Health Savings Accounts
By Carlton Harker,
FSA, MAAA
Written for www.self-fundhealth.com
Overview
HSA Described
Participation
Trust Required
Federal Tax Considerations
Financial Modelling
Commentary
Endnotes
Appendices
A – Comparison
B – Modelling
C - Resources
Overview
New federal legislation 1 creates a new version of the Medical Savings Account. 2 Such new version is called a Health Savings Account (HSA). This HSA may be used by almost any person who has coverage under a qualifying high deductible health plan. 3 The Act further permits such HSAs to be funded pre-tax through a cafeteria plan. Thus, the Act is held to be an impetus to consumer-driven health care.
HSA Described
The three primary qualifications of the HSA are:
- Governed by a trust.
- Established
by either an eligible individual or an employer of eligible
individuals.
- Purpose being to pay qualified medical expenses of such eligible individuals (or their dependents).
- Subject to certain other requirements.
There are five other general requirements:
- The HSA must be used only where there is a High Deductible Health Plan (HDHP).
- Funding may be done through an employer-sponsored cafeteria plan.
- Favorable federal tax treatment is given to HSA contributions (employer or participant).
- An HSA may be established by an employer, an individual or a self-employed person.
- Favorable rules are given to HSA distributions. Any HSA distribution (withdrawal) is free of the 10% penalty so long as it is for medical expenses. 4
A comparison of the FSA, MSA, MRA with the HAS is set forth in Appendix A.
Participation
Introduction
Certain concepts introduced by the Act must be understood:
- Eligible Individual
- High Deductible Health Plan
- Permitted Insurance.
Eligible
Individual
An eligible individual is one covered by a HDHP as of the first day of the month to the extent that such person is not also covered under a non-HDHP that provides benefits which are also covered by the HDHP. Such eligible individuals who elect to be covered are called Account Beneficiaries.
Certain individuals are automatically excluded:
- Individuals with coverage under their spouse’s plan
- Individuals covered under policy
- Individuals covered under either a FSA (Flexible Spending Account) or a HRA (Health Reimbursement Account) unless non-duplication of coverage can be shown.
High
Deductible Health Plan
Such HDHP is one which has an annual deductible of at least $1,000 for individual and $2,000 for family; also, traditional out-of-pocket maximums are $5,000 individual and $10,000 family. For the purpose meeting such statutory requirements, out-of- network additional limitations may be ignored. A HDHP will not be disqualified merely because it pays 100% of first dollar for preventive care.
Permitted Insurance
To gain HSA advantages, only an HDHP or permitted insurance are allowed. Permitted insurance is defined as follows:
- Medical benefits relative workers’ compensation, tort liabilities, automobile insurance, e.g.
- Disease-specific coverages (critical illness, transplant, cancer, e.g.)
- Provider-specific coverages (hospital indemnity, dental, vision, hearing, e.g.)
- Cause-specific coverages (accidents, e.g.)
- Disability (long or short term).
Trust
Required
Any contributions to a HSA must be made into a trust which meets the following requirements:
- Qualified bank or insurer must be IRS-approved.
- Trust assets do not include any insurance contracts.
- May not be a master or commingled trust.
- Interest accruals to an individual’s HSA must be vested.
Federal
Tax Considerations
In General
These considerations are discussed under the following headings:
- Individual Contributions
- Employer Contributions
- Married Individuals
- Older Account Beneficiaries
- Excess Contributions
- Distributions and Withdrawals
- Rollovers
- HSA Transfers and Assignments
- HSA in a Cafeteria Plan.
Individual Contributions
Individual contributions are above-the-line deductions on IRS Form 1040 which means such are deducted as adjustments to gross income (i.e., exempt from tax). There is a maximum deduction, however which is defined as following (for 2004):
- Individual
Sum of monthly contributions with no monthly contributions exceeding one-twelfth of $2,600.
- Family
Same as individual but limit is $5,150. Such maximums have a cost-of-living adjustment. 5 Such monthly limitations is reduced by these two amounts:
· Amounts paid to Archer MSAs.
· Amounts paid by employer for health care which are otherwise excludible from individuals income.
Employer
Contributions
Employer contributions to an HSA are treated the same as those of the individual and are fully deductible by the employer as a business expense. 6 Employer contributions are not taxable to the eligible individuals when made but may be taxable if withdrawn as non-qualified deductions. Further, employer contributions must be made in a non-discriminatory manner; failure of discrimination tests will trigger an excess tax. 7
Married Individuals
For married individuals, two rules apply.
