Tag Archives: HSA

Paying medical claims with a Health Savings Account. When can it be done tax free?

April 10, 2019

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I have run into this situation several times recently: An employee attempts to pay for their qualified medical expense claim with their health savings account (HSA) tax-free dollars, but are still taxed or face penalties. Why would this happen? Well, the ability to pay with tax-free HSA dollars is not based on when an employee enrolls in the Qualified High Deductible Plan (QHDHP), but rather when he or she establishes the HSA. Yes, the HSA is established separately from the QHDHP. An employee may decide to establish their HSA immediately, after a few months, or may not establish one at all, even when they are enrolled in a QHDHP.

It’s important to establish the HSA when first enrolled in a QHDHP, even if the employee can only contribute the minimum amount. The contribution can be increased or decreased going forward. The date the HSA is established determines eligibility to “go back” to pay a claim.

Consider this example:

An employee, Don, decides to enroll his family in the QHDHP offered by his employer as of January 1. However, Don does not establish his HSA until February 1. He incurs a $10,000 claim on January 12th with follow up doctor visits on January 16th, 23rd and 30th. On the February 15th payroll, Don adds $5,000 to his HSA to help pay the claims from January. Here’s the timeline:

  • January 1 –  Don enrolls in QHDHP
  • January 12 –  Don incurs $10,000 claim with follow up doctor visits on January 16th, 23rd, and 30th
  • February 1 – Don establishes his HSA
  • February 15 – Don adds $5,000 to his HSA to help pay for January claims

Don’s QHDHP has a $3,000/$6,000 embedded deductible. Don thought he would pay for his January claims when they came due in February or March with his HSA funds, and still have money left over after he’d met the $3,000 individual deductible portion.

However, his HSA account was not established until after the claims occurred. Though these claims would still apply to his deductible, Don cannot use his pre-tax HSA funds to pay for these claims. If he did, he would be subject to taxes and potential penalties.

Employees can fund their HSA to the applicable maximum established by the IRS each plan year, but they cannot pay for claims which occurred prior to the HSA being established.

To avoid this kind of problem, it’s important that employers educate their employees on the importance of opening their HSA at the same time as enrolling in the QHDHP being offered.

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Mistaken HSA Contributions

March 7, 2019

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Health Savings Accounts (HSAs) have become increasingly popular over the past decade. When combined with a qualified high deductible health plan (HDHP), an HSA allows an individual to save money to be used on qualifying medical expenses at a later date. Employees may elect to contribute money to their HSA account on a pre-tax basis through their employer’s cafeteria plan. Employers aren’t required to contribute to employees’ HSA accounts, but many choose to do so as part of their health insurance program.

Unfortunately, mistakes can and do occur when administering HSA contributions. Employers may think mistakes are easy to fix, but the HSA regulations are very particular about when (or even if) a mistaken HSA contribution can be recovered. Employers frequently can’t recover the funds even if the HSA holder/employee agrees to the recoupment. However, the IRS does allow an employer is allowed to recover the mistaken contributions in certain situations.

Employee Was Never HSA Eligible

If HSA contributions are made to an employee who was never an HSA-eligible individual, the employer can recover the amounts. The employer may request the bank administering the HSA to return the funds. This option is not available if the employee was eligible for even one month during the year.

Administrative or Process Error

The IRS recently released General Information Letter 2018-0033 clarifying when and how to fix certain HSA contribution mistakes. If there is clear documentary evidence of an administrative or procedural error, the employer may request the HSA bank return the money to the employer so all parties are in the same position before the mistake was made. Examples of the types of mistakes that may be corrected include:

  • Withholding and contribution of amount in excess of the employee’s HSA salary reduction election;
  • Incorrect entries by payroll administrators;
  • Excess amount due to duplicate payroll files being accessed;
  • Employee payroll election change is not timely processed resulting in wrong amount being withheld;
  • Incorrect HSA contribution amount calculation;
  • Wrong decimal entry;
  • Incorrect spreadsheet being accessed; and
  • Employee name confusion.

The above list is not exhaustive and only contains examples of administrative and procedural errors that can be fixed. Employers should maintain documentation to support their decision to correct a mistaken contribution. Documentation should include details on the type of mistake, how it occurred, the impact and the steps the employer took to correct the mistake.

Employee Is No Longer HSA Eligible

Another common mistake is for an HSA holder to continue contributing to their HSA when they are no longer eligible. Individuals must be enrolled in a HDHP and have no disqualifying coverage (such as enrollment in Medicare/Medicaid or coverage under a general purpose FSA or HRA) to be able to contribute to an HSA account.

