CHARTERED BENEFIT CONSULTANT
SYLLABUS
CLASSROOM
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A Summary of Major Improvements: MSA vs HSA
While just the fact that both employers and employees may contribute to the savings component of the HSA is an important enough change allowing for much “consumer-friendly” plan creations, other employer-related differences between the MSA and the HSA become equally important. It has been previously established that, while only the self-employed and employer-sponsored groups of fifty or fewer employees were eligible for the tax-qualified MSA, anyone and any sized group may now establish an HSA and be able to provide the tax preference. This bears more importance that initially meets the eye!
THE SELF-EMPLOYED
Because there can be almost as many definitions of “self-employed persons” as there are people who are self-employed, it was necessary for the IRS to go into
great detail to define a “self-employed” person. People who were self-employed were those who were gainfully employed in his or her own business and those who would be considered “1099 contractors” IF they were not eligible for coverage under group medical insurance plan. Therefore, such people as entrepreneurs and other very small business owners were in the same category as substitute teachers and agency visiting nurses. They were all considered SELF-EMPLOYED for purposes of judging occupational eligibility for the MSA.
THE “ELIGIBLE” EMPLOYER
While the creation of a myriad of definitions to describe someone MSA-eligible due to being self-employed was cumbersome enough, there were other “fringe” provisions about employers – other than merely the limitation by size – that caused a great deal of concern.
1. “Uncovered” Employee Eligibility:
Under the previous MSA law, an employee of an employer who did not sponsor a qualified high-deductible health plan was not eligible for the tax-qualified MSA. A basic technicality got in the way. They were neither self-employed – by any definition – nor were they the owner or officer of their place of employment, so they were not eligible, by law, for the tax-qualified MSA.
2. Maximum Employer Size:
While any employer could establish a tax-qualified MSA if they had fifty or fewer employees, they could only continue to provide the MSA plan until they reached 200 employees. Once that happened, they did not have to stop contributing to their employees’ savings components but they had to advise their employees that all further contributions would be taxable as income to them.
3. “Cafeteria Plan”-Eligibility:
Under the law, MSAs could have been offered aside a “cafeteria plan” but not as part of one. The HSA can be offered aside a cafeteria plan or as a part of one.
In fact, combining an HSA with an FSA and incorporating an HRA may be the ideal for many employer groups. (see HR1 and IRS Ruling 2004-2 in Appendix)
MSA – HSA Comparison at a Glance
Category MSA HSA
Anyone who has a qualified catastrophic medical plan as described by law
Minimum Deductible
1997 – Individual = $1,500
Family = $3,000
2004 – Individual = $1,000
Family = $2,000
Maximum Deductible
1997 – Individual = $2,200
Family = $4,400
No maximum deductible limits but the maximum contribution limits are:
2004 – Individual = $2,600
Family = $5,150
Maximum out-of-pocket
1997 - The greater of deductible + $1,000 or $5,000
2004 – Individual = $5,000 or
Family = $10,000
Including deductible
Indexed Annually?
Yes by CPI as of tax years after
1998.
Yes by CPI as of tax years after
2004.
Other coverages?
Ancillary (accident, dental, hospital indemnity, etc)
Same
Preventive Care
After satisfaction of deductible
Prior to satisfaction of deductible
Annual Contribution Limit
Individual – 65% of the dollar amount of plan deductible
Family - 75% of the dollar amount of plan deductible
Both individual and family – 100%
of the dollar amount of plan deductible not to exceed above amounts
Tax-deductible contributions to
Savings component?
Yes
Yes
Tax-free payment of medical expenses from savings component?
Yes
Yes
Tax-deferred accumulation of
Interest or gains?
Yes
Yes
Penalty for non-medical use
Income tax on money withdrawn plus 15% prior to age 65
Who may contribute to the savings component?
Self-employed or self-employed spouse for individual and either employer or employee (but not both) for group.
Self-employed or self-employed spouse for individual and either employer or employee or both for
Group
Are “Catch-up” payments allowed?
No
Yes. For accountholders 55 and older
Available thru FSA?
No. Had to be offered outside FSA
Yes
Updated IRS Rulings Regarding Health Savings Accounts
IRS Ruling 2004-23: “Safe Harbor” for Preventative Care Benefits.
