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April 21, 2004
CC:DOM:CORP:R (Notice 2004-2)
Internal Revenue Service
Ben Franklin Station
Washington, DC 20004
Re: Additional Comments on Health Savings Account Guidance
I am writing on behalf of America's Health Insurance Plans (AHIP) to request additional guidance from the Department of the Treasury regarding Health Savings Accounts (HSAs). These accounts were authorized by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (PL 108-173).
America's Health Insurance Plans is the national trade association representing the private sector in health care. Our nearly 1,300 member companies provide health, long-term care, dental, vision, disability, and supplemental coverage to more than 200 million Americans.
We previously submitted recommendations on specific issues related to Notice 2004-2, HSA guidance issued December 22, 2003. Those comments addressed the definition of "preventive care" for purposes of a high deductible health plan, coverage for "permitted insurance" and prescription drugs, and how HSAs may be used with other tax-advantaged health care accounts or arrangements.
Our comments today address additional issues related to Notice 2004-2, as well as issues concerning the most recent Treasury Department guidance released March 30, 2004. (Notice 2004-23, Notice 2004-25, Rev. Ruling 2004-38, and Rev. Proc. 2004-22). Our recommendations (which are detailed in the attachment to this letter) include the following:
Requirements for High Deductible Health Plans
We appreciate the Department's efforts to provide guidance as possible given the January 1, 2004 effective date for HSAs. Access to timely guidance directly impacts our members' ability to develop and market these new products.
We are working with our member companies to identify additional HSA implementation concerns as they arise. America's Health Insurance Plans will provide the Treasury Department with our views on those issues as appropriate. Please do not hesitate to contact me if you have any questions.
Diana C. Dennett
Executive Vice President
America's Health Insurance Plans
cc: Roy J. Ramthun
A. Requirements for High Deductible Health Plans
(1) Clarify that an HDHP providing family coverage may apply both an aggregate deductible to the family and lower individual deductibles to each family member.
Health plans and insurers need flexibility to structure HDHPs in ways that will best meet the needs of purchasers. Many high deductible health plans providing family coverage apply an aggregate deductible to the family and lower individual deductibles to each family member. The individual deductibles (sometimes called "embedded" deductibles) allow an individual who incurs significant medical expenses during the year to receive coverage under the HDHP before the family deductible is satisfied. This feature allows an individual who elects family coverage to be treated similarly with respect to the deductible as an individual who elects self-only coverage.
We believe that applying both an aggregate deductible to the family and an individual deductible to each family member is permitted under Code section 223, as long as both deductibles are at least as high as that required for family coverage. While Code section 223(c)(2) establishes the minimum annual deductibles for high deductible health plans for each coverage level (self-only and family), neither the legislation nor the legislative history prohibits an HDHP with family coverage from also applying separate individual deductibles. An HDHP that contains both an aggregate family deductible and separate individual deductibles appears to be permitted in Notice 2004-2 on Health Savings Accounts in Question A-3, Example (2). It would be helpful, however, for IRS guidance to affirmatively state that such a plan design does not conflict with the HSA statutory requirements, as long as no deductible is below the minimum annual deductible for family coverage.
Q: Does a plan providing family coverage satisfy requirements for an HDHP if it contains both an aggregate family deductible and lower individual deductibles for family members?
A: Yes. Code section 223(c)(2) requires a high deductible health plan (HDHP) that provides family coverage to have a minimum annual deductible of at least $2,000. An HDHP providing family coverage may combine an aggregate family deductible and separate deductibles for individual family members so long as no deductible under the policy is below the annual minimum deductible as required under Code section 223(c)(2).
Example: A plan provides coverage for A and her family. The plan has a $5,000 family deductible and provides payment for covered medical expense if any member of A's family has incurred covered medical expenses during the year in excess of $2,000. The plan satisfies the requirements for an HDHP with respect to deductibles.
(2) Clarify that an HDHP providing family coverage may apply an aggregate family out-of-pocket expense maximum and individual out-of-pocket expense maximums for individual family members.
As discussed in (1) above, flexibility in structuring deductibles for HDHPs offering family coverage is vital to making HSA products attractive to purchasers. We believe the HDHP may include both aggregate and individual annual out-of-pocket expense maximums as long as they do not exceed statutory limits. As with embedded deductibles, permitting both aggregate and individual out-of-pocket expense maximums will serve to ensure the attractiveness of HDHP family coverage in the marketplace.
Code section 223(c)(2)(A)(ii) places limitations on the maximum amount of the annual deductible and other annual out-of-pocket expenses for covered benefits required to be paid under a qualified HDHP. The Code section does not expressly prohibit an HDHP providing family coverage from applying both an aggregate family limit on the deductible and other out-of-pocket expenses and a lower limit on the deductible and other out-of-pocket expenses for individual family members.
