Gary Insurance Group

Sidestep HSA Landmines

Enrollment in high-deductible health plans linked with HSAs has continued to increase since they first became available in 2004 and industry experts are predicting 2008 a banner year.

The continued increase is credited in part to insurers that have begun to offer more high-deductible health plans linked with HSAs and in part to company education efforts.

Deere & Company implemented an education program for employees when it replaced its traditional managed care plans with two HSA-based options the first of this year. Ninety-two percent of the company's 15,000 eligible employees have opened an HSA. And 80 percent opted to deposit an annual $700 contribution into an HSA rather than take the cash.

John Hickman, an attorney with the law firm Alston & Bird recently described some landmines that employers should avoid during an audio conference hosted sponsored by AIS including:

• Don't select investment funds for employees: if an HSA custodian offers a broad menu of HSA investments, employers could run into DOL compliance problems if they choose funds for employees. However, employers typically would be allowed to select a "menu" of investment options for their employees.
• Contribute something to an HSA immediately: Even if it's a little as a penny, employers should contribute something to employee-owned HSAs to make them official. The IRS doesn't consider an HSA to be established until the first contribution is made. Under IRS rules, enrollees can't take money out of an HSA for health expenses unless the date of the expense is on or after the establishment date of the HSA.
• Encourage communication role for CEOs: The CEO needs to be a part of explaining to employees the reason for the change and the importance of health and wellness. Deere was enjoying record profits when it moved to a consumer-driven strategy. That could have been a problem if employees viewed the new health plan as a reduction of benefits. Deere spent 18 months communicating the new health plans to employees including an active role for the CEO.
• Help employees understand tax reporting rules: HSA owners must file their taxes using a Form 1040 so that they can report HSA contributions on Form 8889. And employers that contribute to their employees' HSAs need to include in Box 12 the HSA code and dollar amount for all employee contributions, including employee pretax salary reduction contributions.

Changes needed to HSA law, Cato says

Health savings accounts represent a step toward reducing price distortions in the health care industry. However, changes must be enacted to the current law in order for workers to receive the full amount spent on health care as a tax-free contribution, according to policy experts with the Cato Institute, a libertarian think tank in Washington, D.C.

Specifically, changing three key points in the HSA regulations “would allow most workers to receive the full amount that they and their employer spend on their health benefits as a tax-free cash contribution into the worker’s health savings account,” Michael Cannon, director of health policy studies at the Cato Institute, argued at a panel discussion on Thursday.

Cannon believes these fundamental changes are necessary to make HSAs more efficient:

• Increase HSA contribution limits dramatically by tripling the allowable amounts, from $2,850 to $8,000 for individuals and from $5,500 to $16,000 for families.
• Remove the requirement that HSA holders be covered by a qualified high deductible health plan.
• Allow HSA holders to purchase health insurance of any type from any source, tax-free with HSA funds.

These changes, Cannon stated, would allow individuals to set up a “large” HSA to which they could contribute as much income as they desire, subject to higher contribution limits, and from which they could finance insurance premiums and other qualified medical expenses.

“These changes would eliminate the tax code’s influence over consumers’ decisions between self-insurance versus third-party insurance and between employer-sponsored insurance versus other sources of insurance,” Cannon said.

Strategies for boosting HSA participation

Aligning health care costs with financial investing might help employers get more workers into health savings accounts, according to UnitedHealth Group, an HSA provider that recently conducted an analysis of HSA enrollees and their employers.

Firms that integrate health and financial solutions with HSAs stand a better chance of increasing their HSA participation rate, UnitedHealth Group found.

Nationwide, only 60% of patients in an HSA-eligible plan have opened up an account at a bank. At companies that emphasized online enrollment, made steady HSA contributions and mounted a strong educational campaign, 84% of workers have opened an account.

Nearly 70% of UnitedHealth Group's clients contribute to their employees’ HSAs, with the average employer making a contribution of $895. In addition, 67% of participants added to those accounts, with the average deposit totaling $1,206. Equally important, 86% of participants carried a balance into 2006. The average balance was $815.

“Consumers of all backgrounds are increasingly prepared to play more active roles in their health care financing decisions, as long as the process is integrated and simple to use,” says Tracy Bahl, CEO of Uniprise, a health plan managed by UnitedHealth Group. He believes the “data is beginning to establish a clear pattern of how account-based plan designs are working well to support health care affordability and quality.”

Bill makes HSAs more flexible

Bill makes HSAs more flexible

The U.S. House and Senate on Saturday passed a bill that may increase the popularity of health saving accounts. The Tax Relief and Health Care Act of 2006 (H.R. 6408) awaits President Bush's signature.

Under the legislation, employees and employers can contribute up to $2,850 for single coverage and $5,650 for families, even if the deductible is lower. Moreover, companies can contribute more money to HSAs for workers making less than $100,000 per year than for higher-income employees.

The legislation allows a one-time transfer of funds into an HSA from an individual retirement account, health reimbursement arrangement or flexible spending account. The provisions also permit workers hired during middle of the year to enroll in an HSA and make a full-year maximum contribution at that time.

Barry Barnett, a principal at PricewaterhouseCoopers, comments, "I think it's good. I think it'll drive more employers to adopt these plans. It allows people to put in more cash. As they have more cash at risk, they'll be better consumers."

John Hickman, a partner at Alston & Bird law firm, predicts, "This is probably the last, given the makeup of the [new] Congress, favorable HSA legislation we're going to see for a while. We fully expect all of the provisions to be signed [by the president]. Most of these are improvements."

Christopher McFadden, deputy business unit leader for Goldman Sachs' U.S. health care group, notes that Sen. Edward Kennedy (D-Mass.) and Rep. Pete Stark (D-Calif.) are not fans of HSAs and will head key committees on health policy. "What I hope is that this doesn't antagonize these two increasingly powerful members of Congress in a way that incites them to [reverse] the progress that has been made," he adds.

An analysis from the Center on Budget and Policy Priorities states, "HSAs provide a tax subsidy for virtually any out-of-pocket health care costs, including elective procedures not normally covered by health insurance. By enabling individuals to overfund their HSAs, the bill could encourage some people to spend a portion of their excess HSA balances on elective services they would not otherwise consume. The change would primarily benefit high-income individuals, since they are the people most likely to make such a transfer" from an IRA.

The bill garnered praise from the U.S. Chamber of Commerce, the American Benefits Council and America's Health Insurance Plans.

The bill makes "several important improvements to help the growing number of Americans enrolling in these plans and to increase the number of people who will find these plans attractive," says James Klein, American Benefits Council president.

“If you want consumers to prepare for long-term care, they need to develop a long-term strategy,” says Karen Ignagni, president of America’s Health Insurance Plans. “With higher contribution limits that are indexed to inflation, HSAs will offer new opportunities for consumers to plan for their long-term care expenses

New Annual Contribution Levels for HSAs:

*For 2007, the maximum annual HSA contribution for an eligible individual with self-only coverage is $2,850. (Note: for any individual, the maximum contribution is the lesser of this indexed amount or the deductible of the HDHP.) *For family coverage the maximum HSA contribution is $5,650. *Catch up contribution for individuals who are 55 or older is increased by statute from $800 in 2007. *Both the HSA contribution and catch up contribution must be pro rated based on the number of months of the year a taxpayer has an HSA Qualified High Deductible Plan. New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs: *The maximum annual out-of-pocket amounts for HDHP self-coverage increases to $5,500 and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $11,000. Minimum Deductible Amounts for HSA-Compatible HDHPs: *For 2007, the minimum deductible for HDHPs increases to $1,100 for self-only coverage and $2,200 for family coverage.