Health Savings Accounts (HSAs)
May 2004
1
“Nomenclature Leveling”-Consultant 2004
• FSA (Flexible Spending Arrangement) –
– Employer/salary reduction-funded reimbursement account
– Claims adjudication required
– Use-it-or-lose-it rule applies (no carryover)
– Uniform coverage requirement
• HRA (Health Reimbursement Arrangement) –
– IRS Rev. Rul. 2002-41, IRS Notice 2002-45
– Employer-funded account with carryover
– No uniform coverage requirement
• HSA (Health Savings Account) –
– Section 223 of Tax Code
– Tax-advantaged IRA-like trust with carryover
– Employer/salary reduction and/or employee funded
– No uniform coverage requirement
2
Origin of HSAs
• Health Savings Accounts (HSAs) originate from the
Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the “Medicare Bill”)
– Medicare Bill creates new Code Section 223
• Code Sec. 223 sets forth rules for HSA
– Medicare Bill left a number of outstanding issues
regarding HSA implementation and
administration
– IRS/Treasury guidance fills in many gaps
– DOL/EBSA guidance also fills in gaps
3
IRS/Treasury Guidance
• Currently two rounds of guidance from Treasury/IRS
– First Round
• Notice 2004-2
– Clarified IRS position on a number of basic issues
– Second Round was issued on March 30, 2004
• Notice 2004-23 - Safe harbor definition of preventive care
• Notice 2004-25 - Transition relief allowing expenses to be eligible for
2004 HSAs established prior to April 16, 2005
• Rev. Rul. 2004-38 – Addresses Rx, but indicates that other non-HDHP
can only provide permitted coverage/insurance or items above the
deductible
• Rev. Proc. 2004-22-Transition relief from Rev. Rul. 2004-38 until 2006 for
separate prescription drug plan or rider
• Additional guidance expected later in 2004
– “Stacking” HSA with FSA or HRA
– Preventive Care clarification (EAP and Disease Management)
4 – Cafeteria Plan Issues
Effective Date for HSAs
• HSAs effective January 1, 2004
• Notice 2004-25 (March 2004) provides transition
relief for individuals otherwise eligible to establish
HSAs in 2004
– An individual may establish an HSA as late as April 15,
2005 that is retroactively effective January 1, 2004 or, if
later, the first day of the month in 2004 that the
individual became eligible to establish an HSA.
– Allows individuals to receive tax-free reimbursement for
expenses incurred prior to date HSA actually
established.
5
Key Elements of HSAs
(Key terms in quotes)
• HSAs established by or on behalf of “Eligible Individuals”
– Individual must, among other things, have qualifying high deductible
health plan (“HDHP”) coverage and generally no other non-HDHP
coverage
• Recent Treasury guidance addresses the permissible scope of
other non-HDHP coverage
• HSA funds must be held in “Qualified Trust” maintained by “Qualified
Trustee”
• Contributions to HSA are tax free/deductible so long as they are for
“Eligible Individual” and do not exceed sum of the “Monthly Limits” for
that tax year.
• Distributions are tax free if for “Qualified Medical Expenses”
6
What is an Eligible Individual?
• “Eligible Individual” is any individual who satisfies all four of the
following conditions on the first day of a month (the determination is
monthly)
– Condition #1: The individual is covered under a qualifying “HDHP”
• Can be employer’s or spouse’s employer’s group health plan
• Individual policy may qualify as well
– Condition #2: The individual is not covered under another nonHDHP that covers the same benefits as the HDHP except for
“Permitted Coverage” and/or “Permitted Insurance”
– Condition #3: The individual cannot be claimed by anyone else as a
dependent on that person’s tax return
– Condition #4: The individual is not entitled to Medicare
• Due to Age, ESRD, or Disability
• “Eligibility” vs. “Entitled”
7
What is HDHP coverage?
• An HDHP is any health plan (either insured or self-insured) that
satisfies the following:
• Annual deductible satisfies statutory minimum:
– At least $1,000 for single coverage and
– At least $2,000 for family coverage
• No “embedded” deductibles for individual family members
below statutory minimum for family coverage
• HDHP does not cover anything below the deductible except for
Preventive Care (preventive care not defined by the statute)
– Some states mandate insurance coverage subject only to a co-pay or low deductible
(e.g. prescription drug coverage?). Will plans subject to such insurance mandates
qualify as a HDHP? Not likely.
