Sterling HSA ® Health Reimbursement Arrangements: Implications for Benefits Planning CE Course # 233547

1. Sterling HSA®Health Reimbursement Arrangements:Implications for Benefits PlanningCE Course # 233547 Cora M. Tellez February 2010 Sterling HSA®

2. Agenda • Introduction to HRA • Forces Driving HRA Adoption • Implications for Benefits Planning • Employer Control • Evidence of Employee Engagement • Caution: Discrimination Testing • ERISA, COBRA, HIPAA Sterling HSA®

3. What Are HRAs? • Stands for Health Reimbursement Arrangement, owned and controlled by employers • Represents employer’s commitment to pay for certain expenses • Governed by Section 105(H) of the Internal Revenue Code; Rules spelled out under IRS Notice 2002-45 and Revenue Ruling 2002-41 • Tax Treatment: Employer reimbursements to employees are tax-exempt for participants and tax-deductible for employers (considered ordinary business expense) Ref: Section 106 of the IRS code • For groups under 100 lives (churches or govt. entities) no reporting required to the IRS; reporting only to the employer Sterling HSA®

4. Who Are Eligible Participants? • All Employees and their dependents, except partners in partnerships, members of LLC’s and 2% or more shareholders of S-corporations • Employer can also choose to cover retirees, terminated employees, their spouses and dependents and the spouses/dependents of deceased employees • Employer may allow domestic partner coverage that meets IRS Sec 152 definition of dependent • Employer may also allow non-tax dependent coverage if the value of the HRA coverage is imputed in the employee’s income. Sterling HSA®

5. HRAs: Employers Set the Rules for: • How much to reimburse, in what amounts and in what order • When to reimburse (can specify reimbursements for expenses incurred in the current plan year or during the current plan and any prior plan) • What to reimburse (must adhere to Sec.213(d) definitions) • Whether funds will roll over to the next year • Who to cover (ex., employee only; employee + dependents) • Which health plan to pair with HRA (HMO, PPO, HDHP) • Employers can change the rules every year! Sterling HSA®

6. Examples of Reimbursement Rules • Employer reimburses only after participant pays $500 dollars out of pocket for defined expenses (medical only or Sec 213(d)) • Employer reimburses the first $1,000 of expenses incurred by participant and the first $500 of expenses incurred by the participant’s dependents • Employer reimburses 80% of employee expenses up to a defined limit Sterling HSA®

7. How Much Can Employers Contribute? • No government-imposed limits • Employer determines the amount and whether to fund monthly/quarterly/yearly. Can change contribution rules every year, including NOT contributing at all. • Employer can set account cap or limit. No additional contributions can accrue until the account is used and balance falls below cap. • Employer can determine whether it will reimburse only after employee spends own money and at what level. • Note: Employees cannot contribute to the HRA Sterling HSA®

8. Most Popular Types of HRA Plans • Medical Plan • Paired with a health plan • Reimburses expenses tied to the insurance deductible • Comprehensive Plan • Reimbursements can cover dental, vision, long-term care and other expenses defined under Section 213(d) (same regulation covering HSAs) • Limited Purpose Plan • Limits reimbursements to certain types of expenses, such as dental and vision • Typically paired with HSAs Sterling HSA®

9. Employers May Reimburse • Medical expenses tied to the health plan deductible or co-pays • Medical, dental, vision expenses defined by the IRS Code Sec 213 (d) • COBRA, long term care, health plan and Medicare part B and D premiums Sterling HSA®

10. Reimbursement Rules • Cannot reimburse expenses incurred before the effective date of the HRA • Cannot pay CASH except for reimbursement of medical care (no death benefit or as part of severance agreement). Severe penalties apply if this rule is violated. Sterling HSA®

11. HRAs with HSAs and FSAs • Employer can have HSA as long as HRA does not pay medical until statutory deductible has been reached • If employer has HRA and Healthcare FSA, general rule is that the Healthcare FSA pays last. 2010 Statutory deductible limits: individuals - $1200; families - $2400 Sterling HSA®

12. Can Contributions be Forfeited? • Depends on employer rules • Employer can allow carry over, set limits on carry over amount, and define how many years funds can carry over • Employer can require funds be forfeited at termination/retirement or allow funds to be used under certain circumstances (reached a specified age/ completed specified years of service) Sterling HSA®

13. Timing of Reimbursements • Employers specify time limits for submitting claims for reimbursements • Date of service (not when participant pays) determines whether claim qualifies for reimbursement • One exception: Orthodontia expenses • IRS allows reimbursement based on date of payment, date of service OR payment due date. Sterling HSA®

14. Why Employers Choose HRAs • Control of the Asset • Employers have broad latitude to set rules for contributions and reimbursements • Reduce health insurance cost • Reduce employees’ exposure to out-of-pocket expense Sterling HSA®

15. Rising Healthcare Cost: A Big Problem for American Businesses • Premiums for health insurance increase every year at a rate three times higher than general inflation • Results in: • Diminished competitive position relative to international firms • Reduction in the number of firms offering health benefits (from 66% in 1999 to 60% in 2009) * • Margin Pressure • Irony: The US out-spends most countries, but gets poorer results • US ranks last among industrialized countries for life expectancy at birth and at age 60** • Variation in outcomes unrelated to demographics * Kaiser/HRET Survey Sept. 2009 **Commonwealth Fund Study, Sept. 2006 Sterling HSA®

16. Drivers of Cost Inflation • Technology • Health Status (Health behaviors drive health status)* • Aging Population • Defensive Medicine (malpractice) • Perverse payment incentives • Consumers un-engaged, poorly informed, no incentive to change behavior *Centers for Disease Control, 2004 Sterling HSA®

