HSA Plan Feasibility Study

Health Care Plan of__________________________________________________

____________________________________________(Plan Sponsor – Employer)

Proposed Effective Date_______________________________________________

___________________________________________________________________

Plan Manager_______________________________________________________

___________________________________________________________________

Plan Supervisor_____________________________________________________

___________________________________________________________________

Bank Trustee or Custodian____________________________________________

____________________________________________________________________

Producer___________________________________________________________

___________________________________________________________________

Preferred Provider Organization(s)_____________________________________

___________________________________________________________________

Rx Card Issuer_____________________________________________________

__________________________________________________________________

Utilization Review Firm______________________________________________

___________________________________________________________________

Stop-Loss Carrier___________________________________________________

___________________________________________________________________

Demand Management Firm___________________________________________

___________________________________________________________________

Actuary ___________________________________________________________

___________________________________________________________________

In General

Current tax law (see IRC § 223) permits a tax-free Health Savings Account (HSA) for participants in this health care plan conditioned on such participant having in place a High Deductible Health Plan (HDHP).

This Feasibility Study offers such an arrangement (referred to as a HSA Plan) as an Employer-elected alternative to the present Health Plan above-cited. This Feasibility Study provides actuarially-determined projected costs, meets all statutory/regulatory requirements, offers options and provides helpful background information.

The Feasibility Study is in these parts:

• Virtues and Challenges

• Plan Format

• Benefits

• Administration

• Commentary

• Plan Costs

• Appendices

A - Understanding the HSA

B - Advantages of the HSA

C - Anti-Selection

D - HSA as a Retirement Plan

E - Employer Response to HSA Feasibility Study

F - Participant Enrollment and Comment Form

G - HSA Claims Processing

H - HSA and Rx Coverage

I - Financing the HSA Plan

J - Agreement – Account Owner and Trustee

Documents and agreements which are required and will ultimately define all plan details as follows:

• Plan document and SPD

• Employer-Plan Supervisor Administrative Agreement

• Employer-Carrier Stop-loss Agreement

• Employer-Bank Trust or Custodial Agreement

• Employer Vendor Agreements (PPO, Rx Card, UR, Demand Management Firm, e.g.).

There may also be Employer-Producer or Employer-Plan Manager Agreement, if such are appropriate.

Published Federal Regulatory Guidelines relevant to the HSA Options include the following:

1.	Internal Revenue Code
		§ 223 (Pub. L. No. 108 – 173 § 1201) § 4890E (Pub. L. No. 104 – 101)
2.	Internal Revenue Notices
		2004 – 2 (2004-2 IRB 269) 2004 – 22 (2004-15 IRB 725) 2004 – 25 (2004-25 IRB 727) 2004 – 43 (2004-43 IRB 10) 2004 – 50 (2004- IRB ___)
3.	Internal Revenue Rulings
		2004 – 38 (2004-15 IRB 717) 2004 – 45 (2004-22 IRB 171)
4.	Internal Revenue Procedure:
		2004 – 22 (2004-15 IRB 727)
5.	Department of Labor Field Assistance Bulletin
		2004-1

Virtues and Challenges

In deliberating on the adoption of the HSA Plan (optioned or otherwise), the Plan Sponsor should take note of its numerous virtues and added challenges:

• To a considerable extent, it incorporates the concept of consumer-driven health care, believed by many to be both virtuous and cost-containing.

• It equalizes the playing field in terms of tax advantages between the employee and the employer.

• By bifurcating the Plan into a defined contribution and defined benefit plan, the disparate needs of the affluent (seeking asset protection) and the non-affluent (seeking income protection) will be better met for each group.

• With active employer involvement, the likelihood is greatly increased that the HSA Plan will, in fact, meet its intended goals. Informed and reasoned participant elections are expected.

• All parties (employer, TPA, stop-loss carrier, broker, etc.) must accept the reality that the once-simple medical plan has, with the HSA option, becomes (in part) an investment vehicle (or retirement plan) and multiple accommodations are needed (marketing, enrollment, administration, claims, etc.).

• The HSA Plan (similar to a medical IRA only better) is a significant tax-savings opportunity which will both (a) financially help millions of Americans and (b) be instrumental in reducing the large number of uninsureds. The HSA is intended to become part of our national health care strategy and has the strong support of the Federal government.

