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Consumer-Directed Care

HSA 'Landmines' Could Cause Problems for Insurers, Employers

Reprinted from the Feb. 4, 2005, issue of INSIDE CONSUMER-DIRECTED CARE, a biweekly newsletter with timely news and insightful analysis of benefit design, contracts, market strategies and financial results.

It's been six months since the Treasury Dept. issued its last significant round of guidance on HSAs, but questions and loose interpretations of the rules continue to baffle insurers, employers and consumers.

The HSA provision of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 allows anyone with a high-deductible health plan (HDHP) - at least $1,000 for single coverage and $2,000 for couples and families - to open an HSA to pay for medical expenses.

During a Jan. 27 audioconference sponsored by ICDC, two industry experts took on several common HSA "landmines" including prescription drug coverage, prohibited transactions and HSA contribution rules for employers.

One of the most perplexing questions for employers is whether HSAs are subject to the Employee Retirement Income Security Act of 1974 (ERISA), said John Hickman, a benefits attorney in the Atlanta office of Alston & Bird. If subject to ERISA, HSAs would have to comply with portability and privacy rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which would add another layer of complexity to an already confusing list of rules and regulations. "Many employers don't appreciate the scope of the Dept. of Labor's exemption for HSAs from ERISA," Hickman said. "But you can get into sticky situations if ERISA applies to your HSA arrangement," he warned.

The good news: HSAs are little more than self-administered, self-adjudicated savings accounts that are not considered employee welfare benefit plans even when employers contribute to the accounts, Hickman explained. That means they're not subject to ERISA if they meet basic "safe harbor" requirements.

The bad news: Employers could trigger ERISA if they don't satisfy several conditions. First, participation in an HSA must be voluntary, and restrictions cannot be placed on an account holder's ability to transfer HSA dollars to another HSA trustee. The employer cannot restrict the account distributions (e.g., to medical expenses only), cannot endorse an HSA trustee and cannot influence HSA investment decisions made by account holders.

To avoid such compliance issues, Hickman suggested that employers make it clear to employees that the HSA is not health coverage and is not an employer-sponsored benefit plan. "Draw a clear line between the HSA and the health coverage to make it clear that there are two components," he advised.

Employers, such as banks, that can serve as an HSA custodian might have to take additional steps to avoid ERISA traps. An employer that serves as an HSA custodian, for example, should not make the terms of the HSA more attractive to its own employees than to people outside the company, Hickman said.

Five Common HSA Landmines

Here's a look at what Hickman and Ronald Bachman, a consultant in the Atlanta office of PricewaterhouseCoopers, identified as some of the biggest trouble spots related to HSAs:

bulletSpouse's health coverage: Family health coverage, according to the Treasury Dept., is anything other than single coverage. Due to a "glitch" in the statute, someone enrolled in an HDHP with single coverage could be disqualified from opening an HSA if his or her spouse is enrolled in a non-HDHP (such as an HMO) that provides family coverage (e.g., employee + child). Under a broad interpretation of the family coverage rule, "neither spouse can have an HSA even if the [HDHP] enrollee is not covered under the spouse's family coverage," Hickman explained. "We are hoping that issue is resolved so that that person is not disqualified when not covered under the spouse's plan." Editor's note: During a Feb. 1 conference in Atlanta, Roy Ramthun, senior advisor on health initiatives at the Treasury Dept., said that a spouse's coverage would not adversely impact an employee's HSA eligibility if the employee is not a covered dependent under the spouse's plan..
bulletSpouse's flexible spending account (FSA): A similar problem pops up when a spouse is enrolled in a general-purpose FSA. While an individual might have single HDHP coverage, she is not eligible to contribute to an HSA if her husband has an FSA that can cover expenses incurred by all family members. Although the creation of "single" and "family" FSAs would solve the problem, it could lead to "administrative difficulties" for plan administrators, Hickman noted.
bulletPharmacy discount cards: Individuals who have health coverage in addition to their HDHP generally cannot contribute to an HSA. However, individuals now aren't disqualified if they hold a separate policy or rider that covers prescription drugs. This "transition relief" period comes to an end on Dec. 31, 2005. Pharmacy discount cards, however, won't disqualify HSA eligibility, Bachman said. A card, for example, might entitle an employee to receive discounts of 15% to 50% on prescriptions. As long as the principal health coverage is provided by the HDHP, an eligible individual also can carry "permitted insurance," which includes disease-specific coverage (e.g., cancer, diabetes, asthma), he added.
bulletComparability rule: Employers that contribute HSA dollars to their employee's accounts must contribute either the same dollar amount or the same percentage of the deductible to all employees with an HDHP, Bachman explained. However, if contributions are made through a cafeteria plan, employees that have family coverage can receive a larger contribution than can employees who have single coverage, Hickman said. Similarly, under a cafeteria plan, employers can provide additional HSA dollars as an incentive to encourage employees to complete health risk assessments or enroll in wellness programs, for example, if the contributions are made through a cafeteria plan. However, Hickman warned, employers could violate the Americans with Disabilities Act if they require all employees to complete health risk assessments or other health-related inquiries.
bulletAccelerated contributions: HSA funds generally are available only after they have been deposited. However, a little-known provision in the July HSA guidance allows an employer to accelerate contributions to an employee's HSA if that contribution is made through a cafeteria plan. Under the provision, the employer can advance HSA amounts up to the employee's annual salary reduction amount as long as such advances are available to other employees as well. The employee also has to repay the employer. "It's a very helpful provision because the employer can put money into [one employee's HSA] without having to put it in for everyone."