You are probably familiar with the "alphabet soup" that makes up the world of employee benefits: FSAs, MSAs, HRAs, HIPAA, ERISA, COBRA and the like. The plans and related rules have been around, in certain cases for some time. Now, as of Jan. 1, employers can look forward to another set of initials: HSAs — short for health savings accounts, a plan created by the Medicare Prescription Drug and Modernization Act of 2003.
HSAs may provide another potentially valuable way to better manage the rising tide of health care here in Wisconsin as well as in other states. With costs soaring 15% to 20% or more per year, employers are looking for ways to do something about it.
As with some of the other plans, HSAs were created to provide employers with another tool to promote consumerism in health care by transferring some of the responsibility for managing health care costs to employees. The idea is to give health care consumers more options regarding health care spending and to provide incentives to utilize health care more wisely by allowing unused money to roll forward to future years.
HSAs are tax exempt trusts modeled after the better known Archer MSAs (medical savings accounts) that were created several years ago. The HSA has some of the same components as the Archer MSA with several modifications. There is an important medical plan insurance requirement that cannot be overlooked when considering an HSA. The type of medical plan including minimum deductible amounts will determine whether a person qualifies to be eligible for an HSA. It is felt that HSAs will probably replace MSAs in the future.
It is important to know these facts:
— HSAs are completely free of federal taxes, but to qualify, an individual must be covered only by a high-deductible health insurance plan with a minimum self-only deductible of at least $1,000 and a $2,000 deductible for family coverage.
— The amount of money that can be contributed to the HSA on an annual basis can be up to $2,600 for self-only or $5,150 for a family. Those numbers are indexed from 1997 when MSAs were first created.
— Employers, too, can contribute to their employees’ HSAs. In addition, to many peoples’ surprise, the legislation allowed the HSA to be set up via a salary reduction arrangement within a cafeteria plan. If the employer contributes money to the HSA, the amount contributed reduces the employee contribution dollar for dollar.
— Rollovers are allowed, so if the money hasn’t been used from one year to the next, it stays in the trust and continues to roll forward. The money is non-forfeitable and is the employee’s as soon as it is deposited in the trust. The trustee can be a bank, insurance company or other non-bank entity approved to handle IRAs.
— Distributions from the plan that qualify are not subject to tax. However, if the distribution does not qualify, ordinary income tax applies, plus a 10% penalty.
But note this: Because HSAs are so new, there are a number of factors that the IRS needs to clarify, such as FICA tax and whether it will be exempted from HSA contributions if established via a cafeteria plan. ERISA and HIPAA rules also need to be clarified as well as questions surrounding medical plan qualification, election changes and third-party claims substantiation. Substantiation is required with FSAs and HRAs, but it’s still an open question for HSAs. The Treasury Department has indicated that its guidance is set for a tentative release date of June 2004.
There will be further clarifications and education forthcoming. It’s necessary to carefully study all of the ramifications and consider various options in your benefit planning process.
Timothy Pederson is president of the Hartland-based Diversified Benefit Services Inc., a benefit plan design, communication and third-party administrator of FSAs, HRAs, cafeteria plans and HSAs. He can be reached at 800-234-1229, or visited on the Web at www.dbsbenefits.com.
Feb. 20, 2004 Small Business Times, Milwaukee