The 2019 annual HSA contribution limit for those with self-only HDHP coverage is $3,500 and $7,000 for those with family HDHP coverage. HSA holders who lose HSA eligibility during the year will
have their annual contribution maximum pro-rated for the months in which they were HSA eligible. HSA holders who are eligible as of December 1st may contribute up to the annual maximum, regardless of only being HSA eligible for part of the year, as long as they retain HSA eligibility through the end of the following calendar year.[1]

Corrective Distributions

If an individual makes or receives contributions in excess of their annual HSA contribution limit, including contributions received from an employer that the employer is unable to recoup as described earlier, they may be subject to a cumulative 6% excise tax for each year the impermissible contributions remain in the HSA.

To avoid this penalty, the excess contributions must be distributed to the account holder before the account holder’s federal income tax return filing deadline for that taxable year (typically April 15th). HSA holders must also be careful also include the net income attributable to such excess contributions in their gross income for the taxable year in which the distribution was received. This is done by notifying the HSA bank of a need for a corrective distribution. The HSA bank will provide the account holder with the necessary forms and information to make the corrective distribution. We recommend HSA holders work with a tax advisor to correct any HSA errors.


[1] This is described in more detail in “Frequently Misunderstood Health Savings Account Issues” appearing earlier in this newsletter.

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Frequently Misunderstood Health Savings Account Issues

March 7, 2019

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Authors:
Christopher Beinecke is the Employee Health & Benefits National Compliance Leader for Marsh & McLennan Agency. 
Jennifer Stanley is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan Agency.


The health savings account (HSA) eligibility and contribution rules are often misunderstood, which can result in potential adverse consequences for participating employees.[1] This article focuses on certain employer-provided benefits that may unexpectedly affect an employee’s ability to make or receive HSA contributions as well as certain rules that affect the contribution amounts a participant can make and/or receive during the year.

Unexpected Disqualifying Other Coverage and Potential Solutions

In order to be eligible to make or receive HSA contributions, an individual must participate in a qualified high deductible health plan (HDHP) and have no other disqualifying coverage. Some common employer-provided benefits may unexpectedly be disqualifying other coverage, and we’ll address three of the most common “gotcha’s” below.

1. Account-Based Plans (FSAs and HRAs)
General purpose health FSAs and HRAs that may be used to reimburse for a broad range of qualifying medical expenses are generally disqualifying other coverage and disqualify an individual from making or receiving HSA contributions for the entire plan year. This is also true if the FSA or HRA is your spouse’s and can be used to reimburse for your medical expenses (whether or not this actually happens).

HSA Eligibility Solutions for Account-Based Plans –
Employers should consider the following HSA compatible FSA plan design options when offering an account-based plan and an HDHP (these are often referred to as “HSA compatible FSAs”):

  • Offer a limited-purpose FSA or HRA that may only be used to reimburse for dental and vision expenses;
  • Offer a post-deductible FSA or HRA that may only be used to reimburse for general medical expenses after the individual has met their annual HDHP deductible; or
  • An employer can actually offer an FSA or HRA that combines both features by being limited to dental and vision expenses until the annual HDHP deductible is met and can then be used to reimburse for general medical expenses afterwards.

Run-Out Periods, Grace Periods, and Carryover Provisions – FSAs usually operate with a run-out period allowing participants to submit claims after a plan year ends and may also include either a grace period or carryover provision (but not both). We’ll describe how these can affect HSA eligibility when used in a general purpose FSA:

  1. Run-Out Period When we say run-out period, we mean a participant has some period of time after the end of the plan year to submit claims that were incurred during the plan year. For
    example, a calendar year FSA may allow participants until March 31st to submit claims incurred by or before December 31, 2018. If I enroll in an HDHP during annual enrollment, an FSA with a run-out period does not interfere with my ability to make or receive HSA contributions at the start of the next plan year. In this example, I am eligible to make or receive HSA contributions on January 1, 2019.
  2. Grace Period When we say grace period, we mean a participant has some period of time after the end of the plan year to submit claims that were incurred during the plan year OR during the grace period. For example, a calendar year FSA may allow participants until March 31st to submit claims incurred by or before March 15, 2019. If I enroll in an HDHP during annual enrollment, an FSA with a grace period can interfere with my ability to make or receive HSA contributions until the first of the month after the grace period is over. In this example, if I have an FSA balance as of December 31, 2018, I would not be eligible to make or receive HSA contributions until April 1, 2019.The issue is whether I have an FSA balance at plan year end. If I have a zero FSA balance at plan year end (December 31, 2018 in our example), I am HSA eligible at the start of the next plan year without regard to the FSA’s grace period.
  3. Carryover Provision An FSA might include a carryover provision permitting participants to carry over the lesser of: (i) their unspent FSA account balance as of the end of the plan year; or (ii) $500 as a contribution toward their FSA balance for the next plan year. Amounts carried over do not count toward an individual’s annual FSA contribution limit ($2,700 for 2019). If funds are carried over into the following year and can be used to reimburse for general medical expenses, an individual will be ineligible to make or receive HSA contributions for the entire year.An employer can provide employees with options to avoid losing HSA eligibility for the following year:
  • The rules allow FSA funds to carry over from a general purpose FSA into an HSA compatible FSA plan. An employer could design the carryover feature to automatically carry over a balance from a general purpose FSA into an HSA compatible FSA when an individual elects HDHP coverage. This option obviously requires the employer also maintain an HSA compatible FSA.
  • An employer could allow affected employees to decline or waive a carryover at the end of the FSA plan year. An employer that doesn’t provide an HSA compatible FSA might choose this option.

2. Clinics (both onsite and offsite clinics)

In terms of HSA compatibility, clinics can be divided into two categories:

HSA Conflict

A clinic will cause an HSA conflict if all of the following is true:

  • The clinic provides medical services other than first aid, dental or vision care, preventive services, or certain disease management or wellness services;
  • The clinic provides the general medical services before an individual has met their annual HDHP deductible; and
  • The individual does not pay for the fair market value (FMV) of the general medical services before meeting their annual HDHP deductible.

No HSA Conflict

A clinic does not cause an HSA conflict if any of the following is true:

  • The clinic’s services are limited to first aid, dental or vision care, preventive services, or certain disease management or wellness services;
  • The clinic does not provide other medical services before an individual has met their annual HDHP deductible; or
  • The individual pays for the FMV of other medical services before meeting their annual HDHP deductible.

3. Telemedicine

There is much debate over whether telemedicine is a group health plan that is disqualifying other coverage for the purposes of HSA eligibility. We believe most telemedicine programs are disqualifying other coverage despite claims by some that telemedicine benefits should qualify for an exception available to employee assistance programs (EAPs).

The Myth of the EAP Exception for Telemedicine – IRS Notice 2004-50, Q/A #10 indicates that coverage under an EAP, disease management program, or wellness program isn’t other disqualifying coverage if the benefits do not provide significant medical care and provides an example of short-term counseling available through an EAP as meeting this standard. We’ll ignore for now whether a telemedicine benefit can be considered an EAP and agree there may be some wiggle room to do so.

The EAP exception is not a blanket exception for all EAPs without regard to their plan designs, and the real issue is whether the telemedicine benefit offers significant medical care. Some believe the medical care or treatment provided by a telemedicine benefit should not be considered significant because of the narrow range of available services that might be performed within a single telemedicine visit. We disagree. We can infer that a determination of significant medical care or treatment shouldn’t be limited to a single episode of care or the example of the permissible EAP in IRS Notice 2004-50, Q/A #10 wouldn’t bother describing the available counseling as “short-term.” Instead, the language used by the IRS strongly suggests that an EAP providing many or an unlimited number of visits would be considered other disqualifying coverage.

EAPs generally provide for a limited number of visits per year. By contrast, telemedicine programs tend to provide for an unlimited number of participant visits. In addition, telemedicine programs can usually write prescriptions which are not available through most traditional EAPs.

This view is also consistent with statements made by the Departments of Labor, Treasury, and Health & Human Services during the rulemaking process creating the EAP exception under the Affordable Care Act in which the agencies suggested an EAP providing for many or an unlimited number of visits would not qualify.