Rule Number 1
If one has a family $2,000 HDHP and an HSA and the other does not, for IRS Form 1040 purposes, the couple may treat the arrangement as a family
Rule Number 2
If both have a family HDHP and an HSA, where one is for $5,000 and one is for $3,000, the couple may treat, for IRS Form purposes, the arrangement as is $3,000 HSA.
Older Account Beneficiaries
An age-kicker of $500 for Account Beneficiaries beginning at age 55 is effective as of January 1, 2004 and increases by $100 to a maximum of $1,000.
Excess Contributions
To the extent that HSA contributions exceed the statutory limitations, they are not deductible (by Account Beneficiaries) or excludible (by employer). Moreover, there is a 6% excess tax unless such excess contributions are properly returned to the individuals.
Distributions and Withdrawals
The Act specifies that withdrawals must:
- Be eligible medical expenses. 8
- Be by legal spouses. 9
- Be for qualified dependents. 10
- Not be reimbursed by insurance or otherwise.
- Not be for medical insurance premiums except for COBRA premiums, long term care premiums, premiums paid while individual is receiving unemployment compensation, or for premiums for Medicare Supplement coverage.
Non-qualified withdrawals are subject to a 10% penalty. However, special provisions for otherwise non-qualified withdrawals are as follows:
- Withdrawals made after individuals death.
- Withdrawals made after individual’s eligibility for Medicare.
- Withdrawals made after the disability of the individual. 11
- Rollover contributions.
Such distributions from the trust shall not be deemed wages for income or employment tax purposes absent any clear indication that the purpose of HSA was to subvert intent of the FICA rules. The trust has no duty to withheld amounts for FICA or tax purposes.
Rollover Option
A withdrawal by an Account Beneficiary from one HSA to another HSA, within 60 days, is a rollover and not a withdrawal. For rollover purposes, an HSA and an MSA are
treated the same. Only one rollover is permitted in any 12-month period.
HSA Transfers and Assignments
Such transfers and assignments are permitted for these reasons:
- Instrument of divorce or separation
- Death of spouse.
When such HSA is otherwise transferred and assigned, it is done so at fair market value.
HSA in a Cafeteria Plan
To meet the definition of a cafeteria plan, 12 the benefits must not be deferred. An HSA would, by this principle, be ineligible as a cafeteria benefit because contributions to the HSA are defined. The Act, however, provides a special exception to this principle by permitting an HSA to be an eligible cafeteria benefit.
Financial
Modelling
An example of modelling using (a) the Annual Actuarial Report and (b) Monte Carlo Simulations for both the basic plan and the HAS option is set forth in Appendix B.
Commentary
Employer Responses
In viewing the HSA option, the employer may have these concerns:
1. The increase of the present participant plan cost because of (a) the waiver of per occurrence deductibles and (b) recognition of participant deductibles and copays may not be well received by employers. The cost containment and managed care clock is turned back; consumer-driven care is to be financed by both the taxpayer and the employer: ERISA-provided plan design privileges are eliminated or greatly curtailed in that the HDHL is a federally-approved benefit.
2. The present plan design, essentially covers the needs of most of the participants and may be described as imperfect but manageable. The HSA design opens up a broad range of challenges all of which rest on the employer’s doorstep. Should the HSA be optional or mandatory? What will the anti-selection repercussions be? What impact will the federal mandates or the HDHP have?
3. Health plan management, 20 years ago, was 100% employer-dominated with self-funding the funding method of choice. The steady march to federalization is culminated with the HSA. The employer will bring less to the table but will have less authority. Cato was correct – Caesar gives and Caesar takes.
4. Many employers will express concern that some 25 years of cost containment and managed care disciplines are set aside.
- Non-plan provided medical expenses will be paid so long as they are IRC §213 approved.
- The plastic debit card makes access to such funds as easy as can be imagined.
Thus, the HSA is “patently a gratification now with a disregard for the future” scheme which is aided and encouraged in a large part by U.S. Treasury. Politically speaking, most of the players in the health care financing game will see positives. The end result, in time will be eventually higher health care costs and less Treasury revenues.
In viewing the HSA option, the employer may be comforted by these thoughts:
1. The essential purpose of the HSA is that the employer should provide the HDHP leaving the lower-range of claims the responsibility of the participant. Such new risk sharing will hopefully bring greater cost stability and less responsibility and involvement to the employer. The reduced role of the employer should be a welcome relief.
2. This rearrangement of duties and responsibilities should be a deterrant to those who would prefer a single payer system.
