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5.1.A. ERMUSR 10-11-2011Elk River Municipal Utilities 13069 Orono Parkway • P.O. Box 430 Elk River, MN 5 5 3 30-0430 UTILITIES COMMISSION MEETING PO~NppEBED 81 ~H~~~~ ;.µ~. .~ Phone: 763.441.2020 Fax: 763.441.8099 TO: FROM: Elk River Municipal Utilities Commission Theresa Slominski -Finance and Office John Dietz -Chair Manager Daryl Thompson -Vice Chair Al Nadeau -Trustee MEETING DATE: AGENDA ITEM NUMBER: October 11, 2011 S.la SUBJECT: Review and Consider Insurance Options and Renewal BACKGROUND: This year we have an unprecedented (to my knowledge) decrease of 9.5% to our health insurance plan rates. Instead of discussing how to manage an increase we can discuss other components of the health insurance. We have considered offering a Health Savings Account (HSA) plan alongside the current 100% Coverage Awaze Gold (AG) plan in the past but never implemented it, largely because of the staff concern of meeting the deductible in the first year. We would like to be able to offer this HSA plan option in 2012 and provide some assistance in meeting that deductible. DISCUSSION: HSAs have been azound now for quite some time and have been utilized by many companies as a means of reducing premium cost and encouraging health conscious decisions from the participants. In an HSA plan, the participant has a vested interest in the utilization and preservation of the funds, rather than ahands-off or disconnected association because it is the insurance company's funds in the AG plan. Obviously, our staff is doing a goodjob of managing their healthcare and is already making some health conscious decisions because we have had low utilization the past three years and received the reduction in premium cost for 2012. This is the type of group that would benefit from an HSA and creates awin-win situation as both the employer and the employee recognize premium decreases. An HSA may not be the right plan for everyone, but we provide the employee with a choice if we offer the two plans. With an HSA account, there aze two components, a premium payment component and a deductible funding component. The premium component is a shared cost between ERMU (80%) and the employees (20%) now. The premiums are much lower in an HSA because there is a high deductible and the employee pays all of their health care costs for doctor visits, prescriptions, etc. out of pocket until the deductible is met. The deductible funding component would be new and can also be shared by the employee and the employer. Typically, the savings in premiums aze contributed by the employee to help fund the deductible and accumulate in the HSA account. However, the savings are not enough to completely fund the entire deductible by the employee. These funds in the HSA account (resulting from the deductible funding component), are used to pay the out of pocket health care costs. If there are not sufficient funds in the HSA account, the employee needs to cover those expenses (much like out-of-network costs or the additional costs in a percentage capped plan.) We would like to propose that (at least the first year) the employer share in this deductible funding component between 50% and 75% of the deductible amount, and fund it on a quarterly or semi-annual basis. For comparison, the AG co-pay plan has a $1,500 per person (in Network) maximum deductible, with most things covered at 100% after a co-pay amount. FINANCIAL IMPACT: A contribution model is attached that shows the impact of the rate reduction in the AG plan at current participation rates. These are displayed in the first two columns. The top section shows 100% of the cost, so the employer and employee costs combined. The middle section shows just the cost of the employer helping fund the deductible ranging from 50% to 75%. The bottom section breaks out the employer portion and the employee portion of the costs. (All scenarios are as if there was 100% participation in the HSA plan, purely for presentation purposes. Also, the employee contributions are shown unchanged because this will probably vary widely from employee to employee, and these numbers will not impact our budget, regardless of their size.) The bottom section is the one to focus on for financial impact. Again, current AG plan rates and the AG renewal rates are in the first two columns. The next four columns show the costs at the various funding levels ranging from 50% to 75% for an HSA plan. At the same premium sharing of 80/20 ERMU/employee, and a 50% contribution to funding the deductible, the employer cost is $387,192, still less than the renewal