New rules require health plans to obtain a unique Health Plan Identifier (HPID), which eventually must be used by plans, providers, insurers, and others in all standard transactions. The HPID requirement is an effort to standardize health care transactions in order to reduce the cost and increase the quality of heath care. The requirements for full compliance differ depending on the size and structure of the plan. Although the deadline for large health plans to obtain the HPID is fast approaching, further guidance from HHS would be welcome to clarify the rules. As of today, it is our view that all HRAs and FSAs administered by ProBenefits do not need to register this year due to a small plan exception. A summary of the topic, including a discussion of plans subject to the requirement and the deadline for compliance, can be found here.
How Do HSAs Work?
To have an HSA and make contributions to the account, you must meet several basic qualifications. Here’s what you need to know to start saving with an HSA.
HSA Eligibility – In order to qualify for an HSA, you must be an adult who meets the following qualifications:
- Have coverage under an HSA-qualified, high deductible health plan (HDHP)
- Have no other health insurance plan (this exclusion does not apply to certain other types of insurance, such as dental, vision, disability or long-term care coverage)
- Are not enrolled in Medicare
- Cannot be claimed as a dependent on someone else’s tax return
HSAs must be used with an HDHP. To qualify as an HDHP, a health plan must satisfy requirements for the minimum annual deductible and the maximum out-of-pocket expenses.
In 2014, the minimum annual deductible for a qualifying HDHP is $1,250 for an individual and $2,500 for a family. For 2015, the HDHP minimum deductible will be $1,300 for an individual and $2,600 for a family.
In addition, annual out-of-pocket expenses under the plan (including deductibles, copays and coinsurance) cannot exceed $6,350 in 2014 and $6,450 in 2015 for single coverage, and $12,700 in 2014 and $12,900 in 2015 for family coverage.
In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for preventive care services on a first-dollar basis (that is, without a deductible or copay). Preventive care can include care such as routine prenatal and well-child care, child and adult immunizations, annual physicals and mammograms.
Opening Your HSA – Your employer may offer an HSA option, or you can open an account on your own through a bank or other financial institution. Banks, credit unions, insurance companies and other financial institutions are all permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSAs are also automatically qualified to establish HSAs.
Contributions – Contributions to your HSA can be deducted when you file your income taxes. If your employer offers a Section 125 plan (sometimes called a “cafeteria plan”), you may be able to make your HSA contributions on a pre-tax basis. That means that your HSA contribution will be taken out of your wages and no federal income tax or employment tax will be withheld on the contribution.
Determining your contribution – Your eligibility to contribute to an HSA is determined monthly. You must have HDHP coverage on the first day of the month to make an HSA contribution for that month. There is a limited exception that allows individuals who become HSA-eligible during a calendar year to make the full contribution amount for that year. Under this exception, individuals who are eligible to contribute to an HSA on Dec. 1 of a calendar year are allowed to contribute an amount equal to the annual HSA contribution amount provided they remained covered by the HSA for at least the 12-month period following that year. Contributions can be made as late as April 15 of the following year.
Limits – You can make a contribution to your HSA for each month that you are eligible. For each month that you are eligible, you can contribute one-twelfth of the annual maximum for HSA contributions. The full contribution rule described above for individuals who are eligible on Dec. 1 of a calendar year is an exception to the rule that HSA contributions limits are determined monthly. You can contribute no more than the designated annual maximum. For 2014, this is $3,300 for single coverage and $6,550 for family coverage. For 2015, the maximum is $3,350 for single coverage and $6,650 for family coverage. Individuals who are age 55 and older can also make additional “catch-up” contributions of up to $1,000 annually.
Who can contribute – Contributions to your HSA can be made by anyone, including you, your employer or a family member; the combined contributions of you and your employer (and anyone else making contributions to your HSA) can not exceed the HSA maximum contribution limit.
Contributions to the account must stop once you are enrolled in Medicare. However, you can still use your HSA funds to pay for medical expenses tax-free.
Using Your HSA
An HSA is managed by the account holder, giving you the choice of when to use your HSA dollars. You can begin using your HSA money as soon as your account is activated and contributions have been made. You can use your HSA account for any purpose, including paying expenses that are not qualified medical expenses. However, you only get the tax benefits of an HSA when you use the account for qualified medical expenses. If you use it for another purpose, you will be required to pay income tax on the withdrawal, and you may also be required to pay another 20 percent tax, unless you make the withdrawal after you reach age 65, become disabled or after your death.
Qualified Medical Expenses
You can use money in your HSA to pay for any qualified medical expense permitted under federal tax law, which includes most medical care and services, as well as dental and vision care. HSA distributions are tax-free if they are used for qualified medical expenses incurred by the account holder or his or her spouse or dependents. The qualified medical expenses must be incurred after the HSA is established.
