2. © 2012 Employee Benefits Corporation

3. 3 Health Savings Accounts (HSAs) The Basics of HSAs Peter Antonie Compliance Communications Specialist Employee Benefits Corporation The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

4. 4 © 2012 Employee Benefits Corporation Today’s Agenda Origin/Overview of HSAs Eligible individuals High Deductible Health Plan (HDHP) Disqualifying coverage HSA contributions Participant HSA contribution issues Employer contributions to HSAs HSA Distributions HSAs compared to Health Care FSAs and HRAs

5. 5 © 2012 Employee Benefits Corporation Origin of HSAs The Medicare Prescription Drug, Improvement and Modernization Act of 2003 –Added new Code § 223 (created the HSA) –An IRA-type of account for medical expenses –Provided amendment to § 125 to allow HSAs in a cafeteria plan (exception for a benefit that provides deferred compensation)

6. 6 © 2012 Employee Benefits Corporation HSA Overview Account established in the individual’s name - not the employer’s Owned by the account holder HSA account must be with an IRS approved trustee to hold HSA dollars –Banks –Investment companies Account balance is non-forfeitable, interest earned is tax free Portable with the individual – not tied to employer

7. 7 © 2012 Employee Benefits Corporation Eligible Individual Eligible to make or receive HSA contributions Not another individual’s tax dependent Not entitled to (enrolled in) Medicare Covered by a qualified High Deductible Health Plan (HDHP) Not covered by any disqualifying coverage

8. 8 © 2012 Employee Benefits Corporation Eligible Individual HDHP All expenses, except preventive care, apply to the deductible Minimum annual deductible $1,200 for single coverage and $2,400 for other than single coverage – limited family, family, etc. (2012); $1,250/single and $2,500/family (2013) Maximum out of pocket amounts under the HDHP $6,050 for single and $12,100 for family (deductible and coinsurance); $6,250/single and $12,500/family (2013) Amounts are indexed – can be adjusted annually January 1 each year New amounts are announced in June for next year

9. 9 © 2012 Employee Benefits Corporation Eligible Individual No disqualifying coverage Examples of disqualifying coverage HRA that reimburses prior to satisfying minimum HDHP deductible Health Care FSA (own, spouse’s or parent’s - if under 26) Health insurance that has first dollar coverage or a lower deductible than HDHP minimums Prescription drug coverage prior to satisfying HDHP deductible (e.g., drugs covered after a co-pay)

10. 10 © 2012 Employee Benefits Corporation Eligible Individual Permitted coverage Specified disease (e.g., cancer ins.) Preventive care Stand-alone dental and/or vision coverage Insurance paying a fixed amount per day for hospitalization Workers’ compensation, tort liability or property insurance Limited Health Care FSA or Post-deductible Health Care FSA HRA designed to reimburse only after meeting at least minimum HDHP deductible amounts

11. 11 © 2012 Employee Benefits Corporation Ineligible Individual Example Bob and Betty are married. Both carry single health plan coverage through their employers. Bob has an HDHP and Betty has an HMO and Health Care FSA Bob cannot contribute to an HSA because Bob is eligible for first dollar reimbursement from Betty’s Health Care FSA If Betty participated in a Limited or Post Deductible Health Care FSA, Bob could contribute to an HSA

12. 12 © 2012 Employee Benefits Corporation HSA Contributions If employer offers pre-tax HSA contributions or makes employer contributions to HSAs, employer responsible to: Know that employee is covered by HDHP offered by the employer Know that the employee does not have disqualifying coverage offered by the employer Know whether the employee is eligible for “catch up” HSA contributions

13. 13 © 2012 Employee Benefits Corporation HSA Contributions By individual or family member as tax deduction at year-end (post-tax) By individual as pre-tax deduction in cafeteria plan By employer (employer’s contribution reduces the maximum the individual can contribute)

14. 14 © 2012 Employee Benefits Corporation HSA Contributions HSA contribution limits $3,100 for single coverage and $6,250 for family coverage (2012) $3,250/single and $6,450/family (2013) Additional “catch up” contribution of $1,000 allowed for individuals 55 or older Joint limit applies to married individuals Limited to family maximum split between the spouses if either or both have family HDHP coverage Assume 50%/50% split unless agreed upon differently

15. 15 © 2012 Employee Benefits Corporation HSA Contributions Annual maximum contribution is the sum of the monthly contribution limits (annual/12) for the months the individual was eligible to make contributions e.g., 2012 single maximum of $3,100 equates to $258.33 per month Full Contribution rule* for mid-year HDHP enrollees or coverage change allowed * also referred to as the last-month rule

16. 16 © 2012 Employee Benefits Corporation HSA Contributions Full Contribution rule Must be HSA eligible December 1 13-month testing period applies Contribution maximum is the greater of The annual maximum for coverage in effect December 1, or The sum of the monthly maximums for the HDHP coverage that was actually in effect for each month of the year

