service such as vision care.

  9. 2009 Requirements

  10. What’s the appeal to a credit union? • Credit union has only: • IRS year end reporting requirements • Distributions • Withdrawals • Statement reporting requirements to the member • Individual must: • Be certain his/her insurance coverage complies • Be certain withdrawals comply • Be certain contributions limits are not exceeded (although CUs can place internal system limits) • Keep adequate records of expenses

  11. What’s the appeal to a credit union? • Access new markets • Small businesses • Self employed members • Create or strengthen member loyalty • Create new source of deposits • Generate non interest income

  12. How Are They Administered? • Must be opened and held in the name of an individual • Must be invested in vehicles approved for IRAs • There is no requirement that funds be invested in vehicles that do not lose value • Funds may not be invested in life insurance contracts or most tangible property • Some credit unions offer numerous investment options • At varying interest rates • Some tied to minimum account balance requirements • Some without administration fees

  13. How Are They Administered? • The IRS has proposed model agreements for use by account trustees and custodians: • Use of these forms is not mandatory but: • They provide a safe harbor definition of the institutions’ responsibilities • They clarify that trustees and custodians may rely on account owner’s representation about: • Their age • Their covered HDHP • They place the burden of determining medical expense qualification on the owner

  14. How Are They Administered? • Credit Unions may place reasonable restrictions on distributions • Frequency (How often can your member withdrawal?) • Minimum amount (How much can your member withdrawal?) (Savings accounts subject to Regulation D) • Credit Unions DO NOT have to determine: • Whether member is qualified to contribute • Whether a requested distribution is a qualified expense • Credit Unions must report account activity annually to IRS • Form 5498 SA (Contributions) • Form 1099-SA (Distributions)

  15. How Are They Administered? • Depending on the type of underlying investment vehicle, withdrawals can be made via: • Check/Share Draft • Submitted via mail or in person • Savings Accounts (Reg D rules Apply) • Debit Card • VISA has specific requirements • Must say “Health Savings Account” • Suggest obtaining separate BIN • Contributions can be made via: • Check/Share Draft • Cash • Electronically Health Savings Account

  16. How Are They Administered? • Administrative and Account Maintenance Fees can be withdrawn from the HSA • Will not be considered taxable income • Administrative and Account Maintenance Fees can be paid separately • Will not be taken into account when calculating contribution limits • Can be paid by employer • Cash contributions can be offered by credit unions as incentive to establish an HSA • Can be administered by third party such as CMG

  17. What’s the appeal to an individual? • Complete control over where HSA accounts will be established • Complete control over how and when funds will be used to pay medical expenses • Likely lower insurance premiums on High Deductible Health Policy (HDHP) • Balance can be rolled over year to year • Balance is portable…can follow from job-to-job • Contributions can be made any time during the year

  18. What’s the appeal to an individual? • Tax Benefits • Contributions made by employer are not taxable to the employee • Contributions made by individual through employer’s “cafeteria plan” or salary deduction plan are pre-tax • Contributions made by individual are tax deductible on personal return • Withdrawals for qualified expenses are tax free • Earnings (interest) is tax deferred • Savings can build while healthy and young for use later as you age and healthcare problems increase • Savings can be withdrawn for non-health care reasons, but are then subject to tax and penalty

  19. What’s the Appeal to the Employer? • Reduce overall employee health care costs carried by employer • Offer employees choices in health care coverage • In a sense pass “tax-free” income to employees via employer paid contributions • Contributions are not considered wages by IRS • Better than some alternatives, because • Employees contribute • Employees in control

  20. Who Can Have an HSA? • Individuals with a qualifying High Deductible Health Plan (HDHP) and no disqualifying coverage • Insurance providers make determination if a HDHP is qualifying coverage • Determinations are effective as of the first of each month

  21. Who Can Have an HSA? • Individual members of a family • May have individual HSA; or • Be covered through the HSA of someone else in the family • Example-Husband can use his HSA to pay for wife’s medical expenses even though she has her own HSA • Individuals may have more than one HSA account.

  22. Who Can Not Have an HSA? • Individuals enrolled in Medicare • May still qualify if only entitled to Medicare, provided they are not enrolled in Part A or Part B • Individuals who have received Veterans Administration medical benefits within the past three months

  23. Who Can Not Have an HSA? • Individuals who have been claimed as a dependent on another’s personal tax return • Determined yearly • Individuals with simultaneous coverage under a spouses low-deductible plan

  24. Other Permitted “Health Accounts” • Flexible Spending Accounts (FSAs) • Heath Reimbursement Accounts (HRAs) • Both “Permitted” as long as these accounts are • Used for limited purposes (ex. dental services or preventive care) • Provide reimbursement for services covered by the HDHP only after the qualifying deductible is met • Used in retirement

  25. Other Permitted “Programs” • Having or participating in any of the following will not disqualify individuals from meeting their minimum deductible requirement: • A prescription or discount drug card • Employee Assistance Program (EAP) • Disease Management Program • Wellness program • As long as there is no medical care or treatment involved in program

