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Guest Article

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(From the January 19, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

More on Health Savings Accounts and Medicare Prescription Drug Benefit from ABA Audio Conference

Additional details on Treasury's developing views of health savings accounts and the operation of the employer prescription drug benefit subsidy emerged from a January 13, 2004, American Bar Association audio conference, starring among others, Treasury Department attorney/regulatory drafter Kevin Knopf. Mr. Knopf was the primary drafter of the health reimbursement arrangement guidance, released in 2002, and of the Notice 2004-2 guidance issued for health savings accounts.

Health Savings Accounts -- HSAs

In addition to information on HSAs covered in earlier Washington Bulletins, Knopf offered the following new nuggets, which give an indication of the views the Treasury and the IRS may be developing for the additional guidance expected this summer. Many of his comments reinforced the view that those interested in using HSAs as part of consumer-driven health plans should file comments with Treasury as soon as possible.

Knopf's presentation offered the following new information and insights from his point of view, but many of these issues are still under review by the Treasury Department. [Comments in brackets are the views of Washington Bulletin.]

  • The starting point in analyzing HSAs (IRC section 223) should be the rules on Medical Savings Accounts. IRC section 220. [While there are many similarities between the structure for MSAs and HSAs, the HSA statutory provisions are broader than those for MSAs. This includes enabling HSAs to offer preventive care without applying the deductible for such care, regardless of whether state law requires preventive care coverage.]

  • An individual's HSA may be used to pay the reimbursable health expenses of his/her spouse or dependent child. That spouse or child need not be a participant in an HDHP.

  • HSAs can provide "preventive care," as defined in the Medicare Act section 1851, but that section simply provides HHS with general regulatory authority, not a definition of "preventive care." IRS may look to the new listing of "preventive care" described in the new Medicare Prescription Drug Improvement and Modernization (MPDIM) Act section 611 (42 U.S.C. §1395x(ww)). That section provides new Medicare entrants with an "initial preventive physical examination," consisting of a physical examination (including measurement of height, weight, and blood pressure, and an electrocardiogram) and includes preventive services. Preventive services are defined as pneumonia, flu, and hepatitis B vaccines, screening mammography, pap smear and pelvic exam, prostate cancer screening tests, colorectal cancer screening tests, diabetes outpatient self- management training services, bone mass measurement, screening for glaucoma, medical nutrition therapy cardiovascular screening blood tests, and diabetes screening tests. In the next set of guidance IRS will define preventive care under a general rule and add a menu of treatments (which may or may not follow the Medicare list).

  • Any IRA trustee can be the trustee of an HSA. The HSA's trustee does not have to be the HDHP provider.

  • Although not spelled out in the statute, the IRS believes (and its guidance to date reflects) that the employer contributions to HSAs are not subject to FICA or income tax withholding.

  • Rollovers to HSAs would be limited to amounts from HSAs and MSAs. There is no requirement for certification of the rollovers. [This could change. It is not clear whether employers could demand certification before accepting rollovers.]

  • With respect to nondiscrimination rules, the IRC section 105(h) rules do not apply to HSAs. The HSAs' special nondiscrimination rules in the new IRC section 4980G follow the MSA nondiscrimination rules under IRC section 4980E. These rules require the employer to make comparable contributions to all employees participating in the health accounts. This does not mean the employer must offer HDHPs to all employees, but only for those employees offered and accepting the plans, the employer's HSAs contributions must be comparable. Matching contributions for HSAs probably would violate the nondiscrimination rules. If the HSAs were set up under a cafeteria plan, cafeteria plan nondiscrimination rules would also apply.

  • "Loans" from HSAs probably will be treated as prohibited transactions, and thus, subject to a 35 percent penalty tax.

  • Employers probably have very little control over HSAs. If the employer wants control, it should use health reimbursement arrangements (HRAs). However, the employer possibly could set up a "separate contract" outside the HSAs that permitted some control over HSAs. IRS is waiting for guidance from the Department of Labor on these types of issues for employers covered by ERISA. [The DOL reportedly is planning to issue guidance on HSAs early this year.]

  • Knopf warns against "carving out" other health benefits from the HDHP and paying for them below the deductible. [Except for certain specific benefits "permitted" and explicitly authorized, including insurance for dental, vision, long-term care (but not long-term care services), specific diseases, and per diem hospital reimbursements.] For example, a separate drug plan would violate the "HDHP" only rule. But a drug card that simply offered a discount would not be considered a health plan for these purposes. Knopf recognizes there are other reasonable interpretations of the statutory language, but he does not agree with those interpretations.

  • While an individual could wait to fund HSAs until April 15th of the year following the tax year, the plan can only pay for expenses incurred after the HSAs are established. Hence, HSAs should be established before they are needed, but could be funded on an "as needed" basis.

  • Reimbursements from HSAs that are delayed until long after the expenses were incurred probably will not be allowed, especially if those reimbursements would occur after the statutory period for tax audits.

  • HSAs are not subject to IRC sections 419 and 419A deduction limits. HSAs should not be set up as VEBAs, under IRC section 501(c)(9), because a VEBA could provide "other permitted benefits" thus tainting the HSAs health benefits only rule. [Knopf did not explain why the VEBA instrument could not be limited to only those benefits permitted under HSAs.]