8
• Out of pocket expense limits (including the deductible) do not exceed
the following:
• $5000 for single coverage/ $10,000 for family coverage
• What is affect of this rule on lifetime and annual maximums?
Caps on Benefits?
• Out of network disregarded.
What is Preventive Care?
• Code Section 223 does not specifically define “preventive care”
• Notice 2004-23 provides safe harbor definition of “preventive care”
– Preventive care includes, but is not limited to,
• Periodic health evaluations and routine pre-natal and well-child
care
• Child and Adult immunizations
• Obesity/Weight loss and Tobacco cessation programs
• Screening services (specific list of services provided)
– Preventive care does not include services that treat an existing
condition
– Comments requested by Treasury regarding
• Employee assistance plans and mental health programs
• Prescription drugs
• Disease management/“coaching”
9
Examples of HDHP Coverage
• Example 1:
– $2000 single and $3,000 family deductible for in-network.
– $5000/$7000 deductible for out of network expenses.
– Maximum Out of Pocket (including deductibles, co-insurance,
etc.) for in-network claims for the year is $5,000 for single and
$10,000 for family.
– Maximum out of pocket expense for out of network claims is
$10,000 for single and 12,000 for family.
• Is this an HDHP?
– Yes!!!
– Although the out of pocket maximum for out of network
expenses exceeds the statutory limits, out of network limits are
disregarded. The in-network deductible and out of pocket limits
satisfy the statutory requirements.
10
Examples of HDHP Coverage
• Example 2:
– $500 single and $1000 family deductible for in-network.
– $1000/$2000 deductible for out of network expenses.
– Maximum Out of Pocket (including deductibles, co-insurance,
etc.) for in-network claims for the year is $5,000 for single and
$12,000 for family.
– Maximum out of pocket expense for out of network claims is
$10,000 for single and 15,000 for family.
• Is this an HDHP?
– NO!!!
– The in-network deductible and out of pocket limits DO NOT
satisfy the statutory requirements.
11
Examples of HDHP Coverage
• Example #3:
– $2000 deductible for single coverage
– $3000 deductible for family coverage; however, plan will
begin covering any individual family member at 80/20
co-insurance once individual family member incurs
$1,500 in expenses towards the deductible.
– Is this an HDHP?
• NO!!!!
• This plan has “embedded” deductible for family coverage
which is below the statutory minimum for family coverage.
• What if “embedded” deductible was $2,000? Then this would
be qualifying HDHP.
12
Examples of HDHP Coverage
• Example #4:
– $2000 deductible for single coverage/$4000 for family
coverage
– Employer pays for annual adult and well-child physical
including any x-rays and blood tests conducted during
physical (physical and diagnostic tests not subject to
deductible)
– Employer pays for 5 visits to mental health practitioner
upon referral from counselor at mental health hotline
(visits not subject to deductible)
– Is this a HDHP?
13
• Screening visits clearly within preventive care safe harbor.
• Not clear yet whether mental health visits fall under safe
harbor. Treasury requests comments.
Can an individual have other non-high
deductible coverage?
• Statutory rule:
– Individual cannot have other non-high deductible
health coverage that covers the same benefits as the
HDHP except for “permitted insurance” or
“permitted coverage”
• HSA rules impact coverage under other nonHDHPs such as Health FSA and/or HRA
14
What is Permitted Insurance?
• “Permitted Insurance” is:
– Insurance where substantially all of the coverage relates
to one of the following, even if it covers benefits also
provided by the HDHP
• Workers’ compensation liability
• Tort liabilities
• Property/landowner liabilities
– Insurance for a specified disease or illness
• e.g., Cancer coverage
– Insurance paying a fixed amount per day of
hospitalization
• e.g., Hospital Indemnity
15
What is Permitted Coverage?
