Create New Personal Savings Accounts to Pay Medical Expenses

The Act creates a new tax-preferred personal savings account to pay medical expenses. Health savings accounts (HSAs) are effectively an expansion of Archer medical savings accounts (Archer MSAs). The accounts can be included in a cafeteria plan, and they require a trust or custodial account. They are not limited to small employers and are not a demonstration project, as Archer MSAs originally were. The accounts are effective for taxable years beginning January 1, 2004. Although the effective date for the accounts is the beginning of 2004, there are some questions about administration of the accounts that will need to be addressed by the Internal Revenue Service (IRS). Therefore, plan sponsors may wish to wait to implement an HSA until the IRS issues implementing regulations.

HSAs permit above-the-line deductible contributions to an account by an individual, family member or employer for individuals covered by a high-deductible health plan ($1,000 individual/$2,000 family). Individuals cannot contribute if they are enrolled in a non-high-deductible health plan that provides any benefit covered under the high-deductible health plan, and individuals who are eligible for Medicare may not make contributions to an HSA.

The high-deductible plan must not exceed $5,000 individual/$10,000 family for out-of-pocket expenses. These dollar amounts will be indexed. The annual contribution limit (determined on a monthly basis) would be the lesser of 100 percent of the deductible under the health plan or the Archer MSA maximum high deductible for the year in which the contribution is made. (For 2004, the Archer MSA maximum high deductible is $2,600 individual/$5,150 family). There is an additional catch-up contribution for those age 55 and older of $500 in 2004 increasing by $100 annually until it reaches $1,000 in 2009.

In addition to qualified medical expenses under Section 213(d) of the Internal Revenue Code, HSAs could also be used to pay for health insurance for individuals receiving unemployment compensation, COBRA coverage and retiree health insurance for those over age 65 (including Medicare Part B premiums). Distributions for non-health expenses would be subject to income tax and a 10 percent penalty. However, the penalty does not apply after death, disability or after an individual attains Medicare eligibility. Except in cases in which the spouse is the designated beneficiary of an individual with an interest in an HSA, the HSA ceases to be an HSA as of the individual's date of death and becomes immediately taxable to the beneficiary.

HSA accounts are portable because amounts may be rolled over to another HSA within 60 days with no tax penalties. Therefore an employee could transfer the account to an individual HSA or a new employer's HSA. Amounts in an Archer MSA may also be rolled over into an HSA.

If an employer contributes to an HSA, it must make comparable contributions on behalf of all employees. Contributions are comparable if they are the same percentage of the deductible or the same dollar amount for each employee.

Plan sponsors may wish to consider an HSA because, unlike a health reimbursement arrangement (HRA), it can be funded with employee as well as employer contributions. HSAs may also be an attractive vehicle for funding retiree health and long-term care insurance. However, because the HSAs must be combined with a high-deductible health plan this may limit their attractiveness.

Form 1099 Not Necessary for Debit Cards

The Act also addresses the issue of whether vendors of debit cards used by employees with a flexible spending arrangement must issue a Form 1099 to providers, pharmacies and other entities paid through the debit arrangement. The Act clarifies that no Form 1099 is necessary for payments for medical care made from a flexible spending arrangement (FSA) or an HRA. The provision is retroactive to payments made after December 31, 2002.

While the proposed legislation would have modified the "use it or lose it" rule to permit up to $500 of unused balances to be carried forward in an FSA, this provision did not survive in the final legislation (most likely due to its cost).

Improve Access to More Affordable Prescription Drugs

• Reimportation of Prescription Drugs The Act would permit reimportation of prescription drugs from Canada but only if the Department of Health and Human Services (HHS) certifies that reimportation of prescription drugs from Canada is safe and produces cost savings. This is also required under current law and neither the Bush nor Clinton Administrations were willing to make the necessary findings. Because the Bush Administration has not indicated it will certify reimportation of drugs as safe, it is unlikely that the Act will affect this issue.
• Generic Alternatives to Brand Name Drugs The Act modifies current law regarding drug patents to bring generic alternatives to market sooner.

Erie County Corrections Not Included in Final Legislation

The Senate version of the Medicare bill would have legislatively reversed the Third Circuit U.S. Court of Appeals' controversial 2000 decision in Erie Country Retirees Ass'n. v. County of Erie, Pa. (220 F. 3d 193 (3d Cir. 2000)). There the court had held that it was a violation of the Age Discrimination in Employment Act (ADEA) for the employer to provide richer health coverage for early retirees than for those over age 65. The Senate bill would have amended the ADEA to make it clear that it is not illegal to provide differential retiree health coverage for early retirees and those enrolled in Medicare, or even to provide no health coverage for the over-65 group.

The Erie County correction was not included in the final legislation. However, the Conference Report accompanying the Medicare Act states that the Conferees reviewed the ADEA and its legislative history and believe that the ADEA legislative history clearly articulates the intent of Congress that employers should not be prevented from providing voluntary benefits to retirees only until they become eligible to participate in the Medicare program.

In addition, there are still efforts underway to correct this court's interpretation of the ADEA through regulatory action. On July 11, 2003, the Equal Employment Opportunity Commission (EEOC) released a proposed regulation that would allow sponsors of group health plans to provide different or less health coverage to Medicare-eligible retirees than the coverage provided to younger retirees, without violating ADEA. (This proposed regulation is discussed in the July 14, 2003 issue of Capital Checkup.) However, it is unclear whether the refusal of Congress to act will affect either the EEOC's proposed regulation or the interpretation of the Act by other courts.

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