Vol. 28, No. 2 #6 (April 2005). Health Savings Accounts: An Attractive Option for Employers Facing Escalating Health Care Costs.

• Author: By Joe Greenman

Wyoming Bar Journal

2005.

Vol. 28, No. 2 #6 (April 2005).

Health Savings Accounts: An Attractive Option for Employers Facing Escalating Health Care Costs

WYOMING LAWYERApril 2005/Vol. XXVIII, No. 2Health Savings Accounts: An Attractive Option for Employers Facing Escalating Health Care CostsBy Joe Greenman

The soaring cost of health care has emerged as a top national issue. As employers are faced with increasing contributions for health care insurance premiums, they are often confronted with difficult choices, as they are forced to pass costs along to their employees, reduce salaries, or reduce benefits.(fn1) This no doubt has had an effect on the number of uninsured in America, which has reached 45 million this year.(fn2) Many believe that distorted purchasing decisions and uncontrollable health care inflation will remain problems so long as someone other than the patient is paying the bill.(fn3) The employee out-of-pocket share of health premiums has fallen from 49% in 1960 to 24% in 1980 to 14% in 2001.(fn4) These statistics suggest that distorted purchasing decisions and uncontrollable inflation will remain problems unless the consumers of health care are put in a position to handle their own health care decisions.(fn5) To address these problems, many are advocating a consumer-driven approach to health care aimed toward inducing behavior change through cost transparency, financial involvement, compliance incentives and education.(fn6) Recent major federal legislation has embraced this model of health care reform.(fn7) These recently enacted statutes provide interesting new options for employers and their lawyers when deciding how best to structure health benefits.

On November 25, 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.(fn8) Title 12 of the Act amends the Internal Revenue Code (IRC) of 1986, to provide for health savings accounts (HAS) by redesigning Code section 223 and 224 and inserting a new Code section 223 enabling HSAs. An individual is allowed to fully deduct contributions to a HSA (if eligible) in an amount up to the aggregate amount paid in cash to the HSA during the taxable year subject to certain limitations.(fn9) A health savings account is a tax-exempt trust established exclusively for paying qualifying medical expenses of the account beneficiary.(fn10)

Qualifying individuals may initiate a HSA, without the action of his/her employer, and save substantial amounts of money to pay deductibles, co-pays, etc., under "high deductible" health plans (HDHPs).(fn11) A 'qualifying individual' means, any individual who: (1) is covered under a HDHP on the first day of such month; (2) is not also covered by any other health plan that is not a HDHP; (3) is not entitled to benefits under Medicare; (4) may not be claimed as a dependent on another person's tax return.(fn12)

Eligibility - Determination of a Qualified High Deductible Health Plan

HSAs may be established by an individual or an employer. In order to be eligible to contribute to a HSA, the individual must be covered under a HDHP.(fn13) While the individual is covered

under the HDHP, the individual must not be covered under any health plan which is not a HDHP and which provides for coverage for any benefit which is covered under the HDHP. The individual also may not be covered by Medicare and may not be claimed as a dependent on another's tax return.(fn14) Permissible insurances are workers' compensation, tort liability, liability for ownership or use of a property, and any other similar type of coverage as determined by regulation.(fn15) Other permitted insurance coverage includes dental care, disability, vision care, insurance for a specified disease or illness, insurance that pays a fixed amount per day (or other period of hospitalization), and long-term care.(fn16)

A HDHP is a plan that has an annual deductible for an individual of at least $1,000 and $2,000 for family coverage, and requires the sum of the annual deductible and the other out-of-pocket expenses--including deductibles, co-payments, and coinsurance--be paid under the plan for covered benefits, not exceeding $5,000 for self only coverage and $10,000 for family coverage.(fn17) The minimum deductible for a HDHP is adjusted for inflation using calendar year 2003 as the base year, with adjustments rounded to the nearest $50 increment.(fn18)

The plan cannot pay for any benefits until the deductible is reached, with the exception of a safe harbor for preventive care.(fn19) Preventive care that may be provided by a HDHP is preventive care defined in section 1871 of the Social Security Act (SSA), except as otherwise defined by the Secretary of the Treasury.(fn20) Section 1871 of the SSA, as added by this act, defines preventive care to include the physician's services of a physical exam (including height and weight measurement, blood pressure and an electrocardiogram) with the goal of health promotion and disease prevention.(fn21) Preventive care also includes education, counseling, and referral with respect to screening and other preventive services, but does not include clinical laboratory tests.(fn22)

The IRS has recently ruled that coverage of a treatment that is incidental or ancillary to a preventive care service, such as removing polyps during a diagnostic colonoscopy, is also allowed.(fn23) Furthermore, preventive care includes medication taken to prevent a disease or reoccurrence of a disease--for example, taking cholesterol-lowering medications to prevent heart disease.(fn24)

Contributing to a HSA

A HSA must be established pursuant to a trust created or organized in the U.S. exclusively for the purposes of paying qualified medical expenses for the beneficiary of the account.(fn25) This is done in much the same way that individuals establish individual retirement accounts (IRAs) with qualified trustees or custodians.(fn26)

Like an IRA, an HSA is generally exempt from tax. No permission or authorization from the IRS is necessary to establish an HSA.(fn27) Any large financial institution (such as banks, insurance companies, mutual funds, or brokerages) can be an HSA trustee or custodian.(fn28) The National Credit Union Administration (NCUA) has recently issued a final rule permitting federal credit unions (FCUs) and their members to take advantage of the authority granted in the Medicare Act, authorizing the establishment and maintenance of HSAs at FCUs.(fn29) Existing health plans plan to team up with financial institutions to offer HDHPs along with the HSAs.(fn30)

Family members...