More interest on employers’ part will grow HSA enrollments
Greg Seifert
is an account executive with Vancouver-based Biggs Insurance.
Health Savings Accounts, already a very good thing for many Americans, just got better thanks to the recently enacted Tax Relief and Health Care Act of 2006. A Health Savings Account (HSA) is a tax-favored savings account that when paired with a "qualified" high deductible health plan (HDHP) allows for tax-deductible contributions and tax-free distributions to pay for qualified medical expenses, a tax advantage unique to HSAs.
Therefore, the HSA allows for the payment of out-of-pocket medical expenses with tax-free dollars. A person may also choose to allow the funds in the HSA to accumulate until retirement when they may be withdrawn as taxable retirement income. The trade-off is that an individual taking advantage of the HSA benefits must be covered only by a low premium HDHP, a plan design that requires an insured person to be responsible for all of her or his medical, hospital and prescription expenses until total expenses reach the deductible amount.
Originally authorized by Congress in 2003, there are now over 3.5 million individuals enrolled in HSA qualified high deductible health plans. That number can now be expected to grow due to more competitive insurance premiums from many companies for the HDHP, more interest on the part of employers and employees and the provisions in this new law making it more attractive and easier to contribute to an HSA.
For example, individuals can now contribute more than before into an HSA, $2,850 for a single person, and $5,650 for a family, regardless of the size of their deductible. Someone age 55 or older may contribute an additional $800. Previously, a person was restricted to contributing no more than the deductible. In addition to the higher contribution limits, an insured may now contribute this entire amount into the HSA, even if the HSA was not started until the middle of the year. Contribution amounts were previously pro-rated, although the deductible was not, a combination that made many individuals unwilling to start HSAs except in the first part of the year.
And, in addition to these regular contribution enhancements, the new law allows employers to make a one-time transfer from a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) into a Health Savings Account. Also, an individual who desires the tax advantages of the HSA but may otherwise be unable to fully fund the HSA, may now make a one-time irrevocable distribution from an IRA into an HSA, up to the new annual contribution limit. Both of these provisions will give more individuals access to the HSA.
Due in part to the fact that these changes make HSAs more attractive to many individuals, more employers will now also be more likely to offer Health Savings Account plans to their employees. The other reasons for this new interest include the fact that HSAs now have a reasonably successful track record, the underlying HDHP insurance is now more competitively priced, leaving room for employer HSA contributions on behalf of the employee, and some insurance companies now offer even small employers the ability to provide their employees the HSA and HDHP as an option along side a more traditional plan design. This is usually a preferred provider major medical plan with a lower deductible and office call and prescription drug co-payments that the employees are more used to. In this case, the employees who are not comfortable with the HSA concept may stay on the more traditional plan design and the others can move to the HSA.
Some important provisions that have not changed but need to be noted are that the Health Savings Account needs to be set up with an HSA trustee, often times a bank, and that the HDHP insurance is separate from the account. HSAs are usually interest-bearing savings accounts, but some trustees also offer investment options.
