HSAs Open Door For Big Shift
in Employer Health Insurance
by
Christopher B. Clark, CEBS & Edward C. Fensholt, J.D.
Palmer & Cay
A minor provision in last November’s Medicare reform law is likely to trigger a major shift in employer-sponsored health insurance.
The provision creates “health savings accounts,” almost certain to accelerate the move by employers to higher deductible group health insurance. A high deductible health plan (one with deductibles of at least $1,000 for an individual and $2,000 for a family) can often save an employer 10-20% over a traditional health plan with lower deductibles. Health savings accounts (“HSAs”) help make such a move more palatable to employees because the accounts provide an IRA-like vehicle employees can use to pay their deductibles (and other expenses) on a tax-favored basis.
Many employers offer a medical expense reimbursement tool called a flexible spending account, or “FSA.” FSA programs allow the employer to withhold elective amounts from employees’ pay on a pre-tax basis and credit those dollars to the FSA. Employees then request nontaxable reimbursement from the FSA to cover medical expenses not paid by their health plan.
But the new HSAs are superior to health FSAs in almost every way, and likely spell the latter’s demise. Here are the key differences:
· FSAs are merely bookkeeping accounts. There are no real dollars in the FSA for employees to invest, and employees lose their FSA credits when they die or terminate employment.
HSAs, however, are true accounts holding real dollars for investment. HSAs are held in trust for the employee, so the dollars are available even after he or she leaves. If the employee dies the HSA transfers to a beneficiary.
· Under an FSA, credits unused by year end are forfeited. But unused contributions in an HSA “roll over” from year to year.
· FSAs may reimburse only expenses for medical care. HSAs may reimburse medical expenses, but also some health insurance premiums. They may also pay for nonmedical expenses, although payments for nonmedical expenses are taxed as income and subject to an excise tax if made prior to age 65 or disability.
· FSAs may credit employer or employee pre-tax employee contributions, or both. HSAs may include these, as well as after-tax employee contributions for which the employee then gets a tax deduction.
· Unlike FSAs, HSAs are not subject to the “COBRA” health coverage continuation rules.
In order to make contributions to an HSA in a given month, the employee must be enrolled—on the first day of the month—in a “high deductible plan.” These plans must provide comprehensive medical coverage and meet specific deductible and “out of pocket maximum” requirements.
In addition, the employee must not be covered under a medical plan that is not a high deductible plan. This may make employees ineligible who are also covered under a spouse’s health plan. It also means that persons enrolled in Medicare may not contribute to an HSA.
The maximum annual amount an employee may contribute (or have contributed on his or her behalf) to an HSA is the sum of his or her monthly limits for the year. A monthly limit is the lesser of two amounts: 1/12th of the employee’s annual deductible under the high deductible plan, or $216.67 for individual coverage ($429.17 for family coverage). These amounts are for 2004, future amounts are indexed for inflation. Of course, if the employee is ineligible to make an HSA contribution for a month, the monthly limit is zero.
Although HSA eligibility is determined monthly, and the annual contribution limit is the sum of monthly limits, an employee or employer may fund the HSA in advance…or arrears. For example, if the employee is eligible on January 1 to contribute to an HSA, he may estimate his annual contribution and contribute that entire amount in January. But if by year’s end the HSA received a larger contribution than permitted, the excess is taxed as ordinary income and subject to an excise tax if not refunded.
Alternatively, the employee may fund his or her HSA at year’s end (after the maximum is determined), and even up to the April 15 following the year.
Employees age 55 to 65 may contribute up to an extra $500 per year. This $500 bonus contribution increases $100 per year for the next five years.
Unlike claims under an FSA (where the claimant submits receipts and the claim payer verifies the bona fide nature of the expense), HSAs require no such verification. Neither the employer, nor the bank or insurance company holding the HSA, is required to verify the employee’s claim for reimbursement.
An employee may make a claim against the HSA account even if he or she is no longer eligible to contribute to the HSA.
Employers wishing to install high deductible health plans as a cost savings measure now have, with HSAs, a highly flexible and tax-advantageous tool that employees may use as a means to soften the blow of a higher deductible.