rate of the AG plan which was $394,297. At a 60% funding, it is only $95 more for the entire year. At 70% and 75% funding it is more than the renewal rate, however less than the current year premiums. The true savings is in the long term use of this plan in subsequent years. Helping fund the deductible at the start encourages participation, incentivizing employees to switch by removing the fear factor of meeting the deductible. And it can be accomplished at the same or lower cost. The HSA accounts would be administered through our current flex provider, Select Account, and would have similar fees, so there would be minimal increased cost for the administration. ACTION REQUESTED: Management is requesting a decision to offer an HSA account option. If it is decided to offer such an option, it needs to be determined if there will be a funding component and what the level of that contribution should be, as well as the timing of the contribution. ATTACHMENTS: Contribution Modeling information sheet Questions and Answers sheet on HSAs Elk River Municipal Utilities 80% Employer Contribution / 20% Employee Contribution Januaury 1, 2012 Current AG-Copay Renewal AG-Copay CDHP $1200-100% CDHP $1200-100% CDHP $1200-100% CDHP $1200-100% Enrollment Enrollment Enrollment Enrollment Enrollment Enrollment Employee Employee+l Family 6 5 22 6 S 22 6 5 22 6 5 22 6 5 22 6 5 22 Total Enrollment 33 33 33 33 33 33 Rates Employee Employee+l Family Tier 4 $ $ $ $ 522.00 1,096.50 1,671.00 - $ $ $ $ 472.50 992.52 1,512.50 - $ $ $ 421.00 884.50 1,347.00 $ $ $ 421.00 884.50 1,347.00 $ $ $ 421.00 884.50 1,347.00 $ $ $ 421.00 884.50 1,347.00 Monthly Premium $ 45,377 $ 41,073 $ 36,583 $ 36,583 $ 36,583 $ 36,583 Annual Premium $ 544,518 $ 492,871 $ 438,990 $ 438,990 $ 438,990 $ 438,990 Dollar Change %Change $ (51,647) -9.5% $ (105,528) -19.4% $ (105,528) -19.4% $ (105,528) -19.4% $ (105,528) -19.4% NSA Funding (%of Deductible) 50% 60% 70% 75% Employee Employee+l Family $ $ $ 50.00 100.00 100.00 $ $ $ 60.00 120.00 120.00 $ $ $ 70.00 140.00 140.00 $ $ $ 75.00 150.00 150.00 Monthly $ 3,000 $ 3,600 $ 4,200 $ 4,500 HSA Funding $ 36,000 $ 43,200 $ 50,400 $ 54,000 CONTRIBUTION MODELING Employer Contribution (80% of Premium plus HSA Contribution) Employee Employee+l Family $ $ $ 417.60 877.20 1,336.80 $ $ $ 378.00 794.02 1,210.00 $ $ $ 386.80 807.60 1,177.60 $ $ $ 396.80 827.60 1,197.60 $ $ $ 406.80 847.60 1,217.60 $ $ $ 411.80 857.60 1,227.60 Annual Spend $ 435,614 $ 394,297 $ 387,192 $ 394,392 $ 401,592 $ 405,192 Em ployee Contribution (20% of Premium, does NOT include HSA Funding) Employee Employee+l Family $ $ $ 104.40 219.30 334.20 $ $ $ 94.50 198.50 302.50 $ $ $ 84.20 176.90 269.40 $ $ $ 84.20 176.90 269.40 $ $ $ 84.20 176.90 269.40 $ $ $ 84.20 176.90 269.40 Annual spend $ 108,904 $ 98,574 $ 87,798 $ 87,798 $ 87,798 $ 87,798 *HSA Admin fees are not included in the rates David Martin Agency Inc. Contributions 2012 Revised \ Contribution With Funding 75 10/5/2011 Employee Bextfit Specialists HEALTH SAVINGS ACCOUNT (HSA) OVERVIEW POR EMPLOYERS Q: What is a Health Savings Account (HSA)? A: A Health Savings Account is atax-advantaged account that allows participants to save money on a pretax basis for the satisfaction of health plan deductibles and other qualified medical expenses. HSAs were enacted under the Medicare Prescription Drug Improvement and Modernization Act signed in December 2003 and became available January 1, 2004. HSAs are owned by the participant and are portable upon termination of employment. Q: What is an HSA health plan design? A: An HSA health plan design is one that couples a qualified high deductible health plan (QHDHP) with an HSA. This kind of health plan follows IRS regulations dictating the amount of the health plan deductible, plan benefits (like prescription drugs), and allowed HSA contributions. Q: What are the key advantages of an HSA? A: Tax Advantages • No federal or state tax* on contributions (in most states). • No federal or state tax* on interest or earnings accrued within the HSA. • No federal or state tax* on withdrawals for eligible expenses. Non-eligible expense withdrawals prior to age 65 are subject to income tax and a 10%. This penalty increases to 20% effective 1/1/2011. After age 65, income tax only applies to withdrawals for non-eligible expenses. • No FICA taxes when contributions are made through payroll deduction. 