Qualified medical expenses are defined in Section 213(d) of the federal tax code. Section 213(d) defines “medical care” to include amounts paid “for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.”
You can use your HSA account to pay for your health plan deductible, your copay or coinsurance for doctor’s office visits and prescription drugs, your share of the cost for dental care, such as exams and cleanings, and your costs for vision care, such as exams, eyeglasses and contact lenses. See Appendix B for a list of eligible expenses.
Generally, you cannot use your HSA to pay for medical insurance premiums, except specific instances, including:
- Any health plan coverage while receiving federal or state unemployment benefits
- Continuation coverage under federal law (COBRA or USERRA coverage)
- Qualified long-term care insurance
- Any deductible health insurance for HSA account holders who are age 65 or over (whether or not they are entitled to Medicare) other than a Medicare supplemental policy
You can use your HSA to pay for medical expenses for yourself, your spouse or your dependent children, even if your dependents are not covered by your HDHP. Any amounts used for purposes other than to pay for qualified medical expenses are taxable as income and subject to an additional 20 percent penalty. Examples of taxable expenses include:
- Medical procedures and expenses not considered qualified under federal tax law
- Over-the-counter drugs and medications without a prescription (except insulin)
- Other types of health insurance unless specifically described above
- Medicare supplement insurance premiums
- Non health-related expenses
After the age of 65, you can withdraw money for nonmedical expenses without penalty, but you will have to pay taxes on the money. If you become disabled, the account can be used for other purposes without paying the additional penalty. If you withdraw money from an HSA for non-medical expenses before you turn 65 (or become disabled), you will have to both pay taxes and a 20 percent penalty.
To Read Part 1, Click here!
What Are HSAs?
Health savings accounts (HSAs) are a great way to save money and efficiently pay for medical expenses. HSAs are tax-advantaged savings accounts that accompany high deductible health plans (HDHPs).
HSAs were created in 2003 to provide individuals who have HDHPs with a tax-preferred method of saving money for medical expenses. There are certain advantages to putting money into these accounts, including investment earnings and favorable tax treatment. The rationale behind the HSA/HDHP combination is that people will have a clearer idea of their medical costs and more control over their spending, enabling them to reduce their medical costs.
HSA money can be used tax-free when paying for qualified medical expenses, helping you pay your HDHP’s larger deductible. At the end of the year, you keep any unspent money in your HSA. This rolled over money can grow with tax-deferred investment earnings, and, if it is used to pay for qualified medical expenses, then the money will continue to be tax-free. Your HSA and the money in it belongs to you—not your employer or insurance company.
An HSA can be a tremendous asset as you save for and pay medical bills because it gives you tax advantages, more control over your own spending and the ability to save for future expenses.
Why Have an HSA?
HSA/HDHPs take a different approach to health coverage than other plans with lower deductibles. Having an HSA provides you with many benefits, including flexibility and easy saving, helping you plan and pay for medical expenses.
Here are some of the advantages an HSA provides you with:
- Security – Your HSA can provide a savings buffer for unexpected or high medical bills.
- Affordability – In most cases, you can lower your monthly health insurance premiums when you switch to health insurance coverage with a higher deductible, and these HDHPs can be paired with an HSA.
- Flexibility – You can use your HSA to pay for current medical expenses, including your deductible and expenses that your insurance may not cover, or you can save your funds for future medical expenses, such as:
Health insurance or medical expenses if unemployed
Medical expenses after retirement (before Medicare)
Out-of-pocket expenses when covered by Medicare
Long-term care expenses and insurance
Also, you do not have to use your HSA to pay for medical expenses. You can withdraw money from your HSA at any time and for any reason. However, if your HSA money is not used for medical expenses, you will have to pay income tax on your withdrawal. You will also have to pay a 20 percent additional tax, unless the withdrawal is made after you attain age 65, become disabled or after your death.
- Savings – You can save the money in your HSA for future medical expenses, all while your account grows through tax-deferred investment earnings.
- Tax Savings – An HSA provides you with triple tax savings:
Tax deductions when you contribute to your account
Tax-free earnings through investment
Tax-free withdrawals for qualified medical expenses
- Control – You make the decisions regarding:
How much money you will put in the account
When to make contributions to the account
Whether to save the account for future expenses or pay current medical expenses
Which expenses to pay for from the account
How to invest the money in the account
- Portability – Accounts are completely portable, meaning you can keep your HSA even if you:
Change your medical coverage
Move to another state
Ownership – Funds remain in the account from year to year, just like an IRA. There are no “use it or lose it” rules for HSAs, making it a great way to save money for future medical expenses.
