Are you skeptical or confused that HSA s will really save the employer money?
Don't understand why some employers are waiting to implement a HSA ?
We will try to answer these questions in this article.
The Current Health Care Environment --Right now employers pay $5 out of every $6 spent on health care in the private market.
Adding insult to injury, the average employer spends $14,000 on benefits per employee per year (more than 42% on top of payroll according to the U.S. Dept. of Commerce), but employees don't fully recognize or appreciate it. In fact, employees typically undervalue their benefits at less than 50% of their actual cost.
Therefore most employees do not understand and know the true cost of health care and believes that "my insurance will pay for everything." Over utilization and uneeded consumption of health care are the results.
"But in some ways it "actually makes sense" economically because employers' payments are excluded from taxes, unlike employees' out-of-pocket payments, which are made with after-tax dollars. In addition, because employers would save money on lower premiums for plans with higher deductibles and coinsurance rates, they could pass on the savings to employees in the form of higher wages, Lee states (Lee, Wall Street Journal, 8/9/04). Susan Lee, Wall Street Journal Editorial Board
So why have most benefit plans offered and sponsored by Congress/Government directed to individuals not been popular and do not help individuals lower their health care costs? Because most health plans are not working unless there is strong endorsement and adoption by employers. And employers will not adopt these higher deductible plans and attach a HSA to it unless there are incentives to do so.
Don't believe me? Consider the facts:
- Historically MSAs (which Congress created to lower health care costs) did nothing unless an employer sponsored them
- Historically FSA s have not grown as anticipated unless the Employer heavily promotes and communicates them
- Many Fortune 500 clients have all loved the idea of HSA s until they were told there could be no claims substantiation, no claims audits by a qualified Third Party Administrator (TPA), and no restriction on employer contributions. These are all disincentives for an employer to adopt a HSA .
- Our clients that are implementing HSA s under current law are replacing either their old MSA, expanding on an existing HRA and have in general less than 100 employee lives.
- Larger employers with more than 500 lives are waiting on HSA s hoping that further IRS clarification will restrict funds for health care only, and allow claims substantiation.
Many Small Employers Are Turning toHSA s for Help
Information Strategies Inc. (ISI) did a semiannual survey of about 1,200 small employers.
According to the survey results, more than half of small employers intend to change the health coverage choices that they now offer to employees. Among these employers, about 20% say they are considering making an HSA -compatible high-deductible health plan available. By contrast, only about 8% of employees say they are considering a health reimbursement arrangement (HRA )-based plan. About 10% of employers say they will make flexible spending accounts (FSA s) available.
The survey results also confirm that employers are increasingly interested in shifting more of the costs and decision making to employees, says ISI President JoAnn Laing. "We're seeing a real movement toward requiring employees to participate in the process of holding down costs," she adds.
Recent Experiences Among Small Employers
|Double-digit rate increases||68.8%|
|Significant employee resistance to change||14.0%|
|Switching more costs to employees||26.4%|
|Reducing costs by decreasing benefits||34.1%|
|Limiting choices to new employees||4.8%|
|Eliminating health care contribution entirely||4.1%|
Planned Changes/Additions to Health Coverage Choices
|Health Savings Accounts (HSA s)||20.4%|
|Partial coverage with high-deductible plan||17.1%|
|Flexible Savings Accounts (FSA s)||9.6%|
|Health Reimbursement Arrangements (HRA s)||8.3%|
Where/What are the Rules and Regulations needed for a HSA ?
The Treasury has created a website just for HSA s:www.ustreas.gov/offices/public-affairs/hsa/faq1.html . Please visit it.
The Treasury Department and The IRS have issued many rulings and announcements in the last year. The previous guidance addressed:
- Notice 2004-2 (general overview of HSA s)
- Notice 2004-23 (safe harbor definition of preventive care)
- Notice 2004-25 (transition relief allowing establishment of 2004 HSA as late as April 2005)
- Rev. Rul. 2004-38 (defines scope of other permissible non-HDHP coverage)
- Rev. Proc. 2004-22 (transition relief from Rev. Rul. 2004-38 for prescription drug plans offered under separate plan until January 1, 2006)
- Rev. Rul. 2004-45 (addresses the scope of permissible Health FSA /HRA coverage maintained by an eligible individual)
- Sample Trust/Custodian documents
- Notice 2004-43 (transition relief for plans in states that cannot qualify as HDHP due to state laws until January 1, 2006)
- FAB 2004-1 [EBSA/Department of Labor] (outlines rules for determining whether HSA is subject to ERISA)
- Notice 2005- 8 (defines the tax treatment of HSA s for Partnerships and S Corporations)
- Notice 2005- 25 (defines that a married individual can be eligible for aHSA even if the spouse has a non-HDHP family coverage that does not cover the individual)
Eligible employee for a HSA must be covered by a high-deductible health plan (HDHP). Many employers offer employees a choice of several health plans, including HDHPs and non-HDHPs. In this situation, if the employee chooses the HDHP is he eligible for a HSA ? Yes- as of the date he enrolls in the HDHP.
What if the employee is eligible for Medicare? If they are just eligible and not enrolled in Medicare Part A or B, they can continue to fund an HSA and make additional catch-up contributions from age 55-65. Once they enroll in Medicare they loose their eligibility to fund additional amounts into the HSA .
A health plan does not qualify as an HDHP unless it limits annual out-of-pocket expenses for covered benefits to $5,000 for self-only coverage and $10,000 for family coverage. (These limits will be adjusted annually for inflation.)
On April 13, 2005 the IRS issued Ruling 2005-25 that could allow employers to let employees elect FSA s for each dependent and their spouse but still have the other spouse just covered under the HSA with a qualifying HDHP Plan; as long as they were not covered under the HDHP and HSA .
Benefits under Employee Assistance Plans, Disease Management Plans and Wellness Programs generally do not disqualify an employee from being eligible for a HSA .
Mistaken distributions from an HSA can be repaid to an HSA without penalty or tax.
HSA salary reduction by an employees can allow changes in elections throughout the year as long as any election is only effective prospectively
Employer matching contributions made through a cafeteria plan are not subject to the comparability requirements for discimination testing. It should make testing easier to pass.
Pre Tax HSA contributions may come from four sources: the eligible individual, the eligible individual's employer, any other person or a rollover contribution from another HSA or MSA. Any person, regardless of family status, can make contributions to an HSA for an eligible employee.
Distributions from an HSA are generally excluded from an HSA beneficiary's gross income to the extent the distributions are for qualified medical expenses.HSA funds can also be withdrawn for non-medical reasons but are includable in gross income and generally subject to an additional 10% excise tax.
Could HSA s be used as savings vehicles by deferring when nontaxable benefit reimbursements are received? Yes.
May HSA distributions pay/reimburse long-term care insurance premiums, even if the distributions derive from amounts contributed by salary-reduction? Yes.
HSA is not a health FSA so HSA distributions for the cost of a long term care services are nontaxable payments for medical expenses.
Individuals age 65 or older and eligible and enrolled in Medicare may use theHSA to pay for Medicare premiums (including reimbursing the payee for premiums withheld from Social Security payments) and the retiree's share of employer-provided health care costs. Individuals under age 65 and covered by Medicare for end-stage renal disease or disabled cannot use the HSA to pay for Medicare or other medical premiums
Employees who elect to make HSA contributions can start, stop, increase or decrease elections at any time, so long as the elections are prospective only.
An employer can add an HSA as a new plan benefit mid-year, and employees can prospectively elect the HSA .
So Where can I Learn More?
Buy a Kit or package that has the forms, materials and documents that you need. There are several lawyers, law firms, and consulting firms that have developed such a Kit. Go to www.hrconsultinggroup.com and see what a Kit looks like. Search the Internet or go to the major Benefits publications (we recommend Employee Benefit News- go to www.benefitnews.com , select SourceBook, select several topics like HSA , HRA , Flex, or even Comprehensive Benefits Consulting Services, etc..) and find the case studies and plan designs on HSA /HRA s and on Consumer Driven Health. Attend a Web conference, local meeting, or national conference on these topics.
Summary- We are still very excited about HSA s. We feel employers should offer HSA s to employees who work for them. Understanding the current Guidance, Rulings, and what is allowed are crucial to having a successful HSA .
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