'There are several states that currently do not recognize [he HSA tax deduction: Alabama, California, and New Jersey. Other Advantages • No "use it or lose it". Unlike flexible spending accounts (FSA), HSA funds remaining at the end of year roll into the following year with no limit. • The HSA is always fully vested and portable. • HSA health plan designs offer potential savings through lower premiums (which can be saved in the HSA). • The money set aside in an HSA allows more control over medical spending. • An HSA helps employees pay for medical costs with tax-advantaged dollars. • An HSA is not an ERISA plan and employer HSA contributions do not require COBRA continuation. ©2OlO. ALI RIGHTS RESERVED. CONFIDENTIAL. INFORMATION PROVIDED BY THE E%PERTS WITH DAVID MARTIN AGENCY. FOR MORE INFORMATION, VISIT WWW. DAVI DMARTINAGENCY.COM MARTIN AGENCY, INC. Q: How is an HSA funded? A: Several ways: An HSA can be funded by the employer, the employee, or both. Funds are held by an eligible financial institution (a third-party administrator). The HSA does not require employer sponsorship. If an employer offers a QHDHP, the employee may establish an HSA on their own at a financial institution of their choice. Funding of the HSA can be done at any time and at any amount subject to the maximum limit of $3,050 for those with single coverage and $6,150 for family coverage in 2011. The limits for 2012 will be $3,100 for single coverage and $(1,250 for family coverage. The funding can be periodic, such as monthly or quarterly, or a lump sum. Contributions for each calendar year must be made by April 15 of the following year. Health plan claims are eligible for reimbursement if incurred after the HSA (the actual account) has been established. Funding of the HSA may occur retroactively to the medical expense. However, in order to be reimbursed from the HSA as a qualified medical expense, the funds must be first deposited into the HSA. Funding by payroll deduction: • An employer can allow funding of an HSA through a cafeteria plan allowing the employee to avoid payroll taxes. Employers also save on payroll taxes for any payroll deducted contributions. • Any payroll HSA deduction can be adjusted during the year subject to employer procedures. This funding flexibility makes funding an HSA more flexible than an FSA which allows no changes once a payroll deduction is elected except in the case of a "life event". • All payroll HSA deductions from the employer/employees are subject to cafeteria plan nondiscrimination rules and other restrictions on participation in cafeteria plan; such as more- than-2% shareholders in a Subchapter S corporation and other self-employed individuals are not eligible to participate in a cafeteria plan. Funding outside of payroll deduction: • If an employee funds an HSA on their own, the funding is tax deductible for federal taxes on an "above the line" basis (thereby reducing adjusted gross income). • If an employer funds an HSA, it is tax deductible by the employer and is not subject to payroll taxes. Note: special rules determine the tax treatment of HSA contributions made by Subchapter S corporations on behalf of their more-than-2% shareholders. • As an exception to HSA comparability rules, employers making HSA contributions outside of a cafeteria plan may contribute more to non-highly compensated employees than to highly compensated employees. However, all non-HCES must receive the same contribution based on coverage. • HSA funding may also be made by a one-time rolloverfrom the employee's Individual Retirement Account (IRA). However, the employee must remain HSA eligible for 12 months after the rollover date. The rollover amount counts toward the HSA annual maximum contribution. CONFIDENTIAL. PAGE 2 DAVID MARTIN AGENCY, INC. Limited direct rollovers from medical FSAs and health reimbursement accounts (HRAs) are also permitted if the employer agrees. The rollover will not count against the annual HSA contribution limit. There is a limit of one such distribution per health FSA or HRA, which may be made only during a limited time period (January 1, 2007 -December 31, 2011). The rollover amount may not exceed the lesser of the individual's health FSA or HRA balance on September 21, 2006 or as of the distribution date. The individual receiving such a rollover must be HSA eligible in the month the rollover is made and must remain HSA eligible for the following 12 months or the rollover will be included in gross income and subject to a 10% penalty (exceptions apply if the individual dies or becomes disabled). A modified comparability rule also applies: To avoid the 35% excise tax under Code Section 49806, an employer that makes this new rollover opportunity available to any employee must make it available to all employees who are covered under the employer's ClHDHP. Other