health savings accounts-hsa health reimbursement arrangements-hra flexible spending accounts- fsa

Health Savings Accounts-HSA Health Savings Accounts-HSA

Health Reimbursement Arrangements-HRAHealth Reimbursement Arrangements-HRA

Flexible Spending Accounts- FSAFlexible Spending Accounts- FSA

The HDH Group, Inc.The HDH Group, Inc.600 Grant Street, Suite 1100600 Grant Street, Suite 1100Pittsburgh, PA 15219Pittsburgh, PA 15219412-391-7300412-391-7300

Flexible Spending Flexible Spending AccountsAccounts

FSAFSA

Flexible Spending Accounts Flexible Spending Accounts (FSAs)(FSAs)

A Flexible Spending Account (FSA) is a plan that operates under Section 125 of the Internal Revenue Code (IRC).

An FSA permits eligible employees to set aside pre-tax dollars for out of pocket medical expenses not covered through their medical program and dependent care expenses

Employees or employers may contribute to FSAs.

Employees save federal income tax, Social Security/Medicare and state and local taxes.

Maximum amount is statutorily limited in Dependent Care Accounts to $5,000. No limit is imposed on Medical Spending Accounts – employers can choose to limit or not.


Funds are available to participating employees at anytime throughout the year.

Eligible expenses considered are deductible medical expenses by the IRS (Publication 502 and Section 213(d) of the Internal Revenue Code), are not reimbursed by any other plan AND over the counter medications.

Ineligible expenses would include anything cosmetic or products used to benefit one’s general health as well as those expenses incurred prior to the beginning of the plan or plan year.


Dependent Care Accounts permit reimbursement for baby-sitters, daycare, or the care of a parent.

Pre-tax dollars can be used to help pay the costs of any caregiver providing services while you are at work. These are expenses necessary in order for employees and/or spouses, if married, to continue working.

Employees can be reimbursed for: adult and child daycare services; nanny expenses for services performed inside your home; registration fees to a daycare facility; and expenses paid to a relative who is not under age 19 or a tax dependent of the participant.

Flexible Spending AccountsFlexible Spending Accounts (FSAs) (FSAs)

Use it or lose itYou must incur expenses within your plan year. You can be reimbursed for those expenses through three months following the end of your plan year. Otherwise, you will lose your money.

Employers can also choose to extend the period in which employees can claim expenses beyond the grace period.

Health Reimbursement Health Reimbursement ArrangementsArrangements

HRA

Health Reimbursement Health Reimbursement Arrangements (HRAs)Arrangements (HRAs)

Employer only discretionary contributions. Employee contributions are not permitted.

No contribution limit (except employer’s budget).

Carry-forward of account balance is permitted indefinitely, however carry-forward may be capped or not carried forward at all.

HRAs permit employers a great deal of design flexibility. Employers can establish forfeiture rules. Those rules can address termination, retirement, break-in-service and loss of eligibility.


No portability. Employees participating can only use the account after a qualifying event by paying COBRA premiums to continue coverage.

Employers contribution is not subject to FICA or FUTA.

Employees receive benefits for qualified expenses tax-free.


Permissible medical expenses include: qualified medical expenses under IRC Section 213(d), COBRA premiums, retiree health premiums, long term care premiums (NOT SERVICES) and over-the-counter drugs.

Employers can limit the expenses the HRA will pay.

If combined with an FSA, unless your Summary Plan Description specifies, the HRA pays first and FSA pays second.

Health Savings Accounts Health Savings Accounts

HSA HSA

Health Savings Accounts (HSAs)Health Savings Accounts (HSAs)

Defined

Health Savings Account = special account owned by an individual where contributions are used to pay current and future medical expenses

Used in conjunction with a “High Deductible Health Plan” (HDHP)

Insurance that does not cover first dollar medical expenses (except preventive care)

Can be HMO, PPO or indemnity plan as long as it meets the requirements


Eligibility

Any individual that:

Is covered by an HDHP Is not covered by other health insurance Is not enrolled in Medicare Cannot be claimed as a dependent on someone

else’s tax return

Children cannot establish an HSA Spouses can establish their own HSA

No income limits on who may contributeNo earned income requirement


Other Permitted Health Coverage

Specific disease Hospital indemnity Auto insurance Vision Dental Disability Employee assistance programs* Disease management programs* Wellness programs* Drug discount cards Eligibility for VA benefits

Unless you have received benefits in the last three months

*These programs must not provide significant benefits in medical care or treatment


1st Dollar Medical Benefits Making Someone Ineligible for an HSA

Medicare

TRICARE Coverage

Flexible Spending Arrangements

Health Reimbursement Arrangements

There are permitted HSA/HRA/FSA Combinations


Permitted HSA/HRA/FSA Combinations

Limited purpose” FSAs and HRAs that reimburse certain benefits (i.e. vision, dental, or preventive care benefits)

