An Overview of An Overview of HSAsHSAs

Presented by: Barry HillPresented by: Barry HillDirector - Sales & Director - Sales &

MarketingMarketing

MMIC Agency, Inc.MMIC Agency, Inc.

North Carolina Medical North Carolina Medical Society Employee Benefit Society Employee Benefit

PlanPlan

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HSA OverviewHSA Overview

HSA is money put in an interest HSA is money put in an interest bearing account owned by an bearing account owned by an individual and can be used to pay your individual and can be used to pay your deductible, coinsurance and any deductible, coinsurance and any *qualified medical expenses not *qualified medical expenses not covered by your health plan; or for covered by your health plan; or for future medical expensesfuture medical expenses

Must be used in conjunction with Must be used in conjunction with “High Deductible Health Plan” (HDHP)“High Deductible Health Plan” (HDHP) Insurance that does not cover first dollar Insurance that does not cover first dollar

medical expenses (except for prevention)medical expenses (except for prevention)

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Who Is Eligible for HSAs?Who Is Eligible for HSAs?

Any individual that:Any individual that: Is covered by a HDHPIs covered by a HDHP Is not covered by other health Is not covered by other health

insuranceinsurance does not apply to specific injury insurance does not apply to specific injury insurance

and accident, disability, dental care, vision and accident, disability, dental care, vision care, long-term carecare, long-term care

Is not eligible for MedicareIs not eligible for Medicare Can’t be claimed as a dependent on Can’t be claimed as a dependent on

someone else’s tax returnsomeone else’s tax return

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What Is a “High Deductible What Is a “High Deductible Health Plan” (HDHP)?Health Plan” (HDHP)?

Health insurance plan with minimum Health insurance plan with minimum deductible of:deductible of: $1,050 (self-only coverage)$1,050 (self-only coverage) $2,100 (family coverage)$2,100 (family coverage)

Annual out-of-pocket (including deductibles Annual out-of-pocket (including deductibles and co-pays) does not exceed:and co-pays) does not exceed: $5,250 (self-only coverage)$5,250 (self-only coverage) $10,500 (family coverage)$10,500 (family coverage)

HDHPs can have:HDHPs can have: 11stst dollar coverage for preventive care dollar coverage for preventive care higher out-of-pocket max (copays & higher out-of-pocket max (copays &

coinsurance) for non-network servicescoinsurance) for non-network services

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HSA Contribution RulesHSA Contribution Rules Contribution to HSA can be made by either Contribution to HSA can be made by either

the employer or the individual, or boththe employer or the individual, or both If made by the individual, it is an “above-the-If made by the individual, it is an “above-the-

line” deductionline” deduction If made by the employer, it is not taxable to the If made by the employer, it is not taxable to the

employee (excluded from income)employee (excluded from income) Can be made by others on behalf of individual Can be made by others on behalf of individual

and deducted by the individualand deducted by the individual All contributions are aggregated and can All contributions are aggregated and can

be made through April 15 of the next year.be made through April 15 of the next year.

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HSA Contribution RulesHSA Contribution Rules

Maximum amount that can be contributed Maximum amount that can be contributed to an HSA (and deducted) = lesser of:to an HSA (and deducted) = lesser of: Amount of High DeductibleAmount of High Deductible

oror Maximum specified in law (indexed annually Maximum specified in law (indexed annually

by M-CPI)by M-CPI) $2,700 (self-only coverage) $2,700 (self-only coverage) $5,450 (family coverage) $5,450 (family coverage)

Reduced by any contribution to an Archer Reduced by any contribution to an Archer MSAMSA

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HSA Contribution RulesHSA Contribution Rules

DeductibleDeductibleOut-of-PocketOut-of-Pocket

MaximumMaximum

MaximumMaximumHSA DepositHSA Deposit

(2004)(2004)

SingleSingleCoverageCoverage

$1,050$1,050 $5,250$5,250 $1,050$1,050

$1,500$1,500 $5,250$5,250 $1,500$1,500

$2,000$2,000 $5,250$5,250 $2,000$2,000

$2,500$2,500 $5,250$5,250 $2,500$2,500

$3,000$3,000 $5,250$5,250 $2,700$2,700

FamilyFamilyCoverageCoverage

$2,100$2,100 $10,500$10,500 $2,100$2,100

$3,000$3,000 $10,500$10,500 $3,000$3,000

$4,000$4,000 $10,500$10,500 $4,000$4,000

$5,000$5,000 $10,500$10,500 $5,000$5,000

$6,000$6,000 $10,500$10,500 $5,450$5,450

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HSA Contribution RulesHSA Contribution Rules

