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NEWS: New FSA Extension concerns for HSAs  IRS & Treasury released Notice 2005-42, so employers can amend their flexible spending arrangements (FSAs) to provide employees up to 2½ months after the end of the plan year to incur eligible expenses and submit them for reimbursement.  Treasury & IRS representatives have indicated informally the additional 2½ months of coverage under a health FSA would be considered “other coverage” and would render a participant in a high deductible health plan (HDHP) ineligible to contribute to a health savings account (HSA). E.G., EE enrolls in a traditional health plan for 05, contributed to a FSA (05); the ER amends the FSA plan to offer the additional 2½ month period (Notice 2005-42), and offers an HDHP/HSA combination as an option effective 1/1/06. ER then tells participants in the HDHP/HSA they are not permitted to enroll in the health FSA for 2006. EE enrolls in the HDHP/HSA & doesn’t participate in the health FSA. The participant now has 2½ months of FSA coverage in 06 (relating to 05 elections), IRS considers this as prohibited health FSA coverage. For the first 3 months of 06, the EE would not be eligible to make contributions to an HSA (contribution limits are reduced to reflect the 3 months of impermissible coverage). This true even if the EE exhausts FSA dollars before 06. For an 06 HSA, the best solution may be to NOT amend the FSA for the additional 2½ months of coverage. The IRS has suggested potential solutions for EEs participating in an HSA.  The ER might convert the health FSA to a limited purpose FSA (e.g., to reimburse dental & vision expenses only) during the 2½ months, or allow participants to waive submitting claims during the additional 2½ months. But they present administration problems so you might consider waiting to amend your documents. They are even discussing a 1-year FSA rollover!

NEWS: Increased Health Coverage More Important than Pay Increase  //  75% of working Americans would prefer $6,200 in employer-provided health insurance to an equivalent amount in pay, according to an Employee Benefits Research Institute (EBRI) survey.  The seventh annual Health Confidence Survey, underwritten by The Principal Financial Group, also finds that employees with coverage are twice as likely to accept lower pay for more health benefits as vice versa, and nearly one-third of those polled said that they stay with their current employer because of uncertainty surrounding other employers' health coverage plans. Employees with coverage are twice as likely to accept lower pay for more health benefits than vice versa. Health coverage is also shown to increase job loyalty, according to the survey, since nearly one-third of those polled said that they stay with their current employer because of uncertainty surrounding other employer's health coverage plans. Rising health care costs affect the bottom line for many employees, the poll shows. 48% of those surveyed save less because of  health care cost increases; 30% have difficulty paying bills. One in four employees used up their savings last year on health care costs. 25% said they decreased retirement saving contributions in response to the cost increases. 74% said that they take better care of themselves to help lower costs & 58% pay closer attention to doctor's orders and 57% only visit a physician in serious situations. This EBRI survey also shows that health savings accounts are gaining popularity. 11% stated they were ‘very interested' in the new plans (HAS style plans). When employer contributions were considered in conjunction with the plans, nearly 25% expressed interest. HSAs are an initiative by Bush to combine high deductible insurance with tax-free medical accounts for EE’s. The complete survey is in the Nov. 04 EBRI Issue Brief at www.ebri.org

NEWS: 04/14/05 - Family Coverage Won't Disqualify Spouse From HSA, IRS Rules = A married individual eligible to contribute to a HSA does not lose eligibility when the spouse has low-deductible family health coverage, if the spouse's plan does not cover the individual, as per Rev. Rul. 2005-25, the special rule in the Internal Revenue Code treating both spouses as having only family coverage when either one has family coverage does not apply when the other spouse's low-deductible coverage excludes his or her spouse, it does not affect the eligible spouse's eligibility to make HSA contributions up to his or her annual contribution limit. The maximum amount an eligible individual may contribute to an HSA is based on whether they have self-only or family high-deductible health plan (HDHP) coverage, the 2005, the contribution limit is the lesser of the annual deductible under the HDHP (minimum of $1,000 for self-only coverage and $2,000 for family coverage) or $2,650 for self-only coverage and $5,250 for family coverage.

