Health Savings Accounts Update 2007!

1. Health Savings Accounts Update 2007! Presented by: Sharon Alt President Alt Benefit Consultants, Inc. Fort Worth, TX 817-731-6258 sharonalt@altbenefits.com

2. IRC Section 223 Health Savings Accounts A Sleeping Giant?

3. What is an HSA? Part of the Medicare Prescription Drug Act! Health Savings Accounts (HSA’s) are new tax favored IRA-type accounts authorized under the IRS Code Section 223 and is an individual trust established by certain “eligible individuals” that have high deductible health plan coverage (HDHP). An HSA can be established with or without employer involvement.

4. HSA Governing Law • Newly available January 2004 • IRS Notice 2004-2 • Tax Relief and Health Care Act of 2006 (passed December 9th, 2006, effective January 1, 2007)

5. Health Savings Accounts • Who is an eligible individual? • Who is an ineligible individual? • What is a “qualified” HDHP? • What are the contribution limits and who can contribute? • How are the distributions taken? • How do you establish an HSA?

6. Who is an eligible Individual? • Open to everyone with a “qualified” HDHP Generally HSA eligibility is open to any individual with qualifying HDHP coverage, so long as he or she has no other disqualifying health coverage

7. Who is an ineligible individual? • An individual who is covered under any other health plan that is not a qualified HDHP • Specific disease coverage, hospital indemnity, auto, vision, dental, accident, and disability do NOT count as other coverage • FSAs and HRAs are both considered other coverage • An individual who is entitled to Medicare • An individual who is eligible to be claimed as a tax dependent of another individual

8. What is a “qualified” HDHP? • A HDHP is a comprehensive health plan with an annual deductible of at least (2007) • $1,100 for self only coverage and • $2,200 for family coverage • Having a $0 deductible for preventive care doesn’t disqualify the HDHP • Except for preventive care, an HDHP may not provide benefits for any year until the deductible for that year is met. • If an HDHP provides benefits for prescription drugs or office visits before the deductible is met, it would fail to be an HDHP unless prescription drugs and office visits are considered to be preventive.

9. What is a “qualified” HDHP • No separate out of network deductible maximum • Max Out-of-Pocket: $5,500 Single/$11,000 Family • First dollar benefits allowed for preventive/wellness

10. Contributions to an HSA • Funding of an HSA • Employer/Employee or Both • Annual funding is 100% of deductible or $2,850 single/$5,650 family (whichever is less) • Contributions accepted until April 15 of following year • Annual catch-up contribution for individuals age 55 or older is $800.00

11. Contributions to an HSA • Contributions must be made in cash • Individuals 55 years of age or older can make extra contributions to their accounts. • Catch-up contributions are only allowable for the months during a year that a person is younger than age 65. If the person is age 64 for only 4 months of the year, 1/12 of the $800 annual allowance is multiplied by the 4 months the person is under age 65

12. HSA Distributions • Qualified Medical Expenses - • There is no third-party claims determination. • The individual account holder is responsible for determining if an HSA distribution is for a qualified medical expense. • Non-Medical Expense – • Income tax – amounts distributed from and HSA for non-qualifying medical expenses are subject to income tax • Excise Tax – amounts distributed from an HSA for non qualifying medical expenses are also subject to an additional 10% excise tax.

13. HSA Distributions • Reimbursements • Checkbook and Debit Card for reimbursement • Availability for dependents based on tax filing • Tax free and penalty free at any age (if used for a qualified 213(d) expense • Accountholder responsibility

14. Establishing an HSA • Establishing an HSA • Simple to set up • Tax sheltered Custodial Account • Consumer chooses the administrator; bank, approved trustee or an insurance company • Can be set up anytime during the year

15. Health Savings Accounts • Other Advantages: • Can be used for qualified long-term care insurance and expenses • Health insurance premium for those receiving unemployment compensation • Cobra coverage • For those age 65 or over (whether entitled to Medicare or not) any health insurance other than a Medicare Supplemental policy

16. Employer Contributions and Discrimination Rules • If the employer makes contributions to an HSA, they must make comparable contributions for all comparable participating employees during the same period • A comparable contribution means the same dollar amount or the same percentage of the deductible under the HDHP • Part-Time employees are considered separately when calculating comparable contributions • If an employer doesn’t meet the comparability rule, they are subject to a 35% excise tax on aggregate contributions made to HSAs during the period, or to rollovers from a MSA or another HSA

17. Final Regulations on Employer H.S.A. Contributions • Hearing held on Feb. 23, 2006 • Treasury and IRS issue Final regulations on July 28, 2006 • Effective for Plan years beginning on or after January 1, 2007

18. Final Regulations for Comparability Requirements • An Exception from the comparability requirement for groups of collectively bargained employees. • The ability to make different comparable contributions based on different variations of family coverage. • Clarification of the exclusion from the comparability requirement for employer contributions made through a cafeteria plan.

19. Health Savings Accounts – Good News! HR 6111 • HR 6111 – Effective January 1, 2007 • Modifies the annual contribution limit for everyone to statutory maximum (eliminates the “lesser of deductible” rule) • Allows full annual contribution for certain individual who are eligible only part of the year; i.e. no pro-ration • Allows for a one time trustee to trustee transfer of IRA amount subject to certain limits

20. Health Savings Accounts – Good News! HR 6111 • HR 6111 • Allows a one time tax rollover from health FSA and /or HRA to HAS for certain individuals with balance as of 9/21/06 • Facilitates HAS establishment for participant in Health FSA with grace period that on or before the last day of the plan year the balance is zero • Requires Treasury to issue H.S.A. COLAs on or before June 1 of each year

21. Health Savings Accounts – Good News! HR 6111 • HR 6111 • Modifies comparability rule to allow greater H.S.A. contributions for non-HCEs than HCEs

22. Health Savings Accounts – Good News! HR 6111 • General Assessment of HR 6111 • Improves access to H.S.A.s for some • Increases contribution limits for some • Improves administration and plan design

23. Health Savings Accounts – Good News! HR 6111 • What HR 6111 did not do.. • Allow all prescription drugs to be covered by HDHP below deductible • Increase the contribution limit to equal OOP maximums under plan • Allow tax free distributions from H.S.A for expenses incurred after becoming an eligible individual (instead of after the H.S.A is established)

24. Health Savings Accounts – Good News! HR 6111 • What HR 6111 did not do.. • Address when H.S.A is officially established • Establish tax credits for H.S.A establishment by low income individuals

25. FSAs/HRAs/HSAs.. Which one is right for you? • Health Savings Account • Portable and nonforfeitable accounts • Both employer and employee contributions are allowed • Subject to statutory requirements: eligibility, HDHP, & contribution limit • Employer cannot control use of funds • Can be offered under a cafeteria plan

26. FSAs/HRAs/HSAs.. Which one is right for you? • Health Savings Account • Not limited to common-law employees • Cannot be offered with traditional health fsa or hra coverage • Employer contributions must satisfy comparability rules

27. Questions & Answers