• If the HSA plan concept fails, the considered opinion of the majority is that the employer-dominated paradigm will be replaced by a single-payer arrangement.

Plan Format

The Employer is expected to modify the present plan with one of the following two choices:

Choice 1

Add an HSA Plan as an option to the present plan which option is available to each participant.

Choice 2

Eliminate the present plan and replace it with an HSA Plan which plan offers to each participant the choice of either one of three HDHP deductibles:

• $1,000 with 0% copay thereafter

• $2,600 with 50% copay thereafter (up to $4,800 of eligible expenses)

• $5,000 with 0% copay thereafter.

The HSA Plan will be managed by the Plan Manager (as a general contractor), but the administrative functions (claims, records, funding, compliance, etc.) will be performed by the Plan Supervisor. In most plans, the Plan Manager and the Plan Supervisor are the same. Supportive vendors to the Plan Manager/Plan Supervisor include the following:

• Stop-Loss Carrier

• Bank Trustee or Custodian

• Producer

• Preferred Provider Organization

• Rx Card Issuer

• Utilization Review Firm

• Demand Management Firm(s)

• Actuary.

Benefits

The three benefit modules are as follows:

Present Benefits

These benefits will be those contemplated for the plan on the Proposed Effective Date.

High Deductible Health Plan

These benefits may be described as follows:

• Deductible and out-of-pocket as provided by the Plan.

• After deductible and out-of-pocket are met, Plan pays 100% for in-network and 50% for all out-of-network expenses, e.g.

• Annual Maximum of $100,000 and Lifetime Maximum of $1,000,000.

• Benefits Additional to the HDHP which are Permitted

• Dental

• Vision

• Hearing

• Disability

• Long Term Care

• Workers Compensation

• Accident-Only

• Critical Illness

• Dread Disease

• Hospital Indemnity

• Medical Reimbursement

• Organ Transplant

• Benefits Offered Special Treatment

• Rx Card

Per-filling deductible apply; for HDHP treated as any other benefit thereafter.

• Preventive Care

The HDHP deductible is waived for the provided preventive care benefits.

Health Savings Account

This Account will be treated for Plan purposes as an ERISA-governed benefit subject to the unified administration.

Administration

Overview

The existing administrative systems of the Plan Supervisor now in place for the present plan will be applied to the HDHP. New administrative systems will be applied to HSA because such HSA is a new welfare plan in the ERISA sense. HSA administrative systems will be patterned after the well-known IRC § 401(k) plans. This logic applies to the following.

• Plan Document and SPD

• Records

• Claims

• Funding

• Compliance.

This Feasibility Study proposes that two separate and freestanding systems be used: one for the HDHP and one for the HSA. This division is believed to be most prudent until the transition with all of its technical challenges has been made. In due time, when experience warrants, the HDHP and the HSA systems will become more integrated and/or unified.

Plan Document and SPD

The HDHP and the HSA are each freestanding ERISA plans and will be provided their own Plan Document and SPD. Because of the requirement that the HDHP be compliant with IRC § 223, the benefits therein will be different than those for the traditional or present plan.

Records

The present recordkeeping systems of the Plan Supervisor will be used for the HDHP. A new recordkeeping system will be installed for the HSA. They should begin as separate systems, but in time be integrated so as to have common enrollments, data bases, billings, reports, etc.

Claims

A host of significant new claims challenges will arise with the HSA Plan. Some examples include:

• Compliance

• Effect on provider assignments

• Rx card

• HDHP and HSA coordination.

While this Feasibility Study provides only a brief overview, these observations may be helpful!

• Both the HDHP and the HSA must be compliant with ERISA, HIPAA, ADEA, ADA, etc.

• It is possible that providers will be more reluctant than they are at present to accept assignments when the increased risk borne by the participant is known by the provider.

• The need ultimately is for the Rx card program to clear or not clear a purchase at the Rx counter depending on whether or not the HDHP deductible has been met. This computer accommodation may not happen in the near future.

• Al! distributions from the HSA should be treated as an ERISA claim and processed accordingly.

Funding

The Plan Supervisor may access the HSA daily for deposits and weekly for distributions. The aim is to meet the HIPAA rapid claims requirement and also to avoid plans assets with regards the funding of the HDHP as contemplated by the Department of Labor Asset Reglations.