Is an HSA Right for You?
HSAs are a growing trend in health care and offer many advantages, but whether it’s the right choice for you depends on several factors.
Comparing HSA/HDHPs to traditional health plans can be difficult, as each has pros and cons. For example, traditional health plans typically have higher monthly premiums, a smaller deductible and fixed copays. You pay less out-of-pocket costs due to the lower deductible, but you will pay more each month in premiums.
HDHPs with HSAs generally have lower monthly premiums and a higher deductible. You may pay more out-of-pocket medical expenses, but you can use your HSA to cover those costs, and you pay less each month for your premium.
The decision is different for each individual. If you are generally healthy and/or have a reasonable idea of your annual health care expenses, then you could save a lot of money from the lower premiums and valuable tax-advantaged account with an HSA/HDHP plan. For example, even someone with a chronic condition could take advantage of an HSA/HDHP plan if he or she has a good idea of his or her annual expenses and then budgets enough money to cover cost of care.
However, if you are older, more prone to illness or unexpected medical conditions, or prefer certainty in medical costs over the possible risk of unexpected out-of-pocket expenses, you may want to stick with a traditional plan. You’ll pay more in monthly premiums, but you will have a lower deductible and fixed copays.
Read more about How HSA’s work on Thursday!
On September 18th, the IRS released Notice 2014-55, helpful guidance that will provide relief for employees that have coverage through an employer’s group health plan but want to terminate coverage and enroll through the Health Insurance Marketplace (federal or state options). Notice 2014-55 expands the list of approved qualifying events to include enrollment in the Marketplace during an open enrollment period or Special Election Period. This development will primarily assist employees in non-calendar plan years concerned about being locked on the group health plan since the group plan renewal did not align with the Marketplace open enrollment period. With the change, employees now have the option to enroll in Marketplace coverage when eligible and make a corresponding Section 125 election change to drop group coverage. This effectively solves the “election lock” problem that has been a concern for both employers and employees. Note: the Marketplace open enrollment period for 2015 coverage will be from 11/15/14 through 2/15/15.
HEALTH CARE REFORM PROVISIONS
Which Health Care Reform Rules Do Not Apply to Grandfathered Plans?
The health care reform law specifically exempts grandfathered plans from certain requirements of the law. Grandfathered health plans are not required to comply with the following health care reform provisions:
- Coverage of Preventive Health Services. Effective for plan years beginning on or after Sept. 23, 2010, group health plans and health insurance issuers offering group or individual health insurance coverage must provide coverage for certain preventive health services without imposing cost-sharing requirements. Additional preventive health services for women must be covered without cost-sharing effective for the plan year beginning on or after Aug. 1, 2012.
- Patient Protections. Effective for plan years beginning on or after Sept. 23, 2010, the health care reform law requires the following protections for patients:
- Group health plans and health insurance issuers offering group or individual health insurance coverage that require designation of a participating primary care provider must permit each participant, beneficiary and enrollee to designate any available participating primary care provider (including a pediatrician for children);
- Group health plans and health insurance issuers offering group or individual health insurance coverage that provide emergency services may not impose preauthorization or increased cost-sharing for emergency services (in or out of network); and
- Group health plans and health insurance issuers offering group or individual health insurance coverage that provide obstetrical/gynecological care and require a designation of a participating primary care provider may not require preauthorization or referral for obstetrical/gynecological care.
- Nondiscrimination Rules for Fully Insured Plans. Fully insured plans will have to satisfy the requirements of Internal Revenue Code section 105(h)(2). This section provides that a plan may not discriminate in favor of highly compensated individuals as to eligibility to participate and that the benefits provided under the plan may not discriminate in favor of participants who are highly compensated individuals. This provision will be effective sometime after regulations are issued. The regulations will specify the effective date.
- Quality of Care Reporting. Reporting requirements will be developed for group health plans and health insurance issuers offering group or individual health insurance coverage. The reports will relate to benefit and reimbursement structures that are designed to improve health outcomes, prevent hospital readmissions, improve patient safety, reduce medical errors and implement health and wellness activities.
- Improved Appeals Process. Effective for plan years beginning on or after Sept. 23, 2010, group health plans and health insurance issuers offering group or individual health insurance coverage must implement an improved appeals process and meet minimum requirements for external review. A grace period until plan years beginning on or after Jan. 1, 2012, was provided for some elements of the process.
- Insurance Premium Restrictions. Effective for plan years beginning on or after Jan. 1, 2014, premiums charged for health insurance coverage in the individual or small group market may not be discriminatory and may vary only by individual or family coverage, rating area, age and tobacco use, subject to certain restrictions.
