by 
Sheryl T. Dacso, J.D., Dr.P.H. and Michael E. Sodolak, J.D.
Law Office of Sheryl Tatar Dacso, P.L.L.C., Houston, Texas

Last month, we reported on how the Medicare Prescription Drug, Improvement and Modernization Act, P.L. 108-173 (the “Act”) affects your practice from a reimbursement perspective. This month, we focus on how the Act affects you as an employer and those you employ in your practice. Specifically, we will discuss the availability of high deductible health benefit plans and Health Savings Accounts (“HSAs”) which are part of the Act.

The Act provides certain tax incentives for the payment of medical costs through the creation of HSA’s. The provisions creating HSA’s are now embodied in the Internal Revenue Code under a new Code Section 223, entitled Health Savings Accounts, and are effective for tax years beginning in 2004. In general, these provisions resemble those of the Medical Savings Accounts, or Archer MSA’s that were created a few years ago.

In simplest terms, an HSA is an account established to help pay medical costs. Monies are contributed to the account, and when medical costs arise, distributions are made from the account to pay those costs. An HSA is used in conjunction with a high deductible health benefit policy. The idea is that the monies contributed to the HSA will be used to pay the amount of the deductible, and therefore alleviate what would otherwise constitute a financial burden for many families.

Who is eligible?

In order to be eligible to contribute to a health savings account, the individual must be covered under a high deductible health plan on the first day of the month. While the individual is covered under the high deductible health plan, the individual must not be covered under any health plan which is not a high deductible health plan and which provides for coverage for any benefit which is covered under the high deductible health plan. The individual also may not be covered by Medicare and may not be claimed as a dependent on another’s tax return. Other coverage that is not considered in determining if the individual is only covered by a high deductible health plan are certain permitted insurance, coverage for accidents, disability, dental, vision or long-term care. Permitted insurances are worker’s compensation, tort liability, liability coverage for ownership or use of a property, any other similar type coverage as determined by regulation. Other permitted coverages include dental, disability, vision, or long-term care insurance.

What is a high deductible health plan?

The individual must be covered by a high deductible health plan which is a plan that has

an annual deductible for an individual of at least $1,000 for self only coverage and $2,000 for family coverage, and the sum of the annual deductible and the other out-of-pocket expenses required to be paid under the plan for covered benefits does not exceed $5,000 for self only coverage and $10,000 for family coverage. (The minimum deductible for a high deductible health plan is adjusted for inflation using calendar year 2003 as the base year, with adjustments rounded to the nearest $50.) The plan cannot pay any benefit until the deductible is met other than for preventive care. A plan will still be a high deductible health plan even if it does not apply the deductible to preventive care. 

What are qualified medical expenses?

Qualified medical expenses are defined as those medical expenses which would be deductible under Section 213(d) of the IRS Code, and include expenses of the individual, his/her spouse, and any dependent, so long as not compensated for by insurance. You cannot use the HSA to pay the premiums for health insurance, except for (a) continuation coverage required under federal law; (b) long-term care insurance; (c) health plan while receiving unemployment benefits, or (d) health insurance for senior citizens other than for a Medicare supplemental policy

Qualified medical expenses as defined under the Act includes preventive care such as a physical exam (including height and weight measurement, blood pressure and an electrocardiogram) with the goal of health promotion and disease prevention. Preventive care further includes education, counseling, and referral with respect to screening and other preventive services such as: (a) pneumococcal, influenza and hepatitis B vaccine and the administration of the same; (b) screening mammography; (c) screening pap smear and screening pelvic exam; (d) prostate cancer screening tests; (e) colorectal cancer screening tests; (f) diabetes outpatient self-management training; (g) bone mass measurement; (i) glaucoma screening; (j) medical nutrition therapy; (k) cardiovascular screening blood test (cholesterol level and other lipid or triglyceride levels or such other indications associated with presence of, or an elevated risk for cardiovascular disease as the Secretary of Health and Human Services approves for all individuals, and (l) diabetes screening tests (fasting plasma glucose test and such other tests approved by the Secretary of Health and Human Services). It does not include clinical laboratory tests. If the plan provides for a network of providers, the high deductible health plan will still.

be a high deductible health plan if it has an out-of-pocket limitation for their out-of-network services which exceeds the applicable limit of $5,000 for self only coverage and $10,000 for family coverage, and if the annual deductible for services provided out-of-network is not taken into account for purposes of calculating the monthly limit.

How do you establish a Health Savings Account? 

A health savings account must be established pursuant to a trust created or organized in

the United States as a health savings account exclusively for the purposes of paying qualified medical expenses for the beneficiary of the account. There must be a written agreement or instrument governing and creating the trust, that provides that, except in the case of a rollover contribution, no contribution will be accepted unless it is in cash,50 or to the extent that when such contribution is added to all previous contributions to the trust for the calendar year that it does not exceed the sum of the annual maximum monthly limitations for either family coverage or for self only coverage for calculating the deduction limit under Code section 223(b)(2)(A)(ii) or 223(b)(2)(B)(ii), the dollar limit for family coverage, plus, if applicable, the dollar limit for individuals age 55 and over.51 The trustee must be a bank, an insurance company, or any person that demonstrates to the satisfaction of the Secretary of Treasury that they will administer the trust consistent with the requirements. None of the trust assets can be invested in life insurance contracts. The assets of the trust cannot be commingled with other property except in a common trust fund or common investment fund. The interest of the individual in the balance in his account must be nonforfeitable. The Health Savings Account does not need to be established at the same institutions as that offering the high deductible health plan.

What are the benefits to you as an employer?

The bill presents potential financial cost savings to employer plans that provide retiree drug coverage. Most notable are tax-free reimbursements for a portion of the drug costs of retirees who do not take Medicare drug benefits, as long as the employer plan provides drug coverage at least as generous as the Medicare drug benefit. Beginning in 2004, all employers can offer health savings accounts (HSAs) to all their employees, both current and non-Medicare-eligible retirees. HSAs are similar to medical savings accounts that have been available to small companies. Employees with high-deductible coverage can contribute to a trust or custodial account on a pre-tax basis through a cafeteria plan, and employers can make pre-tax contributions on their behalf. Earnings in the accounts accumulate tax-free; unused amounts carry over to future years; and withdrawals for medical expenses are tax-free. Distributions for non-medical expenses are allowed, though they are subject to income tax and possible tax penalties.