Consumer-Directed Care

Three Years After Birth of HSAs, Employers and Enrollees Are Still Baffled by the Rules

Reprinted from the June 22, 2007, issue of INSIDE CONSUMER-DIRECTED CARE, a biweekly newsletter with timely news and insightful analysis of benefit design, contracts, market strategies and financial results.

The findings in a June 12 Wall Street Journal article - of low satisfaction rates among employees who enroll in HSA-based health plans — should not be entirely surprising. Account-based plans are much different than the more traditional managed care products to which employees have become accustomed. And the myriad rules that govern how an HSA is to be used in conjunction with a high-deductible health plan (HDHP) can be confusing .

In some cases, even the Internal Revenue Service (IRS) doesn't have the answers, says Larry Grudzien, an employee benefits attorney based in Oak Park, Ill. One of his employer clients contributes HSA dollars only to employees who had qualified medical expenses during the year. While such a practice violates Section 4980G of the Internal Revenue Code, the employer determined that paying the 35% excise tax penalty was more cost effective than changing the practice, Grudzien says. After contacting IRS officials, he learned that a form to report the penalty does not yet exist. The tax penalty has been on the books since Jan. 1, 2004, he adds.

Employers Must Devote Time to Questions

Industry observers agree that most employers tend to spend far too little time explaining intricacies of the plans (and accounts) to employees. "The average employee is still very confused" about HSAs and how they work, says Vinnie Daboul, senior vice president of sales with TD Banknorth Insurance Agency, Inc. in Springfield, Mass.

Eric Hammill, a consultant with Bingham Farms, Mich.-based The Rains Group, says HDHP enrollees sometimes don't realize that their provider needs to bill the charge through the insurer so that the enrollee can receive a network discount. Without the discount, the provider is likely to deduct too much from the HSA, he says.

"I still deal with employees who pay for [services] out of their HSA without asking the provider to bill through the carrier for the approved charge," Hammill says. "The HSA has a learning curve, but once employees understand it, the plan is typically embraced."

Darla Coffman, who supervises the customer care center at First Horizon Msaver, says she has been getting a lot of questions related to the transfer of an Individual Retirement Account (IRA) into an HSA. As of Jan. 1, 2007, HSA owners are allowed a one-time trustee-to-trustee transfer of IRA funds into an HSA as long as the amount doesn't exceed the maximum annual HSA contribution limit. The IRS also allows a one-time tax-free transfer of funds from a flexible spending account (FSA) and/or a health reimbursement arrangement (HRAs) into an HSA. However, the maximum transfer amount from those accounts is limited to the lesser of the FSA/HRA balance as of Sept. 21, 2006, or the balance in those accounts as of the distribution date (ICDC 12/22/06, p. 5). Unlike the HRA and FSA transfers, any amounts transferred from an IRA reduce the maximum amount that can be contributed to the HSA during that year.

Eligibility Can Be Confusing

"I see a lot of confusion with HSA eligibility and dependent coverage," says Shoshanna Sofaer, professor of health care policy at Baruch College's School of Public Affairs in New York City. "Employees might have stepkids or dependents covered under the ex-spouse's traditional plan as well as their own HDHP. The assumption is made that first-dollar coverage somewhere else for a stepchild will disqualify them for HSA eligibility. Although each case is different, most of the time these employees are able to contribute the maximum HSA amount," she says. According to Grudzien, there is no requirement that dependents covered under an HDHP have to be covered only by the HDHP.

One of the top areas of concern among large employers is the Employee Retirement Income Security Act of 1974 (ERISA), says Tom Hricik, principal and national director of HSA product distribution at ACS/Mellon HSA Solution. Some employers, he explains, don't realize that they are not allowed to initiate and/or require employees to transfer their HSA from one custodian to another.

William Sweetnam, a principal at the Groom Law Group in Washington, D.C., says some of "the most interesting" questions his firm has received are related to the type of insurance coverage that is compatible with an HSA. Prior to joining Groom, Sweetnam was the benefits tax counsel at the Treasury Dept., where he co-wrote much of the early HSA guidance. "Generally, we have found that insurance companies are trying to determine what products they can market" as HSA-qualified HDHPs, he says.

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