  • The substantiation process for individuals will be "between the individual, God, and the IRS."

  • An employer could adjudicate claims for administration, although this process could raise HIPAA privacy issues. [In fact, an individual can waive HIPAA privacy rules and if the individual wanted the employer to handle claims payments, presumably, he or she would waive such rules or treat the employer as a "business associate."]

  • The COBRA provisions outlined in the tax code do not apply to HSAs; however, it is not clear whether the COBRA rules in ERISA will apply to HSAs. The DOL will have to make that determination.

  • If HSAs are offered through a cafeteria plan, it is unclear whether the account would be covered by the principles that apply to health FSAs (employer can impose limits, timing, types of benefits covered, etc.) or under the principles that apply to 401(k) contributions made through cafeteria plans. Under the 401(k) principles, the rules applicable to the 401(k) also apply to all amounts contributed to the plan, including amounts contributed through the cafeteria plan. By analogy, the HSAs' rules would apply to HSAs in cafeteria plans. [Harry Beker of IRS has urged that the 401(k) approach be used, but Knopf did not make a commitment on this issue.]

  • Whether an employee assistance plan would be considered "other insurance" depends on how the EAP operates. If the EAP offers referrals only, it is probably not insurance. If it offers treatment, it probably is insurance and thus jeopardizes the HDHP and the HSAs' status.

Medicare Part D Drug Coverage and Employers

John Blum, who worked on the MPDIM Act as a Senate staffer, and Kathy Bakich of Segal Company presented on the employer retiree medical drug benefit subsidy. Blum confirmed what most who followed the bill already knew-- Congress essentially wrote the final Act in haste in a few weeks, with relatively few people participating. Consequently, many issues went unaddressed and many questions were either never raised or never answered. The Department of Health and Human Services and its subsidiary agency, the Centers for Medicare and Medicaid Services (CMS) will have substantial authority and discretion to interpret the law. Employers offering prescription drug plans that are actuarially equivalent to the Medicare Part D prescription drug plan may receive a subsidy of 28 percent of the plan's costs (including both employer and employee payments) between $250 and $5,000 per participant for each plan participant that is eligible to enroll in the Medicare Part D prescription drug plan, but does not enroll in Part D. These costs include dispensing fees and exclude any discounts, rebates or administrative costs. There is virtually no guidance on how CMS will determine "actuarial equivalence" or on how it will audit the plans. All of these details will have to be developed under regulations. Alternatively, the employer could modify its drug plan to act as a "wrap around" plan for Medicare Part D.

The speakers began by agreeing that the subsidy does include both retiree and employer costs. [The statute states this twice.] But the general view is that the requirement of the Part D plan "actuarial equivalence" test for the employer's plan must be calculated using only the employer's contribution to the plan, not the retirees' contributions.

Blum and Bakich made the following points.

  • If an employer sponsored a retiree pay-all drug plan, the employer could still receive the 28 percent subsidy, if the plan were actuarially equivalent to Medicare Part D, but it would seem impossible that a retiree pay-all plan could be actuarially equivalent to Part D. [It also seems impossible that a retiree would participate in such a plan once Part D is available!]

  • Spouses will be included in calculating the subsidy, if the spouse is eligible for Part D, but not enrolled in Part D. [Thus spouses under age 65 or enrolled in Part D will not be counted in the subsidy.]

  • Active workers will not be counted in the subsidy. [This conclusion seems questionable. For those workers who are eligible for Medicare Part D, but not enrolled, there seems to be no reason to exclude them from the calculation if they are covered under a former employer's retiree drug plan. Additionally, the plan may have no way of knowing whether the retiree is working for another employer.]

  • The calculation will be based on an individual basis, not on the average of all participants.

  • The speakers expect intense CMS oversight of both the employer's drug benefits equivalencies and the costs, whether the employer receives the subsidy or uses a wrap around.

  • The intent of the Act was to give the employer as much flexibility as possible in retiree medical plan design. The employer has several options, including (1) keeping the plan unchanged and taking the 28 percent subsidy, (2) redesigning the plan and taking the 28 percent subsidy, (3) coordinating the plan with Part D (and perhaps paying the premium for Part D), or (4) dropping the drug plan completely.

  • Congress intended that employers' drug plans fill the "hole" in coverage. [Note, there is no requirement or additional incentive for them to do so, and in fact the employer's payment could actually make the "hole" larger.]

Treat with Caution-- Correct Today, But Subject to Change

All of the above statements by the presenters reflect current thinking but much remains for Treasury, IRS, DOL, HHS, and CMS to determine. Keeping up with these agencies' latest pronouncements will be critical. Treasury and the IRS are moving quickly to get out guidance on HSAs. HHS and CMS are likely to move more slowly on employer retiree medical subsidy guidance for two reasons. Those agencies have several new programs and changes to implement which must be up and running before the 2006 effective date for Part D and the employer subsidies. Additionally, the provisions on employer subsidies are much more broadly drawn and leave HHS and CMS with more discretion in interpreting the employer subsidies, so they will have many more decisions to make.

Deloitte logoThe 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.

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