• “Permitted coverage” is coverage for any of the
following:
–
–
–
–
Dental
Vision
Long term care
Accidents
– Disability
• An example: automobile PIP coverage or dental
reimbursement plan
16
Can other Non-HDHP cover services or
treatments excluded by HDHP?
• Rev. Ruling 2004-38 indicates that other coverage is
limited to:
– Permitted coverage or Permitted Insurance
– Services or treatments above the statutory deductible
• A plan that covers benefits that do not constitute
permitted coverage or insurance but are not otherwise
covered by the HDHP is STILL an impermissible
“other” Non-HDHP plan.
– 2004-38 renders useless the phrase “that covers the
same benefits covered by the HDHP”
17
Can other Non-HDHP cover services or
treatments excluded by HDHP?
• Rev. Proc. 2004-22 provides transition relief for separate
prescription drug plan or “rider” until January 1, 2006
– Prescription drug benefits can be provided by a separate plan or
rider below the deductible until January 1, 2006
• Is a self-funded PBM arrangement a “rider” ?
– Transition relief limited to prescription drug carve out plans
– Transition rule presumably does not apply to OTC drugs
• Health FSA that covers OTC drugs would presumably be
impermissible “other” coverage, EVEN DURING THE
TRANSITION PERIOD.
18
Impact of HSA on HRAs and Health FSAs
•
What role can other coverage such as Health FSAs and HRAs play with HSAs?
– “Vertical Stacking” covers services or treatments otherwise covered by the HDHP
but for a monetary limitation (e.g., deductible, Co-Pay, etc).
– “Horizontal Stacking” covers services or treatments not covered by the HDHP
•
“Vertical stacking” below the deductible is not permitted
– Other health coverage, such as Health FSA or HRA, cannot cover expenses that would
otherwise be covered under the HDHP but for the deductible
– Only the HSA can cover expenses that would otherwise be covered under the HDHP
but for the deductible (except with respect to permitted coverage/insurance and
preventive care).
•
“Vertical Stacking” above the deductible is permitted
•
“Horizontal stacking” is permitted to a limited extent
– Other non-HDHP coverage is limited to “permitted coverage” or permitted insurance
19
Example of Vertical Stacking
• Example #1:
• Employee has HRA, HSA and HDHP
• The HDHP imposes 80/20 coinsurance for all hospitalization after the
deductible has been satisfied.
• The HRA covers both the amounts below the deductible and also the 20%
co-pay for all hospitalization after the deductible has been satisfied.
• Is the HRA permissible “other” coverage?
– No!!!
– HRA covers expenses that would be covered by the HDHP but for the
deductible
– HRA coverage goes beyond permitted coverage/insurance
20
Example of Vertical Stacking
• Example #2:
• Employee participates in ABC Health Plan and an HRA. The ABC
Health Plan is a qualifying HDHP. Employee also has an HSA.
• The HDHP imposes 80/20 coinsurance for all hospitalization after the
deductible has been satisfied within Reasonable and Customary limits
(“R&C”). Employee responsible for 20% and amounts over R&C.
• The HRA covers the 20% for all hospitalization as well as amounts
exceeding R&C– but only after the HDHP’s deductible has been
satisfied.
• Is HRA in this example permissible “other” coverage?
– Yes!!!!
– HRA is basically a HDHP itself because it does not cover any
expenses until the deductible of the qualifying HDHP has been
satisfied.
21
Example of Horizontal Stacking
• Example #1:
• Employee participates in ABC Health Plan (a HDHP)
and an HSA.
• Employee also has an FSA that only reimburses
vision/dental expenses.
• Is the FSA permissible “other” coverage?
– Yes!!!!
– Even though the FSA does not provide coverage subject
to a deductible, its coverage is limited to “permissible
coverage.”
22
Example of Horizontal Stacking
• Example #2:
• Employee participates in ABC Health Plan (a HDHP) and an
HSA. The HDHP does not cover prescription drug expenses.
• Employee also has a separate prescription drug plan that provides
prescription drug benefits subject to only a $5/10 co-pay.
• Is the prescription drug plan permissible “other” coverage?
– Yes, but only until January 1, 2006.
– This fits within the transition relief provided by Rev. Procedure
2004-22
23
Example of Horizontal Stacking
• Example #3:
• Employee participates in ABC Health Plan (a HDHP)
and an HSA. The HDHP does not cover lasik or over
the counter expenses.
• Employee participates in an FSA that pays for dental
and vision expenses as well as any expenses not covered
by the HDHP such as OTC and lasik.
• Is the FSA permissible “other” coverage?
– NO!!!
– The FSA provides more than permissible coverage
and/or insurance.
24
Implementation of HSAs
• HSA can be established by the Eligible Individual or by Employer or
Family Member on behalf of Eligible Individual.
– The account is the “Eligible Individual’s” account regardless of who
sets it up
– Account is COMPLETELY PORTABLE
• Must be a “Qualifying Trust” maintained by a “Qualifying Trustee”
• Generally, HSAs only effective for expenses incurred after HSA
established
– Notice 2004-25 provides additional time for Eligible Individuals to
establish HSAs for 2004
– HSA must be established by April 15, 2005
• Qualified Trustee may, but is not required to, require certification that the
individual is an “Eligible Individual”
25
Documentation Required to Implement HSA
• HSA Documents
– Ancillary Trust/Custodial Account Documents
– Summary/Communication Materials
• HDHP Coverage Documents
– Contract/Plan/SPD
– DOI Filing Issues
• Financial/Investment Documents
• ERISA documents (if ERISA applies)
– Plan document
– SPD
26
What is a “Qualified Trust”?
•
•
•
•
•
Created in the United States
Only receives cash (except Rollover Contributions)
The Trustee is a “Qualified Trustee”
No part of the trust assets is invested in life insurance contracts
The assets of the trust are not commingled with other property
except in a common trust fund or common investment fund
• The assets of the account are non-forfeitable
– Does this requirement prohibit restrictions on the HSA account by
contributing employers?
• Adjudication/substantiation not required by IRS
• Can employer contractually require adjudication/substantiation?
– IRS informally indicated that purpose of distribution is between “IRS, the
taxpayor, and God”
27
What is a Qualified Trustee?
• Automatic
– Bank
– Life Insurance Company
– Any person or entity who is already approved by the IRS
to be an IRA trustee (see Announcement 2003-54 for a
list of non-bank entities already approved to be an IRA
trustee)
• By written application
– Any other person who obtains approval from the IRS to
become a non-bank trustee in accordance with IRA
non-bank trustee rules (see Treas. Reg. 1.408-2(e))
28
How do you become a qualified trustee?
• Generally, you must provide written application showing
each of the following (see Treas. Reg. 1.408-2(e))
– The ability to act within certain rules of fiduciary conduct,
including a showing of continuity, established location,
sufficient fiduciary experience and financial responsibility
– The ability to account for the interest of a large number of
individuals (e.g., accounting for the interests of a large number
of shareholders in a regulated investment company)
– The ability to handle funds
– Satisfaction of other fiduciary rules such as employing legal
counsel, conducting audits, and having adequate net worth
29
Contributions-Generally
•
•
•
•
•
Employer, employee and employee’s family members may contribute
“Rollover Contributions” are permissible
– Contributions from another HSA or MSA (but not an HRA or FSA)
– How do you transition from an HRA to an HSA?
Employer contributions are tax free if:
– Made on behalf of an “Eligible Individual” and
– Do not exceed the “Monthly Limits”
Does employer have responsibility to verify HSA eligibility?
Employer contributions are deductible by the Employer in the year in which paid
to HSA
– Compare to treatment of contributions under unfunded HRA or Health FSA
– Compare to treatment of contributions to VEBA
•
30
Employer contributions are subject to “Comparability Rule”
Employer Contributions: Comparability Rule
• What is the “Comparability Rule”?
– If an employer makes contributions to an individual’s HSA, it must
make contributions for all “comparable employees” with HDHP and
the contributions must be
• The same amount or
• The same percentage of the HDHP deductible covering the
employee
– “Comparable employees” are employees with the same level of
HDHP coverage (e.g., single/family) who also have HSAs
• Part-time employees (less than 30 hours) are measured separately
– IRS guidance and legislative history suggests that rule does not apply
to contributions made under a cafeteria plan
• Pre-tax Contributions
• Matching Employer Contributions????
– Failure to comply results in excise tax
31
Employer Contributions: Comparability Rule
• Example #1 of Comparability Rule:
– Employer sponsors high deductible health plan with 2 high
deductible options: a) $1000 or b) $2000
– The Employer contributes 50% of the deductible to an HSA of
each employee who chooses a high deductible health plan option.
– Employee A chooses the $1000 high deductible option and
receives a $500 HSA contribution; Employee B chooses $2000 high
deductible option and receives a $1000 HSA contribution.
– Is this a violation of comparability rule?
• No!!!!
• Employee A and B receive the same percentage of the deductible.
32
Employer Contributions: Comparability Rule
• Example #2 of Comparability Rule:
– Employer sponsors high deductible health plan for fulltime and part-time employees
– The Employer contributes $1000 to HSAs of each fulltime employee who elects coverage under the high
deductible health plan. Employer does not contribute
to HSAs of part-time employees who choose high
deductible health coverage.
– Is this a violation of comparability rule?
• No!!!!
• Part-time employees treated separately from full-time
employees.
33
Employer Contributions: Comparability Rule
• Example #3 of Comparability Rule:
– Employer sponsors high deductible health plan
– Employees who choose high deductible health plan may also
contribute to an HSA with pre-tax salary reductions under cafeteria
plan.
– Employer will match each employee’s salary reductions up to $500.
– Employee A salary reduces $300 (so employer matches $300) and
Employee B salary reduces $500 (so employer matches $500)
– Is this a violation of comparability rule?
• Not yet clear!!!
• Presumably, the matching employer contributions are made
through the cafeteria plan so comparability rule does not apply.
• Additional guidance is needed.
34
Employee Contributions
• Employee contributions are deductible (above the line)
if:
– Made by an Eligible Individual (or by the family member of an
Eligible Individual) and
– Do not exceed the “Monthly Limits”
• Employees may contribute on a pre-tax basis under the
Employer’s cafeteria plan
– HDHP need not be sponsored by employer
• HSA is portable
• Does employer need certification that individual is an “Eligible
Individual” to ensure qualified benefit status?
– Pre-tax contributions are “employer contributions” for IRS purposes
35
What are the “monthly limits”?
• In order for contributions to be deductible and/or tax free, the
aggregate annual contributions for the year from all sources cannot
exceed the sum of the “Monthly Limits” for months during the year
in which the individual is an Eligible Individual
• The “Monthly Limit” is 1/12 of the lesser of the following:
– Single coverage -- the annual deductible or $2600 (for 2004)
• Basically, 1/12 of the annual deductible or $216.67 per month
– Family coverage -- the annual deductible or $5150 (for 2004)
• Basically, 1/12 of the annual deductible or $429.17 per month
• Monthly limits are adjusted for inflation.
• The Monthly limit is reduced by:
– Employer contributions made to the HSA during the year and
– Any MSA contributions made during the year
36
Special Rule for those Age 55 or Older
• Special Rule for those age 55 or older
– The aggregate annual contribution limit is increased for
those between age 55 and 65 by the “Additional
Contribution Amount”
– The Annual Additional Contribution Amount is as
follows:
37
• 2004
$500
• 2005
• 2006
$600
$700
• 2007
• 2008
$800
$900
• 2009
$1000
When must contributions be made?
• Contributions do not have to be made monthlythey may be made at any time prior to April 15
following the end of the tax year.
– Some employers may wish to make an annual
contribution at beginning of tax year
• Creates Health FSA like benefit
• If individual ceases to be an “Eligible Individual”
during any month of the tax year, contributions
attributable to such month and subsequent month
are “Excess Contributions”
38
What are Excess Contributions?
• Employer or Employee Contributions that exceed the
Monthly Limit or are made for an ineligible individual
• Excess contributions are subject to a 6% excise tax unless
they are returned to the employee prior to April 15 following
the year in which they were contributed
– Employer contributions are included in gross income
• Should not be subject to income and employment tax withholding
unless there was reason to know when made that the contribution
would not be excluded from income
– Earnings from excess contributions are included in gross income
– Distribution itself is NOT subject to excise tax for non-qualified
medical expenses
39
Example of Tax Rules for Contributions
•
Employee A participates in Employer’s HDHP with $1200 annual deductible. On January 1,
2005 employer contributes $1200 into Employee A’s HSA. Employee terminates employment
on June 15, 2005 and does not elect COBRA or other qualifying HDHP coverage.
•
In April of 2006, Employee A is filling out his 2005 tax return and wants to know how much
of the Employer’s contributions can be excluded from income?
•
Step #1: Determine “monthly limit” for 2004
– 1/12 of lesser of annual deductible or $2600
– In this case, monthly limit is 1/12 of $1200 or $100
•
Step #2: Determine # of months an “Eligible Individual”
– 6 months (January through June. Still count June even though he terminated
employment on June 15, 2005)
•
Step #3: Multiply # of months an “eligible Individual” (6) by “Monthly Limit” ($100)
•
Total amount that may be excluded from income: $600 (6 x $100)
•
The remainder, $600, will be included in income and subject to a 6% excise tax unless
returned to the individual before the due date of the individual’s tax return.
40
Special Rule for Family Coverage
• Special Rule for Family coverage
– If either spouse has family coverage, they are both treated as
having the plan with family coverage
– If both have family coverage under different plans, then they
are treated as being covered under the one with the lowest
annual deductible
• If one spouse’s annual deductible does not satisfy the statutory
limits, neither can have an HSA
– The monthly limits are split evenly (or otherwise by
agreement)
41
Contributions
• Example re: Special Family Rule
– Employee has single coverage under her employer’s plan that has a
$500 deductible.
– Spouse has family coverage under his employer’s plan that covers kids
and employee and has a high deductible of $3,000.
• Can Employee have an HSA? No
– If so, how much can employee contribute to her HSA?
• $0
• Employee’s expenses can still be reimbursed from spouse’s HSA
so long as employee is “spouse” as defined by federal law
• Can Spouse have an HSA? Yes
– If so, how much can spouse contribute to his HSA?
• Up to $3000 (the lesser of the annual deductible or $5150)
42
Distributions
•
•
Distributions from HSA are tax free if for “Qualified Medical Expenses”
What are “Qualified Medical Expenses”
– Any Code Section 213(d) expense (with a few exceptions) for the individual or
the individual’s “Tax Dependents”
• Includes OTC drugs
• Excludes premiums for health coverage except in the following
situations:
–
–
–
–
43
COBRA
Long term care premiums (issue under cafeteria plans)
Health coverage while receiving unemployment compensation
Health coverage received by a Medicare Eligible individual (only due to age)
other than a Medicare Supplemental Policy
• e.g., retiree coverage (whether HDHP or not)
• Does it also include Medicare premiums? IRS Guidance confirms it
includes Medicare Part A and B premiums
Distributions
• What are “Tax Dependents”?
– Defined by Code Section 152
– Includes
• Legal spouse of opposite sex
– Domestic Partners cannot be a “Spouse” regardless of status under
state law
• Any child or other close relative for whom you provide over
half of their support
• Anybody else who lives with you and for whom you provide
over half of their support
– Could include Domestic Partners if support/residence requirement
satisfied
44
Distributions
•
What if distributions are not for “Qualified Medical Expenses”
– Distributions included in gross income
– Subject to 10% excise tax except in the following situations:
• Upon attaining the age of 65 (Medicare eligibility age)
• Becoming “Disabled”
– Disabled means unable to engage in any substantial gainful activity
by reason of a physical or mental impairment which will result in
death or be indefinite in duration
• Upon death of account holder
– May transfer to spouse tax free (spouse becomes account holder)
– If beneficiary is not spouse, may be includible in gross income of
non-spouse beneficiary
• Rollover contribution-redeposit of otherwise taxable
distribution within 60 days (Once every 12 months)
45
Distributions
• Adjudication/Substantiation
– Who determines whether the distribution is taxable or not?
• The responsibility is on the individual to make that determination.
– Individuals should keep receipts in case audited by the IRS.
• The trustee is not required to make that determination.