“Post-deductible” FSAs or HRAs that only provide reimbursement after the minimum annual deductible has been exhausted under the HDHP

“Retirement” HRAs providing reimbursement after retirement

“Suspended” HRAs when employees have elected to forgo health reimbursements for the coverage period


High Deductible Health Plan Defined (HDHP)

2007 Minimum Deductible:o $1,100 (self-only coverage)o $2,200 (family coverage)

Annual out-of-pocket (including deductible and co-pays):o $ 5,500 (self-only coverage)o $11,000 (family coverage)

Benefit Designs not counted toward the out of pocket maximum:

Lifetime limits on benefitsLimits to UCR amountsLimits on specific benefits:

max number of daysmax dollar reimbursement


High Deductible Health Plan Defined (HDHP)

HDHPs can have:

o First dollar coverage (no deductible) for preventive care (co-pays allowed)

o Higher out-of-pocket (co-pays and coinsurance) for non-network services

All covered benefits must apply to the plan deductible, including prescription drugs

Prescription Drugso Must apply costs to the annual deductibleo May NOT contribute if drugs are separate plan

or rider

Preventive Care - Defined:

Excludes any benefit or service intended to treat an existing illness, injury or condition

Certain drugs and medications can be considered preventive care

Drugs taken by a person who has developed risk factors for a disease that has not yet manifested itself or to prevent reoccurrence of a disease (i.e. Cholesterol-lowering medication)

Plan sponsors can apply co-pays to preventive care services

Be aware of state mandated 1st dollar coverage – it is possible to lose HDHP status

Safe harbor list - Defining Preventive Care:o Periodic health evaluations (e.g. annual physicals)o Screening services (e.g. mammograms)o Routine pre-natal and well-child careo Child and adult immunizationso Tobacco cessation programso Obesity weight loss programs



HSA Contribution Rules

Contributions to an HSA can be made by the employer or the individual or both

Employer contributions are not taxable to the employee Employee contributions are an “above the line” deduction Maximum contribution specified by law (indexed) to an HSA

from all sources is: $2,850 (self-only coverage – 2007) $5,650 (family coverage – 2007)

Catch-up contributions for individuals age 55 and older are: $ 800 – 2007 $ 900 – 2008 $1,000 – 2009 and after

Mid-Year enrollments will be entitled to contribute up to the maximum allowable contribution amount for the plan year.


HSA Contribution Rules

Contributions can be made at any time during the year in one or more payments

Deadline for contributions is April 15th

Excess contributions must be withdrawn by the individual/owner or be subject to an excise tax

Pro-rata portion of earnings must be included with return of contributions

Pay income tax on withdrawn amount, but no 10% penalty

If maximum was not reached, any other non-qualified withdrawal will be subject to income tax and the 10% penalty


HSA Contribution Rules - Employee Contributions

Contributions can be made by a salary reduction arrangement through a cafeteria plan (Section 125 plan)

Elections can change on a month-by-month basis

Pre-tax contributions to the HSA are not subject to individual and employment taxes

Employer can automatically make cafeteria plan contributions on behalf of individuals unless the individual affirmatively elects not to have contributions made (“negative elections”)

Employer matching contributions through a cafeteria plan are permitted

Cafeteria plan nondiscrimination rules apply


HSA Contribution Rules - Employer Contributions

Are always excluded from employees’ income (pre-tax)

Final regulations effective on July 31, 2006 require that employer contributions be “comparable” for all employees participating for contributions made on or after January 1, 2007.

o If contributions are not comparable = 35% excise tax applies to the amount contributed on behalf of employees

Self-employed, partners and S-Corporations shareholders are generally not considered employees and cannot receive an employer contribution – they can make deductible contributions to the HSA on their own


HSA Contribution Rules – Employer Contributions - “Comparable”

IRS rules on comparable HSA contributions

Employers are not required to make any contributions, if you do, each calendar year’s contributions must be comparable across certain groups of employees

Contributions must be made to “comparable participating employees”

This means employer contributions are comparable if they are either (1) the same amount or (2) the same percentage of the employee’s deductible for employees within the same category of HDHP overage

Health Savings Accounts Health Savings Accounts (HSAs)(HSAs)

HSA Contribution Rules - Employer Contributions -“Comparable”

Three categories of employees that may be treated separately are recognized:

Current full-time employeesCurrent part-time employees, andFormer employees (except former employees with

HDHP coverage due to a COBRA election)

Categories of HDHP coverage that may be treated separately:Self

Self plus oneSelf plus two (contributions not less than self plus one)Self plus three or more (contributions not less than self

plus two)


HSA Contribution Rules -Employer Contributions – “Comparable”

Comparability rules apply to a category of employees only if an employer contributes to the HSA of any employee within the category.