NEWS: Rev. Ruling 2004-45 describes interaction between HSAs, FSAs and HRAs and

Notice 2004-43

ERs can offer a flexible spending account (FSA) or health reimbursement arrangement (HRA) with an HSA but cannot use a general purpose FSA (used to pay for over-the-counter drugs, etc.). Tax-deductible contributions to an HSA are allowed for individuals covered under a high-deductible health plan but not while covered under another health plan that pays for services before the HDHP's deductible is met.

  • HSA contributions are not allowed when a person is covered by an FSA and/or HRA that pays for medical expenses before the deductible is met.
  • Such contributions are permitted, however, when the FSA and/or HRA pays only for certain benefits, such as vision, dental and preventive care. While most employers have vision or dental plans already, an FSA can be used to pay for such expenses as orthodontics.
  • If the person agrees to temporarily forego HRA payments, HSA contributions are allowed during the suspension period.
  • If the FSA and/or HRA pay for medical expenses only after the HDHP deductible is met, HSA contributions are permitted.
  • HSA contributions are also okay when HRAs pay only for medical expenses after retirement. HSA funds currently can be used for anything.

Read the ruling here:  Rev. Rul. 2004-45 about HSAs & Other Health Arrangements

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Many employers already offer FSAs. A survey of 270 large companies found that more than 60 percent of them are interested in offering HSAs (Health Svings Accounts) although most said they will have to change the structure of their overall health insurance program. The government plans to incorporate an HSA option in the Federal Employees Health Benefits Program & plans an HRA for older workers who are eligible for Medicare. See:  Revenue Ruling 2004-45  (a 12 page .PDF) about how health savings accounts (HSAs) interact with health flexible spending arrangements (FlexCash, including health FSAs - not OK) and health reimbursement arrangements (HRAs).

So what are these things?

• Flexible Spending Accounts (FSAs) are the oldest of the medical alphabet soup, and are widespread today. They allow workers to set aside money pretax and draw on it to pay health care costs that are not covered by insurance. Paying with untaxed dollars in effect lowers these costs by whatever the worker's tax rate is -- typically 15 to 30 percent. The IRS recently eased restrictions so that FSA dollars can be used even for over-the-counter drugs. There is no legal limit on FSA accounts but we suggest a ceiling. Employees decide at the beginning of the year how much they think they will need & should use it all by the end of the year.

• Health Reimbursement Arrangements (HRAs) - the employer sets up an "account" for each worker and credits it with a certain amount of money. The worker can draw on it for medical expenses or let it build up over the years. Employer contributions can be of any size, limited only by the employer's budget. Contributions are not taxed, nor are withdrawals if used for medical expenses. An HRA is not subject to a use it or lose it, no employee money is allowed in an HRA so it is "technically an unfunded, non-vested 'notional' account" &  participants are really unsecured creditors. HRAs insurance with a high deductible & lower premiums, while coupling it with this account to tend uninsured expenses and give workers an incentive to avoid unnecessary costs. Many employers are moving from regular insurance for retirees to HRA that allows workers to accumulate money available in retirement to supplement Medicare. HRAs could be a repository of ER contributions used for post-retirement medical expenses.

• Health Savings Accounts (HSAs) - a savings/investment account permitted for an EE (or self-employed person) with has a high-deductible medical insurance plan or policy attached to it like a combination of an IRA-with an insurance policy for major medical expenses. The worker and/or the employer can contribute $2,600 a year for individual plans, or $5,150 for family - invested in a mutual fund, brokerage, bank account. The policy must have an annual deductible of at least $1,000 for an individual or $2,000 for a family & an annual out-of-pocket expense limit (excluding premiums) of $5,000 for an individual or $10,000 for a family however, it may pay the entire cost of preventive care. Note: some states mandate certain kinds of coverage that can conflict with HSA rules. That is not a problem for self-insured plans because state rules are preempted by federal law, but could be a barrier for small businesses. Workers eligible for Medicare are ineligible for an HSA.

• Medical Savings Accounts (MSAs), later called Archer MSAs, are a more limited form of HSA first allowed in the 1990s on an experimental basis. MSAs were limited to small businesses or self-employed individuals and failed to gain popularity. They have been supplanted by HSAs, and while existing MSAs may continue, new MSAs cannot be established AND MSA accounts can be rolled over into HSAs.