Q: Does a plan providing family coverage satisfy requirements for an HDHP if it contains both an aggregate limit on the annual deductible and other annual out-of-pocket expenses and separate limits on the annual deductible and other annual out-of-pocket expenses for individual family members?
A: Yes. Under Code section 223(c)(2)(A)(ii), annual out-of-pocket expenses (including deductibles) required to be paid under a high deductible health plan may not exceed $10,000 for family coverage. An HDHP providing family coverage may include an aggregate limit on the annual deductible and other annual out-of-pocket expenses for the family and separate limits on the annual deductible and out-of-pocket expenses for individual family members.
Example: A plan provides coverage for C and his family. The plan has a $5,000 family deductible and provides payment for covered medical expenses for any member of C's family if they incur covered medical expenses during the year in excess of $2,000. The sum of the deductibles and other annual out-of-pocket expenses for covered benefits required to be paid under the plan does not exceed $8,000 for the family or $4,000 for any individual family member. The plan satisfies the requirements for an HDHP.
(3) Provide a transition period to allow modifications to a high deductible health plan (HDHP) established in good faith compliance with the Code and with applicable Treasury Department guidance or rulemaking in the event subsequent guidance or rules require changes to the HDHP.
A number of AHIP's members currently offer high deductible health plans or intend to market such products within the next 12 months. In addition, many health plans and insurers that previously sold Archer Medical Savings Accounts (MSAs) are allowing those account holders to convert to an HSA.
Almost all HDHPs are subject to state regulation and the policy forms and rates must be approved by the state insurance regulators before the plans can be sold. The processes for state approval can be lengthy and it may take a period of time for a health plan or insurer to file and obtain authorization for any required HDHP modifications. Individual taxpayers should not be penalized because of the state approval process.
Recently, the Treasury Department issued guidance allowing a transition period in certain situations involving the payment of medical expenses prior to the establishment of a health savings account (Notice 2004-25) and where an HDHP may provide coverage for prescription drug costs through a separate plan or rider (Rev. Proc. 2004-22).
We believe that it is very important for the Treasury Department to continue its policy of granting specific transition relief to cover a particular fact situation involving health savings accounts. In addition, the Treasury Department should provide a general transition period for high deductible health plans that are established in good faith compliance with the statute and with HSA guidance, where the terms and conditions of such HDHPs may need to be modified to conform to subsequently issued rulemaking or guidance.
Providing a general transition period would minimize uncertainty regarding the tax status of HSAs by allowing health plans and insurers a period of time to make changes to qualified high deductible health plans in the event that any new Treasury Department guidance or rulemaking require modifications to the HDHP. This transition period would be in addition to any specific transition relief that may be provided as appropriate, based on a particular fact situation involving health savings accounts.
We believe that health plans and insurers should be given until the later of the renewal date of the HDHP or a time period of at least 12 months to make necessary changes to the HDHP.
Q: Will an HDHP issued in good faith compliance with statutory requirements and guidance be granted a period of transition relief to conform to any Treasury Department guidance or rulemaking that is subsequently released?
A: Yes. An HDHP issued by an insurer or health plan in good faith compliance with Code section 223 will have the later of the following time periods to comply with any Treasury Department rulemaking or guidance released after the issuance date of the HDHP:
a) The renewal date of the HDHP; or
b) 12 months after the issuance of Treasury Department guidance.
During such transition period, the HDHP will be deemed to satisfy statutory requirements for use with an HSA.
(4) Allow a limited transition period for HDHPs that incorporate coverage for mental health or other services through a separate plan or rider.
Recent guidance from the Treasury Department (Rev. Rul. 2004-38) clarifies that an individual who is covered by a health plan that provides prescription drug benefits before the minimum annual deductible for an HDHP is met is not eligible for an HSA.
The Treasury Department has recognized that some health plans and insurers may need time to modify the benefit structure for their high deductible health plans to conform to the statutory requirements for HDHPs. As a result, the Treasury Department has also issued guidance (Rev. Proc. 2004-22) that suspends the application of Rev. Rul. 2004-38 until January 1, 2006. This transition period allows health plans and insurers time to modify their administrative and other systems related to providing coverage for prescription drug costs.
There are other health benefits which some health plans and insurers may also administer separately such as coverage for mental health services or for alcohol and substance abuse services. These plans may have similar concerns about the application of Rev. Rul. 2004-38 to such benefits that are administered separately from the HDHP.
