CUNA Comment Letter
Health Savings Accounts (HSAs)
April 8, 2004
CC:DOM:CORP:R (Notice 2004-2)
Room 5226 Internal Revenue Service POB 7604 Ben Franklin Station Washington DC 20044
Dear Sir or Madam:
On behalf of the Credit Union National Association (CUNA), we are pleased to provide comments to the Internal Revenue Service (IRS) on Notice 2004-2 containing guidance on health savings accounts (HSAs). HSAs, authorized under the recent Medicare reform legislation, are tax-exempt trust or custodial accounts established exclusively for the purpose of paying qualified medical expenses of an account beneficiary who is covered under a high deductible health plan (HDHP).
CUNA represents more than 90% of our nations approximately 9,700 state and federal credit unions, which serve approximately 84 million member-consumers. A limited number of credit unions have expressed interest in offering HSAs, although going forward HSAs may prove to be of particular interest to many of the businesses and individuals that credit unions serve throughout the United States. Thousands of credit unions are chartered to serve multiple employer and associational groups, and many of these groups are small businesses. In addition there are more than one thousand community-chartered credit unions that also have programs to reach out to small businesses.
At least in the early days of this new savings plan, we believe that employees of small businesses and self-employed individuals are the most likely people to be covered by high deductible health plans and therefore qualify to open HSAs. We hope that an appropriate regulatory framework will be established by the Service so that it will be relatively easy for credit unions to serve as fiduciaries for HSAs, a framework that allows credit unions to build on their operational and marketing expertise in providing individual retirement accounts to their members.
Some credit unions are also interested in the HSA issue as employers. Consistent with national trends, credit unions are seeing their health care costs become a large share of total benefit costs. And for many small credit unions, health care is simply too expensive. According to CUNAs 2003-2004 Credit Union Staff Benefits Survey, only one-third of credit unions with less than $20 million in total assets offer healthcare coverage to their CEOs. We believe HSAs may help address concerns about rapidly rising health care costs for small employers like credit unions.
The guidance issued in December 2003 leaves some unanswered questions on how credit unions and other entities qualified under the IRS regulations to be an HSA custodian can set up and begin offering such accounts. We understand that the IRS will be issuing further HSA guidance over the next several months. We appreciate the willingness of the IRS to move quickly to provide clarification on these remaining issues, and appreciated Treasury and IRS staff meeting with CUNA in February.
CUNA appreciates the Treasury and IRS issuing further guidance on a number of issues on March 30, and we commend the agencies for their commitment to releasing more guidance in June. HSA model documents, similar to what the Treasury has issued for individual retirement accounts (IRAs), will help HSA trustees/custodians to put their HSA programs into place quickly. We hope these documents will include model disclosures.
It is important to have additional guidance out by mid-year so credit unions can build their HSA programs and because that is when employers begin the process of selecting health plans for the upcoming year. While a regulation would be the preferable format for guidance, we will understand if an interim regulation is not possible by mid-year. Certainly notice in Q& A format that provides timely guidance on these unanswered questions would be helpful in terms of enabling credit unions and other entities to offer these innovative medical savings vehicles.
SUMMARY OF CUNAS POSITION
Credit Unions as Trustees/Fiduciaries
- CUNA recommends that the content and delivery of HSA disclosures should be similar to disclosures given for IRAs.
- Information reporting requirements for an HSA should be similar to the reporting requirements for an Archer Medical Savings Account (MSA).
- Corrective procedures for excess contributions and non-qualifying distributions should mirror the IRA model. Given the fact that HSAs are new vehicles, appropriate transition relief should be provided for 2004-2005, particularly when an individual relies on a vendors representation that the health plan qualifies as an HDHP.
Credit Unions as Employers
- Upcoming guidance should provide flexibility to allow for integration of HSAs, health flexible spending arrangements (FSAs) and Health Reimbursement Arrangements (HRAs), if structured properly.
- The employer's reporting obligation should be limited to reporting employer contributions to an HSA on the employee's IRS Form W-2.
- The discrimination rules already issued in Notice 2004-2 are sufficient and Treasury should not impose any additional rules.
- Guidance should clarify that HDHPs should be allowed to impose reasonable annual or lifetime maximum limits on benefits. Employers should be able to impose maximum limits on benefits without violating the out-of-pocket limits.
- CUNA encourages the IRS to allow individuals to establish HSAs even if their prescription drug benefits are not offered on an HDHP basis.
- CUNA suggests that in future guidance the Treasury and IRS define preventive care via cross-reference to the U.S. Preventive Services Task Forces Guide to Clinical Preventive Services.