Health Savings Accounts (HSA)

03/04/2004 - Premiums paid under high-deductible health plans (HDHPs) by holders of health savings accounts (HSAs) MAY be made fully deductible under legislation introduced in the House 3/4/04. HSAs were created as part of last year's Medicare prescription drug law. They are open only to employees and individuals enrolled in HDHPs. For now, only employer contributions to an HSA are deductible. The HSAs for the Uninsured Act of 2004 (H.R. 3901) would create a new Section 224 of the Internal Revenue Code to permit deduction of these HDHP premiums. For individuals covered by more than one plan, deductions could be taken for one plan only. The deduction would be allowed whether or not the individual itemizes other deductions. It would apply to taxable years beginning after Dec. 31, 2003. It would not count against the medical expense deduction under Code Section 213 or the Section 162 deduction for health insurance of self-employed individuals. The bill has 44 co-sponsors from both parties.

FROM THE OFFICE OF PUBLIC AFFAIRS - December 8, 2003  JS-1045

U.S. Treasury Secretary Snow Statement On Health Savings Accounts

Today, the President signed the Medicare Prescription Drug legislation into law. This is an important victory for the health of America’s senior citizens.

An important provision in the bill greatly expands the former Medical Savings Accounts into new and innovative Health Savings Accounts ("HSA”s).  HSAs provide an important and welcome option for many Americans to fund their health care expenses.

Treasury is committed to ensuring that taxpayers get the full benefit of HSAs as quickly as possible.  We will be releasing basic information and guidance about HSAs shortly, and will request suggestions about how the rules should be applied.  In addition, we expect to issue more detailed guidance. 

http://usgovinfo.about.com/library/weekly/aataxfree_qa.htm

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FACT SHEET:
HEALTH SAVINGS ACCOUNTS

• The Medicare billed signed by the President today creates new Health Savings Accounts (HSAs) to help individuals save for qualified medical and retiree health expenses on a tax-free basis. 

• Beginning on January 1, 2004, individuals under the age of 65 are eligible to contribute to an HSA if they have a qualified health plan.

o For self-only policies, a qualified health plan must have a minimum deductible of $1,000 with a $5,000 cap on out-of-pocket expenses (indexed annually). 

o For family policies, a qualified health plan must have a minimum deductible of $2,000 with a $10,000 cap on out-of-pocket expenses (indexed annually).
 
• Preventive care services, as well as coverage for accidents, disability, dental care, vision care, and long-term care is not subject to the deductible.

• Individuals may contribute up to 100% of the health plan deductible.  The maximum annual contribution is $2,600 for self-only policies and $5,150 for family policies (indexed annually). 

• Individuals age 55 – 65 may make additional “catch-up” contributions of up to $500 in 2004, increasing to $1,000 annually in 2009 and thereafter.  A married couple can make two catch-up contributions as long as both spouses are at least 55.   For individuals age 55 and older, additional “catch-up” contributions to HSA allowed:

  • 2004 - $500
  • 2005 - $600
  • 2006 - $700
  • 2007 - $800
  • 2008 - $900
  • 2009 and after - $1,000  Contributions must stop once an individual is eligible for Medicare. If both spouses are eligible individuals, both may make catch-up contributions.

• Contributions may be made by individuals, family members and employers and are tax deductible, even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee.  Employers will be allowed to offer HSAs through a cafeteria plan.

• Investment earnings accrue tax-free.

• HSA distributions are tax-free if they are used to pay for qualified medical expenses.  Qualified expenses include prescription drugs, qualified long-term care services and long-term care insurance, COBRA coverage, Medicare expenses (but not Medigap), and retiree health expenses for individuals age 65 and older. 

• Distributions made for any other purpose are subject to income tax and a 10% penalty.  The 10% penalty is waived in the case of death or disability.  The 10% penalty is also waived for distributions made by individuals age 65 and older.

• Upon death, HSA ownership may transfer to the spouse on a tax-free basis.

IRS Initial guidance on health savings accounts (HSAs) as per IRS notice 2004-2

IRS Notice 2004-2 was issued on December 22, 2003, providing the first official guidance on health savings accounts (HSAs) since they were created as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (signed into law December 8, 2003). HSAs are new tax-favored vehicles that individuals covered by high deductible health plans (HDHPs) can establish (as early as January 1, 2004) to pay for certain medical expenses.

