Considering a Considering a Health Savings Account?Health Savings Account?

2

HSA (Health Savings Account) Eligibility

Covered by a qualified high-deductible health plan (HDHP)

Not covered by any other non-HDHP coverage

Not claimed as a dependent on another person’s tax return

Not enrolled in Medicare A or B*Section 152 of the Internal Revenue Code excludes spouses from

the definition of dependent.

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*Check with your insurance provider to determine if your plan meets the High Deductible Health Plan requirements.

**Qualifying deductible ranges are limited by the Maximum Out-Of-Pocket expenses allowed.

What is a qualified high-deductible health plan (HDHP)?

For 2008 Single Family

Minimum Deductible* $1,100 $2,200

Max. Out of Pocket** $5,600 $11,200

For 2009 Single Family

Minimum Deductible* $1,150 $2,300

Max. Out of Pocket** $5,800 $11,600

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Basic HSA Plan Concept

Part 1: High Deductible Health Plan

Part 2: Health Savings Account

Made by: Employer, Employee, and/or other party

HSA Concept

Intended to cover serious

illness or injury

Can pay for eligible expenses

not covered by the health plan

For 2008 Single Family

Min. Deductible $1,100 $2,200

Max. Out of Pocket $5,600 $11,200

For 2009 Single Family

Min. Deductible $1,150 $2,300

Max. Out of Pocket $5,800 $11,600

For 2008 Single Family

Max. Contribution $2,900 $5,800

For 2009 Single Family

Max. Contribution $3,000 $5,950

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What is included in Out-of-Pocket Maximum?

Included Deductible Co-insurance Co-pays

Not Included Payment of or penalties

for a service not pre-certified

Payment to or penalties for non-network providers

Amounts over the usual, customary, & reasonable amounts

Amounts for ineligible expenses

6

Advantages of an HSA

For an Employer Tax benefits Employee-owned funds promote increased

motivation for involvement in health care decisions resulting in Health care dollars being spent more wisely Employees ‘shopping around’ for healthcare based

on quality of care and price

HSAs allow “matching” contribution options by employers and employees through a cafeteria plan

7

Advantages of an HSA

For an Employee/Accountholder Funds roll over year to year

No need to “use it or lose it”

Tax benefits on the contributions, earnings, and distributions Increases take home pay Even greater potential for 2007 and beyond

Long-term investment opportunity Investment products are not FDIC insured, are not a

deposit or other obligation of or guaranteed by the bank, and are subject to investment risks including possible loss of the principal amount invested.

Portability

8

Basic HSA ConceptCompare to IRA

Contributions

Contributions

Earnings

Tax-Deferred Growth

Tax-Deductible / Pre-Tax

Contributions

Tax-Free Distributions(For Qualified Medical Expenses)

HSA

Normal Tax*(NON-qualified expenses over age 65)

* 10% Tax Penalty for Non-Qualified medical expenses before age 65

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Maximum Annual Contributions

Are determined by the IRS $2,900 with individual or $5,800 with family coverage for 2008 $3,000 for individual or $5,950 for family coverage for 2009

-- You can contribute the maximum amount regardless of deductible

Can be made during the calendar year and until the tax return due date of April 15th the following year.

Do not need to be prorated based on the date coverage began Some restrictions apply (examples provided on the next 2 slides)

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Prorating Provision

If HDHP coverage begins after January 1st in a given year, contributions no longer need to be prorated as long as qualifying HDHP coverage continues through December 31st of the following year. Exception--Those who change from family to

single plans will need to prorate based on the number of months under each type of coverage

Excess contributions will be subject to income tax and a tax penalty.

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Prorating Examples

*Prorating is required to avoid tax penalties when an individual does not maintain qualifying HDHP coverage through December 31st of the following year.

(Follow the same rules for family coverage, but use $5,800 for the 2008 maximum and $5,950 for the 2009 maximum.)