- Guaranteed Issue and Renewal of Coverage. Effective for plan years beginning on or after Jan. 1, 2014, health insurance issuers offering health insurance coverage in the individual or group market in a state must accept every employer and individual in the state that applies for coverage and must renew or continue in force the coverage at the option of the plan sponsor or the individual.
- Nondiscrimination in Health Care. Effective for plan years beginning on or after Jan. 1, 2014, group health plans and health insurance issuers offering group or individual insurance coverage may not discriminate against any provider operating within their scope of practice. However, this provision does not require a plan to contract with any willing provider or prevent tiered networks. Plans and issuers also may not discriminate against individuals based on whether they receive subsidies or cooperate in a Fair Labor Standards Act investigation.
- Comprehensive Health Insurance Coverage. Effective for plan years beginning on or after Jan. 1, 2014, health insurance issuers that offer health insurance coverage in the individual or small group market must provide the essential benefits package required of plans sold in the health insurance exchanges.
- Limits on Cost-Sharing. Effective for plan years beginning on or after Jan. 1, 2014, certain group health plans may not impose cost-sharing or out-of-pocket costs in excess of certain limits. Out-of-pocket expenses may not exceed the amount applicable to coverage related to HSAs and deductibles may not exceed $2000 (single coverage) or $4000 (family coverage). These amounts are indexed for subsequent years. The annual deductible limit applies to health plans in the small group market, while the out-of-pocket maximum applies to all non-grandfathered health plans.
Update—On April 1, 2014, President Obama signed into law the Protecting Access to Medicare Act of 2014 (H.R. 4302), which repealed the annual deductible limit under the ACA. This repeal is effective as of the date that the ACA was enacted, back on March 23, 2010.
- Coverage for Clinical Trials. Effective for plan years beginning on or after Jan. 1, 2014, group health plans and health insurance issuers offering group or individual insurance coverage must permit certain enrollees to participate in certain clinical trials, must cover routine costs for clinical trial participants and may not discriminate against participants.
Which Major Health Care Reform Rules Do Apply to Grandfathered Plans?
The provisions described below apply to both grandfathered and non-grandfathered health plans. Keep in mind that this is a description of major provisions that affect health plans, not an exhaustive list of how health care reform might affect your company.
- Extension of Dependent Coverage. Effective for plan years beginning on or after Sept. 23, 2010, group health plans must provide coverage for adult children up to age 26. For plan years beginning before Jan. 1, 2014, grandfathered plans may exclude an adult child under age 26 from coverage if the adult child is eligible to enroll in an employer-sponsored health plan, other than a group health plan of a parent.
- Elimination of Lifetime and Annual Limits. Effective for plan years beginning on or after Sept. 23, 2010, group health plans and health insurance issuers offering group or individual health coverage may not establish lifetime limits on the dollar value of essential health benefits. Group health plans may also not establish unreasonable annual limits. Effective for plan years beginning on or after Jan. 1, 2014, annual limits on the dollar value of essential health benefits are prohibited.
- Elimination of Pre-existing Condition Exclusions. Effective for plan years beginning on or after Sept. 23, 2010, pre-existing condition exclusions may not be applied to enrollees under age 19. Pre-existing condition exclusions are eliminated for all enrollees for plan years beginning on or after Jan. 1, 2014.
- Limits on Rescissions. Effective for plan years beginning on or after Sept. 23, 2010, coverage may not be rescinded, except in the case of fraud or intentional misrepresentation of material fact. Policyholders must be notified prior to cancellation.
- Limits on Waiting Periods. Effective for plan years beginning on or after Jan. 1, 2014, group health plans and health insurance issuers offering group or individual health insurance coverage may not require a waiting period of more than 90 days.
- Summary of Benefits and Coverage. Health plans and health insurance issuers must provide a summary of benefits and coverage (SBC) to participants, beneficiaries and applicants. There are specific content and format guidelines for the SBC. Issuers were required to start providing the SBC to health plans by Sept. 23, 2012. For participants and beneficiaries who enroll or re-enroll in plan coverage during an open enrollment period, plans and issuers must start providing the SBC with the open enrollment period that begins on or after Sept. 23, 2012. For participants and beneficiaries who enroll in plan coverage other than through an open enrollment period, the SBC must be provided starting with the plan year that begins on or after Sept. 23, 2012.
- Reporting Medical Loss Ratio. Effective for plan years beginning on or after Sept. 23, 2010, health insurance issuers offering group or individual health insurance coverage must annually report the percentage of premiums spent on non-claim expenses. Beginning Jan. 1, 2011, insurers must provide rebates if more than the applicable percentage is spent on non-claims costs.
More information on grandfathered plans is available through www.healthcare.gov/law/features/rights/grandfathered-plans/index.html.