Health Savings Accounts
Establishes a mechanism for individuals to open health savings accounts.
HOUSE OF REPRESENTATIVES
TWENTY-SECOND LEGISLATURE, 2004
STATE OF HAWAII
A BILL FOR AN ACT
relating to health savings accounts.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. It is the intent and purpose of the legislature to establish a qualified state health savings account program pursuant to Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation, and any regulations promulgated thereunder.
SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:
HEALTH SAVINGS PROGRAM
§ -1 Definitions. As used in this chapter, unless the context otherwise requires:
"Account" or "health savings account" means an individual savings account established in accordance with this chapter.
"Account beneficiary" means an account beneficiary as defined in Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation.
"Account owner" means the individual who enters into a health savings account agreement pursuant to this chapter and as defined under the final regulations adopted by the Internal Revenue Service.
"Financial organization" means an organization authorized to do business in the state that is:
(1) Certified as an insurer by the insurance commissioner;
(2) Licensed or chartered as a financial institution by the commissioner of financial institutions;
(3) Chartered by an agency of the federal government;
(4) Subject to the jurisdiction and regulation of the securities and exchange commission of the federal government; or
(5) Any other entity otherwise authorized to act in this state as a trustee pursuant to the provisions of the Employee Retirement Income Security Act of 1974, as may be amended from time to time.
"Health savings agreement" means an agreement between the director of finance or a financial organization and the account owner.
"High deductible health plan" means a high deductible health plan as defined in Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation.
"Management contract" means the contract executed by the director of finance and a financial organization selected to act as a depository and manager of the program.
"Nonqualified withdrawal" means a withdrawal from an account that is not:
(1) A qualified withdrawal; or
(2) A withdrawal made as the result of the death or disability of the designated beneficiary of an account.
"Program" means the health savings program.
"Program manager" means a financial organization selected by the director of finance to act as a depository and manager of the program.
"Qualified medical expenses" means any qualified medical expense defined in Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation.
"Qualified withdrawal" means withdrawal from an account to pay the qualified medical expenses of the designated beneficiary of the account.
§ -2 Health savings program; established. There is established the health savings program to enable families to save for certain health-related expenses through health savings accounts. The program shall provide health savings accounts to encourage and enable residents of the state to benefit from the tax incentive provided for qualified health savings accounts under the Internal Revenue Code of 1986, as amended.
§ -3 Functions and powers of the director of finance. (a) The director of finance shall implement the program under the terms and conditions established by this chapter. The director of finance may make changes to the program as required for participants to obtain the federal income tax benefits or treatment provided by Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation.
(b) The director of finance may implement the program through the use of financial organizations as account depositories and managers. Under the program, individuals may establish accounts directly with an account depository.
(c) The director of finance may solicit proposals from financial organizations to act as depositories and managers of the program. Financial organizations submitting proposals shall describe the investment instrument that will be held in accounts. The director of finance shall select as program depositories and managers the financial organizations, from among the bidding financial organizations that demonstrate the most advantageous combination, both to potential program participants and this State, based on the following factors:
(1) The financial stability and integrity of the financial organization;
(2) The safety of the investment instrument being offered;
(3) The ability of the investment instrument to track the expected increasing costs of health care;
(4) The ability of the financial organization to satisfy recordkeeping and reporting requirements;
(5) The financial organization's plan for promoting the program and the resources it is willing to allocate to promote the program;
(6) The fees, if any, proposed to be charged to persons for opening accounts;
(7) The minimum initial deposit and minimum contributions that the financial organization will require;
(8) The ability of financial organizations to accept electronic withdrawals, including payroll deduction plans; and
(9) Other benefits to the State or its residents included in the proposal, including fees payable to the State to cover expenses to operate the program.
(d) The director of finance may enter into a contract of up to ten years with a financial organization. The financial organization shall provide only one type of investment instrument. The management contract shall include, at a minimum, terms requiring the financial organization to:
(1) Take any action required to keep the program in compliance with requirements of section -4 and to manage the program to qualify it as a qualified health savings account under Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation;
(2) Keep adequate records of each account, keep each account segregated from each other account, and provide the director of finance with the information necessary to prepare the statements required by section -4;
(3) Compile information contained in statements required to be prepared under section -4 and provide the compilations to the director of finance;
(4) If there is more than one program manager, provide the director of finance with the information necessary to determine compliance with section -4;
(5) Provide the director of finance or designee access to the books and records of the program manager to the extent needed to determine compliance with the contract;
(6) Hold all accounts for the benefit of the account owner;
(7) Be audited at least annually by a firm of certified public accountants selected by the program manager, and provide the results of the audit to the director of finance; and
(8) Provide the director of finance with copies of all regulatory filings and reports related to the program made by it during the term of the management contract or while it is holding any accounts, other than confidential filings or reports that will not become part of the program. The program manager shall make available for review by the director of finance, the results of any periodic examination of the manager by any state or federal banking, insurance, or securities commission, except to the extent that the report or reports may not be disclosed under applicable law or the rules of the commission.
(e) The director of finance may select more than one financial organization and investment instrument for the program when the Internal Revenue Service has provided guidance that giving a contributor the choice of two or more investment instruments under a state program will not cause the program to fail to qualify for favorable tax treatment under Section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation.
(f) The director of finance may require an audit to be conducted of the operations and financial position of the program depository and manager at any time if the director of finance has any reason to be concerned about the financial position, the recordkeeping practices, or the status of accounts of the program depository or manager.
(g) During the term of any contract with a program manager, the director of finance shall conduct an examination of the manager and its handling of accounts. The examination shall be conducted at least biennially if the manager is not otherwise subject to periodic examination by the commissioner of financial institutions, the Federal Deposit Insurance Corporation, or other similar entity.
(h) If selection of a financial organization as a program manager or depository is not renewed, after the end of the term:
(1) Accounts previously established and held in investment instruments at the financial organization may be terminated;
(2) Additional contributions may be made to the accounts;
(3) No new accounts may be placed with the financial organization; and
(4) Existing accounts held by the depository shall remain subject to all oversight and reporting requirements established by the director of finance.
If the director of finance terminates a financial organization as a program manager or depository, the director of finance shall take custody of accounts held by the financial organization and shall seek to promptly transfer the accounts to another financial organization that is selected as a program manager or depository and into investment instruments as similar to the original instruments as possible.
(i) The director of finance may establish a nominal fee for an application for a health savings account.
(j) The director of finance may enter into contracts for the services of consultants for rendering professional and technical assistance and advice and any other contracts that are necessary and proper for the implementation of the program.
(k) The director of finance shall determine a mechanism for a letter of certification to be provided to individuals from the department of health, health plan provider, or other entity as proof that the individual is covered under a high deductible health plan.
(l) The director of finance may adopt rules to implement the program pursuant to chapter 91.
§ -4 Program requirements; health savings account. (a) A health savings account may be opened by any eligible individual who desires to save money for the payment of qualified medical expenses. The person shall be considered the account owner as defined in section -1. An application for an account shall be in the form prescribed by the program and shall contain the following:
(1) The name, address, and social security number or employer identification number of the account owner;
(2) The designation of a beneficiary;
(3) The name, address, and social security number of the designated beneficiary;
(4) A certification relating to no excess contributions;
(5) A letter of certification documenting the annual deductible of the plan; and
(6) Other information as the program may require.
(b) Only the account owner may make contributions to the account after the account is opened.
(c) Contributions to accounts may be made only in cash.
(d) An account owner may withdraw all or part of the balance from an account on sixty days notice or a shorter period as may be authorized under rules governing the program. The rules shall include provisions to generally enable the determination of whether a withdrawal is a nonqualified withdrawal or a qualified withdrawal. The rules may require one or more of the following:
(1) An account owner seeking to make a qualified withdrawal shall provide certifications of qualified medical expenses and other information required to comply with section 223 of the Internal Revenue Code of 1986, as amended, or successor legislation; or
(2) Withdrawals not meeting the requirements of this section shall be treated as nonqualified withdrawals by the program manager, and if the withdrawals are subsequently deemed qualified withdrawals within a reasonable time period as specified by the director of finance, the account owner shall seek any refund of penalties directly from the program.
(e) The director of finance may establish penalties for any nonqualified withdrawals in conformance with federal laws.
(f) The program shall provide separate accounting for each designated beneficiary.
(g) No account owner or designated beneficiary of any account shall be permitted to direct the investment of any contributions to an account or the earnings on it.
(h) Neither an account owner nor a designated beneficiary shall use an interest in an account as security for a loan. Any pledge of an interest in an account shall be of no force and effect.