Other categories based on employment status, such as collectively bargained/non-collectively bargained or salaried/hourly are not permitted

IRS rules present three methods employers can use to make contributions:

pay-as-you-go look-back (made at the end of the year) Pre-funded (made at the beginning of the

year)


HSA Distribution Rules

Tax-free distributions for “qualified medical expenses”, including over-the-counter drugs

Must be incurred on or after the HSA was established

If HDHP coverage effective on first on month, HSA can be established as early as first day of same month

If HDHP coverage effective on any day other than first day of month, HSA cannot be established until first of following month

Distributions can be taken for covered employee, spouse, or dependent of the employee



Non-qualified distributions are included in income of employee/individual

Non-qualified distributions are subject to 10% penalty. Exceptions to this rule are:

Individual dies or become disabled Individual is age 65

Qualified medical expenses do not include premiums for other health insurance. Exceptions include:

COBRA continuation coverage Any health plan coverage while on unemployment

compensation Individuals enrolled in Medicare (except Medigap

premiums) Qualified long-term care insurance premiums Tax-free reimbursement cannot exceed annually adjusted

“eligible long-term care premiums” in IRC



Individuals must keep track of HSA activity (including employer contributions) – Account holders should keep receipts:

o May need proof for IRS for claims substantiationo May be required by insurance company to prove that

HDHP deductible was meto Not all medical expenses paid out of the HSA have to be

charged against deductible

Distributions can be used to reimburse prior years’ expenses as long as they were incurred on or after the date the HSA was established:

o No time limit on when distributions occuro Keep receipts to prove that expenses were incurred and

were not paid for or reimbursed by another source or taken as an itemized deduction



Mistaken distributions from an HSA can be returned to the HSA:

Individual must produce clear and convincing evidence that the distribution was a mistake of fact

Must be repaid by April 15 of the year following the year in which the individual knew or should have known the distribution was a mistake


HSA Accounts

HSA Accounts are owned by individuals, not an employer, and are required to be held in trust. The individual decides:

Whether he or she should contribute; How much to use for medical expenses; Which medical expenses to pay from the

account; Whether to spend or save contributions in their

account; Which company (trustee) will hold their account; What type investments they will use to grow the

account.


HSA Accounts

HSA custodians or trustees can put reasonable limits on accessing the money in the account: Frequency of distributions, and Size of distributions.

Trustees or Custodians can be: Banks, Insurance Companies Credit Unions, and Entities already approved by the IRS to be an IRA or

Archer MSA trustee or custodian. Trustee or Custodian fees can be:

Paid from the assets in the HSA account without being subject to tax or penalty, or

Can be directly paid by the beneficiary without being counted toward the HSA contribution limit.


HSA Accounts

Rollovers from Archer MSAs and other HSAs are permitted: Only one rollover per year permitted, A rollover to a new HSA must be completed within 60 days,

Multiple trustee to trustee transfers are allowed in a single year Both trustees must agree to do the transfer although they

are not required to accept rollovers.

Once in a lifetime trustee to trustee transfer is permitted from an IRA into an HSA, subject to annual contribution limitations.

One-time, tax-free rollover of funds from a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) effective from January 1, 2007 through December 31, 2011.


HSA Accounts - Beneficiaries

When an HSA account holder dies, if the beneficiary listed on the account is the surviving spouse, the spouse will be the new owner of the HSA.

If the beneficiary is other than the surviving spouse, the amount of funds in the HSA are taxable income to the beneficiary, except for medical expenses of the account holder paid within one year of death.

The taxable amount will be reduced by the amount of estate tax paid due to inclusion of the HSA into the deceased individual’s estate.


HSA Accounts – Investments

Accounts can grow through investment earnings with the same investment options and investment limitations as an IRA

Permitted investment options: Cash; Stocks; Bonds; Options (some trustees may limit); or Gold, silver, platinum, or palladium bullion.

Prohibited investment options: Life insurance and Collectibles, including Any work of art; Any rug or antique; Any metal or gem; Any stamp or coin; Any alcoholic beverage; or Coins of most foreign countries.


HSA Accounts - Taxes

Contributions by an eligible individual / family member are tax deductible by the eligible individual on an “above the line” basis. This means a person can deduct their HSA contribution without itemizing.

Employer contributions to an HSA must be reported on the employee’s Form W-2.

Form 1099-SA will be required to be filed by the trustee.

Form 8889, Health Savings Accounts, will be required to be completed along with the employee’s Form 1040 to report contributions to and distributions from HSAs.

HSA Treasury Assistance

Website – www.treas.gov

Click on “Health Savings Accounts”o All Treasury guidanceo Frequently asked questionso IRS forms and publicationso HSA statuteo Examples of tax savings from HSA contributionso Links to other useful sites

E-mail address: [email protected]

Voice mailbox: (202) 622-4HSA

Health Savings Accounts (HSAs)

http://www.treas.gov/

mailto:[email protected]

health savings accounts-hsa health reimbursement arrangements-hra flexible spending accounts- fsa

Documents

qualified expenses

expenses necessary

ineligible expenses

qualified medical expenses

deductible medical expenses

pocket medical expenses

eligible employees

plan year