November 26, 2007
Health Savings Accounts (HSA)
In some circles, Health Savings Account (HSA) Plans are being billed as the next big thing in healthcare insurance. HSA Plans are supposed to reduce premiums, create tax- advantaged savings for employees, and potentially give employees the incentive to take an active role in their healthcare. The idea behind these plans is that employees will spend their healthcare dollars wisely by shopping around for the best value for their medical expenses. If this idea catches on, then theoretically the overall cost of healthcare will drop as more and more consumers take a greater interest in their healthcare and become savvier shoppers. Although this remains to be seen, here is a quick look at these plans.
HSA Plans were signed into law in December 2003 and were made available on January 1st 2004. An HSA Plan has two components. The first component is the account or trust. An HSA is a tax-favored savings account that is similar to an individual retirement account (IRA). Pre-tax money is deposited each year into this account and can be withdrawn at any time to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 10 percent penalty if done prior to age 65. Any money deposited into the account can be saved from year to year and earn interest tax-free to help pay for future medical bills. Like an IRA, the account belongs solely to the employee – one major difference is that the employer can contribute to the HSA on behalf of the employee.
The second component is a High Deductible Health Plan (HDHP). An HDHP is similar to a traditional insurance plan but has relatively high deductibles associated with it. Currently, the minimum deductible for employee-only coverage is $1,100 and $2,200 for family coverage. The annual out-of-pocket expenses (including deductibles and co-pays) currently do not exceed $5,500 for employee-only coverage and $11,000 for family coverage. Health insurance plans that include deductibles typically cost significantly less than traditional plans – thus making them very attractive to employers.
Contributions to the HSA can be made by the employee, the employer, or both. Contributions made by the employee are made with pre-tax dollars while contributions made by the employer are not taxable to the employee. Additionally, funds can be deposited into the account by others on behalf of the individual. The maximum that can be contributed to the account currently is $2,850 for an individual and $5,650 for family coverage. Similar to a retirement plan, “catch-up” rules apply to employees 55 and older. Additional amounts under this provision are $800 in 2007, $900 in 2008, and $1,000 in 2009 and thereafter.
The employee has control over the account and can decide how much to contribute, how much to use for qualified medical expenses, and which medical expenses to pay for using the account. The employee can also decide how the funds in the account are to be invested.
There are no “Use-it-or-Lose-it” provisions like those associated with Flexible Spending Arrangements (FSAs). All the money in the account is fully vested and if an employee does not exhaust the account in a given year, the money will roll over to the next. HSAs are also portable, meaning employees can take their HSA funds with them if they change employers or leave the workforce.
Benefits to Employers:
- Premiums are substantially reduced by switching to a high deductible insurance plan
- Instead of paying 100% of the cost of the insurance to the insurance company, some of those saved dollars can be directed to the employees by funding the HSA
- Employer’s contributions to the HSA are made with pre-tax dollars.
Benefits to Employees:
- Contributions are on a pre-tax basis
- Interest earned in the accounts are tax-free
- HSAs are portable - if employees leave their current employer, they can take their HSA (the account) with them Withdrawals for qualified expenses are tax-free
- There are no “Use-it-or-Lose-it” provisions.
- Setting up an HSA Plan can be complicated
- There is a significant “learning curve” for employees (and employers for that matter)
- Opponents of HSAs argue that medical costs will actually increase with widespread adoption of HSAs. Given the high deductibles under these plans, the argument is that employees will be less likely to go to the doctor if they face the prospect of paying for office visits. Consequently, illnesses and injuries that go untreated will become more serious and thus more costly to treat in the long run
- Many of the employers using HSAs will fund the employees accounts 100%, thus reducing their employees’ incentive to shop around for the best value
- Some believe HSAs provide yet another tax shelter for the wealthy.
For complete information about HSAs click here.