(i) If there is any distribution from an account to any individual or for the benefit of any individual during a calendar year, the distribution shall be reported to the Internal Revenue Service and the account owner, the designated beneficiary, or the distributee, to the extent required by federal law or regulation.
Statements shall be provided to each account owner at least once each year within sixty days after the end of the twelve-month period to which they relate. The statement shall identify:
(1) The contributions made during a preceding twelve-month period;
(2) The total contributions made to the account through the end of the period;
(3) The value of the account at the end of the period;
(4) Distributions made during the period; and
(5) Any other information that the director of finance requires to be reported to the account owner.
Statements and information relating to accounts shall be prepared and filed to the extent required by federal and state tax law.
(j) An annual fee may be imposed upon the account owner for the maintenance of the account.
(k) A qualified withdrawal may be made only after at least three calendar years have elapsed from the time an account is opened.
(l) The program shall disclose in writing the following information to each account owner and prospective account owner of a health savings account:
(1) The terms and conditions for purchasing a health savings account;
(2) Any restrictions on the substitution of beneficiaries;
(3) The person or entity entitled to terminate the health savings agreement;
(4) The period of time during which a beneficiary may receive benefits under the health savings agreement;
(5) The terms and conditions under which moneys may be wholly or partially withdrawn from the program, including any reasonable charges and fees that may be imposed for withdrawal; and
(6) The probable tax consequences associated with contributions to and distributions from accounts.
§ -5 Program limitations; health savings account. (a) Nothing in this chapter shall be construed to:
(1) Give any designated beneficiary any rights or legal interest with respect to an account; or
(2) Guarantee that amounts saved pursuant to the program will be sufficient to cover the qualified medical expenses of a designated beneficiary.
(b) Nothing in this chapter shall create or be construed to create any obligation of the director of finance, the State, or any agency or instrumentality of the State to guarantee for the benefit of any account owner or designated beneficiary with respect to:
(1) The rate of interest or other return on any account; or
(2) The payment of interest or other return on any account.
The director of finance shall provide by rule that every contract, application, deposit slip, or other similar document that may be used in connection with a contribution to an account clearly indicate that the account is not insured by the State and neither the principal deposited nor the investment return is guaranteed by the State.
§ -6 Health savings program trust fund. (a) There is established the health savings program trust fund. The director of finance shall have custody of the fund. All payments from the fund shall be made in accordance with this chapter.
(b) The fund shall consist of a trust account and an operating account. The trust account shall include amounts received by the health savings program pursuant to health savings agreements, administrative charges, fees, and all other amounts received by the program from other sources, and interest and investment income earned by the fund. The director of finance, from time to time, shall make transfers from the trust account to the operating account for the immediate payment of obligations under health savings agreements, operating expenses, and administrative costs of the health savings program. Administrative costs shall be paid out of the operating account.
(c) The director of finance, as trustee, shall invest the assets of the fund in securities that constitute legal investments under State laws relating to the investment of trust fund assets by trust companies, including those authorized by article 8 of chapter 412. Trust fund assets shall be kept separate and shall not be commingled with other assets, except as provided in this chapter. The director of finance may enter into contracts to provide for investment advice and management, custodial services, and other professional services for the administration and investment of the program. Administrative fees, costs, and expenses, including investment fees and expenses, shall be paid from the assets of the fund.
(d) The director of finance shall provide for the administration of the fund, including maintaining participant records and accounts, and providing annual audited reports. The director of finance may enter into contracts for administrative services, including reports.
§ -7 Tax reporting. The director of finance or the program manager of the health savings program, or a designee, shall file a report annually, with the director of taxation, setting forth:
(1) The names and identification numbers of account owners, designated beneficiaries, and distributees of health savings accounts;
(2) The amounts contributed to the accounts;
(3) The amounts distributed from the accounts;
(4) The nature of the distributions as qualified withdrawals or as withdrawals other than qualified withdrawals; and
(5) Any other information that the director of taxation may require regarding the taxation under this chapter of amounts contributed to or withdrawn from the accounts."
SECTION 3. Chapter 654, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:
"§654- Health savings program. (a) An amount not exceeding $10,000 in an account, or in the aggregate for more than one account, where the judgment debtor is the account owner of the account or accounts, in an account created pursuant to chapter is exempt from application to the satisfaction of a money judgment.
(b) For the purposes of this section, the term "account owner" shall have the same meaning as in section -1."
SECTION 4. New statutory material is underscored.
SECTION 5. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2004.