It is commonly known that HSAs can only be established by eligible individuals, who must have coverage by a high deductible health plan (HDHP). Generally, an HDHP cannot provide benefits before the deductible is satisfied, but there is an exception for benefits for PREVENTATIVE CARE. The guidance issued under Ruling 2004-23 provides a safe harbor list of benefits that can be provided by an HDHP, generally clarifying that traditional preventive care benefits – such as annual physicals, immunizations and screening services – are preventive care for purposes of HSA’s, as well as routine prenatal and well-child care, tobacco cessation programs and obesity weight- loss programs. The Ruling also clarifies that preventive care generally does not include treatment of existing conditions. The “safe harbor” provides employers and plans with the flexibility in designing health benefits, allowing them to provide preventive care benefits that reduce health costs and encourage early identification of health conditions that may require medical attention. This Ruling did not provide further details or specifics on “preventative care” treatments. Section 220(c)(2)(B)(ii) of the Internal Revenue Code allowed a high deductible health plan for purposes of an Archer Medical Savings Account to provide preventive care without a deductible if required by State law. However, section 220 does not define preventive care for this purpose. Section 223(c)(2)(C), for purposes of an HSA, does not condition the exception for preventive care on State law requirements. State insurance laws often require health plans to provide certain health care without regard to a deductible or on terms no less favorable than other care provided by the health plan. The determination of whether health care that is required by State law to be provided by an HDHP without regard to a deductible is “preventive” for purposes of the exception for preventive care under section 223(c)(2)(C) will be based on the standards set forth in this notice and other guidance issued by the IRS, rather than on how that care is characterized by State law.
IRS Ruling 2004-25: Medical Expense Transitional Relief.
While prior guidance provided that HSA’s may only reimburse medical expenses incurred after the HSA is established, many individuals eligible to establish HSA’s have been unable to locate trustees or custodians. This Ruling enabled those individuals to open HSA’s. The Ruling provided that for 2004, an HSA established by an eligible individual on or before April 15, 2005 were allowed to reimburse expenses incurred on or after the later of January 1, 2004 or the first day of the first month that the individual became an eligible individual.
IRS Ruling 2004-38: Interaction with Prescription Benefits and Transitional Relief.
As a matter of HSA history, Prior Rulings noted that an eligible individual had to be covered by an HDHP and generally no other health plan that is not an HDHP. This Ruling clarified that individuals covered by a health plan that provided prescription drug benefits before the minimum annual deductible of an HDHP has been satisfied may not make contributions to an HSA. However, companion guidance also issued provided transition relief to those individuals covered by both an HDHP and by a separate health plan or rider that provided prescription drug benefits before the deductible of the HDHP was satisfied. Under the relief, such individuals are allowed to contribute to HSA’s before 2006.
IRS Notice 2004-50: HSA Clarifications
[This notice was issued in July 2004 as a further clarification of points already brought up in this text. Students who require further details on specific aspects of the HSA and HSA legislation under the HSA program than is or can be provided in this course should study this IRS Notice beginning on page 110 (Revision IV) or 111 (Revision V) in the Appendix of this text.]
The “Short Version” to New HSA Details
(From “HSA Rules of the Road”):
Time Limits for Reimbursement-
Ø Ø There is no time limit for when you can reimburse yourself for your health care expenses; you just need to keep legible receipts and records in case you do reimburse yourself, or in case you are audited.
Health Savings Account Eligibility-
Ø Ø You do not have to itemize your deductions on your federal income taxes to deduct your contributions to an HSA.
Health Savings Account Deposit Rules-
Ø Ø If you no longer have HSA qualified high deductible health plan, you cannot contribute to your Health Savings Account, but you can continue to spend or save the funds already deposited. Remember, any distributions for non qualified medical expenses will be a taxable event.
Ø Ø There is no tax code rule preventing a custodian, trustee, HSA administrator or insurer from making your Health Saving Account effective date back to the date you are first eligible (i.e., the first day of the first full month the HSA high deductible health plan is in effect). This is the date from which the maximum allowable contribution is calculated, and is the date when allowable withdrawals can begin.
The Non-Tax Qualified Accounts
Due to the restrictions of the tax-qualified MSA accounts, many insurance
professionals preferred marketing only “non-tax qualified” accounts. The line of distinction between what would be considered a “non-tax-qualified” medical savings account and certain versions of the medical reimbursement account were at the very least, blurry (see pages 22-23 of this course text). Since passage of HR1 allowing for vastly expanded HSAs, however, there are fewer reasons for anyone to acquire a non-qualified plan. There are no longer occupational or employer size restrictions and thus, about the only reasons one would be interested in setting up an non-tax qualified HSA would be: 1) they want to establish a higher than allowed deductible; 2) they want to set aside more money than the HSA law allow; or 2) the client is an individual and has medical impairments (see a discussion on page 69 of this text). Therefore, the client would be uninsurable and would need to stay with the current insurance carrier and raise the deductible to lower the premium. If that carrier does not offer an HSA-qualified insurance plan, the client could establish a non-qualified plan.
As a group medical plan, the “non-tax-qualified” HSA, as the name suggests, is NOT a qualified plan. Therefore, so long as the employees know that all money contributed to their accounts by their employer is taxable as income, there is no fear of having any authority disqualify their insurance plan.
Who may obtain a non-tax qualified HSA?
While it is true that an employer must comply with all the provisions in the HSA law in order to establish a Tax-Qualified HSA, employers who do not comply may establish a “non-qualified” plan that can resemble, in format, an actual HSA. Because of its "non-qualified" nature, there is no restriction on who may obtain this type of HSA. None of the requirements imposed under the tax-qualified HSA are imposed on the non-qualified plans thus there can be much greater flexibility. Specifically, some of the features that can be utilized under the non-qualified version are:
A wider choice of deductibles - Being unregulated by federal law means the employer may set up the program with any size deductible they choose. Whatever deductible offered by an insurance carrier that best suits the needs of the employer (usually, to save enough in premium dollars) can be utilized as “catastrophic wrap-around” policy.
Unlimited funding levels - Again, because there is no law to regulate these activities (except that the employer must contribute equally to the savings component of comparably covered employees), the funding “target” may be set at any level that works for the employer and is acceptable to the employees. Some employer/employee groups may choose a minimum target level relating to the size of the catastrophic plan’s deductible while others may choose to set the funding level relatively high to assure 100% medical expense coverage for between the savings component and the catastrophic medical insurance. Whatever is chosen, the most important aspect is that they are basically free to do it under the non-qualified version.
Can Individuals use Non-Qualified HSAs?
Yes. We have seen how non-qualified HSAs can benefit employer groups but it can benefit the individual as well. Many individuals are "borderline high medical risks". Many have had medical problems in the past that, while they are not currently incurring major expense, still "haunt" them when trying to obtain more affordable medical insurance with the same or similar deductibles. Despite any recent legislation, these individuals are usually locked into remaining with their current insurance carrier. The non-qualified HSA can help mitigate the high cost of being locked into a particular insurance carrier's coverage by raising the same plan’s deductible.
Example: Mr Smith is a 59 year-old man in suburban Chicago who had a heart attack six years ago. He is currently paying $530 per month for a "traditional" $500 deductible health plan. While he has had no repeat episodes of his prior condition and is considered in good health by his physician, he is unable to acquire a less expensive insurance plan from another carrier because insurance underwriters still consider him a risk for another heart attack. He is not qualified for the tax-preferenced HSA but he can still reduce his health insurance cost. Since most insurance carriers offer deductibles higher than $500 in their product portfolio, he can request a switch to a higher deductible and will normally not need to submit to any additional underwriting (because the insurance carrier will, in effect, reduce its risk by transferring the man to a higher deductible). The premium for a $2,500 deductible plan is $286 per month - saving him $244 monthly or $2,928 per year. The savings can then be placed in a non-qualified HSA (earning taxable interest) and used to offset any increased risk should he become ill. (Currently, $2,500 is an HSA-qualified deductible but the illustration assumes that his specific plan is not designed to change the deductible in accordance with any indexing provision.)
The actual breakdown would be as follows:
Current Plan Coverage: $500 deductible.
80% coverage of the next
$5,000, then 100% to $2
million.
Premium Cost: $6,360/ year
Potential Exposure: $1,500/year
Premium Savings: $0
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HSA-type Coverage: $2,500 deductible
80% coverage of the next
$5,000, then 100% to $2
million.
Premium Cost: $3,432/year
Potential Exposure: $3,500/year
Premium Savings: $2,928/year
Risk if Savings placed
in HSA $ 572 (less any accumulated interest or gains)
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In addition, whatever was not used to pay for medical expenses could be carried over into the next year to reduce the overall cash outlay for medical care.