I. Credit Unions as Trustees/Fiduciaries
Notice 2004-2 does not address disclosure requirements for HSAs. However, the IRS requires an IRA fiduciary to provide a detailed disclosure statement at the time an IRA is established, and this requirement is contained in Reg. 1.408-6. This requirement is based on the general reporting requirement of IRS Code Sec. 408(i), which is similar to the reporting requirement in IRS Code Sec. 223(h). The IRS needs to provide guidance on what, if any, disclosures HSA fiduciaries are required provide. We feel that consumers will need to reliable information about the account. It would be helpful for institutions as well as consumers if the IRS provides direction on this important issue. We recommend that the IRS:
- Require that a disclosure statement similar to that for an IRA be given to the account beneficiary no later than at the time the account is established.
- Provide that the account beneficiary will have the right to revoke the HSA within seven days after receiving the disclosure.
- Specify that the contents of the disclosure statement must include a concise explanation of the
- The statutory requirements pertaining to the HSA being established.
- The income tax consequences of establishing an HSA and the tax consequences of receiving a distribution from an HSA.
- The definition of a high deductible health plan as determined by the IRS.
- The limitations and restrictions on making contributions to an HSA and on deducting those contributions.
- The effect of making an excess HSA contribution.
- A statement that the account beneficiary is responsible for determining if an expense is a qualified medical expenses and the definition of this phrase as determined by the IRS.
- A statement of what happens to the HSA following the death of the account beneficiary, including the tax consequences.
- Require the delivery of a disclosure of the fees in connection with maintaining an HSA.
- To the extent the future earnings of the account are guaranteed or can reasonably be estimated,
the IRS should ask for an annual delivery of a projection of the future value of the HSA until the account
owner attains age 65 based on the following assumptions:
- The contribution of $1,000 at the beginning of each year.
- An earnings rate no greater than, and terms no different from, those currently in effect.
- A statement that this amount is a projection and is not guaranteed, and a statement of the earnings rate and terms on which the projection is based.
- For an account to which a rollover contribution will be made, the same information described above, except that it is based on a single contribution of $1,000 at the beginning of the period.
It would be useful if the IRS develops sample disclosure language for HSAs, just as it has for IRAs.
Information Reporting Requirements
We recommend that the reporting requirements for an HSA should be similar to the reporting requirements for an Archer MSA. Under these reporting requirements, all distributions are reported on IRS Form 1099-MSA and all contributions and fair market values are reported on IRS Form 5498-MSA. We understand that the IRS expects to have the sample reporting forms available soon, which will be very helpful for HSA fiduciaries to build their data processing systems.
Corrective Procedures and Transitional Relief
CUNA believes that corrective procedures for excess contributions and non-qualifying distributions should mirror the IRA model. And we support the guidance on corrective procedures in instances where employer contributions exceed the statutory contribution limits. Under the guidance, such excess contributions are included in the gross income of the employee and an excise tax of 6 percent for each taxable year will be imposed. Also, such corrective measures will not even be necessary if the excess contributions are paid to the participant within the timeframe in the guidance. In instances where employee contributions exceed contribution limits, CUNA believes that the excess contributions should be returned to the participants, who should be taxed on that amount as income.
Given that HSAs are new vehicles, there may well be cases of inappropriate coordination of an HDHP with other coverage. Therefore, we feel there should be transitional relief. Specifically, if an individual purchases a health plan on the representation of the vendor that it qualifies as an HDHP, the individual should be allowed to rely on that representation to establish an HSA. In the case where the HSA holder later is informed or determines on his or her own that the plan is not an HDHP, the HSA contributions should be returned to the individual as taxable income, with no penalty. We believe it would be reasonable to have such a transition rule apply for taxable years 2004 and 2005.
II. Credit Unions as Employers
Coordination Between HSAs, Health Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs)
Traditionally, the IRS has considered both FSAs and HRAs as forms of group health plans subject to COBRA (Consolidated Omnibus Budget Reconciliation Act). Under that analysis, HSA participants would be precluded from participating in an FSA and/or HRA because they are not HDHPs and do not fall within any of the enumerated legal exceptions.
CUNA encourages the IRS to consider allowing individuals to maintain FSAs and HSAs concurrently if appropriately structured. Specifically, an HSA should be allowed to run concurrently with an FSA if the FSA falls into the exception for a specific coverage health plan because the use of the FSA is limited to bills for dental or vision care.
