HEALTH SAVINGS ACCOUNTS New Planning Opportunities For Employer Health Plans

1. HEALTH SAVINGS ACCOUNTSNew Planning Opportunities For Employer Health Plans By Jim Griffin Jackson Walker L.L.P. 214-953-5827 Jgriffin@jw.com

2. Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Pub. L. No. 103-173 December 8, 2003 Effective beginning January 1, 2004

3. NEW LAW • New Code Section 223 • New Code Section 4980G

4. LEGISLATIVE POLICY • Allows employees to save for health needs in retirement • Contain medical inflation by giving employees incentive to forego unneeded care • Reduce waste and bureaucracy by giving patients a stake in the savings

5. WHAT IS AN HSA? • Tax - exempt trust or custodial account • Qualified medical expenses • Eligible account beneficiary • High–deductible health plan

6. CONTRIBUTIONS • Employee • Employer • Both • Cafeteria Plan

7. CARRIERS AND PRODUCTS • Aetna • Fortis Health • United Health Group • Lumenos

8. IMPROVEMENT OVER MSAs • First introduced in 1996 • Expand availability • No “small employer” requirement (50 or fewer) • No distinction between corporations, L.L.C.s, partnerships and self employed • No employer involvement required • Make permanent in the tax code • Loosen MSA restrictions

9. WHO IS AN ELIGIBLE ACCOUNT BENEFICIARY? • Monthly Determination • Covered by HDHP • Not covered by any other plan • Not entitled to Medicare • Not a dependent of someone else

10. HIGH – DEDUCTIBLE HEALTH PLAN In – Network Amounts Indexed in $50 increments

11. EXCLUSIONS FROM THE DEDUCTIBLE • Preventive care services • Accident coverage • Disability coverage • Dental care • Vision care • Long term care

12. OUT – OF – POCKET EXPENSES • Deductible • Co-payments • Other amounts

13. TAX TREATMENT OF CONTRIBUTIONS • Contributions are tax – deductible • Above the line • Not an itemized deduction • Amounts paid from an HSA are not also deductible as Section 213 medical expenses • Employer contributions are excludable from the employee’s income • Not subject to FICA taxes

14. TAX BENEFIT CHART Here are the tax savings for a $2,000 contribution to an HSA for families* of various income levels: • Married couple with two children in tax year 2004 • ** No tax benefit because at this income level all tax liability would be eliminated by the child tax credit

15. HIGH – DEDUCTIBLE HEALTH PLAN • Fully insured • Self - funded

16. HIGH – DEDUCTIBLE HEALTH PLAN PERMITTED INSURANCE • Workers Compensation • Tort Liabilities • Property Insurance (for example, car insurance) • Specific disease or illness (for example, cancer insurance) • Fixed amount per day of hospitalization

17. EMBEDDED DEDUCTIBLES The XYZ Company health plan has an individual deductible of $750 and a family deductible of $2,250. If Employee A incurs covered medical expenses in a year of $1,500, the Plan would pay $750, even if the family’s covered medical expenses do not exceed $2,000. The Plan is NOT a HDHP.

18. CATCH-UP CONTRIBUTION • Eligibility: Ages 55 to 65 • Catch-up Limit:

19. CONTRIBUTION LIMIT: CO-ORDINATION WITH OTHER PLANS • Reduced by amount paid to MSAs • Reduced by employer contributions

20. CONTRIBUTION LIMIT • Computed monthly • Spouses • If either spouse has family coverage, then both spouses are treated as having family coverage • If both spouses have family coverage under different plans, both spouses are treated as having family coverage with the lowest annual deductible • Both spouses may make catch-up contributions, if age 55 but not 65

21. CONTRIBUTION LIMIT • Excess contributions are subject to a 6% excise tax, unless removed from the HSA

22. CONTRIBUTION LIMIT: SPOUSES H and W are married. H is 58 and W is 53. Both work and have separate HDHP family coverage. H’s deductible is $3,000. W’s deductible is $2,000. H’s HSA contribution limit is $1,500 W’s HSA contribution limit is $1,000

23. ADDITIONAL CONTRIBUTION REQUIRMENTS • Must be made in cash • Not stock or other property • April 15 deadline • Entire contribution amount may be made on 1st day of the year