HSA funding information: • Without regard to monthly pro-ration, employees may make the total annual allowed amount to their HSA if they join the HSA health plan at any time during the year as long as they are covered in December of that year. However, if they make the total annual contribution, they must remain eligible for HSA contributions for the entire calendar yearthat occurs after they join the plan. (For example, if theyjoin in June 2011, they must remain HSA eligible through December 2012.) Otherwise, they will incur income taxes and a 10% penalty on any excess contributions far months they were not covered under the plan in 2011. • If an employee does not wish to maintain HSA coverage during the required testing period for no pro-ration of contributions, they may make pro-rated HSA contributions based on the number of months they are covered under the HSA health plan. In this case, they need not remain HSA eligible after the last pro-rated deposit. • An additional HSA catch-up contribution is available for members age 55 or older. This catch- upcontribution amount is set by statute and remains $1,000 per year for 2011 and 2012. • Contributions in excess of the maximum allowable amount or contributions made on behalf of an employee who is not an eligible individual will be included in the employee's income regardless of who made the contribution and a 6% excise tax will be imposed. • If excess contributions are returned to the employee before the end of the employee's time for filing a tax return for the year the excess contributions were made (including any extensions), the employee will only be liable for income tax on the excess and not the excise tax. The individual owners of the account are responsible for ensuring that contributions do not exceed the annual maximum. Q: Who is eligible for an HSA? A: Eligible individuals must be covered by a qualified High Deductible Health Plan (QHDHP) and only a ClHDHP. A Ctualified High Deductible Health Plan is a health plan that has a deductible of at least $1,200 for individuals and at least $2,400 for family coverage for 2011. These amounts remain unchanged for 2012. Maximum 2011 HSA funding is $3,050 for individuals and $6,150 for families under a QHDHP. These deductibles will be increased to $3,100 for individuals and $6,250 for families in 2012, and will continue to be indexed in the future. CONFIDENTIAL. PAGE a For family coverage there cannot be an embedded individual deductible of less than the minimum family deductible. This means the entire deductible under family coverage (under certain plan designs) could be incurred by one family member. Only preventive care can be covered 100% without being subject to the deductible. Other expenses must be subject to the deductible including pharmacy expenses. Maximum 2011 out of pockets for QHDHPS cannot exceed $5,950 individual / $11,900 family for network services. The maximum out of pocket limits for 2012 will be $6,050 individual/$12,100 family for network services. • Eligible individuals cannot be covered under another health plan that is not a QHDHP. For example, an employee cannot be covered by a QHDHP and a spouse's employer-provided traditional health plan. • Eligible individuals may not have received any health benefits from the Veteran's Administration or one of their facilities, including prescription drugs, in the last three months. • Specified disease coverage, vision, dental, accident, disability and auto insurance do not count as other coverage. These plans are considered "permitted coverage." • Eligible individuals must not be eligible to be claimed as a dependent on another person's tax return. • HSAs are not available to members entitled to benefits under Medicare. "Entitled" to benefits under Medicare means both eligibility and enrollment in Medicare. Therefore, individuals not actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual is enrolled in Medicare. (At age 65 employees automatically receive Part A. These employees must postpone coverage under Part A in order to remain eligible for HSA funding.) Q: How does HSA plan eligibility and flex plans work together? A: General-purpose health FSA coverage will prevent an individual from being eligible for HSA contributions for the individual's entire period of coverage under the health FSA-even after the individual has completely exhausted his or her health FSA account balance. However, there are alternative health FSA designs that will not prevent HSA eligibility. The IRS has confirmed that an individual with a $0 balance at plan year-end under a general purpose health FSA with a grace period can disregard that health FSA coverage and be HSA- eligibleduring the grace period. This rule requires that the $0 balance be determined on a cash basis, without considering pending claims, claims submitted or under review that have not been paid as of the date in question. A member cannot have both a medical FSA and an HSA unless the FSA is limited to expenses not covered underthe medical plan (usually dental and vision expenses). However, the limited medical FSA can cover medical expenses incurred after the statutory minimum annual health plan deductible is satisfied. For 2011, this is $1,200/single and $2,400/family and these amounts remain unchanged for 2012. CONFIDENTIAL. PAGE 4 DAVID MARTIN AGENCY, INC. • Over the counter medications cannot be reimbursed under the medical FSA until the statutory minimum annual health plan deductible is satisfied. For 2011, this is $1,200/single and $2,400/family, unchanged for 2012. Health care reform narrowed the definition of a qualified medical expense. Effective 1/1/2011, amounts for medicines or drugs (other than insulin) will be qualified medical expenses only if the medicines or drugs are "prescribed drugs' even if they could be obtain legally without a prescription. • HSA holders can still fully participate in the non-medical components of a flex plan including dependent day care and premium conversion. • HSAs are not available to members eligible for a spouse's general purpose FSA. Q: What about HSA distributions? A: Only qualified medical expenses are reimbursed from the HSA tax-free. They include both: • Expenses that count toward the health plan deductible. For example: Section 213 (d) -same expenses as those qualified under an FSA (see attached list) o Expenses for medical care paid for the diagnosis, cure, mitigation, treatment, or prevention of disease. Effective 1/1/2011, nonprescription drugs would need to be obtained with a prescription in order to be reimbursed tax-free. • Expenses that do not count towards health plan deductible. For example: o Vision and dental expenses o Qualified over the counter medications. Health care reform narrowed the definition of a qualified medical expense. Effective 1/1/2011, amounts for medicines or drugs (other than insulin) will be qualified medical expenses only if the medicines or drugs are "prescribed drugs" even if they could be obtained legally without a prescription. o Ctualified long-term care services and long-term care insurance o Mileage to and from medical appointments (19C per mile for 2011) o Upon termination of employment, COBRA premiums and health insurance premiums while collecting unemployment compensation are also qualified medical expenses o Medicare Part A, B and D premiums, Medicare HMO (Medicare Advantage), or retiree health care coverage under an employer-sponsored plan for individuals age 65 and older. Premiums for Medicare supplemental policies, however, are not qualified medical expenses. CONFIDENTIAL. PAGE S DAVID NIANTIN • Other HSA Distribution Facts o State tax handling is dictated by the tax code in each state. Currently, these states do not recognize state tax deductibility on HSA contributions: Alabama, California, and New Jersey. o Ensuring that expenses paid from an HSA are qualified medical expenses is the responsibility of the account holder and not the employer. o The account holder must keep adequate records concerning the use of the HSA funds. o Withdrawals for non-qualified expenses are included in gross income and are subject to an additional 10% tax until the member turns age 65. This penalty increases to 20% 1/1/2011. o Individuals cannot also take a deduction on their tax return for medical expenses if the expenses were reimbursed under an HSA. Q: What happens to an HSA when a participate dies, terminates employment or turns age 65? Upon participant's death: o The HSA balance is available to reimburse medical expenses of dependent survivors. o The HSA can continue to reimburse unpaid eligible expenses of the deceased. o If the participant has designated a beneficiary who is not a spouse, the HSA balance is available to reimburse medical expenses of the beneficiary on a taxable basis. Upon termination of employment The HSA remains an asset of the employee. There is no need for the employer to provide COBRA continuation (except for the QHDHPj. Reimbursements for qualified medical expenses continue to be available tax-free. Funding can continue only if the person is covered by a QHDHP. Upon turning age 65: o Distributions for qualified medical expenses remain tax free. o Distributions for any other