IN THIS ISSUE:
? Merry Christmas!
? IRS to Issue HSA Regs Next Week
? Duplicate Coverage
? Combining HRAs and HSAs
? Converting HRA Funds
? Carving Out Prescription Drug Benefits
? Non-Discrimination Rules
? Funding Non-Eligible Employees
? Independent Substantiation
? Adjudicating HSA Withdrawals
I hope you and your family have a wonderful Holiday. We?ll be taking next week off to enjoy the festivities here, but we?ll be back before the New Year for one more shot at 2003 ? by any measure an interesting year.
IRS TO ISSUE HSA REGS NEXT WEEK
Believe me, after devoting the last three weeks to HSAs, there are other things I would rather be discussing this week. But the IRS is supposed to issue the first round of regulations on Monday or Tuesday, so I do want to devote some time to the regulatory questions I?ve been encountering. Some readers will find the discussion below tedious, and I apologize for that. We?ll get back to sexier issues soon, but how well HSAs work depends on the regulations that come out. I?ll give you my best take on these issues, but this is all gray-area stuff. You may very well know as much or more about some of these matters as I do, and if you would like to weigh-in I?ll devote the next issue to your interpretations. Keep in mind that the only opinion that really counts is the IRS?s. But I will welcome your comments on whatever the Service has to say about this and publish them next week ? if I get them in time. Send your thoughts to me at GMScan@aol.com.
The question of duplicate coverage keeps coming up. I?ll get into the specific applications below, but a lot of people seem to feel that duplicate coverage of the benefits of a high-deductible health plan (HDHP) is not permitted. That is not the way I read the law. What I am reading says: ?(To be eligible for an HSA) such individual is not, while covered under a high deductible health plan, covered under any health plan which is not a high deductible health plan, and which provides coverage for any benefit which is covered under the high deductible health plan.?
This says (as far as I can see) that an individual is disqualified from an HSA if he has coverage that duplicates the benefits of the high deductible plan AND which is not a high deductible plan. Both conditions must be present. Please correct me if I?m missing something, but I see no reason that an account-holder could not be covered by two plans if they are both high-deductible plans.
COMBINING HRAs AND HSAs
One of the implications of this issue is combining a Health Reimbursement Arrangement (HRA) with an HSA. Some people I respect highly have conjectured it would not be allowed because the HRA duplicates the benefits of the HDHP, and an HRA would be allowed only if it does not duplicate these benefits. That is, the HRA might be allowed for peripheral benefits like vision or dental, but not for the core benefits that the HDHP would otherwise cover.
That is not the way I see it. I believe the law says that the minimum deductibles of $1,000/$2,000 are sacrosanct. There may be no coverage below those amounts, other than the HSA. But once you?ve broken through that threshold, benefit construction is wide open. So, an employer-funded HRA could be used to fund another deductible on top of the HSA-funded deductible, or the HRA could be used to cover coinsurance on top of the HDHP deductible. The HRA is, after all, just part of the HDHP. That is especially true for self-funded employers (it is all Section 105 money), but should be true for insured situations as well.
CONVERTING HRA FUNDS
Many employers have asked about HRA conversions. If there is an HRA in place and the company switches to an HSA, can employees continue to access the HRA funds ? in effect, ?spend-down? the HRA money? Again, it would seem that this should be allowable, provided the HRA money doesn?t fill the minimum deductible. Or, if the HRA plan document allows it, an employer could reclaim the HRA fund, and use that obligation as a source of HSA funding.
CARVING OUT PRESCRIPTION DRUG BENEFITS
Some employers have told me they would like to carve-out prescription drug benefits from the HSA/HDHP package, and continue to offer these on a triple-tier copayment basis, or fund it with an HRA. I cannot see any way the law would allow this. It is quite specific on what are ?permitted coverages? below the deductible, and Rx isn?t one of them.
Another issue that has been raised is the application of non-discrimination rules. I hadn?t heard of this before, but I?ve been told that if, in the course of setting up a Flexible Spending Account (FSA) program, it turns out that only ?highly-compensated employees? choose to participate, the whole program can be disqualified after-the-fact. The fear is that applying the same standard to an HSA program could be very messy, involving a return of worker?s contributions, and re-enrollment in a different health plan even after the plan year has begun. There seems to be some relaxation of the non-discrimination rules for HSA programs, but it isn?t clear how far it goes.
FUNDING NON-ELIGIBLE EMPLOYEES
One reader has asked about employer responsibility if an employee misleads the employer about his eligibility for an HSA. Employers cannot know with any certainty if a worker has disqualifying coverage from a spouse or otherwise. If an employer sets up HSAs for 1,000 workers and makes a contribution to them, it is entirely possible (even likely) that some number of them will turn out not to be qualified. Does the employer have any liability in this case? Even if there is no legal liability, and the employee is simply required to pay taxes and penalties of the amount contributed, what happens with the FICA and other payroll taxes that were avoided when the employer made the good-faith contribution? I don?t have any idea how this would work.
Much discussed has been the question of independent ?substantiation? of HSA withdrawals. FSAs and HRAs require that a withdrawal be certified as a qualified medical expense under Section 213(d). But there are severe penalties on the employer if these moneys are used for non-qualified expenses. In the case of an HRA, it may mean losing the tax advantage of the entire benefits program. Non-medical withdrawals are absolutely forbidden. That is not the case with HSAs. People are perfectly free to use HSA money for non-medical purposes, as they have been with MSAs. The only penalty is that the account-holder (not the employer) pays taxes on the funds, plus a 10% penalty. The HSA trustee will issue a statement to the IRS about deposits and withdrawals, and the account holder is required to verify that the withdrawals were for qualified expenses.
This is also how the Medical Expense Deduction works. People are free to claim anything as a medical expense in their tax returns. The claims are not independently verified. But if the taxpayer is audited, there are severe penalties for fraudulent claims. It seems to work pretty well in keeping people honest.
ADJUDICATING HSA WITHDRAWALS
Some employers would like to go beyond ?substantiation? and have HSA withdrawals treated like any other insurance claim, i.e., submitted for adjudication and repricing so that the employee will get the ?benefit? of network discounts and the employer knows whether the service is eligible for meeting the deductible.
This issue indicates that many employers still don?t ?get it.? The HSA money belongs to the worker, not the employer. The whole point is to get workers involved in the costs of the services they consume and begin to demand transparent pricing from the doctors and hospitals they deal with. So-called ?network discounts? are fictitious. They are discounts from a ?charge? that is never actually paid by anyone. HSAs will place more of the health care system on a cash basis, which is far more efficient than the existing third-party payment system. And it will begin to restore true prices that reflect value.
In the short run, some workers may very well spend their HSA money frivolously and be over-charged for services. But that is the precise learning process our entire system needs to go through to change the fundamental economic dynamics in health care. We cannot continue to treat adult Americans like hapless children who are unable to make decisions and value judgments in health care. People are able to learn from experience, and beginning in 2004, we have a tool that allows that to happen.
Please send all comments/questions directly to me at email@example.com.
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The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors