HSAs - Let's Keep It Simple

Everyone's talking about Health Savings Accounts (HSAs), but when it gets down to implementation and administration - what's the first step, and how do you administer a Health Flexible Spending Account (HFSA) or a Health Reimbursement Arrangement (HRA) along side an HSA?

Background

HSAs are individually owned health reimbursement accounts that allow untaxed dollars to fund the account. Interest or dividends accumulate tax-free; and payment of qualified medical expenses has no additional tax consequences.

Individuals who make contributions to an HSA must be covered by a qualified, high-deductible health plan (HDHP). The HDHP must satisfy minimum deductible amounts with certain out-of-pocket maximums. Account holders may not be covered by any other insurance plan that is not an HDHP or that covers benefits provided by the HDHP. However, the account holder may obtain "permitted insurance" or "permitted coverage" products, such as policies that provide dental, vision, accident, disability, and long-term care benefits.

The HDHP can also provide "preventive care" that is below the minimum deductible amount or without a deductible.

Flexible benefits coupled with an HSA

Certain types of HFSAs and HRAs can be administered along side an HSA. These include a limited FSA or HRA, high-deductible FSAs or HRAs, or a suspended or retirement HRA.

Choose the plan that is easy to administer, and more importantly, easy to communicate to employees. We will explore the pros and cons of offering limited-purpose HFSAs and/or HRAs with an HSA.

Limited-Purpose HFSA or HRA: The HFSA and HRA is limited only to payment of permitted coverage items like vision and dental expenses ˆ whether or not the HDHP's minimum annual deductible has been met. The limited-purpose HRA could also compensate premiums for permitted insurance plans that cover a specific disease or illness or that provides a fixed amount per day of hospitalization.

This range of benefits does not breach the "no other insurance" rule of HSAs. It also should be noted that the limited-purpose programs could pay for preventive care, as described in IRS Notice 2004-23.

When adding other benefits to the employer's benefit package, review all the benefits involved ˆ both old and new. The IRS does not limit the amount of medical expenses that may be reimbursed to a participant in the HFSA. To make the HFSA a true benefit, increase the HFSA limit to an amount advantageous to all employees.

An annual HFSA limit of $5,000, for an employer with low turnover, will increase the number of participants in the plan and increase the average deferral per employee. The more employees participate in the plan, the more the employer will save in taxes.

Employee education

First, did the employee enroll in the HDHP and the HSA? Good, now they should be automatically enrolled in the employer's limited HFSA. This limited HFSA will only pay for vision and dental expenses incurred during the flexible benefits plan year.

Why would the employee want to elect into the HFSA if they have an HSA? Well, they might want to save their HSA account funds for a catastrophic event. They may not be able to fully fund the HSA up to the maximum deductible of the health insurance plan. HSA plans grow tax free, so why not keep as many funds in there as possible? By putting vision and dental fees through the HFSA, employees still enjoy the 25% to 40% savings on all these type of expenses.

And don't confuse the issues. Employees who choose HDHP coverage do not lose their right to participate in the regular HFSA. Only if they want to contribute to an HSA would they want the limited FSA.

Administration

You might have noticed that preventive care was not mentioned in employee education. Unless you are working with a full-blown health care system, your claims processor may not know what preventive care is. It can range from tests and diagnostic procedures, tobacco cessation programs to obesity weight-loss programs, and includes a plethora of Safe Harbor Preventive Care Screening Services. The definition may even be expanded to include certain drugs or other therapies.

No one wants their HFSA claims processors to become health care experts, so keep it simple. Reimburse vision and dental expenses from the HFSA. Both the employees and the claims processor will be on the same page.

A software system should be able to:

1. Allow more than one type of HFSA per employer and,
2. Identify the types of expenses allowed through each portion of the plan.

For instance, the regular HFSA would accept all eligible 213(d) expenses, as outlined in the plan document, but the limited HFSA would only accept expenses incurred for vision or dental expenses.

Plan document changes

The plan document needs to allow for HSA contributions to flow through the plan. In this manner, both the employer and their employees enjoy the highest tax savings afforded to HSA contributions. And the plan document must allow for a limited HFSA. A separate plan document is not required. For example, in the case where a participant is in the HSA and the HFSA, they will automatically become a participant of the limited HFSA.

That's as simple as it gets. And you thought that consumer-driven health plans were diffucult to understand.

Click here for more information on HSA's.