Potential HSA Eligibility Solutions for Clinics and Telemedicine

It is reasonable to assume that many telemedicine and clinic benefits will be considered other disqualifying coverage and cause an HSA eligibility issue without some sort of solution to resolve the conflict:

  1. Limit the scope – The benefits could be limited in scope to services that do not interfere with HSA eligibility, such as preventive services, dental or vision care, first aid (in the case of the clinic), or other services deemed insignificant care by the IRS such as immunizations and providing non-prescription pain relievers.This solution falls into the category of legally correct but not particularly useful, as limiting the scope of telemedicine and/or onsite health clinic benefits in this manner can defeat the purpose of meaningfully lowering the cost of the employer’s medical plan.
  2. Provide only post-deductible benefits – If the benefits are restricted to an HDHP participant until after he or she has met their HDHP deductible, there is no HSA conflict. This solution also falls into the category of legally correct but not particularly useful and can be both difficult and impractical to administer.
  3. Charge fair market value for the services – If the HDHP participants pay the FMV for the services received, there is no HSA conflict. While unpleasant, this is often the most practical solution to implement. There is no guidance explicitly directing how to calculate FMV for these benefits, which should make several approaches reasonable:(a) Use the Medicare reimbursement rate for the given service;
    (b) Use the in-network usual, customary, and reasonable charge for the given service; and
    (c) Develop standard rates for services/bundles of services based on the expected cost of providing them through the telemedicine or clinic benefit.

Flat rates are very common for telemedicine and clinic visits with additional charges for labs, tests, or prescriptions. An employer (particularly a healthcare system) may determine a discount is appropriate when determining the appropriate rates to take into account the lower cost of providing the services through a clinic or via telemedicine compared to general medical facilities. It is also not unusual for third-party administrators to have developed standard rates for services using the methods described above that employers can implement. If there is a monthly cost for access to the telemedicine or clinic benefit, that could be factored into the FMV fee calculation.

HSA contributions can be used to offset the cost of services for the telemedicine and clinic benefits, and employers can provide HSA contributions to assist. No fee needs to be charged for limited scope services (e.g., preventive, dental, vision, etc.). Although it adds a layer of administrative complexity, it is also true that the clinic does not need to charge anything once the individual has met the HDHP deductible for the year.

If point-of-service charges are limited to HDHP participants, it does raise a potential nondiscrimination issue under the Tax Code. However, if there is a reasonable mix of both highly and non-highly compensated participants in the HDHP and other medical plan options, this should not present an issue.

Certain Rules Affecting Annual HSA Contribution Limits

In general, an individual’s annual HSA contribution limit is pro-rated based on the number of months an individual is eligible to make or receive HSA contributions with HSA eligibility determined as of the first of each given month. This general rule has a lot of moving parts and is subject to several modifications.

  1. Aggregation Under the health FSA rules, the annual contribution limit ($2,700 for 2019) is based solely on the employee’s own contributions, excluding carryovers. By contrast, all contributions made or received to an individual’s HSA count toward the individual’s annual HSA contribution limit ($3,500 self-only; $7,000 family for 2019), with the exception of rollovers.
  2. The Last Month Rule – While eligibility and contribution limits are generally pro-rated monthly, an individual who is HSA eligible on December 1st can make or receive HSA contributions up to their full annual limit provided he or she remains HSA eligible through the end of the following calendar year. If the individual does not remain eligible throughout this period, the individual’s annual HSA contribution limit for the year is retroactively determined using the pro-rata method and will usually lead to adverse tax consequences. An employer is not required to administer the last month rule for payroll deduction purposes. If an employer does not administer this, the employee is still free to take advantage by contributing the additional amounts to the HSA bank on an after-tax basis (usually by writing a check) and taking a deduction on their personal income tax return using IRS Form 8889.
  3. A Special Rule for Spouses A husband and wife cannot establish a joint HSA, but each spouse can set up their own HSA if eligible. If either spouse has family coverage in an HDHP, both spouses are treated as having family coverage and are limited to the annual HSA family contribution limit split between them. This limit is divided equally unless they agree on a different division. Spouses can demonstrate they’ve agreed to a different division by electing unequal contributions toward their HSAs.A break for domestic partners – This special rule for spouses does not apply to domestic partners. Each domestic partner could contribute up to the annual HSA family contribution limit in this instance, because the contribution limit is not tied to tax dependent status. That said, an individual cannot use their HSA to pay for the medical expenses of a domestic partner on a tax free basis (or without penalty) unless the domestic partner is also the individual’s tax dependent. The individual could avoid the penalty if the individual was already age 65 or older.
  4. Catch-up Contributions HSA eligible individuals who are age 55 or older by the end of the calendar year may contribute an additional $1,000 for that year and every year thereafter so long as they remain HSA eligible.[2] If both spouses are over age 55 or older and HSA eligible, both are able to make catch-up contributions to their separate HSAs.

Putting it all together Chris (56 years old) is married to Jennifer (50 years old). Jennifer has enrolled in employee + children HDHP coverage through her employer and Chris has enrolled in employee-only HDHP coverage through his employer. Jennifer’s employer makes an HSA contribution of $1,000 to her HSA on January 1, 2019. Chris’ employer does not make a contribution to his HSA.

  • For 2019, Jennifer could normally contribute up to $7,000 to her HSA and Chris could normally contribute up to $3,500 to his HSA. Due to the special rule for spouses, Jennifer and Chris begin with a combined annual HSA contribution limit of $7,000.
  • Chris can contribute up to $3,500 plus an additional $1,000 catch-up contribution.
  • Assuming Chris does contribute $4,500, Jennifer’s annual contribution limit is $3,500. Her employer has already contributed $1,000, meaning Jennifer can only contribute an additional $2,500 herself.
  • Alternatively, Chris could limit his HSA contribution to his $1,000 catch-up contribution and Jennifer would be free to contribute $6,000 to her HSA in addition to the $1,000 received from her employer.

[1] We address the consequences of ineligible contributions in the “Mistaken HSA Contributions” article appearing later in this newsletter.

[2] Remember that an individual enrolled in Medicare is not HSA eligible.

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2019 HSA Contribution Limits

May 14, 2018

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The IRS announced inflation-adjusted Health Savings Account limits for 2019 in Revenue Procedure 2018-30. They also announced minimum annual deductible and maximum annual out-of-pocket thresholds for 2019.

* The IRS announced they would continue to allow the original limit to stand for the remainder of 2018 despite the mid year reduction to $6,850.

 

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IRS Extends Relief for Those Affected by 2018 Family HSA Contribution Maximum Change

April 26, 2018

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In early March the IRS announced a change in the family HSA contribution maximum for 2018. As previously discussed, the Tax Cuts and Jobs Bill changed the way the IRS calculates benefit contribution maximums resulting in the 2018 family HSA contribution maximum changing from $6,900 to $6,850.

The IRS announced today that taxpayers with family coverage under a High Deductible Health Plan (HDHP) may continue to use the $6,900 limit for the rest of 2018. The IRS recognized the $50 reduction would “impose numerous unanticipated administrative and financial burdens” including the cost of adjusting cafeteria plan contributions for employers allow pre-tax HSA contributions.

This announcement is a little late for many who have taken steps to adjust their contributions. The new guidance provides ways for HSA holders to recoup those “mistaken distributions” (the $50 difference) without penalty. However, HSA custodians are not required to allow individuals to repay mistaken distributions. If an individual has received a distribution from an HSA of an excess contribution based on the $6,850 limit, they may repay the funds to the HSA. Those funds will not be includable in the individual’s gross income, will not be subject to the 20% excise tax on excess contributions and will not need to be reported on Form 1099-SA or Form 8889.

Those individuals who received a distribution from an HSA of an excess contribution based on the $6,850 limit but choose not to repay the distribution to the HSA will not be required to include the amount in gross income or pay the 20% excise tax if the distribution is received on or before the individual’s tax filing deadline (including extensions of time).

The tax treatment described above will not apply to distributions from an HSA that are attributable to employer contributions if the employer relies upon the $6,900 limit. Then, the distribution must either be used to pay qualified medical expense or it must be includible in the employee’s gross income and subject to the 20% excise tax. Employers should consult tax advisors with any concerns regarding this IRS’s guidance.

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IRS Lowers 2018 Family HSA Contribution Maximum

March 6, 2018

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Late last year Congress passed the Tax Cuts and Jobs Bill into law. It contained a number of tax reforms including a change to the way the Internal Revenue Service (IRS) calculates cost of living increases. The IRS now has to calculate the increases using “Chained CPI.” The new method takes into account consumers switching to cheaper products which reduce the effect of inflation. As a result, Chained CPI results in lower cost of living increases than what we’ve previously seen.

These cost of living increases are used to calculate the HSA contribution maximums for the year. Due to the new calculation method, the IRS announced today the family HSA contribution maximum is reduced from $6,900 to $6,850. Health FSAs and other benefit limits are not impacted. The 2018 limits are as follows:

HSA/HDHP Limits 2018 2017 2016
HSA Contribution Limit (Self-Only) $3,450 $3,400 $3,350
HSA Contribution Limit (Family) $6,850 $6,750 $6,750
HSA Catch-up Contribution Limit (55+years) $1,000 $1,000 $1,000
HDHP Minimum Deductible (Self-Only) $1,350 $1,300 $1,300
HDHP Minimum Deductible (Family) $2,700 $2,600 $2,600
HDHP Maximum Out-of-Pocket (Self-Only) $6,650 $6,550 $6,550
HDHP Maximum Out-of-Pocket (Family) $13,300 $13,100 $13,100

Ultimately it is HSA holders’ responsibility to abide by the contribution maximums as they are individually owned accounts. Because it is so early in the year, most HSA holders likely haven’t contributed the maximum yet. If they have, they will need to speak to their tax advisors about a curative distribution, which can help avoid the 6% excise tax on excess contributions.

