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Health Savings Accounts (HSAs)

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  1. Health Savings Accounts (HSAs) The Basics of HSAs Peter Antonie Compliance Communications Specialist Employee Benefits Corporation The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

  2. Today’s Agenda • Origin/Overview of HSAs • Eligible individuals • High Deductible Health Plan (HDHP) • Disqualifying coverage • HSA contributions • Participant HSA contribution issues • Employer contributions to HSAs • HSA Distributions • HSAs compared to Health Care FSAs and HRAs

  3. Origin of HSAs The Medicare Prescription Drug, Improvement and Modernization Act of 2003 • Added new Code § 223 (created the HSA) • An IRA-type of account for medical expenses • Provided amendment to § 125 to allow HSAs in a cafeteria plan (exception for a benefit that provides deferred compensation)

  4. HSA Overview • Account established in the individual’s name - not the employer’s • Owned by the account holder • HSA account must be with an IRS approved trustee to hold HSA dollars • Banks • Investment companies • Account balance is non-forfeitable, interest earned is tax free • Portable with the individual – not tied to employer

  5. Eligible Individual Eligible to make or receive HSA contributions • Not another individual’s tax dependent • Not entitled to (enrolled in) Medicare • Covered by a qualified High Deductible Health Plan (HDHP) • Not covered by any disqualifying coverage

  6. Eligible Individual HDHP • All expenses, except preventive care, apply to the deductible • Minimum annual deductible • $1,200 for single coverage and $2,400 for other than single coverage – limited family, family, etc. (2012); • $1,250/single and $2,500/family (2013) • Maximum out of pocket amounts under the HDHP • $6,050 for single and $12,100 for family (deductible and coinsurance); • $6,250/single and $12,500/family (2013) • Amounts are indexed – can be adjusted annually • January 1 each year • New amounts are announced in June for next year

  7. Eligible Individual No disqualifying coverage • Examples of disqualifying coverage • HRA that reimburses prior to satisfying minimum HDHP deductible • Health Care FSA (own, spouse’s or parent’s - if under 26) • Health insurance that has first dollar coverage or a lower deductible than HDHP minimums • Prescription drug coverage prior to satisfying HDHP deductible (e.g., drugs covered after a co-pay)

  8. Eligible Individual Permitted coverage • Specified disease (e.g., cancer ins.) • Preventive care • Stand-alone dental and/or vision coverage • Insurance paying a fixed amount per day for hospitalization • Workers’ compensation, tort liability or property insurance • Limited Health Care FSA or Post-deductible Health Care FSA • HRA designed to reimburse only after meeting at least minimum HDHP deductible amounts

  9. Ineligible Individual Example Bob and Betty are married. Both carry single health plan coverage through their employers. Bob has an HDHP and Betty has an HMO and Health Care FSA • Bob cannot contribute to an HSA because Bob is eligible for first dollar reimbursement from Betty’s Health Care FSA • If Betty participated in a Limited or Post Deductible Health Care FSA, Bob could contribute to an HSA

  10. HSA Contributions If employer offers pre-tax HSA contributions or makes employer contributions to HSAs, employer responsible to: • Know that employee is covered by HDHP offered by the employer • Know that the employee does not have disqualifying coverage offered by the employer • Know whether the employee is eligible for “catch up” HSA contributions

  11. HSA Contributions • By individual or family member as tax deduction at year-end (post-tax) • By individual as pre-tax deduction in cafeteria plan • By employer (employer’s contribution reduces the maximum the individual can contribute)

  12. HSA Contributions HSA contribution limits • $3,100 for single coverage and $6,250 for family coverage (2012) • $3,250/single and $6,450/family (2013) • Additional “catch up” contribution of $1,000 allowed for individuals 55 or older • Joint limit applies to married individuals • Limited to family maximum split between the spouses if either or both have family HDHP coverage • Assume 50%/50% split unless agreed upon differently

  13. HSA Contributions Annual maximum contribution is the sum of the monthly contribution limits (annual/12) for the months the individual was eligible to make contributions • e.g., 2012 single maximum of $3,100 equates to $258.33 per month • Full Contribution rule* for mid-year HDHP enrollees or coverage change allowed * also referred to as the last-month rule

