Considering a Health Savings Account?

1. Considering a Health Savings Account?

2. Basic HSA Plan Concept Part 1:High Deductible Health Plan Intended to cover serious illness or injury HSA Concept Part 2:Health Savings Account Made by: Employer, Employee, and/or other party. Pays for small expenses until deductible is met.

3. Basic HSA ConceptCompare to IRA HSA Tax-Deferred Growth Earnings Contributions Tax-Deductible / Pre-Tax Contributions Contributions Tax-Free Distributions (For Qualified Medical Expenses) * 10% Tax Penalty for NON-Qualified medical expenses before age 65 Normal Tax* (NON-Medical expenses over age 65)

4. Are HSAs changing spending behavior? Increased Consumerism in Healthcare (Research results from McKinsey & Co.)Consumer-directed health plan consumers were more value conscious and attentive to wellness & prevention • 50% more likely to ask about costs • 3 times more likely to choose less expensive option • 25% more likely to engage in healthy behaviors • 30% more likely to get an annual exam • 20% more likely to comply with treatment regimens

5. Are HSAs changing spending behavior? Account Trends(Based on HSA Bank’s customer base of over 130,000 accounts) • 95.9% of all open accounts rolled over funds from 2005 to 2006 • On average, accounts rolled over $1582 into 2006 • Average contribution per month = $156.78 • Average distribution per month = $98.61 • Net average per month = $58.17 or 38% saved • Nearly 32% save all contributed HSA funds • Nearly 51% save at least half of the contributed HSA funds

6. HSA Eligibility • Covered by qualified high-deductible health plan (HDHP) • Not covered by any other non-HDHP • Not claimed as a dependent on another person’s tax return. • Not enrolled in Medicare

7. Insurance Coverage Accidents Disability Dental care Vision care Long-term care Specified disease or illness Insurance that pays a fixed amount/day of hospitalization Other Coverage (Non-Insurance) Employee Assistance Plan If they do not provide significant benefits Self-funded worker’s compensation Discount or pre-negotiated pricing cards Cafeteria Plan Health FSAs must be designed for only specified coverage such as dental + vision What other kinds of benefits may an individual have with an HSA?

8. What is a qualified high-deductible health plan (HDHP)? * Plans may include credit for deductible met in same calendar year under a previous plan. **Deductible ranges are limited by the Maximum Out-Of-Pocket expenses allowed.

9. Included Deductible Co-insurance Co-pays Not Included Money or penalties for a service not pre-certified Money or penalties for non-network providers Amounts over the usual, customary, & reasonable amounts Amounts for ineligible expenses What is included in Out-of-Pocket Maximum?

10. Additional Health Plan Guidelines • Plans cannot provide benefits before the deductible is met, except for preventive care, permitted insurance, or permitted coverage

11. What preventive care benefits can a plan offer? • Periodic health evaluations • Routine prenatal and well-child care • Immunizations • Tobacco cessation programs • Obesity weight-loss programs • Screening services

12. What benefits are not considered Preventive Care? • Generally, preventive care does not include any service or benefit intended to treat an existing illness, injury, or condition • “Preventive care” for purposes of establishing an HSA are determined by the IRS, rather than state law.

13. Health Plans NOTE: HSA Bank™ is not in the insurance business. To determine if a specific plan qualifies, contact your health plan representative.

14. How much may be contributed to an HSA? • Contributions are pro-rated for the number of full months the HDHP was in force. • Contributions can be made at any time during the contribution year until the tax return due date (April 15 cut-off). $5,450 100% $2,700 100% Up to 100% of deductible* Up to 100% of deductible* Contribution Guidelines for 2006 Contribution Cap for 2006 $2,700 $5,450

15. What is the catch-up contribution? Individuals, and/or their spouses, over the age of 55 and not enrolled in Medicare can make catch-up contributions. Note: If a husband and wife are covered by a HDHP and both are over the ages of 55 and not enrolled in Medicare, they can both contribute the additional catch-up contribution if they each open an HSA.

16. Who contributes to my HSA? • Accountholder (Individual, Self-Employed, Employee) • Employer • Third-party(on behalf of accountholder) • Family Member, Beneficiary, Friend • State Government

17. How contributions can be made • Contributions to an HSA must be made in “cash”.For example, contributions may not be made in the form of stock or other property. • Contributions to the HSA can be made through a cafeteria plan. • Rollovers are permitted once per year • MSA to HSA • HSA to HSA • Transfers are not limited

18. Employer Comparable Contributions Comparability testing period based on a calendar year and determined on a monthly basis. Testing based on contributions to employees covered under the employers HDHP.Note: If the employer contributes to an employees HSA for an employee that is not covered under the employers plan, the employer must make comparable contributions to all employees with HDHPs

19. Employers Comparable Contributions Exceptions • Comparability rules do not apply to employer contributions made through a Section 125 cafeteria Plan. • Employers may make matching contributions through a Section 125Cafeteria Plan(Non-discrimination rules apply)

20. Coordinating HSA Contributions Since both employees and employers can make contributions, it is important to coordinate contributions to avoid excess contributions and tax penalties. HSA ContributionLimits Up to 100% of deductible with maximum of $2,700 for single and $5,450 for family coverage. EMPLOYERCONTRIBUTIONS ≤ INDIVIDUAL / EMPLOYEECONTRIBUTIONS

21. Tax treatment of HSAs for employees/accountholders • Pre-tax • Contributions are deducted from accountholder’s federal taxable income • Earnings • HSAs grow in the same tax-deferred manner as IRAs • Distributions • Withdrawals can be made for medical expenses tax-free. After age 65, funds may be withdrawn for any reason without penalty and medical expenses remain tax-free

22. Tax Savings Example

23. What is the tax treatment of employer contributions to an individual’s HSA? • Treated as employer-provided coverage for medical expenses under an accident or health plan • Excludable from gross income • Not subject to withholding for income tax • Not subject to other employment taxes • (i.e., Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), or the Railroad Retirement Tax Act)

24. HSAs, HRAs, FSAs

25. Advantages of an HSA To an Employer • Employee owned funds promote increased involvement in health care decisions • Spend health care dollars more wisely • Encourages employees to ‘shop around’ based on quality of care and price • Provides employers and employees with tax benefits • HSAs allow “matching” contribution options by employers and employees

26. Advantages of an HSA To an Employee • Increased consumer choice • Funds rollover year to year, eliminating the “use it” or “lose it” philosophy • Tax benefits on the contributions, earnings, and distributions • Increases take home pay • Long-term investment opportunity • Portability

27. How HSAs/HRAs/FSAs can work together • HSA • Limited Purpose FSA • Pay for dental and vision expenses without having to use HSA funds • FSA Extension • Provides 2.5 months beyond the end of the plan year to use FSA funds • Post Deductible HRA

28. When may I take distributions from my HSA? • Your HSA dollars can be taken at any time to pay for qualified expenses. Note: If reimbursing expenses from previous years, you must maintain sufficient records to prove the expense was not previously reimbursed.

29. What are Qualified Expenses? • A Qualified Expense is generally any expense incurred to maintain your health or your family’s health • A complete listing provided in Section 213d of IRS Ruling

30. Other eligible medical expenses • Premiums for long-term care insurance • Limited to amount listed in 213(d)(10) • Premiums for "COBRA” • Premiums for coverage while receiving unemployment compensation • Premiums for individuals over age 65 • Retirement Health Benefits • Medicare Premiums

31. Thank you for considering…