17. 17 © 2012 Employee Benefits Corporation HSA Contributions Full Contribution rule 13 month testing period applies Individual must remain HSA eligible from December 1 of the year the full contribution rule is used until the end of December of the following year If not, any additional contributions (those in excess of the sum of the monthly maximums) are treated as taxable income plus additional 10% tax

18. 18 © 2012 Employee Benefits Corporation HSA Contributions Full Contribution example #1 John enrolled in family HDHP coverage October 1 (no HDHP coverage prior) and uses the full-contribution rule John’s monthly maximum sum is $1,562 ($6,250/12 months X 3 months) John makes the full $6,250 contribution John’s additional contributions are $4,688 John must remain HSA eligible until December 31 of the following year If not, he is taxed on the additional contributions of $4,688 plus an additional tax of $468.80

19. 19 © 2012 Employee Benefits Corporation HSA Contributions Full Contribution example #2 Mary was enrolled in single HDHP coverage from January through August (8 months) Mary enrolled in family HDHP September 1 The sum of her monthly maximums is $4,155.01 ($3,100/12 mo x 8 mo) + ($6,250/12 mo x 4 mo) Family HDHP contribution maximum is $6,250 Mary contributes $6,250 using the full contribution rule Mary’s additional contributions = $2,094.99 (subject to taxation if she doesn’t remain HSA eligible through the testing period)

20. 20 © 2012 Employee Benefits Corporation HSA Contributions Roll over from Health Care FSA or HRA No longer available Roll over must have been completed by December 31, 2011 Participant must have been a participant in the employer’s Health Care FSA or HRA on September 26, 2006 Could roll over the lesser of balance on 9/26/06 or the end of current plan year Participant must remain HSA eligible during the 13-month testing period

21. 21 © 2012 Employee Benefits Corporation HDHP & HSA Limits* * minimum = deductible, maximum = out-of-pocket 2012 min/max –Single $1,200/$6,050 –Family $2,400/$12,100 2012 contribution limit –Single $3,100 –Family $6,250 2013 min/max –Single $1,250/$6,250 –Family $2,500/$12,500 2013 contribution limit –Single $3,250 –Family $6,450

22. 22 © 2012 Employee Benefits Corporation Participant HSA contribution issues Scenarios assume the participant’s employer has HDHP with HSA Spouse’s employer implements non-HDHP Spouse takes job with employer that has non-HDHP coverage Spouse takes job with employer that has HDHP with HSA coverage Participant marries Participant’s spouse loses job and HDHP with HSA coverage Participant’s spouse loses job and non-HDHP coverage

23. 23 © 2012 Employee Benefits Corporation Spouse’s employer implements non-HDHP Participant drops health plan and enrolls on spouse’s non-HDHP Participant cannot make future HSA contributions Participant switches to single health plan, spouse enrolls in single non-HDHP Participant can make future single plan HSA contributions, unless spouse elects a Health Care FSA Participant remains in family coverage, spouse does not enroll in non-HDHP coverage Participant can continue family HSA contributions, assuming spouse does not elect a Health Care FSA

24. 24 © 2012 Employee Benefits Corporation Spouse takes job with employer that has non-HDHP coverage Participant continues family HDHP coverage and spouse does not enroll Participant continues family HSA contributions, assuming spouse does not elect Health Care FSA Participant switches to single HDHP coverage and spouse enrolls in single non-HDHP Participant limited to single HSA contributions for remainder of tax year, assuming spouse does not elect Health Care FSA

25. 25 © 2012 Employee Benefits Corporation Spouse takes job with employer that has non-HDHP coverage (continued) Participant switches to single or drops plan and spouse enrolls in family non-HDHP Participant ineligible for future HSA contributions

26. 26 © 2012 Employee Benefits Corporation Spouse takes job with employer that has HDHP with HSA Spouse enrolls in family HDHP, participant drops his/her employer’s health plan Participant continues to make family HSA contributions (spouse makes none), or Spouse establishes account and makes family contributions (participant makes none), or Spouses split the future family HSA contributions Participant continues in family coverage Spouse can enroll in single or family coverage. Participant continues to make his/her own family HSA contributions (spouse makes no contributions), or Participant splits family contributions with spouse

27. 27 © 2012 Employee Benefits Corporation Spouse takes job with employer that has HDHP with HSA (continued) Participant switches to single health plan, spouse enrolls in single HDHP Participant's future HSA contributions reduce to single amount for remainder of tax year. Spouse can make single HSA contributions for remainder of tax year Participant switches to single health plan, spouse enrolls in family HDHP Participant and spouse can split family HSA contribution amount, or Participant can stop making contributions and spouse makes family contributions for remainder of tax year