We suggest that guidance be issued providing a transition period to January 1, 2006 for any benefits that are administered separately from the HDHP. This guidance would incorporate the language used in Rev. Proc. 2004-22.
(5) Allow cost-of-living adjustments for annual deductibles and out-of-pocket expense limitations for a qualified high deductible health plan to be applied as of the renewal date of the plan.
Code section 223(c)(2) establishes certain requirements for the deductibles and out-of-pocket expenses in connection with a qualified high deductible health plan (HDHP). Section 223(g)(1) provides an annual cost-of-living adjustment (COLA) to these amounts. The adjustments are determined for the calendar year in which the taxable year begins (i.e., January 1st).
Any required COLA changes to the deductibles and out-of-pocket expense limits should not be applicable until the renewal date of the plan. In general, coverage requirements and premiums for health insurance policies are established based on the term of the policy and are not readjusted until the renewal date. Requiring a non-calendar year health plan to change the deductibles and out-of-pocket expense limits during the middle of the policy term may increase the administration and cost of the HDHP. To avoid these consequences, the requirements of the HSA statute with respect to cost-of-living adjustments should be deemed to be satisfied, as long as the HDHP coverage requirements are modified to reflect the new deductible and out-of-pocket expense amounts upon renewal of the policy.
AHIP recommends guidance be issued to clarify that any COLA changes to the deductible amounts or out-of-pocket expense limits on a qualified high deductible health plan that may be required by Section 223(g) may be applied as of the renewal date of the HDHP.
Q: May a high deductible health plan (HDHP) apply any required cost-of-living adjustments to the deductible amounts or out-of-pocket expense limits on the renewal date of the HDHP if that date is after January 1st?
A: Yes. Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and limitations on out-of-pocket expense. These amounts are indexed for inflation using annual cost-of-living adjustments (COLAs). Any required COLA changes to the deductibles and out-of-pocket expense limits may be applied as of the renewal date of the HDHP in cases where the renewal date is after the beginning of the calendar year.
Example: An individual obtains self-only coverage under an HDHP on June 1, 2004 with an annual deductible of $1,000. Assume that the COLA changes require the minimum deductible amount to be adjusted by $50 in 2005. The minimum deductible for this plan increases to $1050 as of its renewal date of June 1, 2005. The plan satisfies the requirements for an HDHP with respect to deductibles.
B. Contributions to Health Savings Accounts
(1) Clarify that the tax-deductible contribution limitation for a health savings account that is maintained by a participant who is covered by a family HDHP is based on the aggregate family deductible for the HDHP, even though there may be separate individual deductibles included in the plan.
In general, Code section 223(b) limits the tax-deductible contributions to a health savings account to the lesser of: (a) the annual deductible of the HDHP that provides coverage to the participant or (b) a specified dollar amount (in 2004, the dollar amounts are $2,600 in the case of self-only coverage and $5,150 in the case of family coverage). The contribution limits are determined on a monthly basis. Both the annual deductible amount and the statutory dollar amounts may change each year based on a cost-of-living adjustment, and additional catch-up contributions that are allowed for individuals who are ages 55-64 years.
As discussed above, some high deductible health plans providing family coverage may include separate "embedded" deductibles for individual family members that are lower than the aggregate family deductible. The Treasury Department should clarify that the contribution limit for the HSA is based on the aggregate family deductible amount and not on any separate individual deductibles that may be included in the HDHP. Where more than one person is relying on the HSA to cover medical expenses before the individual or family deductible is satisfied, a higher contribution level for the HSA is necessary.
Without such guidance, it is possible HSA participants would be unable to pay for current medical expenses or save for future health care needs because the funds in their health savings account would be exhausted before the aggregate family deductible on an HDHP is met. This was clearly not the intent of Congress. The provisions of Code section 223 established by the Medicare Act are based in large part on the House Savings Account Availability Act (HR 2351) which was approved by the House of Representatives' Ways and Means Committee in June 2003. The House Committee Report outlined the purpose of the legislation:
The Committee believes that individuals should be encouraged to save for future medical care expenses and that individuals should be allowed to save for such expenses on a tax-favored basis. The Committee believes that it is important for individuals to accumulate assets for health care expenses, such as retiree health and prescription drug costs. The Committee also believes that uninsured individuals should be encouraged to set aside funds for future health costs. The Committee believes that consumers who spend their own savings on health care will make cost-conscious decisions, thus reducing the rising cost of health care.US House of Representatives, Report 108-177, p. 13.
To this end, participants in an HDHP with family coverage that includes lower individual deductibles should be permitted to contribute the maximum amount of tax deductible funds in the accompanying health savings account to pay for the medical expenses that the participants or their family members may incur. Even if the HDHP with family coverage includes a separate, lower individual deductible, it is entirely possible that no coverage would be provided under the HDHP until the total family deductible is met because no single family member will meet the individual deductible amount. HSA participants should not be penalized in such an event by limiting the amount of money that may be contributed into their account.
Q: May a participant in a health savings account calculate the maximum HSA contribution limit based on the amount of the aggregate family deductible for an HDHP with family coverage if the HDHP includes a separate individual deductible?
A: Yes. The maximum annual contribution to an HSA is the lesser of: (a) the annual deductible of the qualified high deductible health plan that provides coverage to the participant; or (b) a specified dollar amount (for 2004 the amount is $5,150 for family coverage computed monthly). The annual deductible amount and the contribution limit refer to the aggregate amount of the family deductible for a high deductible health plan with family coverage even in cases where the HDHP may provide a lower individual deductible that is separate from the aggregate family deductible.
Example: An HDHP that provides family coverage has a total family deductible of $3,000 although coverage is provided to any one family member whose medical expenses under the plan exceed $2,000. The HSA participant is allowed to make an annual HSA contribution of up to $3,000.
(2) Allow employers that establish health savings accounts through a cafeteria plan to advance funds into the account to cover qualified medical expenses that are incurred before the HSA is fully funded (similar to funding rules for health flexible spending arrangements).
Employees who are offered HSAs through section 125 cafeteria plans may elect to make their HSA contributions through pre-tax salary deductions. An employee who incurs qualified medical expenses at the beginning of the plan year, however, may find that the funds available in the account are insufficient to pay those expenses. This situation can be remedied by permitting employers to apply a rule similar to the uniform coverage rule under Prop. Treas, Reg. § 1.125-2, Q&A-7(b)(2) (65 Fed. Reg. 1 5887). This proposed rule requires the employer to make available to the participant, on the first day of the plan year, the total salary reduction amount that a participant elects under a health Flexible Spending Arrangement for the year. Allowing employers the flexibility to apply this rule to health savings accounts will make HSAs more attractive to both employers and employees.
Q: If an employer offers HSAs to its employees through pre-tax salary reduction, may the employer provide an advance to a participating employee for expenses that exceed that employee's current HSA balance?
A: Yes. Employers may (but are not required to) apply a rule similar to the uniform coverage rule under Prop. Treas. Reg. § 1.125-2, Q&A-7(b)(2) when offering HSAs through cafeteria plans. Where employees elect to make contributions to their HSAs through pre-tax salary reduction, their employers are permitted to provide an advance for amounts in excess of the employees' current HSA balances without adverse tax consequences. Such advances allow employees a means of paying qualified medical expenses incurred early in the plan year.
(3) Allow employers to match employee contributions to a health savings account.
One way for employers to encourage employees to participate in HSAs is to provide an incentive through an employer match of employee contributions. Employer and employee contributions are permitted to the extent they do not exceed the contributions limits established under Code section 223(b). The ability to use an employer match would also encourage employers to consider offering HSAs to their employees.
Code section 4980G imposes a tax on employers who fail to make comparable contributions to the HSAs of their employees. According to this section, rules and requirements similar to those established for Archer Medical Savings Accounts under section 4980E shall apply. Those rules are satisfied if an employer "makes available comparable contributions" on behalf of "all comparable participating employees for each coverage period during such calendar year." Code section 4980E(d).
"Comparable contributions" means contributions which are either the same amount or the same percentage of the annual deductible limit under the HDHP covering the employees. Code section 4980E(d)(2)(A). "Comparable participating employees" refers to all employees who are eligible individuals covered under the HDHP of the employer, and who have the same category of coverage (self-only or family coverage). Code section 4980E(d)(3).
Under a plain reading of Code section 4980E, an employer match is permitted as long as the same employer match is offered to all employees who are eligible for an HSA and covered under an HDHP at each coverage level.
Q: Are employers permitted to match their employees' HSA contributions?
A: Yes. Employers may provide matching contributions to the HSAs of their employees when the same match is offered on the same terms to all eligible employees covered under an HDHP at each coverage level.
Example 1: An employer establishes HSAs for its eligible employees and offers to match employee contributions, dollar for dollar, up to a maximum of $500 for those employees with HDHP self-only coverage and $1000 for employees with HDHP family coverage. The employer contributions do not violate nondiscrimination rules for HSAs.
C. Distributions from Health Savings Accounts
(1) Clarify that the limitations on the purchase of qualified long-term care insurance through a cafeteria plan or flexible spending arrangement (under Code sections 125(f) and 106(c)) do not apply to HSA distributions used to purchase such insurance.
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