Certain to make a splash for individuals covered under high deductible health plans, Congress included in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 a new Section 223 of the Internal Revenue Code permitting eligible individuals to establish tax-favored health savings accounts (HSAs) for purposes of accumulating funds over the years to pay for eligible medical expenses.  Similar to but much more liberal than the old Archer Medical Savings Accounts, an HSA is a trust or custodial account created by the individual to which contributions, earnings, and distributions receive favorable federal income tax treatment when used to pay for medical expenses.

Eligibility For HSAs:

Who is eligible to benefit under HSAs?  An HSA is only available to individuals (including self-employed individuals) who are covered under an employer's (or individual's) high deductible health plan and who are not covered under any other health plan which is not a high deductible health plan, other than one providing certain permitted coverages.

Examples of other permitted coverages include coverage for liabilities under worker's compensation laws, insurance for a specified disease or illness, or fixed payments for periods of hospitalization.  First dollar coverage for wellness benefits does not prohibit a plan from qualifying as a high deductible health plan.

What Is An HDHP:

A high deductible health plan (or HDHP) is a health plan that satisfies certain requirements with respect to deductibles and out of pocket expenses.  For individual coverage, the plan must have an annual deductible of not less than $1,000, and in the case of family coverage, the plan must have an annual deductible of not less than $2,000.  Additionally, maximum out-of-pocket expense limits on covered expenses cannot exceed $5,000 in the case of individual coverages and $10,000 in the case of family coverage.  One notable requirement of a high deductible family coverage plan is that the plan must provide that no payments will be made from the HDHP before the minimum family deductible required by Section 223 (i.e., at least $2,000) has been satisfied.

HSA Contributions:

What are the sources of contributions to a HSA?  Contributions to an HSA must be in cash and may be made by an employee and/or his family members or by the employee's employer. Employee contributions made to the plan are deductible by the eligible individual.  Contributions may also be made by pre­tax salary reduction contributions through a cafeteria plan.  Contributions are excludible from an employee's gross income and wages for employment tax purposes to the extent the contributions would be deductible if made by the employee (i.e. imbedded individual deductibles insure family coverage would prevent the plan from being an HDHP).

HSA Contribution Limits:

Catch-Up Elections:

For an individual who has reached age 55, catch-up contributions are also permitted to HSAs. The amount is $500 for 2004, increasing in $100 increments to cap at $1,000 in additional contributions in 2009.

Taxation:

How are distributions from an HSA taxed? Distributions from an HSA to pay medical expenses of the individual or the individual's spouse or dependents generally are excludible from income. Distributions that are not used to pay medical expenses are subject to income tax.  Such non-medical distributions are also subject to an additional 10% penalty tax unless the non-medical distribution is made after age 65, or on account of the death or disability of the account holder.

Setting Up An HSA:

How are HSAs established? Beginning January 1, 2004, an eligible individual (covered under HDHP) can establish an HSA with a qualified HSA trustee or custodian in much the same way an individual establishes an IRA.  No permission or authorization from the IRS is necessary to establish an HSA and no independent third party substantiation of medical claims for payments from the HSA are required.  According to the IRS whether or not an individual spends the HSA account on medical expenses is between the taxpayer, the IRS, and a "higher authority".

HSA Portability:

In contrast to medical flexible spending accounts (FSAs) under cafeteria plans, and even though the I-ISA can be established under a cafeteria plan, unused HSA contributions can be rolled over year-to-year and are portable to any new employer's HSA.  In effect, the HSA is an individual's account much like an IRA and is non-forfeitable.  Unlike an FSA under a cafeteria plan, there are no "use it or lose it" rules.  Therefore the HSA can become a very appealing method for employees in high deductible medical plans to establish tax-free accounts to pay for medical expenses incurred by an employee or his dependents using tax-free contributions and earnings.

For any additional information on the new Health Savings Accounts, and Cafeteria Plan services offered by Flex Corp, please contact Stephen N. Mueller at 1-800-444-1311 or by email. 

In December 2003, the Financial Accounting Standards Board (FASB) issued additional disclosure requirements for sponsors of defined benefit retirement plans in conjunction with FASB Nos. 87 and 132.  These addi­tional requirements were developed in response to demands by users of financial statements (i.e., analysts, investors) for more information about pension plan assets, obligations, benefit payments, contributions, and pension expenses.  The changes are effective for fiscal years ending after December 15, 2003 for publicly-traded companies and for fiscal years ending after June 15, 2004 for nonpublic companies.

The primary changes to the disclosure requirements require providing additional pension plan information including:

Asset information

• Actual and target allocation of major broad asset categories, including equities, fixed income, and real estate.

• Description of the plan's investment policy.

• Basis used to determine the expected long-term rate of return on assets assumption.

Contributions

• Estimated employer contributions during the next fiscal year.

Benefit Payments

• Benefit payments expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter.

Interim Disclosures (publicly traded companies only)

• Pension expense recognized for the period, by component.

• Expected contributions, if significantly different from amounts previously disclosed.

Other requirements

• Accumulated Benefit Obligation for all pension plans.

• The assumptions used to determine benefit obligations and pension expense, including discount rate, salary scale, and long-term rate of return on assets.

If you have any questions or would like more information regarding the additional disclosure requirements, or how Hand and Associates, Inc. can assist you with actuarial consulting and pension plan administration, please contact Bryan Wilson at 1-800-444-1311 or by email.

For participants who have attained age 50, "catch-up" deferrals courtesy of ESTRRA are permitted in addition to the $13,000 salary deferral limits for 401(k), 403(b), and 457 plans in 2004.  Sounds great?  Sounds simple?  Great--maybe.  Simple--remember we are dealing with IRS rules, regulations, and interpretations.

