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November 7, 2005

2006 MINIMUMS AND MAXIMUMS FOR HIGH-DEDUCTIBLE HEALTH PLANS, HEALTH SAVINGS ACCOUNTS AND ARCHER MEDICAL SAVINGS ACCOUNTS

The Internal Revenue Service (IRS) recently released Revenue Procedure 2005-70, which announced various inflation-adjusted amounts for 2006 for high-deductible health plans (HDHPs), Health Savings Accounts (HSAs) and Archer medical savings accounts (MSAs). The new numbers are shown in the first of the two charts below. The second chart notes the maximum annual HSA contributions for 2006.

*	HSAs, established by the Medicare Modernization Act (MMA) as of January 1, 2004, allow individuals or employers to contribute to an HSA as long as the individual is covered under an HDHP. For more information about HSAs, refer to various publications available on The Segal Company's Web site.)
**	The Health Insurance Portability and Accountability Act (HIPAA) originally established Archer MSAs in 1996 as a demonstration project. Archer MSAs also require that an individual is covered under an HDHP, but MSAs are more limited than HSAs because they can only be established by the self-employed or small employers (under 50 employees). Most recently, in the Working Families Tax Relief Act of 2004 (WFTRA) Congress extended the Archer MSA demonstration project through December 31, 2005. (As of the date of this Capital Checkup, Congress had not extended the Archer MSA demonstration project into 2006 or later. Existing Archer MSAs can continue, but no new Archer MSAs can be created unless Congress extends the project.)
***	The out-of-pocket expense does not include premiums.

*	This amount is pegged to the Archer MSA deductible limit for individual coverage.
**	This amount is pegged to the Archer MSA deductible limit for family coverage.

The increase in deductibles, out of pocket maximums, and contributions was higher than expected because of increases in inflation in 2005. Consequently, plan sponsors should not rely on the estimates of 2006 numbers that were published prior to the official IRS Notice.

Individuals age 55 or over by the end of 2006 can contribute an additional $700 to their HSAs for 2006. This is an increase from the 2005 catch-up contribution of $600. Catch-up contributions increase by $100 per year under the statute until they reach a maximum of $1,000 in 2009.

Implications for Plan Sponsors

Plan sponsors continue to be interested in offering options that increase employee involvement in health care expenses, and HSAs are often considered one of those options. For the 2005 plan year, the administrative complexity involved in both establishing contributions to the accounts and designing the accompanying HDHP were an insurmountable challenge to some plan sponsors. Issues such as whether to fund the HSAs, how to integrate HSAs with existing flexible benefit programs, such as Flexible Spending Arrangements, and whether to permit salary reductions by employees were also hard to resolve. In 2005, the IRS published proposed rules regarding comparable contributions, which affect any employer payments to HSAs that are made outside a cafeteria plan. (To see The Segal Company's October 2005 Bulletin, "IRS Proposes New HSA Rules on Comparable Contributions," click here.) In addition, the IRS has provided significant guidance and clarification on HSA administration over the past 12 to 18 months.

Despite the challenges involved in implementing HSA/HDHP plans, they continue to grow in popularity. Some plan sponsors tried HSAs in 2005 and these sponsors and others may expand the offerings in 2006. As further guidance clarifies how an HSA is administered, compliance burdens may begin to be minimized. Key considerations, such as how to attract employees to an HDHP/HSA offering and keep them there, will begin to replace more technical design considerations.

Many firms with Archer MSAs, particularly professional service firms, are exploring whether to continue their Archer MSA or to convert the MSA into an HSA. Factors might include the fact that an HSA does not contain a maximum deductible like the MSA, HSAs allow "catch-up" contributions for employees over 55, and HSA distributions can be used to pay for Medicare premiums.

Plan sponsors interested in exploring the benefits of an HSA or in transitioning their MSA to an HSA should contact their Segal consultant to determine what course of action is right for them.

As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on the MMA. The Segal Company can be retained to work with plan sponsors and their attorneys to evaluate possible compliance responses.