Implementation of Health Savings Accounts Causing Confusion

Today’s Wall Street Journal provides a good article discussing the challenges individuals face in adopting and implementing the new health savings accounts (“HSAs”) which are growing in popularity: “Savings Accounts for Health Care Cause Confusion.” The article makes the point that “early adopters” of the accounts may encounter glitches, as “consumers, banks and insurers are still figuring out the details on just how these new accounts are supposed to work.” One such glitch mentioned in the article is “figuring out just what the patient is expected to pay”:

Though consumers must pay for their own care until they meet their policy’s deductible, they’re still supposed to be able to take advantage of any discounted price that their insurer has negotiated, from doctor rates to drug costs. But already some patients and doctors are confusing HSAs with direct, full-price payments consumers make when they don’t have insurance.

Generally, payment with HSAs should work the same way payments generally work for patients with insurance. The doctor informs the insurer of the charges, the insurer sends the patient a statement explaining how much the patient owes, and the patient then has to pay the doctor that amount. Patients using HSAs should wait to pay until the doctor submits the information to their insurer, says Mr. Engel of Mellon Financial. . .

Some insurers, like UnitedHealthcare, are already working to minimize this hassle, for example, by allowing consumers to authorize the insurer to deduct directly from their HSAs to pay medical bills.

Obviously, if consumers are not allowed to take advantage of discounted prices, this will put a damper on the use of HSAs. The issue is not really even mentioned in this recent article from Forbes.com–“Saving for Your Health“–which makes the statement that “[f]or the right customer an HSA can save thousands of dollars a year.” However, according to the article in Forbes, those who can afford it, shouldn’t even use their HSA accounts to pay for medical bills now, but should use their “HSAs to compound tax-free as de facto IRAs”:

If the money is ultimately used decades later to pay postretirement medical bills, so much the better: The account is better than an IRA because the funds are untaxed.

A 40-year-old person putting $5,150 a year into an HSA returning 5% and making no use of the account would end up at age 65 with $268,000. The best interest currently being offered by HSA vendors is only 4.15%, but that will surely improve as balances get bigger and competition heats up.

The Forbes article provides a very helpful chart of the different HSA providers and the interest that can be earned on such accounts as well as whether the accounts allow investments in securities.

There are confusing state law implications as well, as mentioned in this article from SFGate.com–“State rules complicate health savings accounts“:

As if the new health savings accounts weren’t complicated enough, employers and individuals who open one in California should arm themselves with a big bottle of aspirin.

. . . California has not conformed to the federal tax law that created the accounts. That means they provide fewer tax benefits and more record-keeping headaches for Californians than for residents of states that automatically conform to federal tax legislation.

But for an interesting sideline on the use of HSAs, don’t miss this additional article from Forbes.com: “Doctor Your Tax Return.”

(You can read previous posts on the topic of HSAs here.)

Take a DOL Survey

The Department of Labor is soliciting comments about their website. You can give them your thoughts and suggestions for improvement here.

Take a DOL Survey

The Department of Labor is soliciting comments about the viability of their website. You can give them your thoughts and suggestions for improvement here.

Take a DOL Survey

The Department of Labor is soliciting comments about their website. You can give them your thoughts and suggestions for improvement here.

The Blog Revolution in China

I enjoyed this article on how blogs are beginning to wield their influence in China: “A blogger’s tale: The Stainless Steel Mouse.” According to the article, weblogs are referred to in Chinese as “bo ke“, which is phonetically similar to the word “blog”, but also has a literal meaning of rich or abundant traveler.

From the WSJ: "Chapter 11 Doesn't Fly"

Many are wondering how best to address the problem of the Pension Benefit Guaranty Corporation’s ballooning deficit (now $23.3 billion, up from $11.2 billion in 2003) and the further strain to the system of recent airline bankruptcies. Steven A. Kandarian, Douglas M. Steenland and Duane E. Woerth offer their proposal for a solution in a commentary published in today’s Wall Street Journal entitled “Chapter 11 Doesn’t Fly“:

We believe that the airlines, airline unions and the administration should work together to propose to the Congress a new alternative to the “lose-lose-lose” Chapter 11 approach. This would present an airline and unions with the following new choice: First, management and a union would need to agree collectively to freeze an existing defined-benefit pension plan. Importantly for the PBGC, its liability as guarantor of the plan would be capped as of the freeze date and would decrease over time. Second, the unfunded liability of the frozen plan then would be amortized over a specified time period that would be longer than what current law allows. Here’s where compromise is needed — the PBGC will want a shorter period for the unfunded pension liability to be paid; the airlines will want longer. One thing is clear: The existing pension funding law, particularly the so-called deficit-reduction contribution provisions, so accelerate the funding of significantly underfunded pension plans as to make the freeze option unrealistic absent a longer time period to satisfy the unfunded liabilities. Finally, management and labor would negotiate and agree upon a new, replacement defined-contribution pension plan.

The commentary goes on to note that the proposal would serve the interests of “all stakeholders” in that the airlines would “get to continue their transformation without filing for Chapter 11″, employees would “get the chance to keep hard-earned pension benefits” and the PBGC would be “spared having to step in as guarantor of a terminated pension plan.”

(Mr. Kandarian is the former executive director of the PBGC. Mr. Steenland is president and CEO of Northwest Airlines. Capt. Woerth is president of the Air Line Pilots Association, International.)

Breaking for Thanksgiving Week

No posts here this week due to some traveling and activities. There are many things to be thankful for, the greatest of which is not really the focus of this blog. However, I just wanted to express to you how thankful I am for the many readers and colleagues who have linked to this site, emailed me, sent me great material now and then to comment on, or generally just supported this site through their readership. Many blessings to you and hope you have a great week with family and friends!

And for all of you who happen to be cooking the feast this week, you might find this useful: Thanksgiving Recipe Central with over 1,500 Thanksgiving recipes and a cook’s checklist and timeline for the week of Thanksgiving.

Finally, here is George Washington’s Thanksgiving Proclamation, 1789 (via the American Family Association).

The Plan Document Requirements of the Newly-Proposed 403(b) Regulations

After making my way through the newly-proposed and voluminous (100+ pages) 403(b) regulations (mentioned here in this previous post), one of the items that stands out overall is the plan document requirement. Proposed regulation section 1.403(b)-3(b)(3) provides:

A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan, which, in both form and operation, satisfies the requirements of this section and sections 1.403(b)-4 through 1.403(b)-10. For purposes of this section and sections 4.1403(b)-4 through 1.403(b)-10, the plan must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefits distributions would be made. . .

How will this new requirement impact whether or not a 403(b) plan ends up falling under the purview of ERISA? Although the IRS states in the regulations that having a plan document would not necessarily lead to the application of ERISA, it is expected that the DOL will provide guidance on this issue. Here is what the regulations have to say on the plan document requirement and the application of ERISA:

The Treasury Department and the IRS have consulted with the Department of Labor concerning the interaction between Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and section 403(b) of the Code. The Department of Labor has advised the Treasury Department and the IRS that Title I of ERISA generally applies to “any plan, fund, or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that . . . such plan, fund, or program . . .provides retirement income to employees, or . . . results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” ERISA, section 3(2)(A). However, governmental plans and church plans are generally excluded from coverage under Title I of ERISA. See ERISA, section 4(b)(1) and (2). Therefore, section 403(b) contracts purchased or provided under a program that is either a “governmental plan” under section 3(32) of ERISA or a “church plan” under section 3(33) of ERISA are not generally covered under Title I. However, section 403(b) of the Code is also available with respect to contracts purchased or provided by employers for employees of a section 501(c)(3) organization, and many programs for the purchase of section 403(b) contracts offered by such employers are covered under Title I of ERISA as part of an “employee pension benefit plan” within the meaning of section 3(2)(A) of ERISA. The Department of Labor has promulgated a regulation, 29 CFR 2510.3-2(f), describing circumstances under which an employer’s program for the purchase of section 403(b) contracts for its employees, which is not otherwise excluded from coverage under Title I, will not be considered to constitute the establishment or maintenance of an “employee pension benefit plan” under Title I of ERISA.

