Guest Article

(From the November 24, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Pending Final Medicare Bill Boosts Retiree Medical and Health Savings Accounts

[Editor's Note: the Medicare bill passed in the Senate on November 25, 2003.]

In addition to Medicare prescription drug coverage and an expanded role for private coverage under Medicare, the bill, H.R. 1, awaiting final action by the Senate would provide employers offering retiree medical prescription drug coverage with the options of a 28 percent rebate or a wrap-around of the Medicare prescription drug coverage. This relief is estimated to save employers as much as $1,330 per retiree participant annually. The bill would also give a huge boost to consumer-driven health by establishing annual "health savings accounts" of up to $2,250 for individuals and $4,500 for families in high deductible plans. These would be individual HSAs with balances that could rollover from year to year.

Medicare Prescription Drug Coverage and Employers

A Medicare Part D coverage of prescription drugs would begin in 2006. Medicare enrollees would have the option of enrolling in this Part D at a monthly premium with a deductible of $250, co-insurance of 25 percent with initial coverage limited to $2,250. If an enrollee's outof- pocket costs exceeded $3,600, coverage would recommence, subject to copays of $2 for generics and $5 for other drugs or 5 percent of the price.

The estimated beginning monthly premium would be $35. Premiums would be based on a complex formula that would essentially require participants to pay a percentage of the actual cost of the program. The premium would also be increased if the participant did not enroll when first eligible. (The late "enrollment premium" would not apply to enrollees whose employer drops a drug plan.) Additional payments would be available for beneficiaries with limited savings and incomes of up to 200 percent of the poverty level.

Employers and unions offering retiree prescription drug coverage that is actuarially equivalent to the Medicare Part D program would have the option of receiving a reimbursement of 28 percent of their "qualified costs" for such coverage between $250 and $5,000 or using their drug coverage plan as a wrap-around to the Medicare Part D program. The Secretary of HHS could establish any method he chooses for repayment, including interim payments based on estimates. HHS could require employers and unions to submit an attestation of actuarial equivalence annually or "at such as other time" as HHS may require. This provision leaves the door open for HHS to limit attestation to an "as requested basis."

Health Savings Accounts

The bill would permit individuals enrolled in high deductible plans or their employers to establish "health savings accounts" (HSAs) funded up to an annual maximum of the lower of (1) the health plan's annual deductible or (2) $2,250 for those with individual coverage or $4,500 for those with family coverage. Those age 55 and older could contribute an additional $500 in 2006, increasing by $100 each year to a limit of $1000 in 2009 and beyond. High deductible plans would be those with a deductible of $1,000 and total out-of-pocket expenses not to exceed $5,000 for individual coverage and twice those amounts for family coverage. High deductible plans could offer preventive care not subject to the deductible. These amounts would be adjusted annually for inflation.

The individual could not be covered by other health plans. Coverage for accidents, disability, and dental, vision, or long-term health care would not be considered health plan coverage. The HSAs could not be used to pay health insurance, although the accounts could pay for COBRA, health insurance while receiving unemployment compensation, long-term care insurance, and, for those age 65 or older, any insurance other than a Medicare supplemental policy. Individuals could also carry insurance for specific diseases or for fixed hospital per diems.

The HSAs are designed to belong to the individual and move freely with the individual either from employer to employer or to be held directly by the individual if the current employer does not offer an HSA or the individual chooses not to participate in the employer's health plan. Amounts could be funded by the employee or the employer and could be part of an IRC section 125 plan. HSAs would have to be held in a trust and the individual would have a nonforfeitable right to the balance in the account. (By contrast "health reimbursement arrangements" approved last year by IRS guidance requires the employer to fund such accounts and permits the employer to cap the amount an employee may hold in an HRA or allow forfeiture of the account if the employee ceases employment.) The accounts could be rolled-over to other HSAs and could receive rollovers from Archer MSA accounts.

HSAs and their earnings would be exempt from tax. HSA distributions for medical care would be exempt from gross income. Accounts could be transferred to a surviving spouse at the owner's death without tax so long as the spouse uses such amounts for medical care.

If the bill is enacted, these changes will offer a tremendous boost to consumer-driven health care. Since most existing consumer-driven health plans have high deductibles and copayments, plan designs would have to change little, if at all. So long as the employer offered a high deductible plan, any employee enrolled in that plan could set up an HSA without involving the employer in any way.

No Form 1099 for HSA Reimbursements

H.R. 1 would also exempt payments from HSAs, HRAs, and other flexible spending accounts from the need to issue Form 1099s to health care providers paid from these accounts. The requirement to issue Form 1099s for payments has been an impediment to "debit cards" especially. This provision would be retroactive to December 31, 2002, thus eliminating the need to issue Form 1099s for 2003 reimbursements.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Copyright 2003, Deloitte.