The requirements to be a trustee of an HSA are the same as the requirements to be a trustee of an Archer MSA. Any bank (as defined in Code Section 408(n)), and any insurance company (as defined in Code Section 816), is automatically authorized to be an HSA trustee or custodian. In addition, anyone already approved by the IRS as a nonblank trustee of Archer MSAs or IRAs is automatically approved to be an HAS trustee or custodian. (IRS Announcement 2003-54 lists the 238 entities that are approved nonbank trustees as of October 6, 2003.) Any other prospective nonbank trustee (an individual cannot be a trustee) must apply to the IRS and request approval to be a trustee by demonstrating in detail that it will meet certain requirements as set out in Treas. Reg. Secs. 1.408-2(e)(2) through (e)(5).   The requirements include: 

  1. Fiduciary Ability. The ability to act within the accepted rules of fiduciary conduct, including ensuring that the applicant's fiduciary duties will not be interrupted by the death or change of its owners; that it maintains an established place of business; and that it has fiduciary experience and a high degree of solvency.

  2. Capacity to Account. Experience and competence with respect to accounting for the interests of a large numbers of individuals.

  3. Fitness to Handle Funds. Experience and competence with respect to handling of funds.

  4. Rules of Fiduciary Conduct. The ability to follow established rules of fiduciary conduct, which include bonding, auditing and net worth requirements.

Passive trustees (that is, those with no discretion to direct the investment of the trust funds or any other aspect of the business administration of the trust) may be relieved of one or more of the requirements if they can establish with clear and convincing evidence that the specific requirements are not relevant to the manner in which they will administer HSAs.

There is no prescribed form for the application, but Section 3.09 of Revenue Procedure 2003-4 (which should be updated soon for 2004) provides general guidance, including the address to which the submission should be sent. A user fee of $3,520 (applicable for 2003; in an advance copy of Rev. Proc. 2004-8 the amount is $3,665) must accompany the application.

If the application is approved, the IRS will issue a written notice, which will specify the date that the approval becomes effective. A copy of this notice must be given to each account beneficiary before any assets are accepted by the nonbank trustee or custodian. The approval will remain in effect until revoked by the IRS or withdrawn by the applicant. Generally, the notice of approval will not be revoked unless the IRS determines that the applicant has failed to administer fiduciary accounts in a manner consistent with the requirements of the regulations, or has administered a fiduciary account in a grossly negligent manner.

Health broker group thinks AHPs might undermine health insurance market: Some health insurance brokers may be opposed to President Bush's renewed push to allow small employers to band together to negotiate lower prices on health insurance.  The Association of Health Insurance Advisors (AHIA),  www.ahia.net  protests that, according to Executive Vice-President Michael L. Kerley, AHPs would not be subject to the same state regulations as other health plans. That means the plans would be exempt from solvency requirements, state mandates and oversight by state insurance commissioners. Trade associations might end up in charge, which would be disastrous because they don't know anything about running what essentially will be health insurance companies and might add-up to bare bones-style plans that will not be affordable to anyone besides young, healthy, single workers.  AHPs, Kerley states, remind him too much of multiple-employer welfare arrangements (MEWAs), which also were exempt from state law. These resulted in plans that either were fraudulent or where run by people who did not know what they were doing, and left many participants with overwhelming medical costs.

Health Savings Accounts (HSAs) have generated a number questions about funding rules. Comments from attorney & welfare expert, John Hickman, a partner with the Atlanta-based firm Alston & Bird follow: 

Q: If a small employer makes HSAs available only through employee contributions, are these contributions subject to top-heavy or discrimination testing? A number of my small clients have expressed an interest in these plans. Naturally, only the more highly compensated employees would be interested in contributing.

A: If employee contributions are "after-tax," they will not be subject to nondiscrimination rules. It is not clear whether pre-tax contributions made under a cafeteria plan, generally considered employer contributions by the IRS, are subject to Sec. 125 rules (eligibility test, contributions and benefits test, and key employee concentration test).