Type ofCoverage

Coverage Begins

Coverage Ends

Allowed Contribution2008

Allowed Contribution 2009

Individual 1/1/2008 12/31/2008

$2,900 (2008 Max) $0

Individual 7/1/2008 12/31/2009

$2,900 (2008 Max) $3,000 (2009 Max)

*Individual

7/1/2008 4/1/2009 $1,450 (6/12 of 2008 Max)

$750 (3/12 of 2009 Max)

*Individual

11/1/2008

11/1/2009 $483 (2/12 of 2008 Max) $2,500 (10/12 of 2009 Max)

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Additional HSA Funding Options…

IRA funds may be rolled to an HSA on a one-time basis Subject to the annual HSA contribution maximum Only traditional IRAs qualify at this time Individuals must remain covered by a qualifying HDHP until the

last day of the 12th month following the month of rollover to avoid tax penalties

HRA and Health FSA may be rolled to an HSA Employers must amend their plan documents to allow this Rollovers must be made directly from the employer to the

custodian/trustee

*Always consult your tax advisor, and/or the IRS for details and reporting requirements in regard to taxation, fund rollovers and other stipulations.

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Rollovers are optional for employers If rollovers are offered, employers must offer them to

all employees with qualifying HDHPs

Employers must amend the plan documents to allow rollovers by the end of the plan year Contact the health FSA or HRA plan administrator to

amend the plan documents

Employers must limit the rollover to one time per HRA or FSA

HRA and Health FSA Rollover: Employer Role

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HRA and Health FSA Rollover:Employee Role

Rollover amount is determined by the lower of the cash balance on 9/21/2006 or the balance on the date of transfer

Individuals with $0 FSA or HRA balance on 9/21/06 are ineligible

Rollovers must result in a zero balance or coverage under the FSA/HRA must be waived to be eligible for an HSA

Individuals must remain covered by a qualifying HDHP until the last day of the 12th month following the month of rollover to avoid tax penalties

Employees must elect to have the funds rolled over by the end of the plan year

The funds in the FSA/HRA must be frozen by the end of the plan year, and the rollover must be completed by the end of the grace period. This is the same for calendar year and non-calendar year plans.

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What is the catch-up contribution?

Individuals who have an HSA, are age 55 or older and are not enrolled in Medicare A or B are qualified to make catch-up contributions.

Year Catch-up Amount

2008 $900

2009+ $1,000

-If a husband and wife are both qualified to make catch-up contributions, they can both do so if they each have an HSA.

-Contributions need not be prorated based on when in the year a person turns 55.

-Catch-up contributions must be prorated if you are not covered by a qualifying HDHP on December 1st or you do not maintain coverage through December 31st of the following year.

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How contributions can be made

Contributions to an HSA must be made in “cash”. (contributions may not be made in the form of stock or other property)

Through a cafeteria plan (if your employer has one in place)

Online Contributions (through Internet Banking)

Recurring or one-time, as needed Check

With Contribution Form tear-off (on each statement or download from website)

With Deposit Ticket One-time rollovers to HSAs from IRAs

Some restrictions apply as previously noted Rollovers permitted once every 12 months

MSA to HSA HSA to HSA

Transfers are not limited

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Who can contribute to an HSA?

Accountholder IndividualSelf-EmployedEmployee

Employer

Third-party Family

MemberBeneficiaryFriend State

Government

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Coordinating HSA Contributions

EMPLOYERCONTRIBUTIONS

≤INDIVIDUAL / EMPLOYEE

CONTRIBUTIONS

Since both employees and employers can make contributions, it is important to coordinate in order to avoid excess contributions and tax penalties. The maximum can be contributed through a combination of sources or a single source as long as the annual limit is not exceeded.

IRA Transfers

*If an individual has HSA accounts with different administrators, all contributions count toward the annual contribution maximum.