Compliance

All of the ERISA reporting and disclosure requirements apply to both the HDHP and the HSA, each of which has its own Department of Labor Plan Number (502 for HDHP and 503 for HSA, e.g.). Further, the ERISA fiduciary, party in interest rules, e.g, apply to both the HDHP and the HSA.

Commentary

Preparation of the Feasibility Study

This Feasibility Study was prepared and is submitted by the Plan Supervisor; because of the newness of the HSA Plan, it should be deemed a decision-making guide rather than a completed work product.

A few shortcomings of the Feasibility Study are these:

1. Stop-loss terms and costs, while firm for the present plan, are only estimated for the HDHP.

2. Additional administration costs attendant with HSA maintenance, e.g., are ignored.

Items provided to the Actuary in the preparation of the cost modeling are as follows:

1. Claims and census for the plan year (or part thereof) for the plan year ending

2. Terms of Renewal (stop-loss, administration fees, etc.) for the plan year beginning

3. Resume of plan benefits consistent with the terms of renewal

4. Requisite HDHP electives (deductible, out-of-pocket, limitation on annual maximum, etc.).

Anti-Selection

Bearing in mind the well-accepted premise that 20% of the participants, cause 80% of the claims it is estimated in the cost model that of the 200 participants, 100 will elect the traditional and 100 will elect the HSA option. The 100 electing the traditional will increase the claims cost by 25% because the healthier risks will likely prefer the better benefit plan. Thus, for the upcoming plan year there should be an additional monthly surcharge for those electing the traditional plan of $15-I and $36-F. Also, there should be a reduced monthly employer contribution to the HSA for those electing such option of a like amount. See Appendix C.

Useful Websites

Because of the newness of the HSA Plan, many developments are appearing rapidly. Readily-accessible sources of useful background information are these:

Web_Site__ Sponsor_______

www.hsaplanning.com Self-Funding Actuarial Services, Inc.

www.hsainsider.com HSA Coalition a (PAC)

www.ustreas.gov Federal Government Department

www.msa(&hsa)info.net Group of Insurance Agents

www.health.com Publishing Company

www.ifebp.org/harker Educational Foundation

Plan Costs

Introduction

The Actuary has modeled the upcoming plan year and offers the results in three parts:

Annual Actuarial Report

Shows for the present plan the requisite funding and COBRA premiums along with claim reserve estimates.

Monte Carlo Simulation

Shows the confidence limits within which the expected claims are statistically liable to occur both where such claims have or have not specific stop-loss protection. Shows the economic value of stop-loss (statistically-determined) compared with the actual stop-loss premiums. Where appropriate, the likelihood of an aggregate claim may also be shown.

HSA Plan Options

Shows for various HSA-HDHP combinations what the appropriate Employer contribution should be to the HSA, HDHP and specific stop-loss in order to retain cost parity with the present plan. Financial impact of anti-selection is measured where appropriate.

ANNUAL ACTUARIAL REPORT

FOR THE HEALTH CARE PLAN OF

ABC COMPANY

TO: XYZ Administrator Firm, Inc.					FROM: Self-Funding Actuarial Services. Inc.
	160 20th Avenue					8025 North Point Blvd., Suite 207W
	Bigtown, NC 28144					Winston-Salem, NC 27106
						www.self-fundhealth.com
						e-mail: harker2 @earthlink.net

Contact: John Doe					Contact: Carlton Harker, FSA, MAAA
	Tel: (336) 777-1414					Tel: (336) 759-2035
	Fax: (336) 788-1641					Fax: (336) 896-0392

We respond to your request for actuarial services.

	Plan Sponsor:			ABC Company
				P. 0. Box 1400
				Anytown, NC 28014

Plan Year:				January 1, 2004 to January 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 year.
		Part B -	Monthly COBRA Premiums which comply with applicable federal laws and 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. * See www.self-fundhealth.com

Exhibit II

Plan obligations, as of the date indicated herein, which meet the requirements/guidelines of AICPA SOP No. 92-6.