“Obligatory Expense” versus “Potential Expense”
Since the money contributed to a savings account in this example is not tax-qualified, on the surface, it would seem that there would be no advantage to switching to what could be considered a non-qualified HSA. However, the practice of using a high deductible health insurance plan and banking the difference in premiums has been used by some for many years before the introduction of high-deductible tax-qualified plans as a way to reduce their obligatory health care outlay. The premium cost is a known factor while medical expense, although likely for many with medical impairments, is a potential expense, incurred only if needed. Thousands if not millions of people are “stuck” with the health insurance plan they have because of past medical impairments. But these same people are maintaining their medical problems or are healthy enough that they may not always incur hefty medical expense. The savings over a period of time could be huge and, if and when they would need extensive and costly medical care, they would have more money in their savings account to cover that eventuality. In addition, the knowledge that one must use their own funds to cover non-emergency medical expense should lead to receiving the same or better care at a lower cost simply because now, the insured is paying more attention to the type and cost of care they receive, than they ever had under a traditional insurance plan. Unfortunately, with the seemingly never ending spiraling cost of traditional health insurance, the “medically impaired” will very soon have no choice whatsoever but to go to the higher deductible regardless of their health or potential need for care. That being the case, why wouldn’t they choose an HSA-type approach?
WHAT CRITICS SAID ABOUT MSAs AND CONTINUE TO SAY ABOUT HSAs
Despite the apparent benefit of the tax-qualified and non-qualified MSAs and HSAs, there are many who opposed extending or expanding these programs for a variety of reasons. It is important to be exposed to both sides of the argument for a more thorough comprehension of the subject matter.
"These plans are only for the healthy".
While it is true that people who remain healthy stand to benefit by accumulating large sums of money over a period of years, clearly, the alternative benefit plans would benefit more people than they would hurt.
Example: Mr. Jones has a chronic illness for which in a typical year he receives about $10,000 in medical care. His current medical plan carries a $500 annual deductible after which he is required to pay 20% of the next $5,000 before his medical plan pays 100%. In a typical year, his total out-of-pocket expense is $1,500. If Mr. Jones switches to a tax-qualified HSA with the maximum allowable annual deductible of $2,450 and 100% coverage thereafter and he or his employer would contribute up to $1,592.50 annually to
be used to cover medical expenses. With this type of coverage, Mr. Jones would reduce
his out-of-pocket expense to $857.50 or just over one-half of what he had been paying
with his traditional low deductible plan. In addition, Mr Jones would have the option of seeking medical care from the provider of his choice and obtaining medical care that may otherwise not be eligible for coverage under the traditional coverage he had previously.
"These plans will destroy the insurance pool and insurance premiums will increase".
The theory behind this statement is that only those who can medically qualify for HSA catastrophic medical insurance will be able to switch to an HSA thus leaving the medically impaired to languish in insurance pools who have lost the “good risk” money that offsets “bad risk” money. As pointed out earlier, the rapidly increasing premium cost of more traditional medical insurance with lower deductibles or doctor office co-pays and no up front deductible have almost rendered this a moot argument. Many employers and individuals are finding that the only really affordable insurance coverage is high-deductible insurance. Deductibles even higher than those allowed by HSA legislation have been available to the public for several years. Should the people who have been covered by $2,500, $5,000, $7,500 and $10,000 deductibles be prohibited from carrying such high deductibles despite the premium dollars they save? Have the people who have been covered by those higher deductibles for all these years destroyed the insurance pool?
"These plans are simply a "tax dodge" for the wealthy"
Under the initial tax-qualified MSA legislation, the maximum amount anyone could contribute and deduct per year was 65%, if covered as an individual, or 75% of the dollar amount of the catastrophic health plan deductible if covered as a family. Even with the changes brought forth in the HSA legislation, the most anyone could contribute (in 2003) to the savings component and write off their taxes would be $4,500. The deductible size, hence the contribution limits, are correlated with the Consumer Price Index which means the size of the contribution will likely increase each year. Despite that being the case, it will take years, if ever, before the contribution and tax deductibility level become a rational concern to anyone as a “tax dodge”, if ever. People who are "wealthy" certainly could find greater "tax dodges" if they really tried.
Part VI – Summing up Consumer-Driven Health Care Insurance
Having now studied four versions of “Alternative Benefit” or “consumer-driven” insurance programs, let us compare them to the more commonly known and understood Flexible Spending Account and to each other based on certain criteria:
FEATURE
FSA
MERP
HRA
TAX-QUALIFIED HSA
NON-TAX-QUALIFIED
HAS
Description
Account funded with pre-tax dollars normally through payroll deduction
Pre-arranged and normally
unfunded liability set by the employer
Pre-arranged and funded or unfunded liability set by the employer
Funded savings account with tax-deductible dollars in association with statutory insurance plan
After-tax
funded account with no statutory limits
Who is eligible?
Employees
of any group with 2 + employees
Employees
of any group with 2 + employees
Employees
of any group with 2 + employees
Individuals and employee groups of any size
Any individual or employees of any group with 2 + employees
Insurance plan re-quirements
No specific plan or deductible
requirements
No specific plan or deductible requirements
No specific plan or deductible requirements
Statutory deductible and out-of-pocket limits
No specific plan or deductible re-quirements
Funding re- quirements
Statutory limits on
maximum funding
100% pre-set benefit paid when needed
per plan document
100% pre-set benefit paid when needed per plan document
0% -100% benefit must be funded each year with cash only
100% pre-set benefit
must be paid when needed per employer/employee agreement
FEATURE
FSA
MERP
HRA
TAX-QUALIFIED HSA
NON-TAX-QUALIFIED
HAS
Who can contribute?
Either but normally only the employee
Employer only when actual claims incurred
Employer only when actual claims incurred
Either employer or employee or both
Either employer, employee or both
How much can be deposited?
Up to the statutory limit or up to a lesser amount as set by the employer each year.
Up to the pre-set liability limits by the employer when claims are incurred
Not more than 100% of the dollar amount of the deductible annually or $2600 for individuals and $5150 for families **
No limitations
When are funds available for care?
Only during the year funds were deposited in the account*
Funds for the entire year are available immediately but only upon claims incurred
And only while employed by the employer
When deposited
When deposited
Tax status of deposits:
Restrictions on use:
Medical care only
Medical care only
Medical care only. Tax plus 10% penalty for other uses.
FEATURE
FSA
MERP
HRA
TAX-QUALIFIED HSA
NON-TAX-QUALIFIED
HAS
Rollover restrictions:
Not applicable.
Rollovers not available
Employer determines roll-over percent, if any
May not be used outside of em-ployment or COBRA
May not be rolled over to an IRA*
May be rolled over to an IRA
What happens to money not used for medical care?
Account balances reverted to employer at end of year
Employer decides how much, if any, may be rolled over.
Rolls over into next calendar year
Remains in plan for medical care use or for retirement after age 65
No restrictions
Portability (Who owns the funds
?)
Employer
Employer. Terminated employees can be exempted from con-versions.
Employer owns the funds not used while employee is employed or on COBRA
Employee as soon as deposited
Employee as soon as deposited
Advantages:
Employee:
Reduced taxable earnings.
Employer-
Reduced FICA & Workers’ Comp. Premiums.
Covers medical expenses under plan deductible and over “URC”.
Reduced premiums for employer with high deductible
Covers medical expenses under plan deductible and over “URC”.
Reduced premiums for employer with high deductible plan.
Tax-qualified
Flexibility.
Few restrictions
Disadvantages:
Must exhaust account or funds revert to employer
Funds not portable
Statutory restrictions
No tax-deductibility
* Persons age 55 and older may make “catch-up” contributions in addition to normal annual contributions in accordance with a specific schedule.
IN CONCLUSION – KEY POINTS TO REMEMBER
Consumer-Driven Health Insurance Plans:
1. 1. Controls cost and induces personal responsibility
People covered by any and all of the plans studied tend to become good health care consumers thus forcing the health care industry to “compete” for their care by lowering the cost of tests and procedures.
2. 2. Offers freedom of choice
Whether using the MERP, HRA, or the HSA, tax-qualified and non-qualified, alternative benefit plans studied provides the insured with more flexibility in the choice of health care providers and care options.
3. 3. Promotes savings and can create wealth (HSA)
Monies carried over and unused can be used for long term care expenses and general retirement after age 65.
4. 4. Is portable and can be carried by the account holder from employer to employer or even out of the work force (HSA)
Tends to reduce the concern about being eligible for coverage in the future.
5. 5. Builds on our current health care system
The American health care system arguably derives its strength through utilizing the private market system. Coverage through any type of plan that provides an incentive to the insured patient to become a good consumer accentuates the private market place.
Also…
6. Self-Funded Plans are generally exempt from most state insurance mandates
7. 7. When HRAs and HSAs are offered in tandem, HSAs MUST be positioned first!
8. In contrast to more traditional group health insurance rules, “classes” of employees are not allowed when using the HSA (Example: An agent may not differentiate between “Executives, Managerial and ‘all others’” when setting up HSA deductibles.)
The conclusion of whether alternative benefit plans are beneficial or not lies with you, the student. However, it has been demonstrated that the use of these plans are a relatively simple way to make a dramatic and positive change in our health care system and the direction it is headed.