For individuals age 55 and older, additional For individuals age 55 and older, additional “catch-up” contributions to HSA allowed“catch-up” contributions to HSA allowed 2004 - $5002004 - $500 2005 - $6002005 - $600 2006 - $7002006 - $700 2007 - $8002007 - $800 2008 - $9002008 - $900 2009 and after - $1,0002009 and after - $1,000

Contributions must stop once an individual Contributions must stop once an individual is eligible for Medicareis eligible for Medicare

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HSA Contribution RulesHSA Contribution Rules Contributions can be made through Contributions can be made through

cafeteria planscafeteria plans Rollovers from Archer MSAs and other Rollovers from Archer MSAs and other

HSAs permittedHSAs permitted Employer contributions to HSA must be Employer contributions to HSA must be

“comparable” for all employees “comparable” for all employees participating in the HSAparticipating in the HSA If not comparable, there will be an excise tax If not comparable, there will be an excise tax

equal to 35% of the amount the employer equal to 35% of the amount the employer contributed to employees’ HSAscontributed to employees’ HSAs

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HSA Contribution RulesHSA Contribution Rules In order to meet the requirement that the In order to meet the requirement that the

employer make comparable contributions, the employer make comparable contributions, the employer must make contributions:employer must make contributions: which are the same amountwhich are the same amount

oror which are the same percentage of the annual deductiblewhich are the same percentage of the annual deductible

Count only employees who are eligible Count only employees who are eligible individuals covered by the employer and who individuals covered by the employer and who have the “same category of coverage” (i.e., self-have the “same category of coverage” (i.e., self-only or family)only or family)

Part-time employees are tested separatelyPart-time employees are tested separately ““Part-time” means customarily employed fewer Part-time” means customarily employed fewer

than 30 hours per weekthan 30 hours per week

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HSA DistributionsHSA Distributions

Distributions are tax-free if taken for Distributions are tax-free if taken for “qualified medical expenses”“qualified medical expenses” Cannot be used to pay for other health Cannot be used to pay for other health

insurance except:insurance except: COBRA coverageCOBRA coverage Qualified long-term care insuranceQualified long-term care insurance Health plan coverage while receiving Health plan coverage while receiving

unemployment compensationunemployment compensation For individuals eligible for Medicare:For individuals eligible for Medicare:

Medicare (Part A, Part B, Medicare+Choice)Medicare (Part A, Part B, Medicare+Choice) employee share of premiums for employer-based employee share of premiums for employer-based

coveragecoverage Cannot pay Medigap premiumsCannot pay Medigap premiums

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*Examples of Qualified Medical *Examples of Qualified Medical ExpensesExpenses

Prescription DrugsPrescription Drugs Physician office visitsPhysician office visits Durable medical EquipmentDurable medical Equipment Physical TherapyPhysical Therapy Birth ControlBirth Control Chiropractic servicesChiropractic services Vision & Dental careVision & Dental care

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HSA DistributionsHSA Distributions Distributions are tax-free if taken for:Distributions are tax-free if taken for:

person covered by the high deductibleperson covered by the high deductible spouse of the individualspouse of the individual any dependent of the individualany dependent of the individual

Spouse and dependents don’t need to be covered Spouse and dependents don’t need to be covered by the HDHPby the HDHP

If not used for qualified medical expenses, then If not used for qualified medical expenses, then amount is included in incomeamount is included in income

10% additional tax if taken for non-medical 10% additional tax if taken for non-medical expenses, except when taken after:expenses, except when taken after: Individual dies or becomes disabledIndividual dies or becomes disabled Individual is eligible for MedicareIndividual is eligible for Medicare

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HSA DistributionsHSA Distributions

HSA custodian must report all HSA custodian must report all distributions – distributions – not required to check not required to check them for eligibilitythem for eligibility

Should the HSA participant keep receipts?Should the HSA participant keep receipts? YES! Need to prove that deductible was metYES! Need to prove that deductible was met Not all medical expenses paid out of the HSA Not all medical expenses paid out of the HSA

have to be charged against the deductible have to be charged against the deductible (e.g. prescription sunglasses)(e.g. prescription sunglasses)

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Estate Treatment of HSAsEstate Treatment of HSAs If married, the spouse is treated as the If married, the spouse is treated as the

ownerowner In other cases:In other cases:

The account will no longer be treated as an HSA The account will no longer be treated as an HSA upon the death of the individualupon the death of the individual