Exhibit III

Monte Carlo Simulation - Present Plan (Optional)

Exhibit IV

Health Savings Account Plan – Traditional Plan Not Offered

Exhibit V

Health Savings Account Plan – Trditional Plan Offered

EXHIBIT I

RECOMMENDED FUNDING FACTORS AND

COBRA PREMIUMS

Plan Sponsor: ABC Company

DOL/IRS: Plan Number N/A Plan Year: January 1, 2004 to January 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 shown above:

	Medical & Rx	Dental	Vision	Total

Individual	$215			$215
Family	516			516

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 (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:

	Medical & Rx	Dental	Vision	Total

Individual	$295			$295
Family	715			715

PART C - BASIS OF COMPUTATIONS - ABC 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 $877,200 were determined as follows: (a) retrospectively (actuary relied on past data); (b) prospectively (actuary relied 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.

• Basis of claims is paid; benefits include medical and Rx

Assumed claims run-in from prior plan year: $N/A.

Benefit options include: N/A

Participants include: actives and COBRAs.

Census: I – 100; P/C – 0; P/S -0; P + 1 -0; F – 100; Total - 200

• 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 $26,300 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 $32,500

• Where projected paid claims were determined retrospectively, a monetary inflation factor of 8.0% of such claims or $85,000 was assumed.

• It as assumed that all participants reside in Area Index ~. 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 does 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 asssu med Index is replaced by an exact Index.

_______________________		By ______________________________
Date		Carlton Harker, FSA, MAAA
		Self-Funding Actuarial Services, Inc.

EXHIBIT II

ACTUARIAL CERTIFICATION OF RESERVES ANDPLAN OBLIGATIONS OF THE HEALTH CARE PLAN OF ABC COMPANY

AS OF DECEMBER 31, 2003

1. I, Carlton Hanker, Consulting Actuary, am a principal of Self-FundingActuarial 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 December 31, 2003

a. Estimated incurred and unpaid (as contemplated by IRC § 419 A (c)(l)………………..121,800.

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). . . . $203,100.

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 claims (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 continuees 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)(l)) ……..$324,900.

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.

EXHIBIT III

MONTE CARLO SIMULATION

Health Care Plan of ABC Company

A. BACKGROUND

Monte Carlo Simulation is a technique of sampling using millions of numbers stored randomly in a computer. A sample of l,000,e.g., would be represented by a series of l,000 of such numbers beginning with the nth number (seed of n, i. e.). Each such number represents a trial similar to the toss of a coin or the throw of a die. Such simulation becomes practical when the underlying probability curve is mathematically represented as with the well-known normal curve, e.g. The probability curve, which represents health care claims, is the lognormal curve; such is similar to the normal curve except the lognormal curve has an extremely long right-tail representative of rare but very large claims.

Actuarial Caveats. Simulation, modeling, sampling, etc., are, at best, an inexact science. The past is not necessarily the best judge of the future. The tragedy of the six-foot person drowning while crossing the river whose average depth measured five-feet must always be kept in mind. Simulation may reinforce, but not replace, common sense. Particularly challenging to the simulator are the numerous characteristics (economic, social, geographic, demographic, e.g.) which may vary by plan and plan year.

B. RELEVANT FACTS OR ASSUMPTIONS

1. Plan Year to which simulation applies is January 1, 2004 to January 1. 2005

2. Medical plan enrollees assumed to be constant throughout the plan year

a. I – 100; P/C – 0; P/S – 150; P + 1 – 0; F - 100; Total - 200

b. Number of covered persons is 450.

3. Projected paid claims for Plan Year

Benefit	Below Specific	Above Specific	Total
Medical	$877,200	$135,000	$1,012,200
Dental	0	0	0
Rx Card	0	0	0
Other	0	0	0
Total	$877,200	$135,000	$1,012,200

Specific is $30,000

4. Aggregate benefit of $N/A is allocated among:

Medical N/A

Dental N/A

Rx Card N/A

Other N/A

Total N/A

5. Number of covered persons filing at least one medical claim 375.

6. Simulation based upon 1,000 trials is assumed to claim follow the lognormal frequency distribution. The lognormal is similar to the normal (bell-shaped) curve except the lognormal has a very right-handed tail.

7. Insetting lognormal ,the mean is $2,700 the standard deviation is $12,146

seed number for Monte Carlo purposes is N/A.

C. SIMULATION RESULTS

1. Projected plan costs for the Plan Year shown above and set forth as set forth in the COBRA calculation, feasibility study or proposal are as follows:

	a. Actuarially-determined claims above the specific stop-loss attachment point.	$1,012,200
	b. Fixed Costs • Stop-loss • Aggregate Stop-Loss • Administration	$193,200 N/A N/A N/A
	c. Reserve Maintenance	N/A
	d. Total	$192,000

Using Monte Carlo simulation, the projected total claims, without the purchase of stop-loss coverage are $1,012,200. Total actual claims will be in the ranges (confidence intervals) below indicted:

Confidence Percentage	Minimum	Maximum
50%	$826,668	$1,197,732
95%	641,136	1,383,264
99.7%	455,604	1,568,796

3. With the proposed stop-loss attachment points of $30,000 specific-only the expected total claims are $859,900 which means that the economic value of such aggregate stop-loss to the plan is $152,300. Total actual claims will be in the ranges (confidence intervals) below indicated:

Confidence Percentage	Minimum	Maximum
50%	$763,596	$956,204
95%	667,292	1,052,508
99.7%	570,988	1,148,812

With the proposed stop-loss attachment points of $N/A specific and $N/A aggregate, the expected total claims are $N/A which means that the economic value of such aggregate stop-loss to the plan is $N/A. There is a N/A that the plan will have an aggregate claim for the Plan Year.

D. ACKNOWLEDGMENT

This simulation was prepared by Carlton Harker, FSA, MAAA, principal of Self-Funding Actuarial Services, Inc., 8025 North Point Blvd., Suite 2071. Winston-Salem, NC 27106 at the request of XYZ Administrator. Tnc.

EXHIBIT IV

HEALTH SAVINGS ACCOUNT PLAN

COST ANALYSIS

TRADITIONAL PLAN IS NOT OFFERED - TRIPLE OPTION

HEALTH CARE PLAN OF ABC COMPANY

JANUARY 1, 2004

						Individual			Family
Comments	A. Present Plan Monthly Factors Adjusted to HDHP
1	a. Monthly Funding Factors – Present Benefits					$215			$516
2	b. Increase – Eliminating Specific Stop-Loss					32			81
3	c. Increase – Eliminating C. Y. Deductible/Co-Pay					70			170
4	d. Adjusted Monthly Funding Factor					$317			$767

	B. Adjustments to HDHP
5	a. Annual Maximum					$100,000			$100,000
6	b. Specific Limit					30,000			30,000

	C. HSA Contribution to Retain Plan Cost Parity
			Individual-HDHP Deductible				Family-HDHP Deductible
7			$2,600	Other *	$5,000		$2,600	Other *		$5,000
8	a. Through Deductible		$102	$115	$142		$245	$278		$345
9	b. Deductible to Specific		155	143	118		376	345		284
10	c. Specific to Life Max.		41	40	39		100	98		92
11	d. Life Max to $1,000,000		19	19	18		46	46		46
	Total		$317	$317	$317		$767	$767		$767

12	e. Present Monthly Cost		$247	$247	$247		$597	$597		$597
13	f. New Monthly Cost (HDHP)		196	183	157		476	443		376
14	HSA Contribution		$51	$64	$90		$121	$154		$221

15	g. Statutory Maximum		$217	$217	$217		$429	$429		$429
	h. Aggregate Stop-loss
16		Monthly Factor	$186	$177	$142		$451	$414		$341
17		Monthly Net Premium	7	6	5		7	6		5

	D. General $2,600 plus 50% of next $4,800.
	a. Funding is presumed to be employer--pay-all.
	b. Anti-selection exists, but with a triple option HSA, it is expected to be relatively mild and also difficult to predict. The actuary recommends in this instance, that the financial affects of anti-selection be ignored.
	c. Deductible with HDHP is presumed to apply to Rx benefits.

Comments

1 See Annual Actuarial Report Exhibit I, Part A displayed on a two-tier basis.

2 Quoted Specific Stop-loss costs are added to funding factor on a net basis (assuming a 30% expense margin).

3 The HDHP deductible replaces the existing calendar year deductible and copayments.

4 Sum of Items (1), (2) and (3).

5 Annual maximums may be $50,000, $100,000, $200,000 or N/A. Other adjustments may, at the option of the employer, include (a) freestanding Rx card as a non-plan benefit or (b) elimination of such plan expenses as mental/nervous or transplant coverage.

6 Specific deductible as desired by client; aggregate is also feasible.

7 HSA plan design may use any one, two or three of the HDHP deductibles.

8 This line is the monthly cost to fund the deductible so indicated.

9 This line is the monthly cost to fund the claims beginning when the deductible is met, but not beyond the specific stop-loss limit.

10 This line is the monthly net premium estimated for the specific stop-loss for the specific limit above shown.

11 This line is the monthly cost to fund claims over the annual maximum above-shown.

12 The line is A(a) + A(b).

13 This line is C(b) + C(c).

14 This line is C(c) - C(f). Ignores any anti-selection or differences in stop-loss costs.

15 This line is Statutory Maximum divided by 12.

EXHIBIT V

HEALTH SAVINGS ACCOUNT PLAN

TRADITIONAL AND HSA PLAN ARE EACH OFFERED

HEALTH CARE PLAN OF ABC COMPANY

JANUARY 1, 2004

Comments
	A. Present Monthly Factors									Individual	Family
1			a. Monthly Factors Present Benefits							$215	$516
			b. Ajudstments to (a) for Anti-Selection
2						See Section D. Paid by Participant				15	36
3			c. Economic Value of Present Plan Benefits							230	552
			d. Adjustments to (a) for HDHP
4					i. Monthly Funding Factors - Present Benefits					$215	$516
5					ii. Increase - Eliminating Specific Stop-Loss					32	81
6					iii. Increase - Eliminating C. Y. Deductible/Co-Pay					70	170
7					iv. Adjusted Monthly Funding Factor					$317	$767

	B. Risk Sharing Parameters
8			a. HDHP Annual Maximum							$100,000	$100,000
9			b. Specific Stop-Loss (Both Options)							30,000	30,000

	C. HSA Contribution to Retain Plan Cost Parity
							HDHP Deductible - $2,600 Plus
10							50% of Next $4,800
								Individual	Family
11		a. Through Deductible						$115	$278
12		b. Deductible to Specific						143	345
13		c. Specific to Life Max.						40	98
14		d. Life Max. to$1,000,000						19	46
		Total						$317	$767

15		e. Present Monthly Cost						$245	$597
16		f. New Monthly Cost (HDHP)						183	443
17		g. HSA Contribution						$62	$154

18		h. Anti-Selection Adjustment						(15)	(36)
19		i. Adjusted HSA Contribution						$47	$118

20		j. Statutory HSA Maximum						$217	$429
		k. Aggregate Stop-loss (Optional)
21				Monthly Factor				$172	$414
22				Monthly Net Premium				6	6

D. Anti-Selection

Based upon an analysis; the details of which are not made a part of this Exhibit, the additional monthly cost to the Traditional Plan because of anti-selection is as follows:

	Individual	$15
	Family	36

E. General

a. Funding is presumed to be employer-pay-all except for the anti-selection adjustment.

b. Deductible with the HDHP is presumed to apply to Rx benefits.

F. Comments

1 See Annual Actuarial Report Exhibit I, Part A displayed on a two-tier basis.

2 Such analysis is not included as a formal part of this Exhibit because such allowance for anti-selection is too subjective.

3 A(a) + A(b).

4 See Annual Actuarial Report Exhibit I, Part A displayed on a two-tier basis.

5 Quoted Specific Stop-Loss costs are added to funding factor on a net basis (assuming 1 30%) expense margin.

6 The HDHP deductible replaces the existing calendar year deductible and copayments.

7 Sum of Items (1), (2) and (3).

8 Annual maximums may be $50,000, $100,000, $200,000 or N/A. Other adjustments may, at the option of the employer, include (a) freestanding Rx card as a non-plan benefit or (b) elimination of such plan expenses as mental/nervous or transplant coverage. Future Treasury Regulations will determine.

9 Specific deductible as desired by client; aggregate is also feasible.

10 Numerous variations of such deductible may be used:

• $2,500

• $5,000

• $2,500 + 75% of next $3,200.

11 This line is the monthly cost to fund claims beginning when the deductible is met, but not beyond the specific stop-loss limit.

12 This line is the monthly cost to fund claims beginning when the deductible is met, but not beyond the specific stop-loss limit.

13 This line is the monthly net premium estimated for the specific stop-loss for the specific limit above shown.

14 This line is the monthly cost to fund claims over the annual maximum above-shown.

15. The line is (A) (a)(i) + (A)(d)(ii)..

16. This line is (C)(b) + (C)(c).

17. This line is (C)(c) - (C)(g). Ignores any anti-selection or differences in stop-loss costs.

18. See Comment 2. Cost of anti-selection is distributed equally amount both the HSA and traditional plan participants.

19. Sum of C(i) + C(j).

20. This line is Statutory Maximum divided by 12.

21. Aggregate benefits commence as 120% of employer’s expected claims.

22. Monte carlo simulated net premiums and actual stop-loss premiums will likely be at variance.

Appendix A

Understanding the HSA

Overview

1. HSA money is put into an account owned by the participant to pay for future medical expenses. Such account is used in conjunction with a High Deductible Health Plan (HDHP). This is coverage that does not cover first dollar medical expenses (except for prevention).

Eligibility

1. To be eligible, a participant must:

Be covered by a HDHP.

· Not be covered by another health plan (which does not apply to specific illness insurance, accident, disability, dental care, vision care, long-term care, e.g.).

Not be eligible for Medicare.
Not be claimed as a dependent on someone else’s tax return.

HDHP

1. The three features of the HDHP are:

a. Minimum deductible of:

• $1,000 Individual

• $2,000 Family

b. Maximum out-of-pocket (including deductibles and copays):

• $5,000 Individual

• $10,000 Family

c. HDHP may provide:

• First dollar coverage (no deductible) for preventive care.

• Higher out-of-pocket (copays and coinsurance) for non-network services.

Contributions

1. Maximum amount that can be contributed to an HSA (and deducted) is the lesser of (a) or (b):

a. Amount of HDHP Deductible.

b. Maximum specified in law (indexed annually for inflation: I - $2,600, F - $5,150 for 2004) and further reduced by any Archer MSA Contribution. Note Archer MSAs permitted less generous contributions; excluded non-workers; and were limited only to employer contributions.

2. So-called catch-up rules for persons over age 55 (who are also not eligible for Medicare) allows an additional HSA contribution of $500 (2004) and grading upward to $1,000 in (2009.)

3. Special rules apply to the following contributions:

a. Rollovers

A roll-in acceptable but only from an MSA, another HSA o an FSA (up to $500) where needed to avoid such being lost under the use it or lose it rules.

b. Cafeteria Plans

Participant HSA contributions may be made pre-tax by executing and IRC § 125 salary reduction election.

c. Discrimination

Harsh excise tax penalties will apply if employer HSA contributions discriminate in favor of the prohibited participants or against the protected participants. Special testing rules apply to part-timers (defined as 30-hours per week); a discrimination safe harbor is either the same amount or the same percentage of the HDHP deductible; discrimination tests are applied separately for Individuals and Families. IRC § 105(h) discrimination rules applicable to self-funded plans do not apply to the HSA but they do apply to the HDHP.

Distributions

1. Acceptable distributions include medical expenses:

• Which are acceptable by IRC § 213.

• Not used for an other health plan (except for COBRA, plan in connection with unemployment compensation, Medicare-related, and qualified long term care). Medicare Supplement is treated as an other health plan and may not be paid with HSA funds).

2. Special rules apply to the following distributions:

• Expenses of participant’s dependents are acceptable distributions even if the HDHP is only for the participant.

• Non-medical distributions are taxable income (with a 10% penalty), but such non-medical distributions may be received tax-free when (i) participant is disabled by Social Security rules, (ii) participant becomes Medicare-eligible or (iii) used for dependents upon the death of the participant.

3. Several rules relate to reporting and receipts:

• Trustee or custodian must report distributions, but need not certify their correctness. Note with the Archer MSA, trustee or custodian had to certify as to their correctness.

• Participant must keep receipts and records to establish that the HDHP deductible was met. Note: many medical expenses may be paid by the HSA, but not treated as an expense for the HDHP (dental, e.g.).

Death of Participant

1. Upon the death of the participant (without a spouse), the HSA loses its HSA identity and becomes an asset of the estate of participant and treated accordingly.

2. Upon the death of the participant (with a spouse), the HSA retains its HSA identity and becomes the property of the spouse to be used as such.

Appendix B

Advantages of the HSA

1. HSA plans encourage participant savings for future medical expenses:

• Non-covered services under future coverage.

• When employer-sponsored coverage is lost during period of unemployment; for COBRA and for other coverage.

• Medical expenses after retirement (before Medicare eligibility).

• Insurance coverage after Medicare eligibility (except Medigap).

• Out-of-pocket expenses for Medicare.

• Long-term care expenses.

2. Accounts are owned by the participant (not the employer). The participant decides:

• How much to contribute.

• How much to use for medical expenses.

• Which medical expenses to pay from the account.

• Whether to pay for medical expenses from the account or save the account for future use.

• What type of investments to grow account.

3. Accounts are completely portable, regardless of:

• Whether the participants is employed or not.

• Employer for which the participant.

• State to which participant moves.

• Age or marital status changes.

• Future medical coverage.

4. No use or lose it rules as with Flexible Spending Arrangements (FSAs)

• Unspent balances in accounts remain in the account until spent on medical care.

• Encourages participants to spend their funds more wisely on their medical care.

• Encourages participants to shop around for the best value for the health care dollars.

5. HDHP premiums will be cheaper than health coverage with traditional deductibles.

6. Favorable tax treatment:

• Contributions.

• Disbursements.

• Investment earnings.

7. Strong support from the Federal government for the HSA concept:

• Possibility of Association Health Coverage (Federal MEWA) available for HDHP-only plans.

• Executive branch wanting HDHP premiums to be deductible.

Appendix C

Anti-Selection

Introduction

Some confusion has arisen with regards the anti-selection issue where both the Traditional Plan and the HSA Options are offered. This brief critique sets forth some actuarial and risk-related views which may be helpful in understanding the nature of this anti-selection.

Analysis

Were a single risk pooi to be bifurcated with the 20% of the covered persons causing 80% of the claims to go to Risk Pool A (Traditional Plan) and the remaining participants going to Risk Pool B (HSA option) a challenge to the HSA paradigm would need to be met.

This hypothetical situation, however, is not expected to be the case for these reasons:

1. Most of the participants wishing the plan to provide income-protection will tend to elect the Traditional Plan; those wishing asset-protection will tend to elect the HSA option.

2. Many participants needing high-cost acute care will likely elect the traditional plan.

3. Most participants needing high cost chronic care will predictably elect the HSA regardless of income or tax status.

4. The percentage of participants in most employer groups who fail to have a tax incentive to use the HSA in most firms is fairly small. The 20% marginal tax rate (15% federal and 5% state) is reached by a married couple even with near-poverty income.

5. A significant percentage of participants with health problems will tend to elect the HSA because once their deductible is met, they are in the world of 100% coverage in that the per occurrence deductibles , e.g., have been eliminated.

6. Some cost disparity in claim costs between Risk Pools A and B is expected and proper in view of the fact that the economic value to the participant of the HSA Plan Option Pool is significantly greater (e.g., at least $40 per month per participant) due solely to the tax-exempt feature.

Conclusion

Until experience proves otherwise, it is the view of this actuary that:

• Where the HSA is offered along with the Traditional Plan, some anti-selection is to be expected and properly so. The HSA option should be less costly than the Traditional Plan because valuable tax-exempt features are part of the HSA option.

• The amount or extent of the anti-selection is at present an unknown. Experience may show that such anticipated anti-selection is insignificant in effect.

• To take the anti-selection out of play, the HSA option could be offered to all plan participants but with three choices of deductible: $1,000; $2,600 + 50% of next $4,800; and $5,000.

Appendix D

HSA as a Retirement Plan

The HSA is a non-qualified fully-funded retirement plan which permits early access to accumulated funds for purposes of reimbursing the participant for certain covered medical expenses. HSA contributions, investment gains and withdrawals (for medical expenses) are all tax-advantaged.

Withdrawals over age 65 may be made for non-medical expense reasons but are taxed as ordinary income to the participant. There is a withdrawal penalty for non-medical withdrawals pre-65.

Assets are held either in a bank-trust or an IRC-recognized custodial account. Such accounts are plan-governed (i.e., plan assets) with access thereto only through the Plan Supervisor. Investment options will be made available to the participant. It is expected that such plan assets will not trigger independent accountant’s audit where an IRS/DOL Form 5500 is required.

The following table shows the accumulation at age 65 of certain annual deposits beginning at selected ages on the presumption of 7% net gains and that none of the accumulations are withdrawn prior to age 65.

Annual HSA Contribution