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Health Savings Accounts (HSA)

Health Savings Accounts (HSA). Health Savings Accounts (HSAs). 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

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Health Savings Accounts (HSA)

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  1. Health Savings Accounts (HSA)

  2. Health Savings Accounts (HSAs) 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

  3. Eligibility WHO IS ELIGIBLE? • Any individual covered under a qualified High Deductible Plan (HDHP) WHO IS NOT ELIGIBLE? • 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

  4. 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

  5. What are eligible expenses? All services and products covered by IRC 213 (d), except Health insurance premiums Premiums for Long Term Care Health insurance premiums for individuals receiving unemployment benefits COBRA Premiums

  6. 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

  7. 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

  8. 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). Example: 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.

  9. Health Savings Account Plan High Deductible Insurance Savings Account Helps Pay Your Deductible/Out-of-Pocket Medical Expenses Protects You From Big Medical Bills Tax-Deductible Deposits Tax-Deferred Growth Tax-Free for Medical Care

  10. 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: • Death • Disability • Medicare eligibility • Tax-Free transfer of funds to a spouse can occur in the case of death or divorce

  11. 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

  12. Examples of Non-Qualified Medical Expenses  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

  13. 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 Rule. 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” How will an HSA workin a Cafeteria Plan?

  14. 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; or, a ‘Limited Purpose’ FSA which restricts reimbursement to certain permitted benefits such as vision, dental or preventive care benefits. Can HSAs and FSAs Interact With Each Other?

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

  16. HSA/HRA Comparison

  17. HSA deductibles and out-of-pocket maximums are subject to annual cost of living adjustments.

  18. 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 accounts. 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.

  19. 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.

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