These proposed regulations are generally limited to the requirements imposed under section 403(b). In this regard, the proposed regulations require that a section 403(b) program be maintained pursuant to a plan, which for this purpose is defined as a written defined contribution plan which, in both form and operation, satisfies the regulatory requirements of section 403(b) and contains all the material terms and conditions for benefits under the plan. The Department of Labor has advised the Treasury Department and the IRS that, although it does not appear that the proposed regulations would mandate the establishment or maintenance of an employee pension benefit plan in order to satisfy its requirements, it leaves open the possibility that an employer may undertake responsibilities that would constitute establishing and maintaining an ERISA-covered plan. The Department of Labor has further advised the Treasury Department and the IRS that whether the manner in which any particular employer decides to satisfy particular responsibilities under these proposed regulations will cause the employer to be considered to have established or to maintain a plan that is covered under Title I of ERISA must be analyzed on a case-by-case basis, applying the criteria set forth in 29 CFR 2510.3-2(f), including the employer’s involvement as contemplated by the plan documents and in operation.

To the extent that these proposed regulations may raise questions for employers concerning the scope and application of the regulation at 29 CFR 2510.3 -2(f), the Treasury Department and the IRS are requesting comments.

McDermott Will & Emery also comments on the issue in their article on the new regulations here. (From Benefitslink.com.)The article makes the point that the plan document requirement may “effectively supersede and control the main contractual document between the employer and the 403(b) vendor (such as a 403(b) group annuity contract issued by an insurer).”

By the way, in the recent “Extra Special Edition of the Employee Plans News” published by the IRS, Carol Gold, Director of EP, indicates that the IRS is not yet ready to begin implementation of a 403(b) determination letter program until the 403(b) regulations are finalized. She notes, however, that the proposed regulations do indeed “move the ‘403(b) plan’ closer to the concept of a ‘qualified plan’ and leaves the door open for the development of such a program for 403(b) plans in the near future. Here is most of what she had to say:

This week, proposed regulations under section 403(b) were published in the Federal Register. These regulations take the important step of requiring a 403(b) contract to be maintained pursuant to a plan in order for amounts contributed by employers for the purchase of annuity contracts to be excluded from the gross income of employees. For purposes of the regulation, a plan is a written defined contribution plan which must satisfy the applicable requirements of the regulation both in form and operation. Furthermore, the proposed regulation provides rules by which 403(b) plans may be terminated.

Clearly, the proposed regulations move the “403(b) plan” closer to the concept of a “qualified plan”. However, we anticipate it will be a while yet before the regulations are finalized. Nevertheless, we recognize that if 403(b) annuity contracts are treated as ”plans” under the regulations when finalized, there will be more of an impetus to create a program to review plans and plan amendments, and possibly to issue determination letters on those plans or amendments.

We would welcome the opportunity to work with the public on considering such a program. At this point, however, we feel it would be premature to actively develop such a program prior to the finalization of the regulation. Therefore, I would suggest that we continue to exchange ideas about what a program could look like while agreeing that substantive change will have to wait a little longer.

Comments on Newly-Proposed 403(b) Regulations: ERISA Implications

After making my way through the newly-proposed and voluminous (100+ pages) 403(b) regulations (mentioned here in this previous post), one of the items that stands out overall is the plan document requirement. Proposed regulation section 1.403(b)-3(b)(3) provides:

A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan, which, in both form and operation, satisfies the requirements of this section and sections 1.403(b)-4 through 1.403(b)-10. For purposes of this section and sections 4.1403(b)-4 through 1.403(b)-10, the plan must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefits distributions would be made. . .

How will this new requirement impact whether or not a 403(b) plan ends up falling under the purview of ERISA? Although the IRS states in the regulations that having a plan document would not necessarily lead to the application of ERISA, it is expected that the DOL will provide guidance on this issue. Here is what the regulations have to say on the plan document requirement and the application of ERISA:

The Treasury Department and the IRS have consulted with the Department of Labor concerning the interaction between Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and section 403(b) of the Code. The Department of Labor has advised the Treasury Department and the IRS that Title I of ERISA generally applies to “any plan, fund, or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that . . . such plan, fund, or program . . .provides retirement income to employees, or . . . results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” ERISA, section 3(2)(A). However, governmental plans and church plans are generally excluded from coverage under Title I of ERISA. See ERISA, section 4(b)(1) and (2). Therefore, section 403(b) contracts purchased or provided under a program that is either a “governmental plan” under section 3(32) of ERISA or a “church plan” under section 3(33) of ERISA are not generally covered under Title I. However, section 403(b) of the Code is also available with respect to contracts purchased or provided by employers for employees of a section 501(c)(3) organization, and many programs for the purchase of section 403(b) contracts offered by such employers are covered under Title I of ERISA as part of an “employee pension benefit plan” within the meaning of section 3(2)(A) of ERISA. The Department of Labor has promulgated a regulation, 29 CFR 2510.3-2(f), describing circumstances under which an employer’s program for the purchase of section 403(b) contracts for its employees, which is not otherwise excluded from coverage under Title I, will not be considered to constitute the establishment or maintenance of an “employee pension benefit plan” under Title I of ERISA.

These proposed regulations are generally limited to the requirements imposed under section 403(b). In this regard, the proposed regulations require that a section 403(b) program be maintained pursuant to a plan, which for this purpose is defined as a written defined contribution plan which, in both form and operation, satisfies the regulatory requirements of section 403(b) and contains all the material terms and conditions for benefits under the plan. The Department of Labor has advised the Treasury Department and the IRS that, although it does not appear that the proposed regulations would mandate the establishment or maintenance of an employee pension benefit plan in order to satisfy its requirements, it leaves open the possibility that an employer may undertake responsibilities that would constitute establishing and maintaining an ERISA-covered plan. The Department of Labor has further advised the Treasury Department and the IRS that whether the manner in which any particular employer decides to satisfy particular responsibilities under these proposed regulations will cause the employer to be considered to have established or to maintain a plan that is covered under Title I of ERISA must be analyzed on a case-by-case basis, applying the criteria set forth in 29 CFR 2510.3-2(f), including the employer’s involvement as contemplated by the plan documents and in operation.

To the extent that these proposed regulations may raise questions for employers concerning the scope and application of the regulation at 29 CFR 2510.3 -2(f), the Treasury Department and the IRS are requesting comments.

McDermott Will & Emery also comments on the issue in their article on the new regulations here. (From Benefitslink.com.)The article makes the point that the plan document requirement may impact “whether the plan document will effectively supersede and control the main contractual document between the employer and the 403(b) vendor (such as a 403(b) group annuity contract issued by an insurer).”

By the way, in the recent “Extra Special Edition of the Employee Plans News” published by the IRS, Carol Gold, Director of EP, indicates that the IRS is not yet ready to begin implementation of a 403(b) determination letter program until the 403(b) regulations are finalized. She notes, however, that the proposed regulations do indeed “move the ‘403(b) plan’ closer to the concept of a ‘qualified plan’ and leaves the door open for the development of such a program for 403(b) plans in the near future. Here is most of what she had to say:

This week, proposed regulations under section 403(b) were published in the Federal Register. These regulations take the important step of requiring a 403(b) contract to be maintained pursuant to a plan in order for amounts contributed by employers for the purchase of annuity contracts to be excluded from the gross income of employees. For purposes of the regulation, a plan is a written defined contribution plan which must satisfy the applicable requirements of the regulation both in form and operation. Furthermore, the proposed regulation provides rules by which 403(b) plans may be terminated.

Clearly, the proposed regulations move the “403(b) plan” closer to the concept of a “qualified plan”. However, we anticipate it will be a while yet before the regulations are finalized. Nevertheless, we recognize that if 403(b) annuity contracts are treated as ”plans” under the regulations when finalized, there will be more of an impetus to create a program to review plans and plan amendments, and possibly to issue determination letters on those plans or amendments.

We would welcome the opportunity to work with the public on considering such a program. At this point, however, we feel it would be premature to actively develop such a program prior to the finalization of the regulation. Therefore, I would suggest that we continue to exchange ideas about what a program could look like while agreeing that substantive change will have to wait a little longer.

Shortcut to Benefitsblog

By way of reminder, please note that you can arrive at this website by using the web address “www.benefitsblog.com,” i.e. you do not need to type in the longer web address–“www.benefitscounsel.com/benefitsblog”–to reach Benefitsblog. You can also go to the website for my law practice at “www.benefitscounsel.com,” and there is a button to Benefitsblog there as well. The reason I say that is that I have noticed that many arrive here by “Googling” Benefitsblog and just wanted to let you know that there is a more direct route available for those who prefer it.