Interpreted literally, pre-tax contributions to HSAs are subject to Sec. 125 nondiscrimination testing. However, a Treasury official indicated (informally) on Jan. 13, 2004 that pre-tax contributions to an HSA might not be considered employer contributions. If that is the decision made by the IRS, then pre-tax contributions will not be subject to Sec. 125 rules. Until formal guidance is issued, the conservative approach is to handle pre-tax HSA contributions in accordance with all the Sec. 125 rules, including the nondiscrimination rules, which should not adversely impact testing results for most larger employers. But small employers may have issues under the key employee concentration test.

Employer contributions also are subject to HSA "comparability" rules, which require employers to contribute the same amount for each employee with an HSA (subject to limited permissible variations such as part-time and full-time and family and single coverage). This rule could have posed a problem for employers who allow employees to make pre-tax contributions, since employee pre-tax elections will vary by employee. Fortunately, the IRS indicated that contributions made under the cafeteria plan would not be subject to the HSA comparability rules.

MORE from John:

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HSAs new option for consumer-driven health  by John R. Hickman, Misty Leon and Ashley Gillihan

New Medicare legislation provides tax-advantaged health savings accounts (HSAs) for virtually anyone who has coverage under a high-deductible health plan. In a surprising twist, the law allows HSAs to be funded on a pre-tax basis through a cafeteria plan, opening a whole new avenue for funding consumer-driven health care.

This combination of a tax-advantaged HSA with salary reduction funding should prompt more discussions between employers and benefits advisers and accelerate the growth of consumer-driven health care.

What is an HSA? An HSA resembles an Archer medical savings account (Archer MSA). It is a trust established by an "eligible individual" or by an employer for eligible employees to pay the qualified medical expenses of the individual and his or her eligible dependents.

However, HSAs, which became effective for taxable years beginning Jan. 1, 2004, expand substantially on the MSA concept. They are not limited to self-employed individuals and employees of small companies. HSA contributions can come from employers, eligible individuals or both, whereas only an employer or individual may contribute to an Archer MSA. Also, HSAs may be offered under an employer's cafeteria plan, thereby allowing employees to contribute to an HSA with pre-tax salary reductions. Employee contributions to an Archer MSA cannot be part of a cafeteria plan.

Participation requirements - Only people covered by a high-deductible health plan (HDHP) can participate in an HSA. A HDHP is a health plan that has an annual deductible of not less than $1,000 for self-only coverage, and $2,000 for family coverage. The sum of the plan's annual deductible and other annual out-of-pocket requirements (other than premiums) cannot exceed $5,000 for self-only coverage and $10,000 for family coverage. If the HDHP is a network plan, the annual deductible and out-of-pocket limitations for out-of-network expenses are not considered in determining whether the HDHP satisfies the statute's requirements. A plan will not fail to be treated as an HDHP simply because it does not have a deductible for preventive care.

Individuals who are eligible for Medicare cannot actively participate in an HSA; however, HSA funds that have accrued prior to that time may be used to pay for the individual's qualified medical expenses without incurring tax. Also, individuals who may be claimed as dependents of another individual cannot participate in an HSA. Eligible individuals who participate in an HSA are referred to as "account beneficiaries."

Generally, a person with an HSA cannot be covered under any other health plan. However, the legislation does provide an exemption for certain types of "permitted" (generally limited) health coverage. This includes insurance provided under state workers' compensation laws, property insurance, insurance for a specified illness, such as cancer insurance, and hospital indemnity insurance. But individuals with HSAs can receive coverage for accidents, disability, dental care, vision care, or long-term care. Thus, for example, a health reimbursement arrangement (HRA) or flexible spending account (FSA) limited to these types of benefits may still be offered alongside an HSA.

HSA tax treatment - An account beneficiary may deduct contributions made to an HSA if the requirements are met. The deduction is "above the line," which means that HSA contributions are used to determine the individual's adjusted gross income before any itemized or standard deductions are considered. Deductions are subject to statutory "monthly limitations." Employers may also make HSA contributions on behalf of employees, subject to the same monthly limits, if the contributions are made on a non-discriminatory basis. Employer contributions (within HSA limits) are not taxed.

Special rules apply to married individuals and those who also participate in an Archer MSA. The monthly limitation is increased by an "additional contribution amount" for beneficiaries age 55 and older.

