Principal Life Insurance Company Consumer-Driven Account Comparison

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1 Principal Life Insurance Company Consumer-Driven Account Comparison Tax-advantaged accounts designed to help pay for medical expenses come in a number of varieties. This chart provides a basic comparison of the features of these vehicles. Definition An employer established benefit plan that reimburses qualified medical expenses with pre-tax dollars. Also known as Archer MSAs; a tax-advantaged trust or custodial account created for the benefit of someone covered under a high deductible health plan (HDHP). An employer-funded benefit plan that reimburses qualified medical expenses; typically paired with a high deductible health plan (HDHP). A tax-advantaged trust or custodial account created for the benefit of an individual covered under a high deductible health plan (HDHP). An insurance policy with a reimbursement feature, available exclusively from Principal Life Insurance Company. Carryover of funds Subject to the use-it or lose-it rule, and no carryover of funds is allowed. Unused funds revert to the plan and can be redistributed to participants or used to offset plan administrative costs. Funds accumulate to future years. Unused benefit can accumulate to future years. Plan document may specify either annual or aggregate accumulation limits. Funds accumulate to future years. Unused benefit carries forward to future years, up to the Preferred Provider Organization (PPO) coinsurance maximum. Interest crediting Interest crediting does not apply. MSAs can earn interest and investment returns. May allow for earnings, but it is uncommon as most are nominally funded. HSAs can earn interest and investment returns. Interest crediting does not apply. Portability of funds Funds are not portable. Funds are portable. MSA funds can be rolled into a health savings account. Funds are not portable. Funds are portable. There is no fund. Not intended as legal or tax advice 1

2 Funding entity Both employers and employees can fund FSAs, although employers do not typically contribute. Either the employer or employee can fund, but not both in the same year. Funded solely by the employer. These accounts are typically nominally funded. Employer, employee, or a family member (subject to gifting rules) may contribute. Insurance benefit paid for by premium. Employer determines level of employee contribution. Both employer and employee can contribute in the same year. Employer is not required to fund the HSA. Maximum funding level None specified in the law, but most plan documents place a limit to control the employer s risk limits: 65% of the deductible for self coverage and 75% of the deductible for family coverage. Amounts are indexed in the future. There is no maximum stated but most plans fund less than the deductible. (Principal Life recommends an Accumulated Maximum of no more than the Preferred Provider Organization (PPO) out of pocket.) 2007 limits: $2,850 for self-coverage or $5,650 for family coverage limits: $2,900 for self-coverage or $5,800 for family coverage. Individuals age 55 may contribute an additional $800 in 2007 and an additional $900 in This amount increases by $100 annually until 2009 when it reaches $1,000. Coverage is paid for through premium. Amounts are indexed for the cost of living. Not intended as legal or tax advice 2

3 Funding frequency Subject to the Uniform Coverage Rule. The full amount must be available on the first day of the plan year even though funds are contributed through normal payroll cycles. Thus, the employer risks cash flow issues and the possibility of employees leaving, having withdrawn the full amount without having contributed it. Contributions can be made in one or more payments at the convenience of the employee or employer any time prior to the federal taxfiling deadline of the individual (generally April15 for calendar year filers). Funding frequency outlined by the plan document. Typically, the annual amount is available on the first day of the year. Contributions can be made in one or more payments any time prior to the federal tax-filing deadline of the individual (usually April 15). Participants who enroll in a qualified HDHP and meet all eligibility criteria after January 1 can still make the maximum contribution allowed. However, failure to maintain eligibility results in tax and penalties. As a benefit, the entire amount is available on January 1 each year. Participants who do not maintain their eligibility can contribute 1/12 th of the maximum annual funding limit for each month they are eligible. The maximum contribution may be made on the first day of the year. Eligibility No employer income or size restrictions. Sole proprietors, partners, or owners of more than 2% of the stock of a Subchapter S corporation cannot participate in an FSA. Available to employees of companies with an HDHP and 50 employees, on average, during either of the 2 prior calendar years. Also available to selfemployed persons with an HDHP. Individuals claimed as a dependent on another person s tax return are not eligible. In total, eligibility is limited to approximately 750,000 taxpayers nationwide. No income or size restrictions on employers offering HRAs. Principal Life requires 10+ employees. Sole proprietors, partners, or owners of more than 2% of the stock of a Subchapter S corporation cannot participate in an HRA. No employer income or size restrictions. Individuals claimed as a dependent on another person s tax return are not eligible. Must be covered under a qualified HDHP and not simultaneously covered under a non-hdhp (with certain exceptions for plans providing limited types of coverage). Available in approved states to employers with 2* or more employees participating in the insurance program (subject to underwriting guidelines). *Groups of one are eligible where required by state law. Not intended as legal or tax advice 3