Participant Responses
In opting for the HSA option, the participant sees these advantages:
1. An additional participant contribution may be put into the HSA which amount is exempt from income tax when made and never taxed so long as used for IRC §213 medical expenses. This could be a significant tax gift to a significant number of participants.
2. Many foresighted participants will see the HSA option as a way to get employer’s money, be thrifty in the expenditure thereof, let the nest egg grow tax-free in a protected trust-haven and thereby create an additional retirement plan.
3. While the low-paid suffer under the traditional plan with the deductibles and co-payments, these early burdens are eliminated with the HSA and the participant smells 100% first dollar coverage (albeit for only a modest amount per year) for the first time. For many participants, this first dollar gift will be accepted gladly with little or no regard to the fact that between the spending down of the HSA balance and $5,000, such participant is 100% at risk.
4. The profligate health care consumer can, through the HSA, finance large medical expenses, with a tax subsidy, and gain early access to the HDHP promised land. Such anti-selection is the antithesis of cost containment.
Administrative, Legal, Marketing Issues
1. To compute employer cost parity between the traditional and HSA options, two actuarial computation are needed:
a. Increased cost to waive per occurrence deductibles and calendar year
deductibles and copayments must be measured.
b. Simulations are a need to divide the plan costs of the HSA option into three parts:
i. Below deductible
ii. Deductible to specific
iii. Specific to maximum
2. A considerable amount of hype is being directed at the low costs feature of the HDHP. While a large deductible takes a big bite out of the individual health risk, such deductible takes only a more modest bite from the group medical risk.
3. The two colossi (federal v. state) will collide in the individual market where the wishes of the feds to promote the HSA will be thwarted by the states which will make the HDHP unavailable or too expensive because of their mandated benefits.
4. Expect the HSA plan to be the funding method of choice for retirees as employers scramble to discontinue this coverage. The new Medicare Rx benefit is also a reason for employers to discontinue retiree coverage.
5. Some of the big players have lobbied diligently to the HSA passed. Shortly before the bill’s passed, UnitedHealth Group bought Golden Rule; Golden Rule was a pioneer in patient-directed Care. Also, USHealthcare-Aetna has been active in this area. The many Democrats would seek to repeal if they could.
6. Many observers are already cringing at the prospect of ready cash accessible with a plastic card with minimal controls or discipline by uninformed and profligate participants goaded by charlatan care providers. The fear is that gasoline will be poured on the fraud flame.
7. The HSA and supplementary coverage (employer-arranged but employee-pay-all plans) have many features in common; particularly, that employers assure the role of enablers permitting their employees to gain some benefit advantages.
8. Industry wisdom appears to be that HSAs should be studied but their introduction should be delayed until at least 2005 pending regulatory clarification.
9. A potential claims nightmare appears to be in the making with the HDHP. Suppose that the participant with HSA, on a calendar basis with a $5,000 deductible does the following:
· Sends the TPA (claims administrator of the self-funded HDHP) a bushel basket of claims, some paid by the HSA and some paid (allegedly by the participant) on September 1.
· The participant says that he is to undergo open-heart surgery on September 10 and the providers needs confirmation of coverage and eligibility.
· At the very least, the TPA must audit the bushel basket of claims to determining their eligibility. This will not be easy and may well be impossible.
· HIPAA claims rules as regards the HDHP would appear to be fully applicable.
· Issues of network providers and the proposed open heart surgery need to be considered.
10. There appear to be several issues which will hopefully be clarified with regulations:
· Application of non-discrimination rules when HSA is funded as a cafeteria plan benefit?
· Who determines whether withdrawals for an HSA trust are for qualified medical expenses?
· How will electronic payments and the debit card fir into the HSA withdrawal practices?
· How will the HSA and the MSA integrate?
· Is an HSA an ERISA plan? Do the DOL HIPAA claim rules apply: What are HSA reporting and disclosure requirements?
· Can multiple COBRA beneficiaries elect HSA funds?
· Do HIPAA privacy rules apply? Do HIPAA EDI requirements apply?
End
Notes
1. Medicare Prescription Drug Improvement and Modernization Act of 2003, HSA codified at IRC §223.
2. So-called Archer Savings Accounts, IRC §220.
3. IRC §125.
4. As contemplated by IRC §213.
5. IRC §1(f)(3) with 1997 replacing 1992.
6. IRC §162.
7. IRC §5000.
8. IRC §213.
9. Defense of Marriage Act.
10. IRC §152.
11. As defined by IRC §72.
12. IRC §125.
APPENDIX A
Comparison
of HSA, MSA, FSA and HRA
In General
Each of the four accounts are similar in that they
all use specific (or defined) contributions to be set aside in a special fund
(real or imaginary) to pay certain medical expenses in order to achieve
(hopefully) some degree of cost containment.
Yet each of the four has characteristics which make them somewhat
different. Each of the following are
discussed separately:
·
Flexible
Spending Account (FSA)
·
Medical
Savings Account (FSA)
·
Health
Reimbursement Account (HRA)
·
Health
Savings Account (HSA).
(See Description in early pages of
this Critique).
Flexible Spending Account (FSA)
IRC §105 and the proposed Treasury Regulations $125,
Q&A, provide guidance as to how such accounts should be handled.
1.
Health
care benefits must be at risk items (medical expenses, e.g.) as opposed
to being not at risk items (insurance premiums. e.g.).
2.
An
FSA may be an option of a cafeteria arrangement or it may be freestanding; an
FSA is a welfare plan as opposed to a fringe benefit plan as is a premium
option plan.
3.
An
FSA must meet eight conditions:
i.
Only
eligible medical expenses as defined by IRC §213 are allowed.
ii.
Maximum
coverage must be provided evenly throughout the plan year.
iii.
Plan
year must be at least 12 months.
iv.
Medical
expenses (not premiums) only are reimbursable.
v.
Salary
reductions are not to be tied to expenses.
vi.
Expenses
are reimbursed only with documentation.
vii.
All
expenses must be incurred during plan year.
viii.
Each
FSA must be freestanding and not pooled as regards claims experience.
4.
Employer
must accommodate the participant’s financial needs where an FSA is in place
with (a) family and medical leave and (b) COBRA.
5.
For
an FSA to meet the Code’s requirements, four requirements must be met:
·
There
must be a risk-shift as found with insurance.
·
There
must not be a nexus between the pay reduction and the medical
expenses.
·
Expenses
are to be measured by incurred dates.
·
Participant
must be at a risk for some loss.
Medical Savings Accounts
(MSA)
The MSA is a creation of IRC §220
and is quite similar to the HSA. An MSA
may be used only with a high-deductible plan which has a deductible of
$1,500-$2,250 for individuals and $3,000-$4,500 for families. Taxpayers are allowed to make deductible
contributions to MSAs if certain requirements are met, and earnings are
tax-free if used for specific medical purposes. The maximum annual contribution made to an MSA in one year cannot
exceed 65% of the deductible for an individual and 75% of the deductible for a
family. Contributions are allowed to be
made by either employers or employees during any given year, but not by
both. Other additional coverage listed
in the law, such as dental insurance and insurance for specific diseases, is allowed
to those eligible MSAs. Distributions
for nonmedical purposes are subject to a 10% tax and are included in
income.
Contributions are deductible if
made by employees and excludable if made by the employers of eligible employees
(unless made through a cafeteria plan).
Employers and employees must both report these contributions. The law contains comparability rules to
ensure fairness in an employer’s offerings.
In general, distributions from an MSA for medical expenses are excluded
from income. However, they are
excludable only if the person whose expenses were paid was eligible to make MSA
contributions to a family account due to having other coverage and could not
use MSA funds to pay for medical expenses without paying an additional 15% tax,
including the amount withdrawn in income.
For purposes of income exclusions under the MSA provision, medical
expenses would not include expenses for insurance premiums, except long-term
care insurance, premiums for health care continuation coverage and premiums for
health care coverage while receiving unemployment compensation.
Upon death, the balance in an MSA
is included in the decedent’s gross estate.
If the surviving spouse is named as beneficiary of the MSA, this spouse
is allowed to continue the account in such spouse’s own name and the amount in
the MSA is deducted from the decedent’s taxable estate pursuant to estate tax
marital deductions in the Internal Revenue Code. The surviving spouse can use the account to pay the decedent’s
qualified medical expenses prior to death.
If the MSA passes to any one other than the surviving spouse, it ceases
to be an MSA as of the date of death and the beneficiary must declare these
assets as income, minus the amount used to pay the decedent’s medical bills within
one year of death. The beneficiary can
also claim a deduction fro the part of federal estate tax attributable to the
amount in the MSA. If there is no named
beneficiary, the MSA of a decedent ceases to be an MSA as of the date of death
and the assets are included in the decedent’s gross income. This rule applies even if the surviving
spouse eventually obtains the rights to the MSA assets as sole beneficiary of
the estate. MSAs are trust accounts for
the exclusive benefit of the holder and are subject to rules similar to those
applied to individual retirement accounts.
Health Reimbursement
Accounts (HRA)
The HRA is also called either of
the following:
·
Consumer
–driven health plan
·
Defined
contribution plan.
The HRA is used to reimburse a
covered participant (or covered dependent for the purchase of health insurance
or other eligible medical expenses.
They give such participant more control over health care spending
because whatever money is not used during a benefit year can be rolled over
into later years. This is unlike FSAs,
that require such participant to spend all the money in the account or lose it
at the end of your benefit year, the so-called use-it-or-lose-it rule.
The biggest drawback to HRAs is that the employer
decides whether to keep such participant money or allow access to such money if
the employee terminates. If, however,
the employer decides to give access to accrued HRA money – and it’s used for
nonmedical expenses, such as severance package – all amounts paid by the plan
become immediately taxable to such including prior medical reimbursements.
An HRA account exists only on paper. The employer doesn’t have to specifically
set the money aside. Rather, it
reimburses such participant from its funds as they incur eligible expenses. A nontaxable HRA must be funded solely
by the employer (not through salary deduction) and can provide benefits only
for approved medical expenses, as opposed to some nonmedical reimbursements
permitted for MSAs. This means the
employer owns the HRA. MSAs are
individually owned.
Typically an HRA is used in connection with health
insurance plan. To help meet the cost
of the deductible, the employer creates an HRA and credits the participant a
flat dollar amount each year. Over
time, the HRA grows in value as unused funds are carried over. If medical expenses exceed the amount the
HRA, such participant will pay the medical expenses until the deductible is
satisfied and then the group health plan kicks in.
The employer may also allow the participant to
connect HRA with an FSA. However, an
HRA and an FSA cannot both reimburse the same medical expense. If a medical expense could be covered by
both, the HRA plan may specify that the FSA coverage must be exhausted before
the HRA coverage. If the HRA plan
doesn’t address the issue, the HRA coverage must be exhausted before the FSA
coverage becomes operative.
Most observers believe that HRAs may be used to reimburse participants for the purchase of health insurance, including COBRA continuation coverage. COBRA often fails to perform well as safety net for may laid-off workers because it is so expensive.
Essential Features of the FSA, MSA, HRA and HSA
Introduction
These are the following consumer-choice options:
- FSA
- MSA
- HRA
- HAS.
They are compared by the following standards:
- Statutory or regulatory bases
- Eligibility
- Tax savings
- Risk Management Considerations.
Terms used in the comparison include the following:
- Plan – employer sponsored medical plan
- Participant – includes covered dependents
- Common Law Employee – excludes self-employed, subs owners and independent contractors
- Individual – person not necessarily employed, or covered has a plan; i.e., anyone.
Statutory or Regulatory Basis
- FSA – IRC §125; Temp. Treas. Reg §1,125 – 2T.
- MSA – IRC §220.
- HRA – IRS Notice 2002-45; Rev.Rul 2002-41.
- HSA – IRC §223.
Eligibility
FSA – Any participant in any plan
MSA – Any individual who is either self-employed or an employee in a small employer so long as there is a high deductible plan
HRA – Any common law employee in any plan
HSA – Any individual with a HDHP.
Tax Savings
FSA – The FSA is participant-driven but its existence is enabled by the employer. The participant who gambles and wins with the FSA gains significantly in tax savings. A potential loss is also possible. A FSA is not permitted to exist with an HRA, MSA or HSA unless the FSA benefits are different.
MSA – The MSA is an early-generation model for the HSA and is expected to disappear in time.
HRA – The HRA will have an attraction for the employer because it involves for fewer rules and regulations. The process is more relaxed and employer –friendly but significant tax breaks available to participants are not available.
HSA – The availability of a liberal medical IRA to all individuals represents a huge tax advantages to the taxpaying population. The price employers must pay to five this tax advantage to its employees is reasonable enough (many people believe) and its popularity is to be expected.
Risk Management Considerations
FSA – Participant makes a salary reduction putting such amount of reduction into a non-trusted account. Any amounts taken from such account during the participant’s tax year are free of tax to such participant so long as used for IRC §213 medical expenses and not otherwise covered by a plan. Amounts left in the fund unused at the end of the tax year are forfeited under the use it – lose it rule.
MSA – Contributions made to a trusteed MSA fund are deductible when made:
· Employer – IRC §105 or 106
· Employer – IRC §220.