  14. HSA Contributions Full Contribution rule • Must be HSA eligible December 1 • 13-month testing period applies • Contribution maximum is the greater of • The annual maximum for coverage in effect December 1, or • The sum of the monthly maximums for the HDHP coverage that was actually in effect for each month of the year

  15. HSA Contributions Full Contribution rule • 13 month testing period applies • Individual must remain HSA eligible from December 1 of the year the full contribution rule is used until the end of December of the following year • If not, any additional contributions (those in excess of the sum of the monthly maximums) are treated as taxable income plus additional 10% tax

  16. HSA Contributions Full Contribution example #1 • John enrolled in family HDHP coverage October 1 (no HDHP coverage prior) and uses the full-contribution rule • John’s monthly maximum sum is $1,562 ($6,250/12 months X 3 months) • John makes the full $6,250 contribution • John’s additional contributions are $4,688 • John must remain HSA eligible until December 31 of the following year • If not, he is taxed on the additional contributions of $4,688 plus an additional tax of $468.80

  17. HSA Contributions Full Contribution example #2 • Mary was enrolled in single HDHP coverage from January through August (8 months) • Mary enrolled in family HDHP September 1 • The sum of her monthly maximums is $4,155.01 ($3,100/12 mo x 8 mo) + ($6,250/12 mo x 4 mo) • Family HDHP contribution maximum is $6,250 • Mary contributes $6,250 using the full contribution rule • Mary’s additional contributions = $2,094.99 (subject to taxation if she doesn’t remain HSA eligible through the testing period)

  18. HSA Contributions Roll over from Health Care FSA or HRA • No longer available • Roll over must have been completed by December 31, 2011 • Participant must have been a participant in the employer’s Health Care FSA or HRA on September 26, 2006 • Could roll over the lesser of balance on 9/26/06 or the end of current plan year • Participant must remain HSA eligible during the 13-month testing period

  19. 2013 min/max Single $1,250/$6,250 Family $2,500/$12,500 2013 contribution limit Single $3,250 Family $6,450 HDHP & HSA Limits** minimum = deductible, maximum = out-of-pocket • 2012 min/max • Single $1,200/$6,050 • Family $2,400/$12,100 • 2012 contribution limit • Single $3,100 • Family $6,250

  20. Participant HSA contribution issues Scenarios assume the participant’s employer has HDHP with HSA • Spouse’s employer implements non-HDHP • Spouse takes job with employer that has non-HDHP coverage • Spouse takes job with employer that has HDHP with HSA coverage • Participant marries • Participant’s spouse loses job and HDHP with HSA coverage • Participant’s spouse loses job and non-HDHP coverage

  21. Spouse’s employer implements non-HDHP • Participant drops health plan and enrolls on spouse’s non-HDHP • Participant cannot make future HSA contributions • Participant switches to single health plan, spouse enrolls in single non-HDHP • Participant can make future single plan HSA contributions, unless spouse elects a Health Care FSA • Participant remains in family coverage, spouse does not enroll in non-HDHP coverage • Participant can continue family HSA contributions, assuming spouse does not elect a Health Care FSA

  22. Spouse takes job with employer that has non-HDHP coverage • Participant continues family HDHP coverage and spouse does not enroll • Participant continues family HSA contributions, assuming spouse does not elect Health Care FSA • Participant switches to single HDHP coverage and spouse enrolls in single non-HDHP • Participant limited to single HSA contributions for remainder of tax year, assuming spouse does not elect Health Care FSA

  23. Spouse takes job with employer that has non-HDHP coverage (continued) • Participant switches to single or drops plan and spouse enrolls in family non-HDHP • Participant ineligible for future HSA contributions

  24. Spouse takes job with employer that has HDHP with HSA • Spouse enrolls in family HDHP, participant drops his/her employer’s health plan • Participant continues to make family HSA contributions (spouse makes none), or • Spouse establishes account and makes family contributions (participant makes none), or • Spouses split the future family HSA contributions • Participant continues in family coverage • Spouse can enroll in single or family coverage. Participant continues to make his/her own family HSA contributions (spouse makes no contributions), or • Participant splits family contributions with spouse

