Recent HSA Developments

Health & Welfare Alert
05.01.08

Since their implementation a few years ago, Health Savings Accounts (HSAs) have provided individuals with a vehicle to save for future medical costs and have greater personal control over their health care expenditures. Continuingly increasing enrollment in HSAs stresses the role they play in expanding health care coverage and combating rising health care costs. The purpose of this Alert is to provide information regarding four recent developments regarding HSAs:

  • New Legislation Requiring Substantiation of HAS Distributions;
  • 2009 Limits for HSA Deductibles, Out-of-Pocket Amounts, and Contributions;
  • Finalized Regulations on Comparable Contributions to HSAs; and
  • Recent Statistics Indicating Increased Enrollment in HSAs.

New Legislation Requiring Substantiation of HSA Distributions

On April 15th, the U.S. House of Representatives approved the Taxpayer Assistance and Simplification Act (H.R. 5719), which includes a revenue-raising provision requiring individuals to provide the HSA trustee or custodian with substantiation that distributions from an HSA will be used to pay for qualified medical expenses. The provision, which applies substantiation requirements similar to those required for reimbursements from Flexible Spending Arrangements (FSAs), provides that distributions that are not properly substantiated would be includible in income upon distribution and subject to a 10% penalty tax. Currently, no substantiation is required before receiving a reimbursement from an HSA; individuals are simply required to maintain documentation to prove upon IRS audit that HAS distributions were for qualified medical expenses that were not reimbursed from other sources.

Since its introduction into H.R. 5719, the substantiation provision has been widely criticized by employers, trade associations, and health plans as unnecessarily placing additional administrative burdens on HSAs, which would make them less attractive to both individuals and employers. Critics have also argued that the legislation is trying to combat fraud that has not been substantiated by any evidence; rather, the available evidence indicates that 90% of distributions from HSAs are used to pay for qualified medical expenses. U.S. Gen. Accountability Office, GAO-06-798, Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans, 26 (Aug. 2006).

The outlook in the Senate is currently uncertain. Although there is no current plan to act on this legislation during the current calendar year, the Senate could always pick up a revenue-raiser provision -- such as the HSA substantiation requirement -- and include it as part of another bill, which has some concerned about the possibility that the issue of HSA substantiation might have to be addressed yet again.

2009 Limits for HAS Deductibles, Out-of-Pocket Amounts, and Contributions

Although the Department of the Treasury has not yet released the 2009 COLA-adjusted limits for HSAs (such release is required to be made by June 2008), the consumer price index (CPI) data released last month provides one means by which the anticipated 2009 limits on HSA minimum deductible, maximum out-of-pocket, and the single and family contribution amounts can be calculated. Thus, based on the CPI data for March 2008, the anticipated 2009 limits are as follows:

  2008 Limit (Actual) 2009 Limit (Anticipated)
Minimum Deductible - Individual $1,100 $1,150
Minimum Deductible - Family $2,200 $2,300
Maximum Out-of-Pocket - Individual $5,600 $5,800
Maximum Out-of-Pocket - Family $11,200 $11,600
Maximum Contribution - Individual $2,900 $3,000
Maximum Contribution - Family $5,800 $5,950

Thank you to the Blue Cross Blue Shield Association for providing these estimates.

Finalized Regulations on Comparable Contributions to HSAs

On April 17th, the Treasury Department and IRS issued finalized regulations under § 54.4980G-4 (73 Fed. Reg. 20794 (A Apr. 17, 2008)) on the comparability rules for HSAs, without any substantive changes from the proposed regulations that were issued last June. Current federal tax law imposes an excise tax when an employer fails to make comparable contributions to the HSAs of its employees during a calendar year. The final regulations provide guidance on the comparability of employer contributions when (1) the employee has not established an HSA by December 31 and (2) the employer accelerates contributions for select employees. Note that these rules do not apply to HSAs offered through a cafeteria plan.