  26. Bouncing in and out of Qualification • Individuals may keep their HSAs once they become ineligible. But contributions can not be made until they turn eligible once again. • Events which may trigger ineligibility • Turn 65 • Obtain Low Deductible Insurance

  27. All qualification requirements are the compliance burden of the individual, not the credit union!

  28. Who Can Contribute to an HSA? • Eligible individuals; and • Any other individual or entities on their behalf • Including eligible family members and employers and state governments

  29. When are Contributions are Made? • Contributions permissible • Any time through out the year • Up until the April 15 of the following year end…the typical deadline for federal income tax return filing

  30. How are Contributions Made? • Only Monetary contributions are accepted-Not Property • Can be made through cafeteria plan salary reduction agreements • IRS requires that salary reduction agreements allow employees to stop, increase or decrease contributions throughout the year • Employers can contribute amounts to cover medical expenses that exceed employees’ current HSA balances (if the employee has contributed the maximum limit) provided the employees repay the accelerated contributions before the end of the year

  31. Types of Contributions • Two types of contributions: • Regular • Catch Up • Catch Up Contribution Limits Increase $100 each year through 2009 • 2009 limit is equal to $1000 • Can be made by individuals who are at least 55 years of age, but not yet eligible for Medicare.

  32. Rollovers • Can rollover balances from one HSA to another without: • Affecting new/or current year contribution limits • Thru 2011, can now rollover balances from: • Health Reimbursement Accounts (HRAs) • Flexible Spending Accounts (FSAs) • Medical Savings Account Balances (MSAs)

  33. Rollovers • Only one rollover is permitted per year by owner • Deposits must be made within 60 days in order for the transfer to be considered a rollover • Limitless number of rollovers per year if transferred by HSA Trustee • HSA Trustees are not obligated to accept either owner or trustee rollovers • One time transfers from IRAs to HSAs are now permitted • IRA transfers must be trustee-to-trustee transfers • Limited to yearly maximum contribution limits

  34. What Happens to HSAs at Death? • Account balance goes to surviving spouse tax free if designated beneficiary • If someone other than the surviving spouse is the designated beneficiary: • The HSA is terminated as of the date of death • The fair market value becomes taxable income to that designated beneficiary • Reduced by qualified expenses • If there is no designated beneficiary: • The account become part of the estate • Reduced by qualified expenses

  35. Steps to Establish An HSA Program • Fiserv/IntegraSys suggest: • Determine account types • Share drafts and certificates most popular • Make preparations to follow IRS Requirements • Provide access and unrestricted usage of funds • Complete required agreements and legal documents • Establish appropriate reporting mechanisms

  36. Steps to Establish An HSA Program • Fiserv/IntegraSys suggest: • Establish Target Marketing Plan • Three types of members • Transactional account active users • Local business owners • Provide insurance to employees and themselves • Consumers planning for an elective surgery at a later date or health benefits during retirement years • Educate employees and members • Misconception that employers dictate where accounts can be established • Consider technology support needs • Statement and report presentment to members • IRS reporting requirements (If more than 250, filing must be electronic) to maintain compliance

  37. Future Landscape of HSAs • Because they are relatively new, expect frequent regulatory updates (most recent 12/20/08) • Operational or administrative information is not readily available from the IRS • But is becoming available from CMG and core processors • Many insurance providers will also begin to administer HSAs • Likely packaging reduced insurance coverage and reduced administration costs. Balance transfers will likely occur

  38. What do the opponents say? • General Accountability Office study1 • Higher income individuals using for tax shelter • Less expensive to individual annually only if healthy • 1 “Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans”

  39. Major Flaws of the HSA Program • Few health insurance companies offer qualified plans • Some don’t meet the IRS requirements of a qualified plan • Many qualified plans are inferior • Not many financial institutions offer trust or administrative services (opportunity?) • Administrative rules vague and subject to change • HSAs don’t help if the individual can’t afford the HDHP premium • Room for fraud and abuse • General public does not yet fully understand them

  40. CU Times, April 5, 2006 Employee Benefit Research Institute

  41. Resources • PCUA (800-932-0661 www.pcua.coop) • InfoSight • CUNA Mutual Group (800-356-2644 or 800-356-9140 www.cunamutual.com) • HSA Program • Training • Documents/Forms • Toll free support • Marketing tools • CUNA (www.cuna.org) • Training • Compliance • NCUA Regulatory Information (www.NCUA.gov) • Parts 721 and 724

  42. Resources • Federal • www.treas.gov/press/realease/reports/hsanotice200450072304.pdf • www.irs.gov/pub/irs-dft/d5305b.pdf • www.irs.gov/pub/irs-dft/d5305c.pdf • State • www.revenue.state.pa.us/revenue/lib/revenue/pit_2006-06.pdf • http://www.revenue.state.pa.us/revenue/CWP/view.asp?A=238&QUESTION_ID=258849

  43. Molly Snody, Director of Business Advisory Services The Pennsylvania Credit Union Association 800-932-0661, ext 5209

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