Is a Health Savings Account Right for Your Company?

Health Savings Accounts (HSAs) came into law with the Medicare Act of 2003. However, most insurers in the tri-state area have only recently introduced HSA products for their clients. With strong tax and other advantages, HSAs can offer businesses a less expensive way of maintaining or introducing healthcare coverage for employees.

An HSA program has two parts: a high-deductible health care plan (HDHP) and a tax-advantaged, portable savings account for payment of medical related expenses. In general, to be eligible for an HSA an individual needs to be under 65, covered by a HDHP, and not covered by another health insurance plan (note that there are some other detailed rules and exceptions – consult your insurance broker). In order for a plan to be considered a HDHP, the minimum annual deductible must be $1,000 for individuals and $2,000 for families.

Both employees and employers can contribute to an employees HSA account. For employees, all contributions to HSAs are pre-tax. For employers, all contributions to employee HSA accounts are deductible and exempt from payroll taxes. For those employees with individual HDHPs, the maximum that can be deposited in an HSA is the lesser of the deducible or $2650; for employees with family coverage it is the lesser of the deductible or $5250. Employees 55 or older can contribute more than these amounts. In general, the premiums for HDHPs are lower than traditional plans because of the higher deductible. Current premiums for HDHPs in New York are about 90% those of regular rates.

Funds that accumulate in an HSA can be used to pay for a wide variety of health care expenses. Unlike current flexible spending accounts, unused funds carry over from year-to-year in income-bearing accounts with the income earned tax–free until retirement.

HSAs could be kept in a variety of financial institutions including banks and financial service companies. In terms of choosing a manager or account custodian for the savings account, employers should allow employees to choose their own HSA account custodian.

Benefits to the Employer
There are many benefits of using an HSA to the employer. Employers pay no payroll taxes on premiums for HDHPs or contributions they make to employee HSAs.

Furthermore, employees learn to take responsibility for their own healthcare costs. Over the past several years, smaller companies have been increasing the share of healthcare costs paid by employees. HSAs facilitate this trend by allowing employees to pay their share of costs with a tax favored account that allows unused funds to accumulate.

HSAs can also be used to provide healthcare coverage for employees of companies that do not currently have a plan. In this scenario, HDHPs and HSAs are primarily funded by pre-tax dollars from the employees. Often, smaller firms provide some incentives to start the program and act as administrator.

The end result is that employees get access to coverage (often at lower rates than they can on their own) and morale improves with less of a hit to the company’s bottom-line.

Benefits to the Employee
As stated above, all contributions to HSAs made by the employee is with pre-tax dollars. In addition to not paying income and FICA taxes on the funds contributed to an HSA, employees may find themselves benefiting with a lower effective income tax rate.

HSAs function similar to a 401K or IRA; funds that are not used for medical expenses and are not withdrawn for non-qualifying expenses, accumulate tax free. (Similar to other retirement accounts, funds withdrawn for non-qualifying expenses are subject to income tax and penalties). Also similar to IRAs, HSAs are portable – regardless of whether the employee changes jobs, becomes unemployed or retired, the account stays with them.

Another advantage: a spouse or dependent covered by other insurance may not be able to participate in an HDHP. However, an individual may still be able to use a family member’s HSA funds to pay for their qualifying medical expenses tax-free.

Drawbacks
If you currently offer a traditional health care plan and pay for most of the premiums (and plan on doing so), you may not get most of the economic savings of an HSA as outlined above. However, a long term benefit still stands: you will get your employees to become more responsible for decisions and costs related to their health care – what they do not spend, they keep.

Final Note: While HDHPs typically have the lowest premiums of all health plans, almost uniquely amongst the states, New York and New Jersey insurance policies do not permit HDHPs to have significantly less premiums than traditional plans. What is different is that payment programs are more liberal. You need to talk to your insurance agent and study the various plan options closely.

Some Guidelines For Choosing

1. Get three insurance bids from 3 different insurance companies.
2. Get each bid broken down into inclusions and exclusions — that is, what the policy will and won’t cover and pay special attention to:

• Out-of-pocket maximums