28. 28 © 2012 Employee Benefits Corporation Participant marries Participant drops his/her employer’s health plan and enrolls on spouse’s plan If spouse’s plan is HDHP, participant can make family HSA contributions or split family contribution with spouse for remainder of tax year, assuming spouse has no Health Care FSA Participant and spouse keep single health plans with their employers Participant limited to single amount for HSA contributions unless spouse has a Health Care FSA, then no future HSA contributions allowed

29. 29 © 2012 Employee Benefits Corporation Participant marries (continued) Spouse drops his/her coverage. Participant enrolls in family HDHP Participant eligible for family HSA contributions for remainder of tax year (limit can be split between spouses or all contributed by one spouse), unless spouse has Health Care FSA

30. 30 © 2012 Employee Benefits Corporation Participant’s spouse loses job and had HDHP with HSA coverage Participant can enroll in employer’s health plan Participant or spouse can make family HSA contributions or split the limit Contributions can be into the spouse’s account or participant can establish new HSA account

31. 31 © 2012 Employee Benefits Corporation Participant’s spouse loses job and non- HDHP coverage Spouse and participant do not elect COBRA, participant can enroll in family HDHP coverage and make family HSA contributions for remainder of tax year (participant alone or split with spouse) Spouse elects COBRA for single plan, participant enrolls in single HDHP and can make single HSA contributions for remainder of tax year, unless spouse elected COBRA for Health Care FSA

32. 32 © 2012 Employee Benefits Corporation HSA Contributions Pre-tax vs. Post-tax Pre-tax through cafeteria plan Immediate tax savings Automatic contributions Could affect future Social Security Benefit Employer and employee contributions subject to IRC §125 nondiscrimination testing Post-tax outside cafeteria plan Line item adjustment at year-end No effect on future Social Security benefit Any employer contribution subject to Comparability rules of §223 No effect on §125 nondiscrimination testing

33. 33 © 2012 Employee Benefits Corporation Employer HSA contributions Through a cafeteria plan If employees can make pre-tax contributions, employer contributions are considered made through the cafeteria plan (Treasury Reg. §54.4980G-5) Employer contributions and any employee pre-tax contributions are subject to IRC §125 nondiscrimination testing Outside a cafeteria plan Subject to Comparability rules of § 223 Comparable contributions for comparable participating employees (e.g., same dollar amount for all enrolled in single plan coverage, % of HDHP deductible, etc.) Cannot be based on age, years of service or compensation

34. 34 © 2012 Employee Benefits Corporation HSA Contributions through Cafeteria Plan §125 Nondiscrimination Testing HSA contributions (employer & employee) treated as premiums HSAs are taken into account when performing the § 125 Contributions & Benefits test* and Key Employee 25% Concentration test Failing either or both tests means the HCEs or Key employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs) * If employer HSA contributions are not comparable, the C&B Availability test fails if HCEs receive a higher amount

35. 35 © 2012 Employee Benefits Corporation HSA Distributions Distributions are tax free for qualified medical expenses incurred after HSA is established non-medical distribution is taxed plus additional 20% penalty Distributions act as reimbursement of medical expenses to the account holder Generally for medical expenses of account holder, spouse or tax dependents (eligible child rule to age 26 does not apply) Qualified medical expenses the same as for a Health Care FSA (IRC § 213(d)) with exception for some premiums

36. 36 © 2012 Employee Benefits Corporation HSA Distributions Premiums eligible from HSA Qualified long term care insurance (LTC) COBRA or USERRA leave premiums Any health plan premiums during period receiving unemployment compensation If over 65, account holder’s health coverage other than Medicare supplement (e.g., premiums for retiree coverage, Medicare Part B or D or Medicare Advantage, etc.)

37. 37 © 2012 Employee Benefits Corporation Health Care FSA vs HRA vs HSA FeatureHealth Care FSAEBC HRAHSA Contributions Employer and employee Employer Employer and employee Maximum Contribution Set by employer Indexed annually Tax status of ER contributions Excludable from EE income Same PortabilityNone Individual account HDHPNot required Required Non-Medical expenses Not allowed Subject to 20% penalty + tax

38. 38 © 2012 Employee Benefits Corporation Health Care FSA vs HRA vs HSA (continued) FeatureHealth Care FSAEBC HRAHSA Coverage Period12 monthsPlan determinesDoes not apply Uniform coverage rule AppliesDoes not apply Substantiation requirements Plan must substantiate Individual substantiation Reimbursement order FSA pays last unless HRA document over rides HRA pays first unless HRA document stipulates FSA Cannot have FSA or HRA cover same expenses

39. 39 © 2012 Employee Benefits Corporation Questions? Any questions can be addressed by e-mail or phone at your convenience Compliance Department 800 346 2126 compliance@ebcflex.com compliance@ebcflex.com Thanks for Attending!! http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx Visit our online blog: