Health Savings Accounts (HSAs): What’s Changed for 2007

For WellPoint Internal Use Only HSA_2007_WLP-final

Health Savings Accounts (HSAs): What’s Changed for 2007

Consumer Driven Health Plans (CDHP) Sales Training

For WellPoint Internal Use Only HSA_2007_WLP-final 2

Session agenda and objective

• Brief review of the characteristics of Health Savings Accounts (HSAs)

• Description of the changes in the Federal rules for HSAs in 2007

• Description of sales/marketing collateral and key sales messages

• Questions and answers

Prerequisite: You have existing knowledge

of the characteristics and rules of HSAs

Overall objective of the session: You will be able to

describe the changes in the United States Federal

regulations pertaining to HSAs effective January 1, 2007.

Overall objective of the session: You will be able to

describe the changes in the United States Federal

regulations pertaining to HSAs effective January 1, 2007.


Note!

We are not providing investment or tax or legal recommendations, advice, or endorsements in this presentation.

We are not providing investment or tax or legal recommendations, advice, or endorsements in this presentation.


Review: The Characteristics of Health Savings Accounts


Review: HSA characteristics

Which of the following statements are true about HSAs?

Think about your answers, and then click or press a key to see the answers.

True False

1. HSAs offer individuals/employees a tax-advantaged way to accumulate savings for medical expenses.

2. HSAs are controlled and owned by individuals/employees.

3. HSA contributions are tax-free, and can be made by the company and/or the individual/employee.

4. A health savings account must be paired with what the IRS calls a qualified high-deductible health plan.

5. Funds in an HSA accumulate from year to year, and are portable as well as an inheritable asset.

6. HSAs are expected to encourage participants to become better health care consumers.

7. There are specific requirements that determine eligibility for an HSA.

8. HSAs are regulated by Federal rules/legislation.


Changed HSA Regulations 2007

In late December 2006, the US Congress passed the Tax Relief and Health Care Act of 2006 (H.R. 6111), part of which is the HOPE Act (Health Opportunity Patient Empowerment Act of 2006) that made several important changes to the HSA rules. Most of the changes are effective January 1, 2007.

In late December 2006, the US Congress passed the Tax Relief and Health Care Act of 2006 (H.R. 6111), part of which is the HOPE Act (Health Opportunity Patient Empowerment Act of 2006) that made several important changes to the HSA rules. Most of the changes are effective January 1, 2007.


HSA rules: overview of changesOld rules

• Contribution limits defined by plan deductible or IRS annual limits

• Contributions prorated from plan effective date

• Rollover of unused HRA/FSA funds into HSA not allowed

• Contributions into HSA during FSA “grace period”not allowed

• Transfer of funds from IRA to HSA not allowed

• Contributions must be comparable for compensated employees

• Cost of living adjustments (indexed amounts) released inlate November

New rules 2007

• Contribution limits are subject only to IRS annual limits*

• Full contribution maximums are allowed when enrolled*

• One-time rollover of HRA/FSA funds into HSA is allowed*

• Contributions into HSA during FSA “grace period”are allowed

• One-time transfer of funds from IRA to HSA is allowed*

• Contributions may be larger for non-highlycompensated employees

New rule 2008• Cost of living adjustments

(indexed amounts) will be released by June 1

* Certain conditions must be met to avoid tax penalties.

8For WellPoint Internal Use Only HSA_2007_WLP-final

New Rule for 2007:

Contribution Limits Are Subject Onlyto IRS Annual Limits


New rule for 2007

Contribution limits only subject to IRS annual limits

Old rule Could contribute the lesser of:• Actual deductible amountor• Maximum allowed

Example old rule (click):

New ruleCan contribute up to maximum allowed (“contribution cap”)

Key amounts have been increased (deductibles andcontribution caps)

Example new rule (click):

HSA contribution cap(plus $700 if over 55)

HSA minimum required deductible

$5,450

$2,100

Family

$2,700

$1,050

Single



$5,650

$2,200

Family

$2,850

$1,100

Single

Example old rule: For an employee with single coverage, the deductible had to be at least $1,050 and that is the most that could be contributed to an HSA for such a policy. However, if that employee had a single coverage plan with a deductible of $3,000, up to $2,700 could be contributed to the HSA. (Individuals 55 years or older could contribute an additional $700.)

Example old rule: For an employee with single coverage, the deductible had to be at least $1,050 and that is the most that could be contributed to an HSA for such a policy. However, if that employee had a single coverage plan with a deductible of $3,000, up to $2,700 could be contributed to the HSA. (Individuals 55 years or older could contribute an additional $700.)

Example new rule: For an employee with single coverage, the deductible must now be $1,100 and a family plan must have a $2,200 deductible. However, contributions up to $2,850 can be made to an HSA for a single plan and $5,650 for a family plan. (Individuals over 55 may also contribute an additional $800.)

Example new rule: For an employee with single coverage, the deductible must now be $1,100 and a family plan must have a $2,200 deductible. However, contributions up to $2,850 can be made to an HSA for a single plan and $5,650 for a family plan. (Individuals over 55 may also contribute an additional $800.)


Extra notes about the rule:

• The minimum deductible determines if the health plan is HSA qualified.An HSA would not be qualified if the health plan deductible is less than $1,100 for single coverage or $2,200 for family coverage.

• The maximum out of pocket expenses allowed have also increased to $5,500 ($250 more than 2006) for single coverage and to $11,000 ($500 more) for family coverage.

• The member must maintain a full 12-month plan eligibility to avoid a tax penalty.

New ruleCan contribute up to maximum allowed (“contribution cap”)

Key amounts have been Increased (deductibles andcontribution caps)



$5,650

$2,200

Family

$2,850

$1,100

Single

HSA minimum required deductible $2,200$1,100

HSA maximum OOP expenses $11,000$5,500

New rule for 2007



Check your understanding of the new rule

• Bob, age 46, has self-only coverage with a $1,500 annual deductible.

• The legal HSA contribution limit in 2007 for single coverage is $2,850 (plus $800 if over 55).

• Bob joined the plan January 1, 2007 and stayed in the plan for a full 12 months after that.

Question 1 of 2:

Under the new law, what is the maximum that can be contributedto Bob’s HSA during 2007? Think about your answer, and then click or press a key to see the correct answers.

A. $1,100

B. $1,500

C. $2,850

D. $5,560

Under the old rule, with a $1,500 deductible, the maximum contribution would have been $1,500. Under the new rule, an additional $1,350 can be contributed to Bob’s HSA. This allows more to be saved for qualified medical expenses.

Under the old rule, with a $1,500 deductible, the maximum contribution would have been $1,500. Under the new rule, an additional $1,350 can be contributed to Bob’s HSA. This allows more to be saved for qualified medical expenses.

New rule for 2007




• Maria, age 57, has family coverage with a $2,500 annual deductible.

• The legal HSA contribution limit in 2007 for family coverage is $5,650 (plus $800 if over 55).

• Maria joined the plan January 1, 2007 and stayed in the plan for a full 12 months after that.

Question 2 of 2:

Under the new law, what is the maximum that can be contributedto Maria’s HSA during 2007? Think about your answer, and then click or press a key to see the answers.

A. $2,200

B. $2,500

C. $5,650

D. $6,450

Under the old rule, with a $2,500 deductible, the maximum contribution would have been $2,500 (the amount equal to the deductible). With the changed rule, as much as $6,450 can be contributed to her HSA: the maximum contribution of $5,650 plus the $800 extra for being older than 55. ($5,650 + $800 = $6,450)

Under the old rule, with a $2,500 deductible, the maximum contribution would have been $2,500 (the amount equal to the deductible). With the changed rule, as much as $6,450 can be contributed to her HSA: the maximum contribution of $5,650 plus the $800 extra for being older than 55. ($5,650 + $800 = $6,450)

New rule for 2007



New Rule for 2007:

Full Contribution Maximums Are Allowed When Enrolled


New rule for 2007

Full contribution maximums allowed when enrolled

Old rule If an individual enrolled in a plan after the effective date, contribution limits to the HSA were calculated – prorated – on a month-to-month basis (1/12 of the annual contribution limit).

New ruleIf an individual enrolls in a plan after the effective date, but on or before December 1 of the plan year, then the maximum may be contributed to the HSA.



Enroll after health plan effective date of 1/1/06 =1/12 contribution per month enrolled.

Months, 2006

1 2 3 4 5 6 7 8 9 10 11 12

Months, 2007

1 2 3 4 5 6 7 8 9 10 11 12

7/12 of max contribution if join June 1

Full contribution if join June 1

Enroll in health plan anytime before December 1 =contribute 100% of allowed contribution.

Example old rule: Nick enrolled in an HSA-compatible health plan on June 1, 2006. The plan deductible was $1,200. The legal contribution limit that year was $1,200 (the same as the deductible) but the maximum that could be contributed to his HSA under the 2006 rule for prorated limits was $700 (the maximum contribution allowed [$1,200] divided by 12 months [$100 per month] times 7 months [June-Dec] ).

Example old rule: Nick enrolled in an HSA-compatible health plan on June 1, 2006. The plan deductible was $1,200. The legal contribution limit that year was $1,200 (the same as the deductible) but the maximum that could be contributed to his HSA under the 2006 rule for prorated limits was $700 (the maximum contribution allowed [$1,200] divided by 12 months [$100 per month] times 7 months [June-Dec] ).

Example new rule: Karin, age 33, enrolls in an HSA-compatible health plan on June 1, 2007. The plan deductible is $1,200. The legal contribution limit in 2007 is $2,850 and that full amount ($2,850) may be contributed to her HSA for 2007 even though she will be an eligible member for only seven months. Note: There are some caveats associated with this, described next.

Example new rule: Karin, age 33, enrolls in an HSA-compatible health plan on June 1, 2007. The plan deductible is $1,200. The legal contribution limit in 2007 is $2,850 and that full amount ($2,850) may be contributed to her HSA for 2007 even though she will be an eligible member for only seven months. Note: There are some caveats associated with this, described next.


New rule for 2007

Full contribution maximums allowed when enrolledExtra notes about the rule:• Someone who joins the plan after the effective date must remain eligible until

December 31 of the year following enrollment to avoid a tax penalty.

Click to see an example.


Months, 2007

1 2 3 4 5 6 7 8 9 10 11 12

Months, 2008

1 2 3 4 5 6 7 8 9 10 11 12

Enroll in health plan anytime before December 1 =contribute 100% of allowed contribution.

Example new rule: Karin, who enrolled June 1, 2007, made a full year’s contribution to her HSA in the amount of $2,850. She must maintain membership in the plan (or COBRA or another plan) through December 31, 2008 to avoid tax consequences.

Example new rule: Karin, who enrolled June 1, 2007, made a full year’s contribution to her HSA in the amount of $2,850. She must maintain membership in the plan (or COBRA or another plan) through December 31, 2008 to avoid tax consequences.

Must remain eligible until December 31 of the year following enrollment


New rule for 2007

Full contribution maximums allowed when enrolledExtra notes about the rule:• Someone who joins the plan after the effective date must remain eligible until

December 31 of the year following enrollment to avoid a tax penalty.

• If the person terminates employment during the 12 month period, he/she must elect COBRA or coverage under another qualified health plan to avoid adverse income tax consequences.



Months, 2007

1 2 3 4 5 6 7 8 9 10 11 12

Months, 2008

1 2 3 4 5 6 7 8 9 10 11 12X

Contributions added to taxable income as penalty.

Must remain eligible until December 31 of the year following enrollment

Example new rule, continued: Karin terminates employment February 1, 2008 and does not elect COBRA or another qualified plan.

The portion of the contributions she made for January through May of 2007 (the five months before she joined the plan) consequently must be included in her income and will be subject to a 10% tax.

In Karin’s case, the amount added to her 2008 income will be $1,187.50 (5/12 of $2,850) plus a 10% tax ($118.75).

Example new rule, continued: Karin terminates employment February 1, 2008 and does not elect COBRA or another qualified plan.

The portion of the contributions she made for January through May of 2007 (the five months before she joined the plan) consequently must be included in her income and will be subject to a 10% tax.

In Karin’s case, the amount added to her 2008 income will be $1,187.50 (5/12 of $2,850) plus a 10% tax ($118.75).



• The plan effective date is January 1, 2007.

• Lou, a late-year hire, enrolls in single coverage on December 1, 2007.

• His health plan deductible is $1,500.

• The legal HSA contribution limit for a single coverage plan in 2007 is $2,850.

Question 1 of 2:

Under the new law, how much can Lou contribute during 2007even though he enrolls with just one month left in the year? Think about your answer, and then click or press a key to see the answers.

A. $125

B. $237.50

C. $1,500

D. $2,850

Under the old rule, only 1/12 of the annual limit could have been contributed to Lou’s HSA. This would have totaled $125 (1/2 of the limit of $1,500 [the deductible] ). Under the new rule, the legal maximum of $2,850 can be contributed to Lou’s HSA for 2007.

Under the old rule, only 1/12 of the annual limit could have been contributed to Lou’s HSA. This would have totaled $125 (1/2 of the limit of $1,500 [the deductible] ). Under the new rule, the legal maximum of $2,850 can be contributed to Lou’s HSA for 2007.

Assumes Lou remains

eligible for the required amount of time

New rule for 2007



Question 2 of 2:

How many months will be included in the tax penalty? Think about your answer, and then click or press a key to see the answers.

A. 4

B. 7

C. 12

Per the new rule, her tax penalty will be the four months of January, February, March, and April of 2007. $1,216.67 (4/12 x $3,650) will be included in her 2008 gross income and a 10% additional tax ($121.67) will also apply.

Per the new rule, her tax penalty will be the four months of January, February, March, and April of 2007. $1,216.67 (4/12 x $3,650) will be included in her 2008 gross income and a 10% additional tax ($121.67) will also apply.

Check your understanding of the new rule• Doreen, 61, first enrolls in self-only coverage on May 1, 2007.

Under the new rule she is HSA eligible for all of 2007 (January through December 2007).

• Contributions to her HSA for 2007 total $3,650 ($2,850 plus $800 catch up).• She ceases to be HSA eligible March 1, 2008 for reasons other than death or becoming

disabled.• Her situation results in tax consequences.

New rule for 2007



New Rules for 2007:

One-time Rollover of HRA/FSA Funds into HSA Is Allowed

Contributions into HSA During FSA “Grace Period” Are Allowed


HSA

New rule for 2007

One-time rollover of HRA/FSA funds into HSA allowed

Old rule

Funds from Health Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs)could not be rolled over or otherwise transferred into HSAs.


FSA HRA

HSA

FSA HRA

Rollover + 100% Contribution

New rule• Employer can offer a one-time rollover

of funds, tax free, before January 1, 2012 for participants who had an FSA/HRA account balance on September 21, 2006.

• The amount rolled over into the HSAdoes not decrease the contribution cap.

Example new rule: Lianne’s employer allows a roll over of $1,000 from her HRA into her HSA in 2007. The HSA cap for 2007 for her family coverage plan is $5,650, the full amount of which may still be contributed to her HSA – in addition to the $1,000 rollover.

Example new rule: Lianne’s employer allows a roll over of $1,000 from her HRA into her HSA in 2007. The HSA cap for 2007 for her family coverage plan is $5,650, the full amount of which may still be contributed to her HSA – in addition to the $1,000 rollover.


New rule for 2007

One-time rollover of HRA/FSA funds into HSA allowedExtra notes about the new rule:• The amount that may be rolled over can be either

– The FSA/HRA balance as of September 21, 2006or– The FSA/HRA balance as of the date of the rolloverwhichever amount is less.


New rule 2007• A one-time rollover of funds, tax free,

is allowed before January 1, 2012 for participants who had an FSA/HRA account balance on September 21, 2006.

• The amount rolled over into the HSAdos not decrease the contribution cap.

HSA

FSA HRA


Example new rule: Lianne’s HRA balance on September 21, 2006 was $1,000.

Her HRA balance on the date of the rollover (February 1, 2007) was $1,250.

Because the September 21, 2006 balance ($1,000) was less than the February 1, 2007 balance ($1,250), the maximum she was allowed to rollover into her HSA was $1,000.

The HSA offers some tax advantages that the HRA does not.

Example new rule: Lianne’s HRA balance on September 21, 2006 was $1,000.

Her HRA balance on the date of the rollover (February 1, 2007) was $1,250.

Because the September 21, 2006 balance ($1,000) was less than the February 1, 2007 balance ($1,250), the maximum she was allowed to rollover into her HSA was $1,000.

The HSA offers some tax advantages that the HRA does not.

Lianne’sHRA

September 21, 2006

$1,000

February 1, 2007

$1,250

Lianne’s HSA$1,000


Extra notes about the new rule:• The amount that may be rolled over can be either

– The FSA/HRA balance as of September 21, 2006or– The FSA/HRA balance as of the date of the rolloverwhichever amount is less.

• The member must maintain a full 12-month plan eligibility following the month of the rollover to avoid a tax penalty.


New rule 2007• A one-time rollover of funds, tax free,


• The amount rolled over into the HSAdos not decrease the contribution cap.

HSA

FSA HRA


Example new rule:

Lianne, who rolled over HRA funds into her HSA in February 2007 must stay HSA eligible during the 12-month “testing period,” which for her begins in March (the month after the rollover) and ends on the last day of February 2008.

If she becomes HSA ineligible during the testing period for a reason other than death or disability, the full amount of her rollover ($1,000) will be subject to income taxes plus an additional 10% tax ($100).

Example new rule:

Lianne, who rolled over HRA funds into her HSA in February 2007 must stay HSA eligible during the 12-month “testing period,” which for her begins in March (the month after the rollover) and ends on the last day of February 2008.

If she becomes HSA ineligible during the testing period for a reason other than death or disability, the full amount of her rollover ($1,000) will be subject to income taxes plus an additional 10% tax ($100).

1 2 3 4 5 6 7 8 9 10 11 12

Must maintain eligibility for full 12 months to avoid taxes

1 2 3 4 5 6 7 8 9 10 11 12

Months, 2007 and 2008

New rule for 2007



More extra notes about the new rule:• This “qualified HSA distribution” feature is optional for employers; they

may choose to add it to health FSA or HRA plans but are not obligated to do so.

• An employer who offers rollovers to any employee must offer to all employees covered under the employers HDHP; otherwise a hefty excise tax applies.

New rule• A one-time rollover of funds, tax free,


• The amount rolled over into the HSAdos not decrease the contribution cap. HSA

FSA HRA


New rule for 2007



Check your understanding of the new rule• On September 1, 2006 Josh had $2,000 in his health FSA.

• Later that month, on September 21, Josh had $2,500 in his health FSA.

• On the day of the rollover, the balance has grown to $2,800.

• Josh, age 46, has self-only HDHP coverage with a $1,500 deductible.

• The statutory HSA contribution limit in 2007 for single coverage is $2,850.

Question 1 of 2:Under the new rules for 2007, how much can Josh rollover intohis HSA in 2007?Think about your answer, and then click or press a key to see the answers.

A. $2,000

B. $2,500

C. $2,800

D. $2,850

In this case, the amount that can be rolled over is the balance in the health FSA on September 21, 2006 ($2,500) because it is less than the balance on the rollover date.

Under the old rule, Josh would not have been able to rollover any amount from his health FSA (or an HRA).

In this case, the amount that can be rolled over is the balance in the health FSA on September 21, 2006 ($2,500) because it is less than the balance on the rollover date.

Under the old rule, Josh would not have been able to rollover any amount from his health FSA (or an HRA).

Assumes Josh remains enrolled for 12 months

New rule for 2007



Check your understanding of the new rule• In early 2007, Josh rolled $2,500 from his health FSA into his HSA.

• Josh, age 46, has self-only HDHP coverage with a $1,500 deductible.

• The statutory HSA contribution limit in 2007 for single coverage is $2,850.

Question 2 of 2:Counting the rollover amount, what is the maximum that couldbe contributed to Josh’s HSA in 2007?Think about your answer, and then click or press a key to see the answers.

A. Just the $2,500 from the rollover

B. The $2,500 from the rollover plus $1,500 (same amount as the deductible)

C. The $2,500 from the rollover plus $2,850 (contribution limit)

The rollover does not decrease the HSA contribution limit.The rollover does not decrease the HSA contribution limit.

Assumes Josh remains enrolled for 12 months

New rule for 2007



New rule for 2007

Contributions to HSA during FSA “grace period” allowed

Old rule • If an individual was a participant in a

health FSA on the last day of the plan year and that FSA had a grace period (usually 2.5 months), the individual was not allowed to establish or contribute to an HSA until the end of the grace period.

• This was true even if the FSA account balance was zero.


1 2 3 4 5 6 7 8 9 10 11 12

FSA Grace Period

HSA Eligible (contributions)

Eligible for 9/12 annual max. contribution

Months prior to 2007

New ruleAn FSA participant may establishor contribute to an HSA duringthe FSA grace period (with certainconditions, described next).

1 2 3 4 5 6 7 8 9 10 11 12

FSA Grace PeriodHSA Eligible (contributions)

Eligible for full annual max. contribution

Example old rule: Tony participated in a health FSA in 2005 with a 2.5 month grace period. He had a zero balance on December 31, 2005. Under the old rules, he was not able to enroll in an HSA until April 1 of 2006 (after the FSA grace period) and he would have been able to contribute only 9/12 of the HSA contribution limit.

Example old rule: Tony participated in a health FSA in 2005 with a 2.5 month grace period. He had a zero balance on December 31, 2005. Under the old rules, he was not able to enroll in an HSA until April 1 of 2006 (after the FSA grace period) and he would have been able to contribute only 9/12 of the HSA contribution limit.


Extra notes about the rule:One of the following must apply:Either• The balance in the FSA is $0 at the

end of the plan year.or• The employer allows a one-time

transfer of the entire FSA balance at the end of the plan year.

New ruleAn FSA participant may establishor contribute to an HSA duringthe FSA grace period (with certainconditions, described next).


1 2 3 4 5 6 7 8 9 10 11 12

FSA Grace PeriodHSA Eligible (contributions)

Eligible for full annual max. contribution

Example new rule: Joanie’s health FSA includes a 2.5 month grace period (January 1-March 15) following each calendar plan year. On December 31, 2006, her FSA balance is $0 and she is HSA eligible for 2007. Under the new rules, the FSA grace period is disregarded and so she may enroll in an HSA (any time) and the full annual maximum for her plan may be contributed to her HSA.

Example new rule: Joanie’s health FSA includes a 2.5 month grace period (January 1-March 15) following each calendar plan year. On December 31, 2006, her FSA balance is $0 and she is HSA eligible for 2007. Under the new rules, the FSA grace period is disregarded and so she may enroll in an HSA (any time) and the full annual maximum for her plan may be contributed to her HSA.

OR

enroll in HSA

FSA$0

FSA Grace Perio

d

FSA$$$

FSA Grace Perio

d

transfer to HSA

New rule for 2007




• In 2006, Maiko participated in a health FSA that has a 2.5 month grace period.

• She had a balance of $0 in her FSA on December 31, 2006.

Question 1 of 2:

If she is HSA eligible, is she allowed to participate in an HSA asearly as January 1, 2007?Think about your answer, and then click or press a key to see the answers.

A.Yes

B.NoThe new rules disregard the FSA “grace period.” Of course Maiko must have a health plan that meets HSA deductible requirements.The new rules disregard the FSA “grace period.” Of course Maiko must have a health plan that meets HSA deductible requirements.

New rule for 2007




• In 2006, Oscar participated in a health FSA that has a 2.5 month grace period.

• He had a balance of $100 in his FSA on December 31, 2006.

Question 2 of 2:

If he is HSA eligible, is he allowed to participate in an HSA asearly as January 1, 2007?Think about your answer, and then click or press a key to see the answers.

A.Yes, the rule requires it.

B.Yes, but only if his employer allows FSA transfer to an HSA.

C.No, even if his employer allows FSA balance transfers.

A one-time transfer/rollover of the balance in an FSA is allowed under the new rule, but the feature is an option for employers. Not all will elect to offer it to their employees due to the likely administrative burden.

A one-time transfer/rollover of the balance in an FSA is allowed under the new rule, but the feature is an option for employers. Not all will elect to offer it to their employees due to the likely administrative burden.

New rule for 2007



New Rule for 2007:

One-time Transfer of Funds from IRA to HSA Is Allowed


New rule for 2007

One-time transfer of funds from IRA to HSA allowed

Old rule

Funds from an Individual Retirement Account (IRA) could not be rolled over or otherwise transferred into an HSA.

New rule• HSA participants may make a one-time

tax-free rollover from an IRA to the HSA.

• The amount rolled over into the HSAdoes decrease the contribution capand therefore may not exceed the cap.Note that this differs from the FSA/HRA rollover, which does not decrease the contribution cap.


IRA

HSA

HSA

IRA

Transfer becomes part of contribution

Example new rule: Brian rolls over $1,000 from his IRA into his HSA in 2007. The HSA cap for 2007 for his family coverage plan is $5,650. The $1,000 counts toward that cap, which means that an additional $4,650 may still be contributed to his HSA .

Example new rule: Brian rolls over $1,000 from his IRA into his HSA in 2007. The HSA cap for 2007 for his family coverage plan is $5,650. The $1,000 counts toward that cap, which means that an additional $4,650 may still be contributed to his HSA .


New rule for 2007

One-time transfer of funds from IRA to HSA allowedExtra notes about the rule:• The one-time transfer must be made during the member’s lifetime

and is irrevocable.

• Transfers from SEPS or Simple IRAs are not allowed.(It is not yet clear if transfers from Roth IRAs are allowed; guidance from IRS is anticipated).

• Transfer must be a direct trustee-to-trustee transfer.

• The member must maintain a full 12-month plan eligibility to avoid a tax penalty.



• The amount rolled over into the HSAdoes decrease the contribution capand therefore may not exceed the cap.

Note that this differs from the FSA/HRA rollover, which does not decrease the contribution cap

HSA

IRA



Extra notes about the rule:There is a limited exception to the once-in-a-lifetime transfer rule:

• An individual has a single-coverage HSA-qualified health plan. – That person makes a transfer from an IRA into his or her HSA.

• Later that same plan year, that person switches to a family plan (same HSA).– That person may make an additional transfer from his/her IRA.

– Both transfers count toward the HSA contribution for that year (and may not exceed the contribution cap).

Click to see an example of this exception (it will appear on the next screen).

New rule for 2007




• The amount rolled over into the HSAdoes decrease the contribution capand therefore may not exceed the cap.

Note that this differs from the FSA/HRA rollover, which does not decrease the contribution cap

HSA

IRA


a one time an additional


Example exception to new rule: It is March, 2007. Ray (age 40) has an HSA-qualified self-only health plan. He has an HSA with a total balance of $500 (left over from 2006; he has not made any contributions yet in 2007). (Refer to the first row of the matrix below.)

He transfers $1,000 from his IRA into his HSA. His HSA now has a balance of $1,500 ($1,000 of which is a 2007 contribution). (Second row of matrix.)

In the months of April and May, he contributes $100 per month into his HSA. (Third and fourth rows.)

Now it is June of 2007. His HSA balance is $1,700 (of which $1,200 has been contributed in 2007). Ray switches to a family health plan. (Fifth row.)

The rule exception allows another transfer from his IRA into his HSA. He transfers $500. This brings the balance to $2,200 (of which $1,700 has been contributed in 2007). The contribution cap for an HSA with a family health plan is $5,650. Up to $3,950 more can be contributed to his HSA in 2007, but he may not ever transfer more funds from his IRA into his HSA. (Sixth row of the matrix below.)

Example exception to new rule: It is March, 2007. Ray (age 40) has an HSA-qualified self-only health plan. He has an HSA with a total balance of $500 (left over from 2006; he has not made any contributions yet in 2007). (Refer to the first row of the matrix below.)

He transfers $1,000 from his IRA into his HSA. His HSA now has a balance of $1,500 ($1,000 of which is a 2007 contribution). (Second row of matrix.)

In the months of April and May, he contributes $100 per month into his HSA. (Third and fourth rows.)

Now it is June of 2007. His HSA balance is $1,700 (of which $1,200 has been contributed in 2007). Ray switches to a family health plan. (Fifth row.)

The rule exception allows another transfer from his IRA into his HSA. He transfers $500. This brings the balance to $2,200 (of which $1,700 has been contributed in 2007). The contribution cap for an HSA with a family health plan is $5,650. Up to $3,950 more can be contributed to his HSA in 2007, but he may not ever transfer more funds from his IRA into his HSA. (Sixth row of the matrix below.)

DateBalance

(Ray’s HSA)Source of funds ’07 contribution

’07 contribution to date

Type of health plan

’07 contribution cap

possible ’07 contribution remaining

March 2007 $500 2006 left over $0 $0 Single $2,850 $2,850

March 2007 $1,500 IRA transfer $1,000 $1,000 Single Same $1,850

April 2007 $1,600Pre-tax payroll

deduction$100 $1,100 Single Same $1,750

May 2007 $1,700Pre-tax payroll

deduction$100 $1,200 Single Same $1,650

June 2007 $1,700 -- -- $,1200 FAMILY $5,650 $4,450

July 2007 $2,200 2nd IRA transfer $500 $1,700 Family $5,650 $3,950

New rule for 2007



New rule for 2007

One-time transfer of funds from IRA to HSA allowedCheck your understanding of the new rule

• On January 1, 2007 Sue, 46, enrolled in an HSA-qualified single-coverage health plan that has a $1,500 deductible.

• The legal HSA contribution cap for that type of plan in 2007 is $2,850.

• Later in 2007 Sue rolls over $2,000 from her IRA to her HSA.

Question 1 of 2:

How much more than the rolled over amount can be contributed to her HSA in the 2007 plan year before reaching the contribution cap? Think about your answer, and then click or press a key to see the answers.

A.$1,500

B.$850

C.$2,000

D.$2,850

The HSA contribution cap for single-coverage plan is $2,850 for 2007. Sue already transferred $2,000 from her IRA. That means that no more than $850 additional can be contributed to her HSA during 2007. ($2,850 - $2,000 = $850)

The HSA contribution cap for single-coverage plan is $2,850 for 2007. Sue already transferred $2,000 from her IRA. That means that no more than $850 additional can be contributed to her HSA during 2007. ($2,850 - $2,000 = $850)

Assumes Sue remains enrolled for 12 months



• Sue’s HSA balance is $2,000, all of which she transferred from her IRA while she was enrolled in an HSA-qualified single-coverage health plan in 2007.

• Toward the end of 2007, she switches to a family-coverage plan.

Question 2 of 2:

Can Sue transfer any more from her IRA to her HSA? Think about your answer, and then click or press a key to see the answers.

A. Yes, there is an exception to the rule when someone switches to a family plan in the same year.

B. Yes, there is an exception to the rule when you have funds remaining in your IRA and your employer allows it.

C. No, it is a once in a lifetime rule.

D. No, she has exceeded the contribution cap for 2007 with her IRA transfer.

Since Sue changed plans in the same year, the exception applies and she may make one more transfer from her IRA into her HSA as long as she does not exceed the family contribution cap and as long as she remains HSA eligible for 12 months after the second transfer.

Since Sue changed plans in the same year, the exception applies and she may make one more transfer from her IRA into her HSA as long as she does not exceed the family contribution cap and as long as she remains HSA eligible for 12 months after the second transfer.

Assumes Sue remains enrolled for 12 months

New rule for 2007



New rule for 2007:

Contributions May be Larger for Non-Highly

Compensated Employees


New rule for 2007Contributions may be larger for non-highly compensated employees

Old rule • Employer outside a cafeteria plan required to make

comparable contributions (same dollar amounts or same percentages of deductible) regardless of employee compensation levels.

• 35% tax penalty if they failed to comply.

New rule

Employer outside a cafeteria plan may make higher contributions for “non-highly compensated employees (non-HCEs).



Example old rule: Ten HSA-eligible employees in 2006. All current full-time. All with self-only coverage. Three are HCEs and seven are non-HCEs. To avoid the tax penalty, their employer contributes the same amount of $100 to each of the ten HSAs.

Example old rule: Ten HSA-eligible employees in 2006. All current full-time. All with self-only coverage. Three are HCEs and seven are non-HCEs. To avoid the tax penalty, their employer contributes the same amount of $100 to each of the ten HSAs.

Example new rule: Ten HSA-eligible employees in 2007. All current full-time. All with self-only coverage. Three are HCEs and seven are non-HCEs. Under the new rule, their employer may contribute $100 to each of the three HCE’s HSAs and $200 to each of the seven non-HCE’s HSAs.

Example new rule: Ten HSA-eligible employees in 2007. All current full-time. All with self-only coverage. Three are HCEs and seven are non-HCEs. Under the new rule, their employer may contribute $100 to each of the three HCE’s HSAs and $200 to each of the seven non-HCE’s HSAs.

Non-highly compensatedemployees (non-HCEs)

Highly compensatedemployees (HCEs)

Highly compensatedemployees (HCEs)

Non-highly compensatedemployees (non-HCEs)


Extra notes about the rule:

Even though the amount for non-HCEs and HCEs can now be different, all employer contributions must be “comparable” for every employee with the same employment status and the same health plan coverage.

These new rules for designing comparable contributions for non-HCEs and HCEs can result in a chart like the following.

Only one contribution amount in each box

Self-Only Self-Plus One Self-Plus Two Self-Plus Three or More

HCEsNon-HCEs

HCEsNon-HCEs

HCEs Non-HCEs HCEs Non-HCEs

Current FTE $100 $150 $125 $200 $150 $225 $175 $275

Current PTE $75 $125 $100 $175 $125 $200 $175 $250

Former Employee

$50 $100 $75 $150 $100 $175 $150 $200

Note: The dollar amounts on the chart are strictly for illustrative purposes.

What this means, for example, is that if one HCE who is a current full-time employee and who has self-only coverage gets $100, then every other HCE employee with these same criteria also gets $100.

What this means, for example, is that if one HCE who is a current full-time employee and who has self-only coverage gets $100, then every other HCE employee with these same criteria also gets $100.




Employee 1 Employee 2

• Bob is a current FTE HCE. • Rick is a current FTE non-HCE.

• Bob has single HDHP/HSA coverage. • Rick has single HDHP/HSA coverage.

• ABC Company contributes $500 to Bob’s HSA.