HSA Contribution

LimitsUp to the IRS determined

maximums

For 2008:

$2,900 single$5,800 family

For 2009:$3,000 single$5,950 family

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Employer’s Comparable Contributions

Comparability testing period based on a calendar year and determined on a monthly basis. Testing based on contributions to employees covered under the employer’s HDHP. There is a 35% penalty for failing to meet comparable contribution requirements. Note: The employer must make comparable

contributions for all employees with HDHPs who open HSAs under the employer’s plan. Contact the IRS to determine the requirements for employees who have an HSA-Compatible health plan but have not opened an HSA by December 31st.

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Exceptions to the Comparability Rule

ExceptionsDue to new legislation, employers may contribute more

for employees who are non-highly-compensated employees (non-HCEs) as long as contributions compare within employment categories. Non-HCEs are defined under Internal Revenue Code §414 (q).

Comparability rules do not apply to employer contributions made through a Section 125 cafeteria Plan.

Employers may make matching contributions through a Section 125 Cafeteria Plan (Non-Discrimination rules apply).

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Comparable Contributions Example

Family

 Single / Full-Time

Self + One / Full-Time

Self + Two / Full-Time

Self + Three / Full-Time

HCENon-HCE HCE

Non-HCE HCE

Non-HCE HCE

Non-HCE

Deductible$120

0 $1200 $2500 $250

0 $2500 $2500 $2500 $2500

Same Dollar $100 $200 $150 $250 $175 $275 $200 $300

% ofDeductible

50%$600

75%$900

25%$625

30%$750

50%$1250

60%$1500

75% $1875

80%$2000

*Employer may contribute up to the maximum amount as determined by the IRS, $2900 for individual coverage and $5800 for family coverage for 2008 and $3,000 for individual and $5,950 for family for 2009.

**Apply the same concept for part-time employees within each category

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When can distributions be taken from an HSA?

HSA dollars can always be used to pay for qualified expenses on a tax-free basis, regardless of age or healthcare coverage If HDHP coverage ends, contributions cannot be made to an

HSA, but distributions to pay for qualified expenses are always allowed.

If reimbursing expenses from previous years, sufficient records must be maintained to prove the expense was not previously reimbursed.

HSA dollars can be withdrawn for any non-qualified expense prior to age 65, subject to a 10% penalty and regular income tax.

After age 65, withdrawals can be made to pay for any non-qualified expense, subject to regular income tax.

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What are Qualified Expenses?

A Qualified Expense is generally any expense incurred to maintain an individual’s health or the health of their family, including: Doctor and hospital visits Medical equipment Dental care, braces, dentures Vision care, glasses & contacts Medications, including certain over-the-counter versions Transportation costs associated with healthcare

*A definition of Qualified Medical Expense is provided in Section 213(d) of Internal Revenue Code. A list of eligible medical expenses can be found in IRS Publication 502. Check with your tax advisor about expenses not on the list. For more information, visit www.hsabank.com.

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Negotiating Payments

Negotiate Payments With Healthcare Provider

Negotiate Payments

PayMonthly

$200$100$300

$200

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Other eligible medical expenses

Premiums for long-term care insurance Limited to amount listed in 213(d)(10)

Premiums for "COBRA”

Premiums for coverage while receiving unemployment compensation

Premiums for individuals over age 65 Retirement Health Benefits Medicare Premiums

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Additional Health Plan Guidelines

Plans cannot provide benefits before the deductible is met, except for preventive care, permitted insurance, or permitted coverage

*Contact your health plan representative to determine if a plan is a qualifying HDHP.

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What preventive care benefits can a plan offer?

Periodic health evaluationsRoutine prenatal and well-child care ImmunizationsTobacco cessation programsObesity weight-loss programsScreening services

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What benefits are not considered Preventive Care?

Generally, preventive care does not include any service or benefit intended to treat an existing illness, injury, or condition.“Preventive care” for purposes of

establishing an HSA are determined by the IRS, rather than state law.

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What other kinds of coverage may an individual have with an HSA?