purpose are subject to income tax at current rate only. CONFIDENTIAL. PAGE a DAVID MARTIN AGENCY, INC. IRS Code Section 213(d) Eligible Medical Expenses An eligible expense is defined as those expenses paid for care as described in Section 213 (d) of the Internal Revenue Code. Below are two lists which may help determine whether an expense is eligible. For more detailed information, please refer to IRS Publication 502 titled, "Medical and Dental Expenses;' If tax advice is required, you should seek the services of a competent professional. Deductible Medical Expenses • Abdominal supports • Elastic hosiery (prescription) • Oxygen and oxygen • Abortion • Eyeglasses equipment • Acupuncture • Fees paid to health institute • Pediatrician • Air conditioner (when necessary prescribed by a doctor • Physician for relief from difficulty in • FICA and FUTA tax paid for • Physiotherapist breathing) medical care service • Podiatrist • Alcoholism treatment • Fluoridation unit • Postnatal treatments • Ambulance • Guide dog • Practical nurse for medical • Anesthetist • Gum treatment services • Arch supports • Gynecologist • Prenatal care • Artificial limbs • Healing services • Prescription medicines • Autoette (when used for relief of • Hearing aids and batteries • Psychiatrist sickness/disability) • Hospital bills • Psychoanalyst • Birth Control Pills • Hydrotherapy • Psychologist (by prescription) • Insulin treatment • Psychotherapy • Blood tests • Lab tests • Radium Therapy • Blood transfusions • Lead paint removal • Registered nurse • Braces • Legal fees • Special school costs for the • Cardiographs • Lodging (away from home for handicapped • Chiropractor outpatient care) • Spinal fluid test • Christian Science Practitioner • Metabolism tests • Splints • Contact Lenses • Neurologist • Sterilization • Contraceptive devices • Nursing (including board and • Surgeon (by prescription) meals) • Telephone or TV equipment to • Convalescent home • Obstetrician assist the hard-of-hearing (for medical treatment only) • Operating room costs • Therapy equipment • Crutches • Ophthalmologist • Transportation expenses • Dental Treatment • Optician (relative to health care) • Dental X-rays • Optometrist •Ultra-violet ray treatment • Dentures • Oral surgery • Vaccines • Dermatologist • Organ transplant (including • Vasectomy • Diagnostic fees donor's expenses) • Vitamins (if prescribed) • Diathermy • Orthopedic shoes • Wheelchair • Drug addiction therapy • Orthopedist • X-rays • Drugs (prescription) • Osteopath CONFIDENTIAL PAGE 7 DAVID MARTIN AGENCY. INC. • Advancement payment for services to be rendered next year • Athletic Club membership • Automobile insurance premium allocable to medical coverage • Boarding school fees • Bottled Water • Commuting expenses of a disabled person • Cosmetic surgery and procedures • Cosmetics, hygiene products and similar items Non deductible Medical Expenses • Funeral, cremation, or burial expenses • Health programs offered by resort hotels, health clubs, and gyms • Illegal operations and treatments • Illegally procured drugs • Maternity clothes • Non-prescription medication • Social activities • Special foods and beverages • Specially designed car for the handicapped other than an autoette or special equipment • Stop-smoking programs • Swimming pool • Travel for general health improvement • Premiums for life insurance, income protection, disability, loss of limbs, sight or similar benefits • Scientology counseling • Tuition and travel expenses to take a child to a particular school • Weight loss programs Deductible Over-the-Counter (OTC) Drugs* • Antacids Sinus Medications and Wart removal medicatior • Allergy Medications Nasal sprays Antibiotic ointments • Pain Relievers Nicotine medications and Suppositories and creams • Cold medicine nasal sprays for hemorrhoids • Anti-diarrhea medicine Pedialyte Sleep aids • Cough drops and throat First aid creams Motion sickness pills lozenges Calamine lotion *Health Care Reform Law: New Restrictions Apply to OTC Drugs Beginning January 1, 2011. Beginning January 1, 2011, OTC medicines and drugs (other than insulin) must be prescribed in order to be reimbursable under a health FSA or HRA orto qualify for atax-free distribution from an HSA. Non-deductible Over-the-Counter (OTC) Drugs • Toiletries (including toothpaste) • Acne treatments • Lip balm (including Chopstick or Carmex) • Cosmetics (including face cream and moisturizer) • Suntan lotion • Medicated shampoos and soaps • Vitamins (daily) • Fiber supplements • Dietary supplements • Weight loss drugs for general well being • Herbs CONFIDENTIAL. PAGE 8