RSM Resources

Health savings accounts (HSAs) appear to be living up to their billing as an antidote to rising health-care costs. They also a regenerating another benefit for savvy midsized employers: tax benefits to reward and retain highly compensated employees.

HSAs, created in a 2003 law that overhauled Medicare, allow businesses and individuals to establish accounts to save for medical expenses on a pretax basis. They must couple the accounts with health-care plans that have high deductibles — at least $1,050 for individuals and $2,100 for families in 2006. The higher deductibles mean lower premiums for employers and lower health insurance costs for employees, plus an opportunity for employees to build tax-free savings.

Employers increasingly are turning to the combination of high-deductible plans and HSAs as a way to lower both company and employee health-care costs. According to a recent survey by Aetna, employers that offered HSAs as a voluntary option slowed their annual health-care spending growth rate to 3.7 percent, compared with the average 15 percent increase employers experienced in each of the previous five years.Companies that switched to HSAs completely achieved cost reductions of 11percent.

Cost savings likely is driving the dramatic growth of consumers opting for coverage through plans using HSAs as well as the increasing number of insurance companies offering such plans. More than 1million people used HSAs as of March 2005, up from 438,000 in September 2004,according to a study by America’s Health Insurance Plans (AHIP). Meanwhile, the number of insurers offering HSAs increased to 99 from 29 during the same period. However, those numbers remain small relative to the potential. AHIP, for example, represents nearly 1,300 member companies providing health insurance coverage to more than 200 million Americans.

How HSAs work
Like other consumer-driven health plans, HSAs offer tax benefits to consumers willing to assume more responsibility for health-care spending decisions. The idea is, when consumers have their own money at stake they will be more careful about medical spending decisions.

Employees determine how much they wish to contribute to their HSAs at the beginning of the plan year. For 2006, eligible individuals may contribute up to 100 percent of their qualified health plan deductible to their HSA on a tax-deductible basis. The maximum annual contribution is $2,700 for individual policies and $5,450 for family policies. No minimum contribution is required. Taxpayers 55 and older may contribute an additional $700 annually to save for health-care expenses after retirement. Employers may cover some or all of the deductible to encourage participation.

Preventive care, such as annual check-ups, is typically covered at 100 percent. Employees withdraw their HSA contributions or pay out-of-pocket for medical expenses until they meet their deductibles. For 2006, the plan’s annual maximum out-of-pocket limit is $5,250 for individuals and $10,500 for families.

HSA contributions, asset growth and distributions are tax-free if used for medical expenses. Unlike health-care reimbursement accounts, in which participants forfeit money remaining in their accounts at year-end, unused funds in HSAs "roll over" year after year, potentially creating a sizable retirement nest egg. Money in an HSA belongs to the employee and goes with the individual if he or she leaves the job.

Experts say the tax advantages of HSAs are particularly attractive to highly compensated executives, whose contributions to 401(k) and other qualified retirement plans are often limited under IRS rules. HSAs also may provide tax relief to professionals in limited partnerships, such as lawyers and accountants, because their business structure prohibits partners from making personal pretax contributions to a plan.

Implementing HSAs
Rising insurance rates may mean it’s time to look at more affordable health-care alternatives. While HSAs appear to lower costs for both employers and employees, plan acceptance remains challenging for some companies. For example, employees may be reluctant to accept higher deductibles or pay fully for physician visits instead of making $15 or $20 co-payments. Such concerns may make employers skeptical about HSA renewal the following year.

Before introducing an HSA, experts say midsized businesses should consider the following tips:

• Find a good benefit broker. Selecting the right broker may be as important as picking a health plan. Nearly 80 percent of benefits managers rely on brokers when developing their plans, according to a survey by Employee Benefit News. A good broker will take the time to understand your business and financial goals when helping design the best plan.
• Provide choice. Offer an HSA as a health-care choice instead of switching to the plan completely. Employees will appreciate having an option, and the positive experiences of early HSA adopters could help boost enrollment the following year. One caveat: Don’t offer too many choices. Overwhelming employees can hamper decision-making.
• Differentiate plan design. Offer employees clear choices between plan benefits and corresponding costs. Selecting a higher deductible should translate into significantly lower premiums for employees.
• Consider incentives. Employers offering multiple health plans may want to provide additional incentives to encourage sufficient HSA participation to achieve health-care cost reductions. Subsidized contributions may nullify savings in the first year but eventually lead to lower costs.
• Educate, educate, educate. Employee education is perhaps the most important factor in making a smooth transition to HSAs. Promote early acceptance and participation through targeted communications that use clear education materials and interactive decision-making tools.

Help employees understand how tax-advantaged savings accounts work and how to determine their appropriate HSA contributions.To increase confidence in their ability to make smart health-care decisions,give employees access to information about provider quality and medical costs. An employee may learn, for example, that an over-the-counter medication could save more than $1,000 a year compared with a prescription drug.

One popular HSA education resource is the Web site www.hospitalcompare.hhs.gov, created by the U.S. Department of Health and Human Services. The site compares health-care quality at 4,000 U.S.hospitals and includes the results of patient satisfaction surveys, as well as costs for visits and procedures. A similar Web site is People’s Medical Society (www.peoplesmed.org), a not-for-profit consumer advocacy organization.

The future of HSAs
HSAs are part of an overall trend toward consumer-driven health care. This may be the biggest shift in health-care coverage since health maintenance organizations. Experts agree that continued double-digit increases in annual health-care costs will fuel the popularity of HSAs. The attractiveness of these plans as tax-sheltered savings vehicles for highly compensated executives also may boost their popularity.

HSA Savings Comparison
This table compares how a married couple,both 38, with two children, would fare under a traditional health-care plan and an HSA. They have a $1,500 medical claim, which is deductible because of the income limits.

Source: Colorado Health Insurance Brokers