Insurance Coverage Accidents Disability Dental care Vision care Long-term care Specified disease or

illness Insurance that pays a

fixed amount/day of hospitalization

Other Coverage (Non-Insurance)

Employee Assistance Plan If it does not provide

significant benefits Self-funded worker’s

compensation Discount or pre-

negotiated pricing cards

Cafeteria Plan FSAs must be designed

for only specified coverage such as dental + vision

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HSAs, HRAs, FSAs

HSA HRA FSAAccount owner

Employee Employer Employee

FundingEmployee, Employer,

OtherEmployer

Employee,Possible

Employer

Roll over year-to-year

YesGenerally

NoNo

Portable YesGenerally

NoNo

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How HSAs & FSAs Can Work Together

Limited Purpose FSA (can have with an HSA) Pay for dental and vision expenses without having to use HSA funds

Health FSA (cannot normally have at the same time as an HSA)

Extension provides 2.5 months beyond the end of the plan year to use FSA funds

Recent legislation allows employees to contribute to HSAs during the extension if their FSA balance is zero during that time or the total FSA balance is transferred to an HSA.

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

Jan. – Dec. Plan March 15th extension

May –April Plan July 15 extension

$0 bal. May 1-July 15

$0 bal. Jan. 1-March 15

$5 bal. Feb. 6th, $0 bal. Feb 7th

$32 bal. May 2nd

Eligible to contribute to HSA NOT Eligible to contribute to HSA

Example of when HSA contributions can be made if an individual still has a Health FSA. This assumes that the FSA plan is not renewed after the extension.

Plan Year

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How HSAs & HRAs Can Work Together

Three types of HRAs you can have with an HSAPost deductible HRA—pays for out-of-pocket

expenses after the HDHP deductible has been metRetirement HRA—Designated for medical expenses

after retirementSuspended HRA—Cannot make contributions or take

distributions from the HRA while contributing to the HSA

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Tax Treatment and Advantages for Employees/Accountholders

Contributions are either pre-tax through a cafeteria plan (via paycheck) or tax-deductible

Earnings HSAs grow in the same tax-deferred manner as IRAs

Interest and investment income are tax-free or tax deferred

Distributions Withdrawals for qualified medical expenses are always

tax-free. After age 65, funds may be withdrawn for any reason without penalty, subject to regular income tax.

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Tax Savings Example

Contribution $3,000 per year for 25 yrs

Annual Medical Expenses $500 per year

Tax Bracket 28% (Federal)5% (State)

Average Interest Rate 4%

TAX SAVINGS ON CONTRIBUTIONS = $20,625.00

TAX SAVINGS ON DEFERRED GROWTH = $13,732.87

ACCOUNT BALANCE AT THE END OF 25 YEARS =$104,114.77

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Tax Treatment and Advantages for an Employer

Treated as employer-provided coverage for medical expenses under an accident or health plan

Excludable from gross incomeNot subject to withholding for income taxNot subject to other employment taxes

(i.e., Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), or the Railroad Retirement Tax Act)

36

Are HSAs changing spending behavior?

Increased Consumerism in Healthcare (Research results from McKinsey & Co., June 2005)

Consumer-directed health plan holders were more value conscious and attentive to wellness & prevention and therefore:

50% more likely to ask about costs30% more likely to get an annual exam25% more likely to engage in healthy behaviors20% more likely to comply with treatment

regimens3 times more likely to choose less expensive

options

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Are HSAs changing spending behavior?

Based on HSA Bank’s customer base of over 186,000 accounts as of December 31, 2007 96.5% of all open accounts rolled over funds from 2007

to 2008 On average, accounts rolled $2,163 into 2008 Average contribution per month = $214 Average distribution per month = $173 Average monthly savings = $41 Nearly 18% of accountholders saved all contributed funds

and rolled over an average balance of $4,013 into 2008. More than a third of accountholders saved at least 50%

of their 2007 contributions.

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Thank you for considering…