If HSA contributions exceed the monthly limitations, the contributions will not be deductible or excludable from income. Excess contributions are also subject to a 6% excise tax unless they are returned to the beneficiary before his tax-filing deadline, along with any net income attributable to the excess contributions. Returned excess contributions will be included in the beneficiary's gross income.

Distributions from an HSA for qualified medical care expenses are tax-free. Non-medical distributions are taxable and generally subject to an additional 10% excise tax. The excise tax does not apply in certain situations such as payments made after death, disability, or the age of 65 (i.e., the Medicare eligibility date) and for rollovers that meet statutory requirements.

A "qualified medical expense" is generally a payment for medical care for the account beneficiary and her spouse and tax dependents. The amount cannot be reimbursed by insurance or otherwise. Qualified medical expenses include over-the-counter medications that are reimbursable under IRS rules for health FSAs.

Generally, qualified medical expenses do not include payments for health insurance premiums. Therefore, neither the beneficiary nor his spouse or dependent can pay for HDHP or other coverage from the HSA. However, the legislation includes exceptions for certain types of insurance coverage, such as COBRA.

Generally, employers will have no withholding obligations on HSA distributions.

HSA distributions for non-medical expenses are not included in the beneficiary's income if the distribution is part of a qualified rollover distribution. This exception allows individuals to roll over HSA and Archer MSA funds to an HSA once every year. Such rollovers are permitted on a tax-free basis.

Other non-taxable transfers are permitted in the event of the death or divorce of a beneficiary. The transfer must meet statutory requirements and may be subject to income or estate tax.

HSAs in a cafeteria plan

Generally, cafeteria plans cannot include a benefit that provides coverage in future years. However, the legislation specifically permits HSAs to be offered under a cafeteria plan. Therefore, individuals may make contributions to the HSA with pre-tax salary reductions, even though the contributions may be carried over to future years. The pre-tax salary reductions are treated as "employer" contributions and may not be deducted on an individual tax return.

As with any new legislation, the Medicare act leaves a few loose ends that require further regulatory clarification. For example, it is not clear what restrictions will be placed on mid-year changes to salary reduction elections for HSAs that are part of a cafeteria plan. In addition, the legislation does not state whether employer-funded HSAs will be subject to the substantiation requirements currently applied to health FSAs.

The IRS has indicated that it will provide guidance on HSAs very soon. Additional guidance from the Labor Department is necessary to determine ERISA coverage and related issues.

02/13/04 HSA NEWS - IRS guidance on HSAs is coming son. The second quarterly update of the Treasury Department's 2003-2004 Priority Guidance Plan [ www.irs.gov/pub/irs-utl/2003-2004pgp.pdf ], released 2/13/04 lists additional guidance on HSAs as a new project for the plan year ending June 30, 2004. Another item that has been on this Priority Guidance Plan since it was originally released in July 2003 is guidance on HRAs. The new HRA guidance may address how COBRA applies to HRAs.

IRS revises 2005 version of publication 15-B to reflect that HSAs can be offered under a cafeteria plan [IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits (For Benefits Provided in 2005)) www.irs.ustreas.gov/pub/irs-pdf/p15b.pdf ]  This Publication 15-B provides information on the employment tax treatment of fringe benefits and is a practical resource for employers and administrators involved with fringe benefit programs. The initial release of this 2005 version of Publication 15-B incorrectly included health savings accounts (HSAs) in a list of benefits that cannot be offered under a cafeteria plan -  the IRS has a page entitled "Changes to Current Tax Forms and Publications," to check for revisions (www.irs.gov/formspubs/article/0,,id=109875,00.html)

DOL says ER-provided HSAs often may not be ERISA plans

This DOL guidance addresses HSAs offered in the workplace as “employee welfare benefit plans” under ERISA & its obligations for reporting, disclosure and fiduciary responsibility, etc. The DOL suggests  that HSAs may not be subject to ERISA if the EE’s participation is voluntary & the ER’s involvement is limited & indicates an ER may make ER contributions to HSAs for EEs without causing the arrangement to be an ERISA plan. è “Accordingly, we would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA.”  è And the DOL indicates that any of the following ER actions (beyond Code requirements) will create ERISA-covered plans:

  1. limiting an employee’s ability to move HSA funds to another HSA;
  2. imposing conditions on the use of HSA funds;
  3. making or influencing investment choices for HSA funds;
  4. representing that the HSAs are an employee welfare benefit plan under ERISA; or
  5. accepting any payment or compensation in connection with an HSA

The guidance permits an ER to limit the forwarding of contributions through its payroll to a single HSA provider without triggering ERISA, as long as the EE isn’t  restricted from moving the funds to another HAS & the ER can limit contributions as needed to satisfy Code requirements.

The DOL distinguishes HSAs from “group insurance,” subject to a more limited exception from ERISA suggesting HSAs are not a form of group health insurance but are a personal health care savings vehicle under which the beneficiary has sole control and exclusive responsibility. The DOL says existing court precedent that ER contributions are significant evidence of an ERISA plan is inapplicable to HSAs. A high deductible health plan (HDHP) sponsored by an ER (offered in conjunction with HSAs) will be an EE welfare benefit plan subject to ERISA’s requirements (excepting governmental or church plans).

For ERs with HSAs that don’t do what the DOL indicates would trigger ERISA, this guidance MAY remove the uncertainty & eliminates the administrative burdens associated with ERISA plans, including reporting, disclosure, and fiduciary obligations & ERISAs HIPAA portability & COBRA may not apply although code mentions COBRA does not apply to HSAs ERISA does not. COBRA implications do exist for government ERs under the Public Health Service Act (PHSA) & HIPAA may apply. ER FICA savings from EE salary reductions in a cafeteria plan might constitute an impermissible “payment or compensation” & effectuate ERISA. NOTE: without ERISA preemption EEs can bring state-law claims against an ER related to HSAs.

05/11/04 NEWS: Treasury issues HSA/FSA interplay guidance via  Revenue Ruling 2004-45 - which clarifies how flexible spending accounts and health reimbursement accounts can be offered to employees enrolled in health savings accounts linked to high-deductible health insurance plans. Under Revenue Ruling 2004-45, FSAs, which typically are funded through employees’ pretax contributions and HRAs, which are funded by employers, can be used by employees in HSAs for reimbursement of medical expenses above the health insurance plan deductible. The minimum annual health insurance deductible in an HSA arrangement is $1,000 for individual coverage and $2,000 a year for family coverage. Limited purpose FSAs and HRAs—arrangements that limit reimbursement for vision care, dental care and preventive care services—also could operate alongside HSAs. ER's offering HSAs can contribute to an HRA that would provide reimbursement of health care expenses after an employee retirees. ER's who already have HRAs could set up HSAs without employees losing balances that have accumulated in the HRAs. For this to be allowed, though, funds could not be withdrawn from these so-called “suspended” HRAs while the employee was contributing to the HSA. However, the accumulated HRA funds would be available for expenses incurred after the employee ended participation in an HSA, such as when the employee switched to another health care plan offered by the employer. Such arrangements, benefit experts said, are likely to be rare. Rev Rule 2004-45 ends long-standing uncertainty about the interaction between HSAs and FSAs and HRAs. 

Revenue Ruling 2004-45 describes interaction between HSAs, FSAs and HRAs. It brings good and bad news, according benefits attorney & Alston & Bird Partner John Hickman: "an employer can offer a flexible spending account (FSA) or health reimbursement arrangement (HRA) with an HSA BUT the bad news is that you cannot use a general purpose FSA (one that can be used to pay for over-the-counter drugs) meaning that most ERss offering FSAs still cannot provide access to HSAs. "We were all expecting this, but we held out hope that you could use an FSA that covered OTC while you have an HSA," Hickman says. HSA contributions are not allowed when a person is covered by an FSA and/or HRA that pays for medical expenses before the deductible is met however, these contributions are permitted when the FSA and/or HRA pays only for certain benefits, such as vision, dental and preventive care (an FSA can be used to pay for such expenses as orthodontics). But if the FSA and/or HRA pay for medical expenses only after the HDHP deductible is met, HSA contributions are permitted. HSA contributions are allowed when HRAs pay only for medical expenses after retirement. HSA funds currently can be used for anything.

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