They escape taxation when finally withdrawn so long as they are used for IRC §213 medical expenses. Otherwise they are taxed with penalties. Such contributions are placed in a participant trust account thus assuring continuity and vesting.
HRA – Employer carves out a front-end deductible from its health plan and assumes the responsibility for funding such carve-out. The fund is in theory only meaning that a build up in liability must be recognized. Employer’s contributions occur only when an actual claim is paid at which time the reimbursement is deductible by the employer and not taxable to participant. No participant contributions are involved.
HSA– The HSA is a clone of the MSA in that:
· Eligibility is open to all with the HSA.
· Available contributions to the HSA extend to all individuals and are significant in amount.
· Penalties for misuse are less onerous for the HSA.
APPENDIX B
Self-Funding Actuarial Services, Inc.
8025 North Point Blvd., Suite
207W Carlton Harker,
FSA, MAAA, Principal
Winston-Salem, NC 27106
e-mail:
harker2@earthlink.net
Tel. (336) 759-2035 Fax
(336) 896-0392 www.self-fundhealth.com
TRANSMITTAL MEMORANDUM
TO: John Jones, President
ABC Administrative Firm
114 Main Street
Anytown, OH 61416
FROM: Carlton Harker, FSA, MAAA
RE: Revised and Expanded Actuarial Report
Health Care Plan of the XYZ Manufacturing Company
for Plan Year – 2/01/2004 to 2/01/2005
DATE: March 3, 2004
1. This subject Actuarial Report provides the following items of information:
Reference Information Provided
Exhibit I – Part A Recommended Funding
Exhibit I – Part B Maximum COBRA Premiums
Exhibit II Actuarial Estimates of Claims Reserves
Exhibit III Monte Carlo Simulation
· Economic value of purchased stop-loss
· Expected claims statistically measured with confidence limits
Exhibit IV HSA Modelling
· Recommended employer HSA contributions needed to maintain plan cost parity.
· Comparison of proposed plan terms and HSA contributions to meet IRC §223 requirements.
· Expected claims of HDHP measured with confidence limits.
2a. Of comfort to the Plan Sponsor are the actuarially-determined funding contributions and claim
reserves for budgeting purposes and also for determining participant contributions.
b. COBRA premiums are at the highest level possible consistent with the letter and spirit of the law.
c. As
for Monte Carlo Simulations, the actuary asserts:
·
Without stop-loss, there is a 95% chance that
the expected claims will fall within the range of $745,666 to $1,705,934 with a
$1,225,800 expectation; with a $50,000 specific limit, these numbers become
$808,108 to $1,332,160 with a $1,070,134 expectation.
· The economic value of the stop-loss coverage, as measured by the Monte Carlo Simulation would be as follows:
Benefit Economic
Value Actual
Premium
$50,000 Specific $155,666 $169,849
$1,270.198 Aggregate 1,313 8,000
$156,979 $177,449
d. As for the HSA Modelling, the
actuary asserts:
·
The monthly cost of
the present plan is $341 I and $819 F.
·
Redesigning the
present plan to meet HDHP requirements increased the plan costs by 9%. This exercise involved benefit content
analyses.
·
Using the increased
funding factors without purchase of stop-loss for the 2004-2005 plan year, we
have plan costs of $372 I and $893 F which, by Monte Carlo Simulation are
divided by risk-share as follows:
Risk Share Individual Family
First $5,000 $142 $372
$5,000-50,000 165 391
Over $50,000 65_
130_
Total $372
$893
·
To maintain parity,
the employer’s HSA contribution should be determined as follows:
Individual
Family
HSA $111 $298
HDHP 230 _ 521_
Total
$341 $819
3. Commentary on the HSA plan is
set forth in Exhibit IV – Part E.
4. The
Terms of Engagement for this study are shown as an Attachment to this
Transmittal Memorandum.
TERMS OF ENGAGEMENT
To make this Annual Actuarial Report simulations set forth in Exhibit III (confidence limits of expected claims and economic value of stop-loss) and Exhibit IV (Employer HSA contributions to maintain plan cost parity and compliance tests) the following documentation was provided to the actuary:
1.
The stop-loss
aggregate report (10-months minimum) or the equivalent for the plan year
ending.
2.
Terms of renewal
(stop-loss, other fixed costs and aggregate factors) with indication of terms
(paid agg, lasers, aggregating specific, e.g.).
3.
Census by tier (if
other than I/F).
4.
Schedule of Benefits
for renewal year including all options (PPO and EPO, e.g.).
The fee schedule under which this study was contracted is as follows:
Exhibits Standard Fee
I and II $1 per participant ($250-1,000 minimax)
III $750
IV $1,500
Note:
Exhibits III and IV may be provided only as an extension to Exhibits I and II.
ANNUAL ACTUARIAL REPORT FOR THE HEALTH CARE PLAN OF XYZ
MANUFACTURING COMPANY
TO: ABC Administrative Firm FROM: Self-Funding Actuarial Services, Inc.
114 Main Street 8025 North Point Boulevard, Suite 207W
Anytown, USA 61416 Winston-Salem, NC 27106
e-mail: harker2@earthlink.net
Contact: John Jones Contact: Carlton Harker, FSA, MAAA
Tel: (800) 614-1414 Tel: (336) 759-2035
Fax: (516) 416-2132 Fax: (336) 896-0392
We respond to your request for actuarial services.
Plan Sponsor: XYZ
Manufacturing Company
Plan Year: February 1, 2004 to February 1, 2005
The following actuarial computations and attestations are provided herein:
Exhibit I
Part A – Recommended Monthly Factors to fund paid claims for the above-cited plan Part B – Monthly COBRA Premiums which comply with applicable federal
regulations for the above-cited plan year.
Part C – Basis of Computations.
Part D – General Commentary on COBRA Premiums.
Part E – COBRA Premiums by Attained Age (Optional).
Part F – COBRA Premiums by Geographical Area (Optional).
Including Table of Area Ratings.
Exhibit II
Plan obligations, as of the date indicated herein, which meet the requirements
and/or guidelines of AICPA SOP No. 92-6.
Exhibit III
Monte Carlo Simulation.
Exhibit IV
HSA Modelling – Employer Plan Cost Parity.
EXHIBIT I
RECOMMENDED FUNDING FACTORS AND
COBRA PREMIUMS
Plan Sponsor: XYZ Manufacturing Company
DOL/IRS: Plan Number N/A Plan
Year: February 1, 2004 to February 1, 2005
PART A – MONTHLY FUNDING FACTORS
The Plan Sponsor may anticipate the following funding demands so as to provide for projected plan claims (no allowance for reserve changes or for fixed costs) for the Plan Year show above:
Medical Lasered Aggregating
2nd Rx_ Dental Participant Specific Total
Individual $340 $30 $3 $10 $383
Participant and
Child 540 50 5 10 605
Participant and
Spouse 610 55 5 10 680
Family 845 75 7 10 937
Plan Sponsor may fund using; (a) a qualified trust [IRC §501(c)(9)]; (b) a non-qualified trust (IRC
§419A); (c) a designated bank account (using Plan Sponsor’s Tax I.D. Number); or (d) internal or
memorandum accounts only. Methods (a) and (b) are funded and plan assets are created. Methods (a)
and (b) are funded and plan assets are created. Methods (b) and (c) are unfunded and plan assets are
not created.
PART B – MONTHLY COBRA PREMIUMS
Monthly COBRA premiums (2% is included) for the Plan Year shown above:
Benefit Participant Participant
Medical Rx Individual
and Child and
Spouse Family
High High $484 $767 $862 $1,167
High Low 460 729 819 1,109
Low High 408 661 742 1,005
Low Low 388 616 700 936
Dental $35 $55 $60 $80
Note: 1. COBRA premiums include charge for aggregating specific and
lasered participants.
2. Vision is included with medical.
PART
C - BASIS OF COMPUTATIONS – XYZ Manufacturing Company
·
COBRA premiums are
based upon the sum of: (a) projected paid claims; (b) fixed costs
(stop-loss premiums, administration fees, employer
internal plan costs, outsourced
service costs, e.g.); (c) amortization of plan
obligations (as contemplated in AICPA SOP
No. 92-6.)
·
Projected paid claims
(below the specific stop-loss limitation) of $1,117,800 were determined
as
follows: (a) retrospectively (actuary relied on past data); (b) prospectively
(actuary relied,
in
part, on stop-loss terms of renewal); Monte Carlo simulation; or (c)
combination of (a) (b) and
(c)
as appears to the actuary to be the most reasonable.
Cost
Medical Rx Census Index
Basis
of claims is paid; benefits include medical and Rx H
H 76
1.10
Assumed
claims run-in from prior plan year: $N/A. H L
75 .90
Benefit
options include: N/A L H 0 1.00
Participants
include: activities and COBRAs. L L
17 .80
Census: I – 75; P/C – 13; P/S – 29; P + 1 - ); F –
51; Total – 168 168
·
Items furnished by
the Plan Sponsor or Claims Administrator, which were used on the
computations, are attached hereto.