– Can the trustee require substantiation before making a
distribution? Can trustee assist the individual in making the
determination whether an expense is a 213(d) medical
expense or not?
– Trustee is required to send 1099 to individual including all
distributions from the HSA during the year. Individual
reports taxable amounts.
• Issue re: delayed distributions
46
ERISA Applicability
• Prior to April 7, 2004, no guidance issued by DOL on either MSAs
or HSAs
• Original view was that HSAs would be treated like IRA’s
• IRAs that satisfy the following four “Safe Harbor” conditions are
not subject to ERISA:
– No contributions are made by the employer
• Pre-tax contributions are employee contributions for DOL purposes
– Participation is completely voluntary
– The employer does not endorse the program (but can publicize
the program and collect contributions via payroll deduction)
– The employer receives no consideration other than reasonable
compensation for services actually rendered (Labor Reg. 2510.32(d))
• Same requirements apply to voluntary group insurance
47
ERISA Applicability
• DOL issued Field Assistance Bulletin (“FAB”) 2004-1:
– Establishes “safe harbor”
– Safe harbor similar to IRA and voluntary group
insurance rules
• DOL found that employer contributions were less
significant in determining whether ERISA applies to
HSAs so they tweaked the safe harbor to allow for
employer contributions without triggering ERISA.
48
ERISA Applicability
• Revised Safe Harbor for HSAs
– Employers may contribute to an HSA without triggering ERISA so
long as the Employer satisfies all of the following conditions:
• Participation is completely voluntary
• No restrictions on account holder’s ability to move funds to
another HSA trustee
– Allows employer to limit its contributions to 1 HSA trustee or
a specified group of HSA trustees
• No restrictions on use of funds other than those permitted by
code
• Does not make or influence investment decisions
• No “endorsement” by employer
• Receive any payment or compensation
49
ERISA Applicability
• If ERISA applies (i.e., safe harbor not satisfied)
– Form 5500
– SPD and Plan Document
– COBRA
• Code’s COBRA provisions do not apply
– Claims procedures
• Generally, claims are self-adjudicated
– Fiduciary Requirements
• Code’s Prohibited Transaction Rules apply whether ERISA’s
prohibited transaction rules apply or not
50
Plan Design Issues
• Green Light Issues
– Deductible credit provisions (coverage takeover within same
calendar/policy year)
– Preventive care benefit mandates
• Consistent with current commercial practice (other than disease
management)
–
–
–
–
–
Reasonable lifetime maximum (OOP impact)
Coverage exclusions (OOP impact)
Coverage caps (e.g., TMJ, substance abuse) (OOP)
Coverage penalties (e.g., failure to pre-cert)(OOP)
Out of network coverage discrepancies (OOP and deductible
impact)
– Permitted benefits imbedded in policy
– Co-pay/coinsurance feature above the deductible (up to max
OOP)
51
Plan Design Issues
• Flashing Yellow Light Issues
– Deductible carryover provisions
• Expenses incurred in last three months
– Broad definition of preventive care
• Disease management benefits ?
52
Plan Design Issues
• Red Light Issues
– Imbedded family deductible (below HSA limits)
– Coverage with a co-pay feature (below deductible)
– Horizontal stacking (current agency position)
• e.g., Prescription drug carve-out with co-pay feature
• Transition rule for separate plan or rider
– State benefit mandates that provide coverage below
deductible
• Possibility for transition relief ?
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Outstanding Issues
• The following issues still need guidance:
– The extent to which Health FSAs and HRAs can be offered with an HSA.
• e.g., Can Health FSA or HRA provide OTC reimbursement?
– Can employers/trustees require substantiation?
• If so, will such a contractual requirement affect ERISA applicability
– What, if any, requirements must an employer satisfy to offer HSAs under the
cafeteria plan, especially if the employer does not sponsor the HDHP?
• e.g., certification from employee that the employee is an “Eligible
Individual”
– How do nondiscrimination rules under Code Section 125 apply?
– Can HSAs offered under cafeteria plan pay for long term care insurance
premiums? (note specific exclusion of LTC from list of qualified benefits
under 125)
– The effect of the out of pocket expense limits on lifetime and annual
maximums, benefit specific caps, etc.
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