24. EMPLOYER CONTRIBUTIONS DISCRIMINATION RERQUIREMENTS • Comparable contributions • Same dollar amount • Same percentage • Comparable participating employees • Applied separately to part time employees (<30 per week) • 35% excise tax

25. DISTRIBUTIONS • May be made at anytime • If used for qualified medical expenses, distributions are excluded from gross income and are not subject to penalty tax

26. DISTRIBUTIONS • Other distributions are includable in income and are also subject to a 10% penalty tax unless the account holder has • Attained age 65; • Becomes disabled; or • dies

27. QUALIFIED MEDICAL EXPENSES • For account beneficiary, that person’s spouse and dependents • Defined in Internal Revenue Code Section 213(d) • Includes over-the-counter drugs as permitted by Revenue Ruling 2003-102

28. QUALIFIED MEDICAL EXPENSES • Other insurance premiums: • Qualified long-term care insurance • Cobra premiums • Health coverage while receiving unemployment benefits • Medicare premiums, if over 65 • Not Medigap • Retiree health insurance premiums after account holder reaches age 65

29. DISTRIBUTIONS • Debit, credit or stored-value cards are ok • HSA may be divided in connection with the account holder’s divorce

30. DISPOSITION OF HSA UPON DEATH OF ACCOUNT HOLDER • Spousal beneficiary – account continues tax-free for spouse • Non spousal beneficiary – account terminates and is taxed as income to the recipient • Taxable amount is reduced by amounts incurred before the account holder’s death and paid within 1 year after date of death

31. HSA TRUSTEE/ CUSTODIAN • Insurance company • Bank • Similar financial institution • Any trustee or custodian for • IRAs • MSAs • Not required to be connected to institution that provides HDHP

32. HSA INVESTMENTS • NOT life insurance • No commingled ownership, except • Common trust fund • Common investment fund • Held in U.S. • Non forfeitable; not subject to “use it or lose it” • Subject to UBTI

33. ROLLOVERS • MSA to HSA: OK • Need not be in cash • Not subject to contribution limits • IRA: Not OK • HRA: Not OK • 125 Account: Not OK • HSA to HSA: OK • 60 day rule • 1 time per year

34. RECORDKEEPING • Burden is on employee • Not employers • Not HSA trustee or custodian

35. SIMILARITIES BETWEEN HSA, HRA AND FSA • Pre tax • Employee and employer contributions permitted • Unused balances may be carried over to later years (except for FSA)

36. DIFFERENCES BETWEEN HSA, HRA AND FSA • HSA assets must be held in trust • HSAs are completely portable • HSA limits are subject to inflation adjustments • HSA have more liberal distribution rules • HRA do not have to be combined with HDHP

37. FIRST ROUND OF GUIDANCE IRS NOTICE 2004-2 Issued December 22, 2003 • HDHP requirements • Trustee requirements • Tax Treatment • Contributions • Distributions • Transfers • MSAs • others

38. FURTHER GUIDANCE • Relationship between HSAs, HRAs, and 125 plans • Definition of preventive care • Corrective procedures • HDHP requirements • IRS Notice 96-53 regarding MSAs • Interplay between HDHP and state mandated coverage

39. CO-ORDINATION WITH CAFETERIA PLANS • Is FSA coverage considered other disqualifying coverage? • FSA coverage for dental or vision benefits • Applicability of nondiscrimination rules • Ability to fund long term care through HSA funded through FSA • Election changes

40. SOME OBSERVATIONS • Boost for consumer driven health plans • Equalizer for self-employed individuals • New retirement savings vehicle • Cost control technique • Impact on current plan designs and premiums • Impact on low deductible plans • Predictability in employer costs

41. SOME OBSERVATIONS • Cap on employer expenses • Impact on Health Reimbursement Accounts • IRS Notice 2002-45 • Rev. Rul 2002-41 • Applicability of ERISA, COBRA, HIPAA • Substantiation requirements

42. TARGET MARKETS • Individuals • Younger, healthier people • Upper income people • Middle aged, middle class (?) • Small groups • Large groups (?)