On July 8, 2003, the IRS released final regulations in an effort to clarify classification and treatment of the catch-up deferrals and the following information was provided in the IRS guidance:

• The final regulations confirm that whether a contribution is classified as a "catch-up" is determined at the end of the plan year for purposes of the average deferral percent test (ADP) limits, the annual addition limitation employer provided plan limits on deferrals, and the (Code Sec. 415), calendar year deferral limit (Code Sec. 402(g)).

• The IRS further clarified the manner in which catch-ups would be calculated for an "off-calendar" year plan, which tests the 402(g) limit at the calendar year end and all other limits at plan year end.

• Since catch-ups are not actually determined until plan year end, issues are created when deferrals are made on a payroll-by-payroll basis, especially when sponsors elect not to match on catch-ups.  Since the final regulations retained this year-end requirement, suggestions were offered by the IRS that sponsors could either match all deferrals (whether or not they turn out to be catch-ups) or delay making a match until the catch-up amount is known.

• Sponsors who offer catch-ups must make contributions available to all employees including other controlled group members sponsoring the plan.  The final regulations clarified that, if the controlled group included union and non-union members, this "universal availability require­ment" would exclude union employees.

The universal availability requirements also provide that if the plan limits the deferral percentage (for example imposing a 25% of compensation limitation on a participant's salary deferral election), and such limit is applied on a payroll by payroll basis, the plan can provide for a dollar amount of catch-up contribution to be made on a per payroll basis by employees who would otherwise reach the plan deferral percentage limit each payroll period.

In the event of a corporate acquisition resulting in one plan permitting catch-up contributions and not the other plan, the sponsor can either remove catch-ups from one plan or add catch-ups to the other plan.  Previously, they were required to add catch-ups.  The sponsor has until the end of the transition period for acquisitions described in Code Section 410(b)(6)(c) to satisfy this requirement.

The Fifth Circuit Court of Appeals, in a recent class-action lawsuit, denied retroactive employment benefits to a group of independent contractors who were not "regular employees." These individuals had been hired through a third-party payroll company and provided services similar to other company employees but weren't on the company's payroll.  The Company's benefit plans specifically limited participation to "regular employees" thus excluding independent contractors and individuals not on the regular payroll.  However, in retrospect, the plaintiffs profess they were common law employees and should be covered under the employer's benefit plans.  The Fifth Circuit determined that even though a conflict existed, the Plan Administrator did not abuse its discretion in interpreting the plan document and ultimately determining that "regular employees" referred to under the plan only permitted participation by employees on the payroll of the Company.  

With employers increasingly using outside services to procure employment services and having workers paid through third companies, it is important to ensure that the hiring/payment practice does not otherwise conflict with employee benefit documents and employment practices.  Legal counsel should carefully review an Employer's plan and employment practices to avoid inadvertently conferring benefits on individuals previously thought to be excluded from plan coverage.

Most employers are aware that they must treat employees on military leave differently than other employees, but may need a "refresher" course on these requirements.  With the increase in civilians being called to duty in the military, many employers are now having to determine what rights such employees have when they return to their employer after serving in the military.  The Uniformed Services Employment and Re-employment Rights Act ("USERRA") was enacted on October 13, 1994 to pro­vide substantial re-employment and benefits rights to military personnel returning to civilian employment after their military duty is completed.

The following is a brief summary of qualified plan considerations contained in USERRA:  

• No break-in-service can be incurred while on military leave.  

• Benefit accrual and vesting is credited during military leave.  

• Upon re-employment following military leave, the returning employee has right to make up deferrals missed due to military leave.  

• Make-up deferrals are permitted to be made beginning on date of rehire and can be made up over a period of time equal to three times the period of military service period, not to exceed five years;

• The Employer is required to make matching contributions on make-up deferrals.

• Under a defined contribution plan, employer non-elective contributions must be made for such employees during military leave.

• A returning employee will not be entitled to share in forfeiture allocations which occurred during military leave.

• Under a defined benefit plan employers must fund pension benefits for such employees during military leave.  

• If a plan provides for suspension of an employee's obligation to repay a plan loan during military leave, the employee must repay the full loan amount upon re-employment subject to the following:  

• Repayments must resume with payment frequency and amount at least equal to the pre-military service schedule;  

• The full amount plus interest must be repaid by end of maximum term from the original loan plus the military service period; and  

• While on military leave, the maximum interest rate to be charged on loan cannot exceed 6% (as required under the Soldiers' and Sailors' Civil Relief Act of 1940).

• An Employee in the military service is treated as receiving compensation from the employer during military leave equal to compensation he would have received but for the military leave.

For over 60 years, employers have relied on Hand Benefits & Trust, Inc. as a single-source provider for professional expertise in the design, administration, and trusteeing of their employee benefit plans, including:

	Actuarial Valuation/Administration of Defined Benefit Retirement Plans
	401(k) - Daily Valued/Participant Directed Savings Plans
	ESOPs, Target Benefit, Cash Balance Plans
	Benefit Plan Trust Services
	Governmental/Tax Exempt Entity 403(b) and 457 Plans
	Cafeteria Plans with Medical and Dependent Care Reimbursement Accounts/HRAs, HSAs, and Debit Card Technology
	WEB/VRU Benefit Information Access
	Qualified Transportation Plans

For more information on the services provided by Hand, please contact Steve Mueller at 1-800-444-1311 or by email.

Hand Benefits & Trust, Inc.
5700 Northwest Central Drive, Suite 400
Houston, Texas  77092-2092