• ABC Company contributes $1,000 to Rick’s HSA.

ABC Company, which does not have a cafeteria plan arrangement:

Question 1 of 2:

Is the above scenario allowed under the 2007 rule? Think about your answer, and then click or press a key to see the answers.

A. Yes

B. NoThis is allowed under the new rule. It is interesting to note that industry experts have identified a loophole, apparently an unintended one: when the rule is read literally it allows employers to contribute less to the HSAs of non-HCEs without violating the comparability rule. Clarification and guidance is expected from the IRS.

This is allowed under the new rule. It is interesting to note that industry experts have identified a loophole, apparently an unintended one: when the rule is read literally it allows employers to contribute less to the HSAs of non-HCEs without violating the comparability rule. Clarification and guidance is expected from the IRS.




Employee 1 Employee 2• Fiona is a current FTE HCE. • Jane is also a current FTE HCE.• Fiona has self-plus-one family

HDHP/HSA coverage.• Jane also has self-plus-one family

HDHP/HSA coverage.• ABC Company contributes $500 to

Fiona’s HSA.• ABC Company contributes $1,000 to

Jane’s HSA.

ABC Company, which does not have a cafeteria plan arrangement:

Question 2 of 2:

Is the above scenario allowed under the 2007 rule? Think about your answer, and then click or press a key to see the answers.

A. Yes

B. No

The rule requires that all HCEs of the same employment status (full time, in this case) and same plan coverage (self-plus-one family coverage in this case) receive the same HSA contribution from their employer. If ABC contributes $1,000 to Jane’s HSA, then to avoid penalty, it needs to contribute $1,000 to Fiona’s and every other FTE HCE who has self-plus-one family coverage.

The rule requires that all HCEs of the same employment status (full time, in this case) and same plan coverage (self-plus-one family coverage in this case) receive the same HSA contribution from their employer. If ABC contributes $1,000 to Jane’s HSA, then to avoid penalty, it needs to contribute $1,000 to Fiona’s and every other FTE HCE who has self-plus-one family coverage.



New Rule for 2008:

Cost of Living Adjustments (COLAs) (Indexed Amounts)

Will Be Released by June 1


Current rule

Cost of living adjustments (COLAs), on which HSA contribution caps and minimum deductibles are based, are not released until some time between October and November prior to the year they take effect.

COLAs are based on the Consumer Price Index (CPI) for the 12-month period ending August 31of the preceding calendar year.


New rule:

Effective for tax years beginning on or after January 1, 2008.

COLAs must be published no later than June 1 of the prior year.

COLAs will be based on the CPI for the12-month period ending March 31 of thepreceding calendar year.

October 2006

2007 COLAs

2008 COLAs

New rule for 2008

COLAs released by June 1



The cost of living adjustments (indexed amounts) for 2008 HSAs will be published by June 1, of 2007 (rather than November 2007 which is when they would have been published under the current rule).

Question 1 of 1:

What benefits will result from this earlier notification of HSA limits?Think about your answer, and then click or press a key to see the answers.

A. Provide more time to plan and communicate changes to members.

B. Allow plan design structure to be 100% compliant prior to open enrollment.

C. More time for HSA participants to budget for contributions.

D. All of the above, and other benefits as well.

Indeed. If only sales training development had been able to receive earlier publication of these new rules, you could have learned about them before now!

Indeed. If only sales training development had been able to receive earlier publication of these new rules, you could have learned about them before now!

New rule for 2008

COLAs released by June 1


HSA rules: summary

New rules effective January 1, 2007• Contribution limits are subject only to IRS annual limits*

• Full contribution maximums are allowed when enrolled* • One-time rollover of HRA/FSA funds into HSA allowed*

• Contributions into HSA during FSA “grace period”allowed

• One-time transfer of funds from IRA to HSA allowed*

• Contributions may be larger for non-highlycompensated employees

New rule effective January 1, 2008• Cost of living adjustments (indexed amounts) released

by June 1

* Certain conditions must be met to avoid tax penalties.


• Comparison Chart

• Newsletter Articles

• FAQs

• Member Memoand Email

• Monthly Bill Statement

• Op-Ed

Numerous sales and marketing materials will communicate the new HSA regulations

Click for examples.

New HSA rules

Sales and marketing collateral


The Hope Act makes HSAs even more attractive…

No more coming up short! Consumers can fund their HSA with pre-tax dollars up to the statutory limit (regardless of when they enroll).

More flexibility for employers who can now make higher contributions to lower wage earners

Save more for now and for the future. Consumers can now make the maximum allowable contribution pre-tax to an HSA account (regardless of the deductible).

Eliminates administrative headaches – no more determining and pro-rating partial-year eligibility.

Aligns and integrates HSA with other savings plans.

Removes barrier to converting from HRA to HSA.

Better ability to plan (earlier annual index adjustments).

New HSA rules

Key sales messages


Health Savings Accounts (HSAs): What’s Changed for 2007

CDHP Sales Training

Questions?

Documents

Health Savings Accounts (HSAs): What’s Changed for 2007