Health Savings Accounts
(A Plus for Employer and Employee)
It’s no secret that 2006 has been another year of frustration for those of us who want to provide cost-effective health benefits to our employees. Maybe, just maybe, the percent increase in your premium was smaller than 2005, but it still went up and that hurt the bottom line. Unlike some costs, it’s difficult to pass on increased health care premiums to your customers.
What did you do to minimize the negative impact of health premiums on your balance sheet? Did you pass more of the cost on to your employees or did you reduce benefits? Perhaps you finally decided you’d had enough and stopped providing low-cost health insurance to your workers altogether. If you did, you’re not alone - more and more employers are being forced to radically alter the health-related benefits they offer to employees.
If you’ve tried everything you know of to reduce health insurance costs, but haven’t investigated Health Savings Accounts (HSAs), please read on:
What is an HSA? In its simplest form, an HSA is an account established to help pay medical bills. In general, an employee establishes an HSA with a bank or other financial institution in much the same way they would start an individual retirement account. The employee then uses the funds in the HSA to pay for qualified medical expenses. Generally, qualified medical expenses include those that are eligible as itemized deductions and over-the-counter medications. This means that physicians’ office charges, lab fees, hospital bills, therapy and similar medical costs can be paid using HSA funds. The one deductible expense that cannot be paid with HSA funds is the premium on a health insurance policy.
An HSA is established in connection with a high deductible health plan. For 2007, a high deductible health plan (HDHP) is one with a minimum deductible of $1,100 for individuals and $2,200 for families. One of the biggest drawbacks in selling such a health plan to your employees is that they won’t typically have the luxury of just ‘co-paying’ at the doctor’s office or for RX prescriptions. The medical bills that are below the deductible amounts will come straight out of their pockets - and this is where the HSA comes in handy. The whole purpose of the HSA fund is to allow the employee (or employer on behalf of the employee), to accrue enough in tax-deductible funds to cover both deductibles and out-of-pocket costs under the HDHP.
Let’s take a closer look at the actual funding of a health savings account. First, an employee establishes the HSA in conjunction with the high-deductible plan you, their employer, puts in place. Next, you, the employee or a combination of both of you, fund the account. The maximum that can be put into an HSA in any one year is the lesser of the HDHP deductible or $2,850 for self-only coverage and $5,650 for family coverage. The funds in the HSA, regardless of source, belong solely to the employee once deposited into the account. Thereafter, withdrawals to pay qualified expenses are tax-free, but if money is withdrawn for ineligible payments, there is a 10% penalty tax.
As the employer, your responsibilities regarding the HSA are ended at this point and it’s up to the employee to follow the provisions of the underlying HDHP. The main idea behind the HSA is that moving to the HDHP will decrease the premium paid by you and the employee. This will, in turn, free up cash to make the deposit to the HSA. The payoff for the employer is a reduction in health insurance premium costs substantial enough to allow payment of your traditional share of the premiums, yet also contribute to the HSA.
Even with the drawback of a higher deductible, an HSA can be very attractive to the employee when the account is funded. Let’s take a couple that is young and healthy: their bills are typically minor, especially if they have no children, and they should be able to contribute to the HSA fairly heavily. This allows them to begin the establishment of a health care ‘rainy day’ fund. Therefore, if and when they actually do have substantial medical costs, the funds are available to pay for the healthcare deductible.
If this is all that ever happened, the couple is ahead because they have been able to deduct the full amount of contributions against taxable income, where they may have been limited on deductible medical expenses taken as itemized deductions. Our couple, however, came out winners in the healthcare lottery and have reached 65 with a fairly large nest egg to cover their medical bills - is there something else that can be done with the money? In a word, yes. Once retirement age is reached, the funds in an HSA can be used much the same as IRAs. The retiree will, of course, pay applicable income tax on any withdrawals (for other than qualified medical expenses), but this is one very attractive way to bypass the limitations on qualified retirement plans and add a little to retirement savings. It is even more attractive when the employer has made some or all of the contributions to the HSA.
So, as an employer, you save on health insurance premiums and add an option for your employee to save for retirement. The employee saves on premiums and gains a retirement savings vehicle (if HSA funds are not required for medical expenses in the meantime). Sounds like a win-win situation for both parties - and it is - as long as the premium decrease is enough to allow you to implement the plan. If you haven’t investigated this type of arrangement to help both you and your employees deal with medical expenses, perhaps it’s time you did.
Typically, accountants are not health insurance salespeople, so you need to speak with your agent about setting up a ‘HDHP and HSA’ plan. We would, however, be pleased to sit down with you and help evaluate the numbers your insurance agent presents. Between tax savings for employees and bottom-line cost savings to you, there is good reason to consider switching to a high deductible health plan and help your employee(s) establish a health savings account. Give us a call and let us help you determine if such a plan would work for your business.
From our family to yours, we wish you a joyous holiday season and a prosperous 2007.