17. A Financial Solution • Provide Financial Incentives for employees to: • Evaluate and thoughtfully use health care services • Seek cost-effective alternatives • Reward them for good decisions • Offer account-based, consumer directed healthcare plans • Examples: Health Savings Accounts (HSA) and Health Reimbursement Arrangement (HRA) Sterling HSA®

18. Consumer Directed Health Care • Puts consumers in central role of decision-making • Usually paired with a financial account (HSA or HRA) • Provides financial incentive to use healthcare thoughtfully • Affordability of such plans drive adoption Sterling HSA®

19. Advantages of HRAs • Employer funds only when expenses are incurred • Employer controls benefit coverage, how funds are spent, timing of and amount of expenditures • Employees enjoy some protection from out-of-pocket costs, but have limited motivation to conserve Sterling HSA®

20. Do Consumer Directed Plans Work? What is the evidence? Sterling HSA®

21. CDHP Enrollees More engaged in Wellness and in Tracking Expenses • Compared to those in traditional plans*: • 52% More likely to ask doctor about cost of treatment • 50% More likely to participate in wellness programs • 72% Tracked health care expenses *BCBSA study released October, 2008 Sterling HSA®

22. Cigna Study: Positive Utilization Results • National study of CDHP members*: • Decreased use of brand drugs where generics were available • CDHP plans reduced medical cost trend by 13% relative to HMOs and PPOs, WHILE MEMBERS MAINTAINED SIMILAR TREATMENT REGIMENS • Insights • Change occurs when there are financial incentives to do so • Consumers don’t skip medications or needed medical care • Consumers more likely to make cost-effective decisions • *Cigna HealthCare Analysis, January 2009, press release. Sterling HSA®

23. 2009 Aetna National Study • 5% to 10% greater spend on preventive care • 5% - 10% lower Emergency Room utilization • 10% - 15% reduction of non-routine visits, but increase in preventive and routine visits Sterling HSA®

24. From a Benefits Planning Perspective, HRAs . . . • Enable employers to reduce medical premium by pairing HRAs with lower cost plans • Keep employers in control of the asset • Protect employees from significant out-of-pocket cost • Promote cost-effective behavior Sterling HSA®

25. Cautionary Notes • Discrimination testing • Regulations that affect HRAs • ERISA • COBRA • HIPAA Sterling HSA®

26. Non-Discrimination Rules • Employers must pass two tests: • Eligibility (are all eligible employees allowed to participate?) • Benefits (are reimbursement rules applicable to all?) Key concern: HRAs cannot discriminate in favor of highly compensated individuals with respect to eligibility and benefits Penalties apply if tests are not met Sterling HSA®

27. Definition of ‘Highly Compensated’ • One of the 5 highest paid officers • Own more than 10% of the company • One of the highest paid 25% of all employees Discrimination tests conducted annually Sterling HSA®

28. Eligibility Tests(Employers must pass one of the following) • The 70% test: Does the HRA benefit 70% or more of all includible employees? (can exclude those who have not completed 3 years of service, are under 25 years of age, part-timers, collectively-bargained employees, and nonresident aliens with no U.S. source of income) • The 70%/80% test: Are at least 70% of includible employees eligible to participate, and of those, at least 80% elect coverage? • Nondiscriminatory classification: Based on facts and circumstances of each case Sterling HSA®

29. Benefits Test • Benefits the same for all? • Benefits offered under the same conditions to all? • Waiting periods the same? • Maximum benefit levels cannot vary based on age, years of service or compensation Sterling HSA®

30. COBRA(CAL COBRA does not apply) • Health coverage, including HRAs, must be continued when employees experience qualifying events such as termination of employment. However, employees must pay their own health insurance premium. • Applies to employers with 20 or more employees • Period of coverage generally up to 18 months for employees • Employers required to provide the maximum contribution at the time of the COBRA event and increase the amount at the same time and for the same amount that it is increased for non-COBRA employees. Sterling HSA®

31. COBRA example • ABC Company offers an HRA and the employer contributes $100/mo to each employee • Sam enrolled in the HRA plan on Jan 1, 2009 • Sam is terminated on June 15, 2009 having submitted no HRA claims; He is offered COBRA • Sam has 2 options: • Do not elect COBRA and spend down the balance in the account (maximum available = $600) • Elect COBRA, pay the HRA-COBRA premium, and have access to $1200 employer contribution for 2009 year Sterling HSA®

32. Calculating HRA COBRA premiums Employers may charge terminated employees a premium equal to a reasonable estimate of the cost of providing coverage for similarly situated beneficiaries Premium determined on an actuarial basis or past cost basis Premium is adjusted for inflation plus 2% administrative fee Sterling HSA®

33. ERISA • Requires employees to receive Summary Plan Description (SPD) which describe the rules affecting the HRA • Requires employees to have access to plan documents • Requires notification of employee rights to appeal denials of claim • Requires reporting (Form 5500) to the IRS except for employers with fewer than 100 participants, churches and government entities Sterling HSA®

34. HIPAA • Non-discrimination requirement • HRAs may not condition eligibility or contributions based on health-related factors • Must issue certificates of creditable coverage (complies with portability requirement) • Does not apply to self-funded employers with fewer than 50 employees Sterling HSA®

35. Summary • HRAs: an excellent tool for employers to constrain health spending while providing financial assistance to employees • Keeps employers in control of HRA contributions • May encourage cost-effective utilization of health services Sterling HSA®

36. Questions? Thank you! Cora M. Tellez Morgan Anthony Senior Director of Sales, Southern California Sterling HSA Office: 800 617 4729 Morgan.anthony@sterlinghsa.com www.sterlinghsa.com Sterling HSA®