The account will become taxable to the recipient The account will become taxable to the recipient of it (including the estate of the individual)of it (including the estate of the individual)

Taxable amount will be reduced by any qualified Taxable amount will be reduced by any qualified medical expenses incurred by the deceased individual medical expenses incurred by the deceased individual before death and paid by the recipient of the HSAbefore death and paid by the recipient of the HSA

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

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Advantages of HSAsAdvantages of HSAs HSA accounts encourage savings for future HSA accounts encourage savings for future

medical expensesmedical expenses When employer-sponsored coverage is lost during When employer-sponsored coverage is lost during

periods of unemploymentperiods of unemployment COBRA continuation coverageCOBRA continuation coverage other coverageother coverage

Insurance coverage or medical expenses after Insurance coverage or medical expenses after retirement (before Medicare eligibility)retirement (before Medicare eligibility)

Long-term care expensesLong-term care expenses Out-of-pocket expenses for MedicareOut-of-pocket expenses for Medicare Non-covered services under future coverageNon-covered services under future coverage

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Advantages of HSAsAdvantages of HSAs Accounts are owned by the individual (not an Accounts are owned by the individual (not an

employer)employer) Individual decides:Individual decides:

How much to contributeHow much to contribute How much to use for medical expensesHow much to use for medical expenses Which medical expenses to pay from the accountWhich medical expenses to pay from the account Whether to pay for medical expenses from the Whether to pay for medical expenses from the

account or save the account for future useaccount or save the account for future use Which company will hold the accountWhich company will hold the account What type of investments to grow accountWhat type of investments to grow account

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Advantages of HSAsAdvantages of HSAs Accounts are completely portable, regardless of:Accounts are completely portable, regardless of:

Whether the individual is employed or notWhether the individual is employed or not Which employer the individual works forWhich employer the individual works for Which state an individual moves toWhich state an individual moves to Age or marital status changesAge or marital status changes Future medical coverageFuture medical coverage

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Advantages of HSAsAdvantages of HSAs No “use it or lose it rules” like Flexible Spending No “use it or lose it rules” like Flexible Spending

Arrangements (FSAs)Arrangements (FSAs) Unspent balances in accounts remain in the Unspent balances in accounts remain in the

account and can grow through investment account and can grow through investment earningsearnings

Encourages account holders to spend their Encourages account holders to spend their funds more wisely on their medical carefunds more wisely on their medical care

Encourages account holders to shop around Encourages account holders to shop around for the best value for the health care dollarsfor the best value for the health care dollars

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Advantages of HSAsAdvantages of HSAs Accounts can grow through investment earningsAccounts can grow through investment earnings

Many different investment options could be Many different investment options could be pursuedpursued

Individual chooses investment option that best Individual chooses investment option that best meets their needsmeets their needs

HDHP premiums should be cheaper than health HDHP premiums should be cheaper than health insurance with traditional deductiblesinsurance with traditional deductibles

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Who is choosing HSA?Who is choosing HSA?

Based on *AHIP’s March 2005 member surveyBased on *AHIP’s March 2005 member surveyHSA products appeal to all ages. In the smallHSA products appeal to all ages. In the smallemployer (2-50 employees) market:employer (2-50 employees) market: 43% of people choosing HDHPs with HSAs were age 40 and 43% of people choosing HDHPs with HSAs were age 40 and

over;over; 26% were ages 20-3926% were ages 20-39 22% were under age 2022% were under age 20

In addition, the same survey showed that in the small group In addition, the same survey showed that in the small group market,market,

27% of small groups offering HSA/HDHPs to employees had 27% of small groups offering HSA/HDHPs to employees had previously offered no coveragepreviously offered no coverage ..

*AHIP – American Health Insurance Plans*AHIP – American Health Insurance Plans

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What are people choosing in What are people choosing in their HAS?their HAS?

The average deductible for people The average deductible for people choosing HSA is:choosing HSA is:

- $2,856 (Individual) - $2,856 (Individual) andand - $5,425 (Family)- $5,425 (Family)

This suggest that people are trying This suggest that people are trying to maximize the tax advantage of to maximize the tax advantage of their contributions by choosing the their contributions by choosing the deductible closest to the maximum deductible closest to the maximum limit. limit.

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HSA IssuesHSA Issues

Payment for servicesPayment for services PreventionPrevention Rx drugsRx drugs Coordination with HRAs & FSAsCoordination with HRAs & FSAs Individual vs. Family deductiblesIndividual vs. Family deductibles SubstantiationSubstantiation