Health Savings Accounts

Frequently Asked Questions

Prepared by Ross Schriftman, RHU, LUTCF, CBC
[ Please note concerning t a x / or legal advice at the end of this report ]

Wouldn't employee who are sick end up with more out of pocket with the HSA?

In most cases, the sick employee would be in a better position especially if they are paying a significant share of the group health insurance premiums. Besides the lower premiums, the HSA account would pay "first dollar" benefits. Traditional health insurance plans have deductibles. Managed care plans have co-payments. They each represent out of pocket expenses to the employee BEFORE the insurance company pays any benefits. With an HSA, the employee would have to use all of his or her HSA funds before having out of pocket expenses. In a sense, the combination of HSA plan and the high deductible policy creates a corridor of out of pocket expenses.

What happens if someone has a lot of medical expenses early the first plan year?

Again, besides the premium savings that can be used to pay out of pocket expenses, the funding of HSA can be made early in the plan year. The other solution is that the expenses could be spread out over the year. Many people who have no insurance make arrangements with providers to pay a bill on an installment basis. It is important to note that even though the exposure for a family may be a couple thousand dollars, this is significantly offset by a couple thousand dollars in premium savings throughout the year.

If the employer puts the money in the HSA account for the employee, don't they lose control of the funds?

This is correct. The employer's contribution to the HSA is an employee benefit expense. The money is now the employee's to use as they see fit. However, consider that the high premiums paid to an insurance company or HMO is also not recoverable to the business that pays premiums. The insurance company does not set up an account in the firm's name to reimburse the firm if claims experience is good as is done with a self - funded plan. In addition, under many state laws, commercial insurance carriers must also pay the State or Commonwealth a 2% premium t a x which is charged as a pass through in premiums to the business. The bottom line is that premiums paid to an insurance company are gone for ever to the firm.

Aren't there a lot of administrative requirements for this kind of plan?

Since the HSA account is the employee's, there is NO administrative responsibility by the employer for the account. This is the opposite of a flexible benefit plan. If the employer is contributing to the HSA, the only additional administrative requirement would be to cut the check to the HSA in addition to cutting the check to the insurance company for the premiums.

Can our premiums go up in the future?

Just as traditional insurance and managed care plans, premiums are expected to rise in the future. However, with premiums starting at 30% to 50% less and with the smaller expenses being paid outside of the insurance plan, premiums may rise more slowly with an HSA. Remember that claims processing is usually a fixed cost based on volume and not the size of the claim. insurance companies providing HSA's may experience less claims volume resulting in administrative savings that could be passed on the policy holders. However, once the HSA format becomes the "norm" in health care coverage, one might actually see consistent decreases in premiums due to the built in incentive for the insured to become a good consumer.

Aren't the employees restricted to use their HSA accounts for only covered expenses against their deductibles?

NO! The HSA account can be utilized to pay for eligible expenses as determined by Federal law. This may include a wide range of medical necessary expenses that an insurance plan does not cover including dental, chiropractic, orthodontics, home modification, transportation to a doctor's office, nursing services and even "qualified " long term care insurance premiums. the benefit of the HSA account for the employee is that they can use the funds to meet their specific needs.

Aren't the accounts "tied up" if the employee needs money for other eligible expenses?

NO! The funds are available for an employee to withdraw even for non-eligible expenses. However, if the employee is not disabled or not of Medicare eligible age, the withdrawal would be taxed and a 10% penalty on the amount withdrawn would apply.

Won't the employees have a very low rate of return on the HSA account?

HSA accounts are generally placed in money market accounts that currently earn 3.5% to 4.5%. It is important to have the funds in conservative, very liquid accounts especially until the amounts build up. This way if there are unexpected large expenses, the funds will be there. However, Mutual Fund investing may be available as well (depending on the HSA administrator's "menu"). Of course, there are investment risks to consider. However, funds will grow on a tax deferred basis and if the funds are used for eligible expenses the result is tax - free withdrawals.

Why aren't more firms currently offering this plan?

When Congress passed the Health insurance Portability and Accountability Act of 1996, there were certain restrictions placed on the program. They included a limit to the number of plans that could be offered and a sunset of the program. Also plans could only be offered to self - employed persons and firms with 50 or fewer employees. Few insurance companies wanted to invest time, money and marketing efforts in such a temporary prospect. Additional restrictions such as the lack of matching of the funds between employer and employee, limits on the contribution amounts and the lack of first dollar preventive services had made it more difficult for some individuals and firms to move forward. But in December 2003, the President signed a law removing most of these former restrictions giving an incentive to all health insurers to go forward with plans to offer HSA-qualified insurance.

What are the future prospects for HSA's?

Since December 2003, interest in HSA's are skyrocketing with at least thirty-three more insurance carriers deciding to offer product at some time in 2004. The increased offering and proper utilization of these plans will have a most positive effect on health care choices and costs in the near future.

*NOTE: This is a general discussion of HSA strategies and is not intended as legal or tax advice. Please consult your tax advisor and / or legal advisor for specific questions on how this program would affect your firm.