Employers should communicate the family HSA maximum contribution change to their employees, especially if they previously provided the old limit. HR departments will also need to check their payroll accounts and adjust any employee HSA contributions that would exceed the maximum.

In addition, limits for employer adoption assistance programs have changed. The maximum amount that can be excluded from an employee’s gross income for qualified adoption expenses dropped from $13,840 to $13,810 and the adjusted gross income threshold after which the adoption exclusion begins to phase out is lowered from $207,580 to $270,140.

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Telemedicine and Health Savings Accounts

October 12, 2017

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As health care costs continue to rise, so does the demand for cost-control strategies. One such strategy is telemedicine. Telemedicine is a service offered through many health insurance plans by which patients can consult with a doctor over the phone or through videoconference. Telemedicine doctors can often prescribe medication, thus eliminating the need for a trip to the doctor’s office. The trend has been gaining popularity in recent years and many anticipate continued improvements and evolutions of the service in the near future.

But how is telemedicine a cost-control strategy? Telemedicine can eliminate the need for visits to the emergency room, urgent care or the doctor’s office – which could save up to $6 billion annually by one estimate. Without the typical costs associated with in-person consultations such as rent, overhead, nursing staff, etc., telemedicine uses readily available technology to deliver consultations at a fraction of the cost.

How that reduced cost is paid, however, depends on the health plan offering telemedicine service. For a traditional preferred provider organization plan (PPO), co-pays are typically used to offset the cost of a doctor visit. Co-pays for telemedicine consultations would also be appropriate. The rules for high deductible health plans (HDHP), however, are very different.

A HDHP allows subscribers to contribute to a tax-advantaged health savings account (HSA). To be eligible to participate in an HSA, participants in a HDHP cannot receive any employer payment – directly or indirectly – for medical expenses before the deductible is satisfied. Indirect payments would include cost-sharing in the form of co-payments for consultations. The IRS has not directly addressed the issue of HSA eligibility and telemedicine. However, its guidance suggests that an employer offering a HDHP with an HSA and a telemedicine option should require the participants to pay fair market value of the telemedicine consultation. What is the fair market value of a telemedicine consultation? Who knows? It’s likely more than a co-pay but less than the network rate of a doctor’s office visit. Additional IRS guidance on this topic would be helpful, but until it’s issued, employers with HDHPs should be wary of “free” or co-pay telemedicine services.

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Are Consumer-Direct Health Plans Working?

February 22, 2017

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Qualified high deductible health plans (Q.H.D.H.P.), also known as “Consumer-Directed” plans, have been around for a number of years.  Enrollment in these plans has increased over the past decade.  Q.H.D.H.P. plans have a high deductible component which must be met before benefits are paid typically at 100%.  The minimum deductible amount is determined by the Internal Revenue Service (I.R.S) each year.  For 2016, the minimum deductible is $1,300 for individual and $2,600 for family.

According to the Kaiser Family Foundation, eight percent of employees were enrolled in a Q.H.D.H.P. in 2009. By 2015, enrollment had increased significantly to 24 percent.  During this period, out-of-pocket annual costs on average rose approximately 230 percent.   Surveys indicate about 46 percent of employees shoulder a plan deductible of $1,000 or more.

Analysis of the healthcare utilization of employers implementing high deductible plans shows the cost of care decreasing when followed over a 3 year period versus employers who do not implement these plans.

Part of the decrease in utilization comes from a larger portion of “first dollar” medical costs being paid by the employee because of the higher deductible. Another probable factor is plan participants are giving careful consideration before obtaining medical services.  In fact, this consumer behavior was one of the purposes behind why these plans were created along with lowering insurance premiums.

The “Consumer-directed” focus of Q.H.D.H.P. plans is based upon the assumption patients will research the most cost-effective ways to handle their treatment.  If a patient decides to move forward with care then the hope is they will conscientiously shop for the best possible price on their healthcare services.  Some patients may ultimately decide to defer or forego certain medical care.

