Recent HSA Guidance Provides Helpful Information For Employers.

For employers contemplating whether to implement Health Savings Accounts (HSAs) as part of consumer-directed health care plans, the recently issued IRS Notice 2004-50 provides helpful guidance. Many employers have been reluctant to adopt HSAs due to uncertainty regarding health plan design and the viability of HSAs compared to other account-based health plans such as health reimbursement arrangements (HRAs). Under the new guidance, the IRS clarified the following issues for employers:

Employers can provide wellness, disease management and employee assistance programs (EAP) without disqualifying employees from making HSA contributions. One of the eligibility requirements to make HSA contributions is that an individual cannot have coverage in addition to a high deductible health plan (HDHP), other than certain permitted insurance or permitted coverage. The guidance clarifies that programs such as EAPs, disease management and wellness programs can be offered alongside the HDHP as long as they do not provide significant benefits in the form of medical care and treatment.

Employers may design an HDHP to include reasonable lifetime or annual limits on benefits or exclusions for specific benefits. Any restriction on specific benefits is reasonable only if significant other benefits remain available under the plan.

Employers can cover certain prescription drugs below the HDHP deductible if they are preventive care. Drugs are considered preventive care when taken by an individual who has developed risk factors for a disease that has not yet become clinically apparent, or to prevent the recurrence of a disease after an individual's recovery. For example, an individual with high cholesterol can take statins to prevent heart disease; stroke victims can take ACE inhibitors; and individuals can take certain medications as part of smoking cessation or obesity weight-loss programs. However, the IRS has informally indicated that insulin for diabetics and prescription drugs to treat asthma cannot be covered below the HDHP deductible. This is an important development for those employers who want to provide some first dollar prescription drug coverage and still offer HSAs. The IRS previously authorized a transition rule permitting first dollar coverage of all prescription drugs until January 1, 2006.

Employers can provide employees with health discount programs, such as discount prescription drug cards, without adversely affecting an employee's eligibility to make HSA contributions.

HSA dollars can be used to pay for long-term care premiums, subject to certain limits, even if the employee contributes to the HSA through a cafeteria plan. HSA distributions can also be used to pay for certain long-term care services.

Employers are not responsible for substantiating that HSA distributions are used by employees for qualifying medical expenses, but they are responsible for determining whether the employee is covered by a HDHP, whether the employee is covered by any employer-sponsored low-deductible health plans and the employee's age for purposes of making catch up contributions. The employer can rely on the employee's representation regarding date of birth.

However, not all of the guidance in Notice 2004-50 is helpful to employers. The IRS also clarified the following issues:

Employers and HSA custodians and trustees cannot place any restrictions on an employee's use of HSA contributions, including employer contributions. Some employers wanted the IRS to permit restrictions, such as requiring employer contributions to be used solely to pay for qualifying medical expenses. Of course, if an employee uses HSA distributions for non-qualifying medical expenses the employee will be subject to income and possible excise taxes.

Employers that make HSA contributions must ensure that comparable participating employees actually receive comparable HSA contributions. Thus, employers cannot match employees' contributions, vary contributions based on age or service or condition contributions based on an employee's participation in health assessments, disease management programs or wellness programs. Significantly, the IRS will permit employers to adopt these contribution practices if the contributions are made through the employer's cafeteria plan. Of course, any such contributions will be subject to the cafeteria plan nondiscrimination rules.

Employers may not place restrictions on the ability of employees to roll their HSA account balances over to another HSA trustee or custodian of their choice.

Employers can add HSA cafeteria plan contributions mid-year, but the addition of an HSA benefit is not a change in status that would permit an employee to cease participation in a potentially disqualifying health flexible spending arrangement.

Employers who choose to front load HSA contributions through a cafeteria plan must require employees to repay the accelerated contribution by year end. But if an employee terminates employment mid-year, the employer cannot recoup the accelerated contributions from the HSA.

The recent IRS guidance will better enable employers to evaluate whether HSAs are a feasible component of their consumer directed health plan designs. Some employers may be attracted by the relative simplicity of HSAs, especially if an employer intends to fund HSAs with pre-tax employee contributions through a cafeteria plan. Other employers will prefer HRAs, if for no other reason than to retain greater control over account design and the use of the account funds. Given the complexity of the recent IRS guidance, any HSA must be carefully designed and implemented to ensure that employees will be eligible to make HSA contributions.

This article is a brief outline of the many clarifications made by the IRS in Notice 2004-50. Contact your McDermott employee benefits lawyer or any of the lawyers listed under Contacts for more information or solutions to design and implementation issues associated with HSAs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Keith Bilezerian

McDermott, Will & Emery

600 Thirteenth Street NW

Washington, DC

20005-3096

UNITED STATES 

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