4 Medicare restrictions Allowable reimbursements Medicare eligible employees may participate in an FSA. Internal Revenue Code (I.R.C.) Sec. 213(d) expenses not paid by insurance, except for health insurance premiums or long-term care insurance premiums. The plan document may define a narrower list of covered charges at the plan sponsors discretion. Once an individual becomes enrolled for Medicare, no future MSA contributions can be made. Internal Revenue Code (I.R.C.) Sec. 213(d) expenses not paid by insurance. MSA funds cannot be used for health insurance premiums except: (1) Long-term care insurance (2) Premiums for health coverage under any period of continuation required by federal law (3) Premiums for health coverage while receiving unemployment Medicare eligible/enrolled employees may participate in a HRA. Internal Revenue Code (I.R.C.) Sec. 213(d) expenses not paid by insurance. The plan document may define a narrower list of covered charges at the plan sponsors discretion. (Principal Life defines a narrower list of covered charges based on the medical insurance.) Once an individual is enrolled in Medicare, no future HSA contributions can be made. Internal Revenue Code (I.R.C.) Sec. 213(d) expenses not paid by insurance. The HSA cannot be used for health insurance premiums except: (1) Long-term care insurance (2) COBRA continuation premiums (3) Premiums for health coverage while receiving unemployment (4) Medicare parts A or B, Medicare HMO coverage, and retiree contributions to employer sponsored coverage (Medigap policies are not allowed) Medicare eligible/enrolled employees may participate in the Principal Reimbursement Arrangement. Covered charges are limited to what is covered under the policy purchased by the employer. Nonqualified withdrawals are not allowed. are taxable and a 15% penalty applies. are not allowed. prior to age 65 are taxable and a 10% penalty applies. Does not apply. past age 65 are taxable but no penalty applies. Not intended as legal or tax advice 4

5 Benefit limitations There are no benefit limitations for health flexible spending accounts. For 2007: Deductible between $1,900 and $2,850 for self-coverage with a maximum out-ofpocket of $3,650 (including deductible). Deductible between $3,750 and $5,450 for family coverage with a maximum out-of-pocket of $6,900 (including deductible). The HDHP can provide for preventive care without a deductible and still qualify. There are no specific benefit limitations on the insurance policy or self-funded plan. Self-coverage: For 2007, minimum deductible of $1,100 with a maximum out-of-pocket of $5,500 (including the deductible). For 2008, minimum deductible of $1,100 with a maximum out-of-pocket of $5,600 (including the deductible). Family coverage: For 2007, minimum deductible of $2,200 with a maximum out-of-pocket of $11,000 (including the deductible). For 2008, minimum deductible of $2,200 with a maximum out-of-pocket of $11,200 (including the deductible). Limited to filed and approved policy forms and rates. The HDHP can provide for preventive care without a deductible and still qualify. Claims filing process Paper claims can be filed with the administrator or paid by auto flex if the FSA and health plan are administered by the same entity. Stored value cards can be used for certain transactions. Claims are submitted to the insurer and then any amount not paid may be submitted to the MSA. The member may elect to pay charges out-of-pocket even when MSA funds are available so the account continues to grow on a taxadvantaged basis. After the claim is filed and adjudicated under the medical policy, the HRA adjudicates. Principal Life s HRA product is a single claim submission. Claims are submitted to the insurer and then any amount not paid may be reimbursed by the HSA. The member may elect to pay charges out-of-pocket even when HSA funds are available so the account continues to grow on a taxadvantaged basis. Since the Principal Reimbursement Arrangement SM is a benefit under the insurance policy, single claim submission is used for the reimbursement feature and the rest of the policy s benefits. Not intended as legal or tax advice 5