  25. Spouse takes job with employer that has HDHP with HSA (continued) • Participant switches to single health plan, spouse enrolls in single HDHP • Participant's future HSA contributions reduce to single amount for remainder of tax year. Spouse can make single HSA contributions for remainder of tax year • Participant switches to single health plan, spouse enrolls in family HDHP • Participant and spouse can split family HSA contribution amount, or • Participant can stop making contributions and spouse makes family contributions for remainder of tax year

  26. Participant marries • Participant drops his/her employer’s health plan and enrolls on spouse’s plan • If spouse’s plan is HDHP, participant can make family HSA contributions or split family contribution with spouse for remainder of tax year, assuming spouse has no Health Care FSA • Participant and spouse keep single health plans with their employers • Participant limited to single amount for HSA contributions unless spouse has a Health Care FSA, then no future HSA contributions allowed

  27. Participant marries (continued) • Spouse drops his/her coverage. Participant enrolls in family HDHP • Participant eligible for family HSA contributions for remainder of tax year (limit can be split between spouses or all contributed by one spouse), unless spouse has Health Care FSA

  28. Participant’s spouse loses job and had HDHP with HSA coverage • Participant can enroll in employer’s health plan • Participant or spouse can make family HSA contributions or split the limit • Contributions can be into the spouse’s account or participant can establish new HSA account

  29. Participant’s spouse loses job and non- HDHP coverage • Spouse and participant do not elect COBRA, participant can enroll in family HDHP coverage and make family HSA contributions for remainder of tax year (participant alone or split with spouse) • Spouse elects COBRA for single plan, participant enrolls in single HDHP and can make single HSA contributions for remainder of tax year, unless spouse elected COBRA for Health Care FSA

  30. HSA Contributions Pre-tax vs. Post-tax • Pre-tax through cafeteria plan • Immediate tax savings • Automatic contributions • Could affect future Social Security Benefit • Employer and employee contributions subject to IRC §125 nondiscrimination testing • Post-tax outside cafeteria plan • Line item adjustment at year-end • No effect on future Social Security benefit • Any employer contribution subject to Comparability rules of §223 • No effect on §125 nondiscrimination testing

  31. Employer HSA contributions • Through a cafeteria plan • If employees can make pre-tax contributions, employer contributions are considered made through the cafeteria plan (Treasury Reg. §54.4980G-5) • Employer contributions and any employee pre-tax contributions are subject to IRC §125 nondiscrimination testing • Outside a cafeteria plan • Subject to Comparability rules of § 223 • Comparable contributions for comparable participating employees (e.g., same dollar amount for all enrolled in single plan coverage, % of HDHP deductible, etc.) • Cannot be based on age, years of service or compensation

  32. HSA Contributions through Cafeteria Plan §125 Nondiscrimination Testing • HSA contributions (employer & employee) treated as premiums • HSAs are taken into account when performing the § 125 Contributions & Benefits test* and Key Employee 25% Concentration test • Failing either or both tests means the HCEs or Key employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs) *If employer HSA contributions are not comparable, the C&B Availability test fails if HCEs receive a higher amount

  33. HSA Distributions • Distributions are tax free for qualified medical expenses incurred after HSA is established • non-medical distribution is taxed plus additional 20% penalty • Distributions act as reimbursement of medical expenses to the account holder • Generally for medical expenses of account holder, spouse or tax dependents (eligible child rule to age 26 does not apply) • Qualified medical expenses the same as for a Health Care FSA (IRC § 213(d)) with exception for some premiums

  34. HSA Distributions Premiums eligible from HSA • Qualified long term care insurance (LTC) • COBRA or USERRA leave premiums • Any health plan premiums during period receiving unemployment compensation • If over 65, account holder’s health coverage other than Medicare supplement (e.g., premiums for retiree coverage, Medicare Part B or D or Medicare Advantage, etc.)

  35. Health Care FSA vs HRA vs HSA

  36. Health Care FSA vs HRA vs HSA(continued)

  37. Questions? • Any questions can be addressed by e-mail or phone at your convenienceCompliance Department800 346 2126compliance@ebcflex.com • Thanks for Attending!! Visit our online blog: http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx