HSA s Are They Your Ticket To Lower Health Costs

1. www.fiducial.com HSA’s “Are They Your Ticket To Lower Health Costs”? Presented By: Meredith Lindenmann

2. www.fiducial.com 2 WELCOME! In this training session you will learn:  The Pros and Cons of HSA’s for you and your employees How to Avoid Pitfalls and Set up HSA’s correctly How HSA’s relate to other consumer-directed health plans What a high-deductible health plan (HDHP) is and why its required for an HSA The rules on HSA contributions, who can contribute, and how much The rules on HSA distributions and the penalties for non-medical withdrawals How HSA’s work with cafeteria plans

3. www.fiducial.com 3 ABC’s of Health Options Know Your Acronyms: CDH: HSA: FSA: HRA: HDHP: OTC:

4. www.fiducial.com 4 CDH Defined HRA – Health Reimbursement Account: allow employees to debit medical expenses and allow for year to year rollover. HRA is not portable nor does it belong to the employee. HRAs are employer-owned, and the account’s interest belongs to the employer. FSA – Flexible Spending Account: are IRS Section 125 cafeteria plans that allow employees to have money deducted from their paychecks on a pre-tax basis and placed into an account that can be used to pay insurance premiums and un-reimbursed medical expenses. Employers may also contribute to the account. Funds in an FSA do not roll over at the end of the year; they are forfeited by the employee. HSA – Health Savings Account: is a tax sheltered savings account that is dedicated for medical expenses, tied to an HDHP (high-deductible health insurance plan). Funds in the account can be used to pay for medical expenses until the deductible threshold is reached (deductible must be at $1,000 for individuals, $2,000 for family).

5. www.fiducial.com 5 Healthcare Management Tools for managing health care costs 50% to 80% of health care expenditures are related to lifestyle choices: smoking not wearing a seatbelt drinking too much overeating choosing bad foods and not exercising Wellness Programs Smoking Cessation Weight Management HSA = Health Savings Accounts lead employees to different purchasing behavior motivate employees to manage their personal health and health costs better

6. www.fiducial.com 6 Promoting Wellness Employer Sponsored Wellness Programs on the rise: Exercise and fitness Smoking cessation Blood pressure management Weight management Stress management Nutrition Payoffs of having healthy workers: Lower health care costs Higher productivity Greater labor market competitiveness

7. www.fiducial.com 7 Recipe for Success Have an aggressive strategy to control health care costs Be decisive and swift in implementing programs Behave as you would with any out-of-control expense Use employee feedback and evaluation to learn what is and is not working Make changes accordingly Point of care cost-sharing and premiums are a must When people have a financial reason to pay attention to healthcare costs, they do pay attention Study fairly recent health care claims and target issues that are your cost drivers Provide information, education and online tools for employees Including how they can manage their out-of-pocket costs

8. www.fiducial.com 8 Distinguishing Health Options How do HSA’s compare to other consumer-driven health plans? Similarities: HSAs, FSAs, and HRAs all enable users to pay for out-of-pocket health expenses (and some dependent health costs) with pretax dollars Differences/Benefits of HSA: Can be funded by employees (as can FSAs but not HRAs) Require a high-deductible health insurance policy (unlike FSAs and some HRAs) Allow participants to roll over unused funds from year to year Allow employees to choose account investments Are portable when an employee switches jobs Provide survivor benefits

9. www.fiducial.com 9 Health Savings Account New Annual Contribution Levels for HSA (For 2005) The maximum annual HSA contribution for an eligible individual with self-only coverage is $2,650.00 For family coverage the maximum annual HSA contribution is $5,250.00 “Catch-up Contributions” for individuals who are 55 or older is increased by statute from $500.00 to $600.00 (increasing $100 per year, up to $1,000 per year in 2009) Both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual, and, with respect to the catch up contribution, the number of months of the year that the taxpayer is age 55 and over New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs The maximum annual out-of-pocket amount for HDHP self-coverage increases to $5,100.00 The maximum annual out-of-pocket amount for HDHP family coverage is twice that, $10,200.00. Minimum Deductible Amounts for HSA-Compatible HDHPs The minimum deductible for HDHP is unchanged, at $1,000.00 for self-only coverage The minimum deductible for family coverage is $2,000.00

10. www.fiducial.com 10 Health Savings Accounts An HSA can benefit anyone who currently pays taxes: Individual Contributors Whether or not an individual itemizes deductions, the individual gets a tax deduction for amounts that he or she contributes to an HSA (up to the statutory limit) Employer contributions and/or employee pre-tax salary reductions through cafeteria plan Deductible by employer up to statutory limits Excludable from employee’s taxable income and not subject to federal income tax withholding, FICA or FUTA Amounts in the HSA build up on a tax-free basis and are portable Distributions for qualified medical expenses are not taxed

11. www.fiducial.com 11 Health Savings Accounts Additional Rules/Requirements: Money from an HSA may be spent tax-free on medical expenses both before and after age 65 Withdrawals for non-medical expenses before age 65 will be hit with a 10% penalty plus income taxes on the funds withdrawn After age 65, money can be withdrawn for non-medical expenses without triggering the 10% penalty, but employees will still have to pay income taxes on the money, thus the HSA turns into a retirement account Most HSA’s are expected to be provided through employer plans that combine both health insurance and savings accounts Individuals with their own high-deductible health policies can purchase HSA’s directly from financial services providers

12. www.fiducial.com 12 Benefits of HSA Benefits for Employers: It is difficult for small businesses to offer insurance to employees The combination of an HDHP and an HSA lowers the insurance rates for an employer, creating a situation in which small businesses can afford to provide insurance! Benefits for Employees: Deposits into the spending account are tax-deductible Account can be used to pay routine medical bills, including insurance premiums Any unused amount remains at the end of the year and stays in the account and grows Helps reduce premium costs Lowers an employee’s taxable income Gives employees autonomy and control over their health-care spending Plans are portable

13. www.fiducial.com 13 Health Savings Accounts HSAs can be offered through a cafeteria plan May be funded with pre-tax salary reductions, employer flex credits or both Code 125 nondiscrimination rules do apply HSA comparability rules do not apply to employer contributions to HSAs that are made through a cafeteria plan (including ones made pursuant to pre-tax salary reductions) Irrevocable election rules do not apply HSA elections can be changed prospectively at any time “Use it or lose it” uniform coverage, and 12-month period of coverage rules do not apply Employer funding – Pay-as-you-go, in advance, or at year-end Automatic elections permitted but employee needs to establish account

14. www.fiducial.com 14 HSA’s – Who can have one? “Eligible individuals” can have HSAs Eligibility and contribution limits determined month by month – no partial months Eligible individual must: Be covered by a high-deductible health plan (HDHP) as of the first day of the month Not be covered by a low or no deductible plan (a non-HDHP) unless it is “preventive care” or “permitted coverage” or “permitted insurance” – the three P’s Not be entitled to Medicare (entitled = eligible + enrolled) Not be able to be claimed as a dependent on another persons tax return

15. www.fiducial.com 15 HSAs – High Deductible Health Plans What is an HDHP? A comprehensive health plan (insured or self-insured) with an annual deductible of at least: $1,000 for self-only coverage $2,000 for family coverage Family coverage is any coverage that is not self-only coverage Except for preventive care, an HDHP may not provide benefits until the deductible for the year is met Out of pocket expenses under an HDHP may not exceed specified limits: $5,100 for self-only coverage $10,200 for family coverage (2005 limits)

16. www.fiducial.com 16 HSA’s – What other coverage is allowed? The Three Ps (Preventive Care, Permitted Coverage, Permitted Insurance) What is “Preventive Care”? IRS Notice 2004-23 describes the preventive care services that an HDHP can offer Periodic health examinations, immunizations, tobacco cessation and obesity weigh-loss programs and listed screening services Not services treating an existing illness, injury or condition Preventive care may include treatment of a related condition In narrow circumstances, certain drugs or medications may constitute preventive care IRS definition of preventive care controls over state mandate definitions

17. www.fiducial.com 17 HSAs – What other coverage is allowed? The Three Ps “Permitted Coverage” is coverage (whether through insurance or otherwise) for: Accidents Disability Dental Care Vision Care Long term care

18. www.fiducial.com 18 HSA’s What other coverage is allowed? The Three Ps “Permitted Insurance” Insurance if substantially all of its coverage relates to – Liabilities under workers compensation laws Tort liabilities Liabilities relating to ownership or use of property Other similar liabilities as prescribed in future regulations Insurance for a specified disease or illness Example: Cancer insurance Principal health coverage must be provided through HDHP Insurance paying a fixed amount per day of hospitalization

19. www.fiducial.com 19 HSA’s What other coverage is allowed? The Three Ps No “carve-out” coverage allowed Revenue Ruling 2004-38 confirms that separate low-or no-deductible prescription drug plan will make an individual ineligible for an HSA Prescription drug plan or rider in which there are no deductibles but rather co-pay amounts would disqualify an otherwise eligible individual from participating in an HSA Rationale of Revenue Ruling 2004-38 closes the door on other “carve-out” coverage Prescription Drug Transition Relief (Revenue Procedure 2004-22) IRS allows that until January 1, 2006, a plan that provides either a separate prescription drug benefit or a prescription drug rider not meeting the HDHP deductible minimums will not preclude an otherwise eligible individual from making an allowable HSA contribution

20. www.fiducial.com 20 HSA’s What other coverage is allowed? Miscellaneous coverage that won’t disqualify an individual The following won’t disqualify an individual: Mere eligibility for low-deductible coverage Certain discount cards and discounted prices So long as plan does not pay any benefits before deductible Query about cards with huge discounts Must carefully tailor other benefits to meet exceptions: EAP, wellness programs or disease management programs On-site clinics Executive reimbursement plans Employer responsible for knowing about employer-provided coverage – HDHP and non-HDHP

21. www.fiducial.com 21 Designing FSA to work with HSA What health FSA coverage is HSA compatible? Some health FSA designs prevent HSA eligibility Traditional wide-open health FSA coverage makes an individual ineligible for an HSA It is impermissible non-HDHP coverage Health FSAs can be designed to limit categories of expenses that can be reimbursed and/or the individuals whose expenses can be reimbursed

22. www.fiducial.com 22 Designing FSAs to work with HSA What health FSA coverage is HSA compatible? Some designs will not prevent HSA eligibility Limited purpose health FSA High-deductible health FSA Should Ask: Is it a traditional health FSA (not limited-purpose)? Is coverage limited to just spouse, or spouse and dependents?

23. www.fiducial.com 23 Designing FSAs to work with HSA Limited-purpose health FSAs Types: Vision Dental Preventive care Mix and match Problems with limited-purpose health FSAs Administering preventive care

24. www.fiducial.com 24 Designing FSAs with HSA High-deductible health FSAs A high deductible health FSA is one that does not pay or reimburse any medical expense incurred before the minimum annual HDHP deductible is satisfied $1,000 for self-only $2,000 for family The deductible for the health FSA (other coverage) need not be the same as the deductible for the HDHP, but in no event may the HDHP or other coverage provide benefits before the minimum annual HSA deductible is satisfied If the HDHP and the other coverage do not have identical deductibles, contributions to the HSA are limited to the lower of the deductibles

25. www.fiducial.com 25 Design Rules No Double Dipping Employer offering both health FSA and HSA must advise employees that the same expense cannot be used to claim reimbursement from the health FSA and HSA Employer cannot restrict use of HSA funds HSA shoebox rule opens door for abuse May retain funds in HSA for years and then take distributions No time limit on when distribution must occur An individual who has an HSA balance and becomes covered by a traditional health FSA becomes ineligible to make future HSA contributions but still can use up HSA balance Caution: Record keeping is critical

26. www.fiducial.com 26 Lessons Learned When offering HSA Plan: Change Plan Designs and Require “Active” Enrollment Make conscious decision about health care plan during open enrollment Communicate information Early and in Stages Communicate, communicate, communicate Provide Education Support to Help Employees Evaluate Choices Ex. Cost calculators

27. www.fiducial.com 27 Plan Administration Develop a strategy to determine how HSA’s fit in your organization’s long term goals Gain support from senior management and front line management Provide some level of employer contribution Model designs to determine impact on various groups of employees Work closely with your health plan carrier to understand administrative details

28. www.fiducial.com 28 Contact Information Human Resource Department1370 Avenue of the Americas 31st Floor, New York, NY 10019 Phone: 212-207-4700 Ext. 103 Hr@fiducial.com Fax: 212-308-3613

29. www.fiducial.com Thank You!