Health Savings Accounts

1. Health SavingsAccounts Jerry L. Ripperger Director – Consumer Health Registered Representative – Princor Financial Services Corporation

2. Health Savings Accounts • Definition • Eligibility • High Deductible Health Plans • Contributions • Distributions • Comparability

3. Definition • Health Savings Accounts are tax advantaged trust or custodial accounts created for the benefit of an individual covered under a qualified high deductible health plan • Funds used to pay for qualified medical expenses are tax exempt • HSAs are portable and unused balances carry forward to future years allowing for accumulation

4. Eligibility An HSA can be established by an individual who: • Is covered under a high deductible health plan (HDHP) as of the first day of the month • Is not covered by any other health plan that is not an HDHP • Is not enrolled for benefits under Medicare • Is not claimed as a dependent on another person’s tax return

5. Eligibility • An individual can have permitted insurance and still contribute to an HSA but generally these permitted benefits must be provided by insurance contract (unless provided in satisfaction of a statutory requirement such as workers’ compensation)

6. Eligibility Permitted insurance includes: • Worker’s compensation • Tort liability • Liabilities relating to the ownership or use of property (home and automobile insurance) • Insurance for a specified disease or illness • Insurance that pays a fixed amount per day of hospitalization

7. Eligibility • The individual can have the following permitted coverages in addition to an HDHP • Accident • Disability • Dental care • Vision care • Long-term care • A HDHP can be either insured or self-funded

8. Eligibility • Individuals can be covered by Employee Assistance Plans (EAP), wellness plans, and disease management programs as long as they don’t provide significant medical benefits • Discount cards can be included

9. Eligibility • Participating in a health flexible spending account (FSA) or health reimbursement arrangement (HRA) prevents an individual from contributing to an HSA • Four exceptions to this rule

10. Eligibility • Limited purpose FSAs and HRAs that restrict reimbursements to certain permitted benefits such as vision, dental, or preventive care benefits • Suspended HRAs where the employee has elected to forgo health reimbursements for the coverage period • Post-deductible FSAs or HRAs that only provide reimbursement after the minimum annual deductible has been satisfied • Retirement HRAs that only provide reimbursement after an employee retires

11. High Deductible Health Plans • 2005 Minimum Deductible • Self $1,000 (unchanged from 2004) • Family $2,000 (unchanged from 2004) • 2005 Maximum Out-of-Pocket (including deductible) • Self $5,100 ($5,000 in 2004) • Family $10,200 ($10,000 in 2004) • Beginning in 2005 minimums and maximums are indexed to the cost of living (rounded to the nearest $50) • Indexing takes place on the first anniversary after January 1 (unless policy year is longer than 12 months)

12. High Deductible Health Plans • Preventive care can be included in the HDHP without being subject to the calendar year deductible • Preventive care is defined as: Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.

13. High Deductible Health Plans • Preventive care includes, but is not limited to, • Routine prenatal and well-child care • Child and adult immunizations • Tobacco cessation programs • Obesity weight-loss programs • Screening services • Some prescription drugs

14. High Deductible Health Plans • Prescription drug benefits are paid after the HDHP deductible is satisfied and are subject to the out-of-pocket limit • Prior to January 1, 2006, an individual with an HDHP and prescription drug benefit (under a separate plan or rider) will be allowed to make contributions to an HSA

15. Contributions • The HSA can be funded • in one or more payments • convenient to the employee, employer, or other person • prior to the individual’s federal tax filing date (generally April 15) • The maximum monthly contribution is 1/12th of the maximum funding level for each month the member is covered by the HDHP • HSAs must be funded with cash

16. Contributions • Maximum 2005 contribution • Self – lesser of HDHP deductible or $2,650 ($2,600 in 2004) • Family – lesser of HDHP deductible or $5,250 ($5,150 in 2004) • Maximum contribution is indexed to cost of living (rounded to the nearest $50) beginning January 1, 2005 • Indexing takes place on the first anniversary after January 1 (unless policy year is longer than 12 months)

17. Contributions • Catch up contributions are allowed for those age 55 and over • $600 in 2005 (increased from $500 in 2004) • Increases by $100 per year until it reaches $1,000 in 2009 • Catch up contributions cannot be made after Medicare enrollment • Both the employee and spouse can make a catch up contribution if eligible

18. Contributions • Employer contributions to the HSA are tax deductible • Employer contributions do not require income tax withholding from employees’ wages • Contributions are not subject to: • The Federal Insurance Contributions Act (FICA) • The Federal Unemployment Tax Act (FUTA) • The Railroad Retirement Act

19. Contributions • Employee contributions can be made pre- tax through a Section 125 plan • If the employer does not sponsor a Section 125 plan, the employee can take an above the line tax deduction on their Form 1040 (even if they don’t otherwise itemize)

20. Distributions • I.R.C. Section 213(d) defines qualified expenses • HSA cannot be used for health insurance premiums except: • Long-term care insurance • Premiums for COBRA continuation • Premiums for health coverage while an individual is receiving unemployment

21. Distributions • For Medicare eligible employees, the HSA can be used for premiums for: • Medicare parts A & B • Medicare Advantage (HMO coverage) • Retiree contributions to employer sponsored coverage • Medigap policies are not allowed

22. Distributions • A retiree age 65 or over may receive tax-free distributions from their HSA to pay their contribution to an employer’s retiree health coverage (including self-funded) • An individual under age 65 may not use their HSA to pay health insurance premiums • HSA distributions to pay for Medicare premiums deducted from Social Security benefits are a qualified medical expense

23. Distributions • Distributions can take place by a person not covered by an HDHP eligible plan. • Therefore, Medicare enrolled individuals can withdraw from their HSA but cannot make future contributions • An individual may make a withdrawal from their HSA for qualified medical expenses of a dependent even if they are not covered by the HDHP

24. Distributions • Nonqualified distributions prior to age 65= tax + 10% penalty • Nonqualified distributions post age 65= tax only, no penalty • Distributions used for qualified medical= no tax, no penalty

25. Distributions • The responsibility that distributions are qualified medical expenses is the taxpayers’ • Taxpayer needs to keep records should they be audited • Receipts • Explanation of Benefits

26. Comparability • Applies to employer contributions made outside of a Section 125 plan (a.k.a. cafeteria or salary reduction plan) • Employers must make comparable contributions for all HDHP participants taking the employer sponsored HDHP • A contribution is comparable if either the same dollar amount or the same percentage of the HDHP deductible is provided

27. Comparability • Contributions made through a cafeteria plan are subject to the Section 125 nondiscrimination rules • Contributions made through a Section 125 plan allow the employer a much greater degree of flexibility • Matching concept • Additional contributions for participating in wellness, disease management, or EAP • Additional contributions for those that have attained a specified age (i.e. catch up contributions)

28. This material is believed to provide accurate information on the subject matter covered. The accuracy of the content is not guaranteed, and it is provided with the understanding that Principal Life Insurance Company, its agents and representatives are not rendering legal, accounting, tax or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. This material is a summary of Health Savings Accounts and High Deductible Health Plans. It is not a complete statement of the provisions or requirements of HSAs and HDHPs. High Deductible Health Plans and custodial services for Health Savings Accounts offered by Principal Life Insurance Company. Bank products and services provided by Principal Bank, Member FDIC, Equal Housing Lender. HSA monies held in a Principal Bank account are FDIC insured. Insurance and securities are not FDIC insured products and have no bank guarantee. Securities may lose value. Securities offered through Princor Financial Services Corporation, 800/247-4123, member SIPC. Principal Life, Principal Bank, and Princor® are members of the Principal Financial Group, Des Moines, IA 50392. Available now for quote for September 1, 2004 effective dates and beyond!