Health Care Savings Accounts

1. Health Care Savings Accounts Presented by Linda A. Meyerhoffer, CPA June 6, 2006 www.yourflex.com Benefit Solutions, Inc.

2. Consumer Driven Health Care Vehicles • High-Deductible Health Insurance • MERP’s – employer & employee funded • HRA’s – ER funded, carry over & spend down features • Health FSA’s • MSA’s • HSA’s

3. Medicare Reform Legislation Benefit Solutions, Inc. • Most significant change to Medicare since it’s inception • Also helps those not eligible for Medicare by adding HSA’s, effective January 1, 2004 • Legislation is hailed as “historic breakthrough” by some, criticized as flawed and limited by others • While new law provides framework for change, details will emerge over time. • Implementation of programs scheduled from 2004 to 2010+

4. HSA Eligibility Requirements • An individual is eligible only if • Covered by a qualifying HDHP • Not covered by another disqualifying coverage • General purpose health FSA or HRA • Impact of new FSA 2 ½ month rule • Pharmacy benefits must be under the HDHP – no card program below the deductible unless 100% paid for by employee • Not eligible to be claimed as a dependent (Code Sec 152)

5. HSA Eligibility Requirements • An individual is eligible only if • Not ENTITLED TO Medicare Have attained age 65 and - • have applied for and are receiving retirement benefits from Social Security or the Railroad Retirement Board; or • is eligible for monthly retirement benefits from Social Security or the Railroad Retirement Board (but is not receiving such benefits because he or she has not applied for them) and has filed an application for Medicare Part A.9

6. HSA Eligibility Requirements Other Types of Insurance Permitted • Insurance associated with a specific disease • Hospitalization that pays a fixed amt/day • Vision • Dental • Limited FSA - covering vision, dental and preventive care (Not OTC meds) • Suspended HRA – elect forgoing coverage before coverage period begins • Many EAP’s and Wellness Mgmt Programs

7. HSA Eligibility Requirements Other Types of Insurance Not Permitted • Va Benefits within 3 months before month of eligibility (preventive excluded) • TRICARE – Health care for active-duty & retired members of uniformed service/family • On-site clinic – if it provides more than nominal medical services and preventive/permissible care.

8. HSA Eligibility Requirements The following can also establish an HSA and contribute but not under a 125 plan. Therefore any contributions by the employee can not be pre-taxed. Since they are not employees, any ER contribution is not tax deductible either. • More than 2% shareholder of an S Corp • Partners in a Partnership • Self-employed individuals

9. HSA Eligibility Requirements Eligibility is determined on the 1st of each month

10. HSA Eligibility Requirements Once a participant becomes ineligible, they can not contribute but they can take distributions

11. HSA Coverage Requirements • Employee must have plan with deductible of $1,050 or more in 2006 ($2,100 for family) • Plan out-of-pocket maximum cannot be greater than $5,250 ($10,500 family) • OK if plan imposes no deductible for preventive care or has higher OOP limit for out-of-network benefits • Deductible and OOP maximums are indexed annually

12. HSA Contribution Requirements • Maximum annual contribution is lesser of deductible or $2,700 ($5,450 family) for 2006 – $225/month • Additional contributions allowed for 55+ : $700 ($1,400 family) increasing to $1,000 ($2,000 family) in 2009+ • Roll over contributions not subject to limits (HSA to HSA) • Maximum annual contributions are indexed • Cannot rollover HRA or FSA funds in to HSA

13. ER Contributes to HSA Outside of a 125 plan – then comparable contributions must be made for all employees with comparable coverage – same $ or % of deductible. Employees don’t have a choice of what to do with the money. Inside of a 125 plan – comparability does not apply, only discrimination testing regs. More flexibility on allocating funds, matching, etc.

14. Special Rule for Married Couples • If either spouse has family coverage, then both spouses are treated as having only that family coverage. • If both spouses have family coverage, then the lower annual deductible is used for purposes of determining both eligibility and the combined monthly contribution limit. • Separate Trusts – no joint HSA

15. Tax Treatment • Contributions (subject to limits) • Employer contributions excluded from income and wages • Individual after-tax contributions deductible “above the line” • Contributions can be made until April 15 of the following year • Pre-tax contributions allowed through Section 125 “cafeteria plan” if limited to permitted coverage • Earnings • Trust earnings grow tax-free

16. Tax Treatment • Distributions • Distributions for qualified medical expenses are tax-free • Other distributions are permitted but are included in income and subject to 10% penalty tax (no penalty if eligible for Medicare) • Special rules for distributions upon death and divorce • Can be used for self, spouse and dependents even though they may not be eligible for HSA • Self-adjudicating – keep those receipts

17. What Happens at Death • If beneficiary is spouse, transfer to spouse is non-taxable • If non-spouse, the account ceases to be an HSA and the fair market value of the account is given and taxed then • Claims for qualified medical expenses of the decedent can be deducted first if done within a year

18. Tax Treatment • Only approach where contribution, investment earnings and withdrawals for health-related expenses are all free from taxation • Expenses must be incurred after an HSA is established

19. What Expenses Will HSA’s Cover • Most insurance not covered except: • COBRA, • LTC within Code § 213(d)(10) limit • any received while unemployed, • any health insurance when 65 or over except for Medicare Supplement

20. Investing Options • No life insurance • No co-mingling with other property • No collectibles • Yes - Same investment options of an IRA • Yes Bullion or coins • No borrowing against it

21. Special Considerations • HSA’s offered through 125 plans • Irrevocable election rules do not apply • Changes are prospective • Uniform coverage rule does not apply • No required 12 month coverage • No comparability rules • Include when running Key Man Test (25% rule) • Can still fund LTC through HSA

22. Special Considerations • COBRA does not apply • ERISA does not apply as long as • Establishment of the account is voluntary • Limit the ability for the employee to move the $ • Must not impose conditions on utilization • Must not make or influence investment decision • Must not represent that the HSA is established or maintained by the employer • must not receive any payment or compensation in connection with the HSA. • HIPAA not sure if “health plan” yet

23. Employer Options • Do nothing • Adopt a HDHP (HSA compliant) • With or without employer-sponsored HSA • With or without employer contribution to HSA Convert existing CDHC from HRA to HSA • Adopt an HSA • Convert existing Archer MSA to HSA • Communicate changes in conjunction with future reductions in retiree subsidies

24. Employer Options - HDHP • Offer an HSA-compliant HDHP • Employees have option of setting up HSA of their own • No cost to employer for HSA • Offer HDHP and sponsor an HSA for eligible employees • Employees can contribute through employer or set up HSA on their own • Administrative cost for employer unless employees pay cost • Offer HDHP, sponsor HSA and make contributions to the HSA • Employer plus employee contribs cannot exceed limits • Employer pays HSA cost plus administrative cost (unless paid by employees) • Funding HSA’s by employer is not a long-term liability but has a cash cost

25. Employer Options - CDHC Consumer Driven Health Care – Implement HSA compliant plan, or convert current HRA based plan to an HSA Disadvantages: • Contraints on insurance protection provided • No employer control over savings account qualified expenses and carryover provisions • Greater risk that employees will not use savings account wisely • Employees less bound to employer • Cash funding required • Cannot roll “unused” HRA funds into HSA

26. Vendor Overview • Vendor landscape is morphing • Stay alert • Many not certain what final shape will be

27. Questions & Answers ? ? ?