6 Substantiation requirements Administrator must substantiate all payments as being allowable. The taxpayer is responsible for substantiating payment and keeping records to prove allowability if requested by the IRS. Administrator must substantiate all payments as being allowable. The taxpayer is responsible for substantiating payment and keeping records to prove allowability if requested by the IRS. All charges are substantiated as part of the claim payment process. COBRA continuation COBRA continuation applies. If there is remaining balance at time of employment termination, the participant can continue until the end of that plan year. Contributions are made with after-tax dollars following termination. Since the accounts are portable and owned by the individual there is no COBRA on the MSA. The HDHP would be subject to COBRA or state continuation. COBRA continuation applies to both the medical policy and the HRA. The plan sponsor does not have to allow continuation on only the HRA (member would have to continue the insurance to get the HRA). Since the accounts are portable and owned by the individual there is no COBRA on the HSA. The HDHP would be subject to COBRA or state continuation. The Principal Reimbursement Arrangement is a benefit funded through premium and would be subject to COBRA or state continuation. Tax treatment upon death Does not apply beyond COBRA rights. Upon death, the MSA transfers to the spouse (if named as the account beneficiary). If there is no spouse or the spouse is not named as beneficiary, the MSAs fair market value is included in the estate. The terms of the plan document would have to outline what access the spouse or estate has to the funds following COBRA continuation. Upon death, the HSA transfers to the spouse (if named as the account beneficiary). If there is no spouse or the spouse is not named as beneficiary, the HSAs fair market value is included in the estate. Does not apply, as there is no fund. Tax treatment - employer Employer contributions are tax-deductible to the employer. Contributions made by the employer to the MSA are tax-deductible in the year contributed. HRA benefits paid are taxdeductible to the employer in the year expended. Unused HRA benefits are not tax deductible. Employer contributions are tax deductible in the year contributed. Employer contributions are not subject to withholding for income taxes or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Act. Premiums are deductible in the year paid. Not intended as legal or tax advice 6

7 Tax treatment - employee Employees may contribute to the health FSA on a pretax basis. FSA funds used for qualified medical expenses are not considered imputed income to the employee. Employee contributions are tax-deductible. Any interest or investment return is not taxed in the MSA. Distributions used for qualified medical expenses are not considered imputed income to the employee. Payments made from an HRA for qualified medical expenses are not considered imputed income to the employee. Employee contributions made on a pre-tax basis through an I.R.C. Section 125 plan are treated as employer contributions. Any interest or investment return is not taxed if used for qualified medical expenses. Distributions made for qualified medical expenses are not considered imputed income to the employee. Employee contributions for coverage may be made on a pre-tax basis under an I.R.C. Section 125 plan (premium only plan). Federal tax law testing on fund I.R.C. Section 105(h) discrimination testing applies. (1) Eligibility testing all non- excludable employees must be able to elect the same coverage (2) Benefit testing benefits cannot be designed to favor highly compensated employees I.R.C. Section 125 testing applies. No more than 25% of the benefits can accrue to owners, officers, and/or key employees. If the employer makes contributions to the MSA, they must make comparable contributions to all participants. Contributions are considered comparable if they are either the same amount or the same percentage of the deductible. I.R.C. Section 105(h) discrimination testing applies. (1) Eligibility testing all non- excludable employees must be able to elect the same coverage (2) Benefit testing benefits cannot be designed to favor highly compensated employees Employer contributions must be comparable for all participants. Contributions are comparable if they are either the same amount or the same percentage of the deductible. For purposes of discrimination testing, only the amounts contributed by the employer are considered. Employers may contribute higher amounts to HSAs of non-highly compensated employees. Does not apply, as there is no fund. Not intended as legal or tax advice 7

8 Applicable Internal Revenue Code Section I.R.C. Section 125, 105, and 106 Revenue Act of 1978 I.R.C. Section 220 Created by Health Insurance Portability and Accountability Act of 1996 U.S. Department of the Treasury Revenue Ruling Enabled under I.R.C. Section 105 and 106 I.R.C. Section 223 Section 1201 of the Medicare Prescription Drug Improvement and Modernization Act of 2003 I.R.C. Sections 104, 105, and 106 Effective date January 1, 1979 January 1, 1997 Sunset on a date to be determined for new contributions (withdrawals may continue). June 26, 2002 January 1, 2004 April 1, 2004 in Principal Life growth states. Additional states available as approved. *Dependent care accounts are enabled under I.R.C. Sections 125 and 129 and excluded from this comparison. Transportation accounts are enabled under I.R.C. Section 132 and are excluded from this comparison. WE LL GIVE YOU AN EDGE SM Principal Life Insurance Company, Des Moines, Iowa , This comparison is provided for general information purposes only. This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the information is not guaranteed and is provided with the understanding that The Principal is not rendering legal accounting, or tax advice. While this communications may be used to promote or market a transaction or an idea that is discussed in the publication, it is not a marketing opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. GP / Principal Financial Services, Inc. Not intended as legal or tax advice 8