·
Plan Sponsor's
internal costs are assumed to be 3.0% of projected claims or $23,500
and
are treated as a plan cost. Such internal plan costs must be shown as such on
the Form
5500.
The actuary assumes that the Plan Sponsor is able to justify these assumed
internal costs.
·
Reserves for Plan
Obligations are shown in Exhibit II, herein. An amortization charge to create
and/or maintain such reserve is assumed to be 3.8% of projected paid
claims or $41,400_.
·
Where projected paid
claims were determined retrospectively, an inflation factor of 8.0% of
such claims or $82,800 was assumed.
· It as assumed that all participants reside in Area Index 11. See Table of Area Ratings attached.
This
assumption is of concern only if the Plan Sponsor elects to vary COBRA premiums
by geographical area. Where the Plan
Sponsor des elect to vary COBRA premiums by geographical area, COBRA premiums
should be increased or decreased by using the Table shown in Part F.
Also, prior to using the Area Index shown above, the exact location of participants by residence should be determined so that the assumed Index is replaced by an exact Index.
___________________________ By_________________________________
Date Carlton Harker, FSA, MAAA
Self-Funding Actuarial Services, Inc.
EXHIBIT II
ACTUARIAL CERTIFICATION OF RESERVES AND PLAN OBLIGATIONS OF THE HEALTH
CARE PLAN OF XYZ MANUFACTUARIAL COMPANY
AS OF JANUARY
31, 2004
1.
I, Carlton Harker,
Consulting Actuary, am a principal of Self-Funding Actuarial Services, Inc., am
a
Fellow of the Society of Actuaries and a member of
the American Academy of Actuaries. My firm has
been retained to provide calculations of COBRA
premiums for the above-cited health care plan. I have
determined, by appropriate actuarial assumptions
and methods, the plan obligations referred to below.
I have relied upon the claims administrator and/or
the plan sponsor of the subject health care plan as to
the accuracy and completeness of any underlying
information provided to me and used in the computation
of such plan obligations. In other aspects, my examination included such review of the
actuarial
assumptions and methods and such tests of
calculations as I considered necessary under the circumstances.
Enumerative procedures were replaced by statistical
modelling techniques, where provided data was
below acceptable credibility limits or not
provided.
2. Plan
Obligations as of January 31, 2004
a. Estimated incurred and unpaid (as contemplated by
IRC § 419 A (c)(l)................$155,200.
Includes
claims due and unpaid, in course of settlement and incurred but not reported.
Excludes
any reserve
for pending or ongoing lawsuits. Reserve is net of any excess loss recovery.
b.Estimated future claims not yet incurred (settlement basis as
contemplated by AICPA SOP
No.
92-6 only)….$258,800.
Includes future claims, not yet
incurred, but deemed to be a plan obligation, as contemplated by
AICPA SOP No. 92-6 as I understand it. Such plan
obligations represent the discounted value of
future expected claims on a settlement basis,
assuming that persons with significant health problems
cease assumed to be active on the valuation date
and elect continuation coverage. Weighted
continuation period is to be 18 months. Such
electing persons are those who have an economic
advantage to continue as determined by statistical
modelling. When discounting future net claim
(gross
claims less participant cost of continuation coverage), these assumptions were
made:
·
Interest at .5% per month.
·
Medical inflation at .5% per month.
·
Lapsation of continues at 3% per month.
·
Effect of anti-selection (healthy lives
discontinue; unhealthy lives continue) at 2% per month.
c. Plan
Obligations (a) + (b) (contemplated by AICPA SOP No. 92-6; not by IRC
§419A(c)(1)
......$414,000.
3. In my
opinion, the amounts shown herein are useful in the calculation of COBRA
premiums and:
·
Are computed in
accordance with commonly accepted actuarial standards (or estimated by
reasonable approximation thereto
by statistical modelling) consistently applied and are fairly
stated in accordance with sound
actuarial principles.
·
Make reasonable
provision, in the aggregate, for all obligations of the plan as contemplated by
AICPA
SOP No. 92-6 (Item c) or IRC §419A(c)(1) Item a).
· Includes reasonable provisions, in the aggregate, for any related items which should be established.
___________________________ By _________________________________________
Date Carlton Harker, FSA, MAAA
Self-Funding Actuarial Services, Inc