Employee Fails to Establish an HSA by December 31

In order to make contributions to an HSA, the employee must acquire qualified High Deductible Health Plan (HDHP) coverage and establish an HSA. Even if both the HSA and HDHP are offered by the employer, the HSA bank trustee will typically require the employee to complete a form with hardcopy signature, which is separate from the HDHP enrollment form, to open the HSA account. Therefore, some employees each year elect the HSA/HDHP option during open enrollment but then fail to open or “establish” the HSA. Neither employer nor employee contributions may be made to an HSA until it is established.

The final regulations provide that the employer must send written notice (which may be delivered electronically) to affected employees by January 15 of the following calendar year stating that if the employee establishes the HSA and notifies the employer by the end of February, the employer will make a contribution to the account by April 15, including interest. The regulations include a model notice for this purpose. The final regulations apply to employer contributions made for calendar years beginning on or after January 1, 2009; however, employers may rely on the new guidance effective immediately. For 2008, employers may either follow the final regulations or rely on the Treasury 2005 proposed regulations, which had provided that an employer was not required to make a contribution for a calendar year if an employee had not established his HSA by December 31. (The 2006 final regulations removed the provision and “reserved” it for later rulemaking.)

Beginning in 2009, employers subject to the comparable contribution rules will have to follow the notice requirements of the final regulations and will no longer have the option to simply not make a contribution for individuals who have not established their HSAs by December 31.

Acceleration of Contributions for Select Employees

The finalized regulations also allow an employer to accelerate part or all of its contributions for the calendar year to the HSA of an employee who has incurred qualified medical expenses during the year that exceed the employer’s year-to-date contributions.

Many employers and employees are familiar with the rule for FSAs that requires an employer to make the employee’s full annual election available on the first day of the plan year, regardless of the actual amount of funds “contributed” by the time the expense is incurred. The general rule with HSAs is that the employee may only be reimbursed up to the actual balance in the HSA and employers are not required to frontload their contributions for all covered employees if they do not choose to do so. This has created concern for many employees during their first year of participating in an HSA that, should they incur significant claims in the early part of the year, the funds will not be available in the HSA to cover the expense.

The finalized rule gives the employer the option to treat expense reimbursement under the HSA more like it currently works for FSAs. If an employer chooses to accelerate contributions for employees whose expenses exceed current contributions, it must do so on an equal and uniform basis for all eligible employees. Further, the employer must establish reasonable uniform methods and requirements for acceleration of contributions and the determination of medical expenses. Alternatively some employers have chosen to make the entire employer contribution to the HSA on January 1, which is also permissible under the comparability rules.

Recent Statistics Indicating Increased Enrollment in HSAs

Recent statistics on HSAs issued by America’s Health Insurance Plans (AHIP) on April 30, 2008, indicate that the popularity of HSAs is increasing. According to AHIP’s census of its members participating in the HSA plan market, more than 6.1 million Americans are covered by HSA-eligible insurance plans, a 35% increase since last year. The following are other key findings from the census:

  • There was an increase of approximately 1.6 million Americans enrolled in an HSA plan since January 2007. Previous censuses found that 4.5 million were enrolled in January 2007, 3.2 million were enrolled in January 2006, and 1.0 million were enrolled in March 2005.
  • 30% of individuals covered by an HSA plan were in the small group market, 45% of individual covered by an HSA plan were in the large-group market, and the remaining 25% were in the individual market.
  • HSA products accounted for 31% of new coverage issued in the small-group market. Individual market consumers selected HSA products for 27% of their new purchases of health insurance.
  • HSA plan enrollment as a percentage of individuals with private coverage is estimated to be the highest in Minnesota (9.2%), Louisiana (9.0%), Washington, D.C. (8.7%), Vermont (7.5%) and Colorado (7.1%).

For more information, please contact any of the following lawyers:

Fred Oliphant, foliphant@milchev.com, 202-626-5834

Susan Relland

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