Shopping for the best price on healthcare sounds great in theory, but can be more difficult to achieve in practice. However, tools and resources are available to assist.  It is important for plan participants to have the knowledge on how to access.

Finding a good deal on prescription drugs tends to be simple. There are many websites and apps available to help.   As an example, GoodRx allow consumers to enter the name and dosage of a medication and receive a list of pharmacies offering discounted pricing in their immediate area. In addition, many large retailers such as Walmart, Kmart, Sam’s Club and Costco advertise flat and discounted co-pays for basic medications.

Conversely, shopping for medical services is much more complex as compared to the transaction of buying a 30 day supply of pills. However, websites do exist for finding the geographically adjusted fair market price for a particular medical procedure.  These websites include Healthcare Bluebook, Clear Health Costs and New Choice Health.   You may be comforted in knowing the reasonable price for your heart transplant is $125,916, but you probably have no clue on what to do next.   And you would not be alone in this lack of knowledge.

As consumers, we are accustomed to shopping online for the lowest price on items such as electronics, hotels or airline tickets. But when it comes to healthcare, most people do not give a second thought to how much it costs.  The idea of price shopping health service is gaining traction though.  Many patients do not realize they ultimately have control over where medical services are performed.  Most usually rely only upon their physician’s advice.

You have probably seen commercials from a local imaging center which includes dramatizations of patients learning how much an imaging exam is going to cost at their local hospital. They later sigh in relief as they learn the imaging center pricing is much less expensive and gives same day results.  They happily announce they are going to tell their doctor they want their imaging exam to be done at this center.

This imaging center has an online tool for patients to obtain a price quote beforehand for a particular exam with discounts given for upfront cash payments. Most healthcare providers do not yet offer services in this manner, but this practice is catching on with the popularity of consumer-directed plans.

There is an open question on whether consumer-directed plans are actually working to reduce health expenditures or are they simply causing patients to forgo medical care today that will become high dollar expenses later.

If the latter ends up being true, our health care delivery system is potentially looking at a tremendous spike in costs given the sheer number of patients covered under these plans. In any event, the lower medical trend being seen in these plans today must be acknowledged.  Something is obviously going right with this plan design.

Surveys indicate many patients enrolled in consumer-directed plans have limited knowledge on how the plan even works. Under the mandates of the Affordable Care Act (A.C.A.), preventative care is offered with $0 co-pays or very little out-of-pocket cost.  In fact, the preventative care benefit is a base benefit of consumer-directed plans even if the A.C.A. mandates goes away.  However, many enrollees have no idea this benefit is included and may skip preventative care.  As a result, health conditions that could be caught and treated early may not be found until late in the game. Routine colonoscopy at age 50 is a perfect example.  A colon polyp found today may prevent major surgery and perhaps even death from colon cancer down the road.

Employees may not fully understand how the health savings account (H.S.A.) component works alongside the high-deductible plan. This would seem a simple concept, but it should not be taken for granted that all participants have sufficient knowledge.  Employees may not understand the funds held in their H.S.A. represent real dollars.

These funds can be used to pay for medical expenses but are also allowed to accumulate (with potential for return on investment) if they are not used.   The contribution maximum for 2017 is $3,400 for single coverage and $6,750 for family.  Employees need to know the account stays with them as they change jobs, medical plans or eventually retire.  The money in the H.S.A. can be withdrawn without penalty at age 65 similar to an I.R.A..

Employees (and employers) realize a savings on their monthly contributions to the group medical plan because the premiums are lower on an HDHP plan. Savings are also realized from the full tax-deductibility of their employee contributions into their H.S.A..  Many employers also make a contribution into an employee’s account.  Employees and employers alike can save an additional 7.5% in F.I.C.A. taxes.

So what can be done today to encourage the continued forward momentum and cost savings of consumer directed plans into the future?

  • Provide education to plan participants to assure they fully understand the benefits of the plan especially preventative care. Be sure your employees understand the health savings account component and the significant savings potential it offers.
  • Make members aware of online tools which are helpful in finding the most cost effective care.
  • Offer lower cost alternatives to incent members to receive needed healthcare.   Telemedicine services and retail clinic care both offer members value by providing lower cost care. According to Mercer’s Survey of Employer Sponsored Health Plans, savings to the member can be significant.   A usual telemedicine visit charge is about $40 and retail clinics are about $60. Both of these yield savings as compared to $125 for a physician office visit.

In summary, consumer directed health plans are a familiar component in today’s employee benefits arena. To assure their continued success, it is important for plan sponsors, payers and providers to remain diligent in staving off any unplanned negative effects so that true long term cost savings can continue to be realized.

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2017 HSA Contribution Limits

June 17, 2016

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The IRS has issued inflation-adjusted Health Savings Account figures for 2017. Revenue procedure 2016-28 provides as follows:

Annual contribution limitation for 2017

For calendar year 2017, the limit on deductions, for an individual with self-only coverage under a high deductible health plan, is $3,400. For calendar year 2017, the limitation on deductions, for an individual with family coverage under a high deductible health plan, is $6,750.

High deductible health plan for 2017

For calendar year 2017, a HSA qualified high deductible health plan (HDHP) is defined, as a health plan with an annual deductible that is not less than $1,300 for self-only coverage, or $2,600 for family coverage, and the annual out-of-pocket (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage, or $13,100 for family coverage.

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2016 HSA Limits

May 14, 2015

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Last week the IRS announced the 2016 contribution limits for health savings accounts (“HSA”).  For calendar year 2016, employees with self-only coverage may deduct $3,350 from income to contribute to HSAs; those with family coverage may deduct and contribute $6,750.

HSAs may only be used in conjunction with a high deductible health plan.  For 2016, a high deductible health plan with an annual deductible of at least $1,300 for self-only coverage or $2,600 for family coverage.  The out-of-pocket maximums must not exceed $6,550 for self-only coverage or $13,100 for family coverage.

The brief IRS publication can be found here.

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2015 Benefit Limits

January 13, 2015

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The start of 2015 brings numerous changes to the benefits world, both large and small.  While the Individual Mandate has received the majority of publicity, there are many smaller changes that deserve attention.  Here are a few of those new limits:

ACA Individual Mandate Tax

The Individual Mandate is the national requirement that individuals have health care coverage or they face a tax that increases each year.  This is one of the two parts to the Affordable Care Act aiming to increase healthcare coverage.  The two parts are the Individual Mandate and the Employer Mandate.  Employers deal with the Employer Mandate, or Pay-or-Play Mandate, and not the Individual Mandate.

Penalty for noncompliance for 2015:

  • Greater of $325 per uninsured person OR 2% of household income

*The final penalty will not exceed the national average cost of bronze coverage for the household.

401(k) Plan Limits and Thresholds

The maximum elective deferral dollar limit:

  • 401(k) plan: $18,000
  • SIMPLE 401(k) plan: $12,500

The maximum catch-up contribution dollar limit:

  • 401(k) plan: $6,000
  • SIMPLE 401(k) plan: $3,000

FSA Contribution Limit

FSAs, Flexible Spending Accounts, allow for individuals to use pre-tax dollars to pay for health care costs.  It can be set up through a cafeteria plan of an employer and allows the employee to use specified money to pay for qualified medical expenses.

  • The FSA contribution limit for 2015: $2,550

Maximum DCAP Amount

DCAP, or the Dependent Care Assistance Program, allows employees to pay for certain dependent care expenses with pre-tax dollars.

  • If you are married and filing separately: $2,500
  • If you are not married and filing alone: $5,000

HSA

An HSA, or Health Savings Account, combines a high deductible health plan (HDHP) with a tax-favored savings account.  Money in this savings account can help pay the deductible and once the deductible is met, the insurance starts paying.  Whatever money left in the savings account will earn interest and is the employee’s to keep.

The HDHP Minimum Annual Deductible:

  • Self-only: $1,300
  • Family: $2,600

The HDHP Out-Of-Pocket Maximum:

  • Self-only: $6,450
  • Family: $12,900

HSA Maximum Contribution Limit:

  • Self-only: $3,350
  • Family: $6,650
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2015 HSA Limits

April 28, 2014

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The IRS has issued inflation-adjusted Health Savings Account figures for 2015. Revenue procedure 2014-30 provides as follows:

Annual contribution limitation for 2015.

For calendar year 2015, the limit on deductions, for an individual with self-only coverage under a high deductible health plan, is $3,350. For calendar year 2015, the limitation on deductions, for an individual with family coverage under a high deductible health plan, is $6,650.

High deductible health plan for 2015.

For calendar year 2015, a HSA qualified high deductible health plan (HDHP) is defined, as a health plan with an annual deductible that is not less than $1,300 for self-only coverage, or $2,600 for family coverage, and the annual out-of-pocket (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage, or $12,900 for family coverage.

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