Likewise, we urge the IRS under the same analysis to allow an individual to participate in an HRA and HSA concurrently. An HRA is attractive as an employer-funded plan that allows employees to pay for medical expenses, health insurance premiums and long-term care. It would make sense to allow concurrent participation in the case where an HRA is committed for retirement use. It would be beneficial for employers to be able to offer retirees a choice of either (1) employer contributions to an HSA coupled with an HDHP or (2) employer contributions to an HRA which could be used by the retiree to purchase group or individual insurance of his/her choice.
Employer Information Reporting Requirements
CUNA feels strongly that the employer's reporting obligation for HSAs should be limited to reporting employer contributions to an HSA on the employee's IRS Form W-2.
Application of Health FSA Non-Discrimination Rules in IRS Code Section 125 to HSAs
CUNA does not support applying the non-discrimination rules governing health FSAs in cafeteria plans under IRS Code Section 125 and the proposed and final regulations under that section in proposed Treasury Regulation (Prop. Treas. Reg.) Section 1.125-2 Q&A 7 to HSAs. Application of those rules to HSAs would significantly increase the complexity, and therefore the cost, of HSA administration for credit unions and other employers. This would reduce the incentive for employers to implements these innovative plans.
Instead, we urge the IRS in future guidance to provide that the only nondiscrimination rules applicable to HSAs are the ones set forth in Code Section 4980G. Under Section 4980G, if employer HSA contributions do not satisfy the comparability rules in Code Section 4980E during a period, the employer is subject to an excise tax of 35% of the aggregate amount contributed by the employer to HSAs for that period. The guidance in Notice 2004-2 already implements Section 4980E -- contributions are considered comparable if they are either the same amount or same percentage of the deductible under the HDHP. (The comparability rule is applied separately to part-time employees.) We strongly feel that these discrimination rules already issued in Notice 2004-2 are sufficient and that Treasury should not impose any additional rules.
One other Section 125 issue that should be addressed in upcoming guidance is the internal build up of assets to pay future benefits that is basic to HSAs. A Section 125 cafeteria plan cannot allow internal build up of funds to pay future year expenses. Upcoming guidance should identify the obligation of the employer to make an employer contribution or an employee's deferral contribution as a separate plan from the HSA funding vehicle. This is a natural dividing line since the HSA is owned by the employee and the Section 125 plan assets are owned by the employer. By excluding the HSA funding vehicle from the Section 125 plan while including an employer's obligation to contribute to the HSA as part of a Section 125 plan, the Section 125 plan does not have internal build up for payment of future year expenses.
Lifetime Limits on Benefits
In our view, it should be permissible for HDHPs that accompany HSAs to impose reasonable annual or lifetime limits on benefits. Many group health plans impose such maximums to ensure that benefits will be available to all covered participants. Correspondingly, credit unions and other employers should have the ability to impose lifetime maximums on benefits in health insurance plans without violating the out-of-pocket limits in the HSA guidance.
Prescription Drug Coverage
The law permits tax-favored treatment for HSAs established only for eligible individuals. Under Code Section 223(c)(1), an eligible individual must be covered under an HDHP and not also be covered by any other health plan that is not an HDHP (with exceptions for plans providing certain limited types of coverage.) The exceptions are for various limited plans, such as cancer, long-term care, dental or disability insurance coverage. According to the guidance announced on March 30 (Rev. Proc. 2004-22), transition relief is provided to those individuals covered by both an HDHP and by a separate health plan or rider that provides prescription drug benefits before the deductible of the HDHP is satisfied; such individuals continue to be eligible to contribute to HSAs before 2006. CUNA feels the proper course is for the IRS to add prescription drug coverage to the list of exceptions. This will enable employers to offer prescription drug benefits through a separate non-HDHP, as long as the separate plan does not provide coverage for a medical expense that could be covered under the HDHP.
Code Section 223(c)(2)(C) provides that a plan will not fail to be treated as an HDHP simply because it lacks a deductible for preventive care. The statute grants the Treasury Department discretion to interpret the term preventive care. We suggest that in crafting additional guidance the Treasury and IRS define preventive care via cross-reference to the U.S. Preventive Services Task Forces Guide to Clinical Preventive Services. The Guide is widely accepted by the health insurance industry regarding the merits of various preventive measures, including screening tests, counseling, immunizations and preventive medications.
Thank you for the opportunity to share our comments. If you have questions about this letter, please feel free to contact me or Senior Regulatory Counsel Catherine Orr at (202) 638-5777.
Mary Mitchell Dunn
Associate General Counsel
and Senior Vice President
Catherine A. Orr
Senior Regulatory Counsel
CC: William F. Sweetnam, Jr., Benefits Tax Counsel, U.S. Department of the Treasury