Health Savings Accounts (HSAs) have hit the mainstream media. Employers and employees are beginning to learn more about this newest weapon in the arsenal of employers aimed at controlling escalating costs of employee health benefits. Information is coming from many sources, such as progressive health insurance professionals, to the business media. The topic is popular at professional and industry conferences and seminars. If you haven’t yet heard about this new type of benefit plan, you will soon.
The HSA concept is derived from an effort to put the actual consumer of health care, the individual employee, in the position of deciding what services and products to purchase based on competitive forces such as price and quality. The theory is simple. If individual consumers first spend their own money to purchase health care products and services, they will make more informed decisions, resulting in higher quality and lower cost products and services. This concept is generically known as consumer-driven health care.
The consumer-driven health care concept accomplishes health care cost savings by establishing individual HSAs, similar to the way in which 401(k) plans revolutionized retirement savings. Employers or employees can make contributions to HSAs and any unused funds are permitted to be carried over to future years. This allows employees to utilize savings from their healthy years to cover health care costs incurred in subsequent less healthy years. Contributions are tax deductible and earnings are tax deferred (tax free if distributions are used to pay for health care costs).
The funding of HSAs is accomplished by utilizing high deductible health insurance plans, also known as catastrophic care plans, which can be purchased at a lower premium than traditional low deductible plans. The differential in premiums is meant to be deposited into the HSAs, which is then used to reimburse the owner for out-of-pocket health care expenses (if any) resulting from the high deductible insurance. The HAS concept depends on a significant assumption that the differential in premium between high deductible and traditional insurance plans is large enough to make significant contributions to the HSA affordable for the employer, and if it is not affordable, that employees will see an advantage in (and be able to afford) funding a portion of the deductible themselves.
Another factor that complicates the decision to adopt an HSA plan is the varying health circumstances existing in any workforce. Few individuals or families are similarly situated from a health care perspective, so the decision to move to HSAs will have varying financial impacts on the workforce. Expensive maintenance drugs without generic alternatives and age-related health conditions are just some examples of circumstances causing certain families or individuals to spend more on health care. Heavy consumers of health care will not find much appealing about any plan utilizing high deductible insurance because it means they may have to spend more of their own money to pay for health care.
One of the latest trends in health benefits planning is offering different health plan alternatives and allowing employees to choose among plans, which have varying levels of coverage and premium. An HSA plan may work very well in this scenario as the lowest cost alternative. It would be the plan of choice for the youngest, healthiest, and likely single, employees. Additionally, because HSAs involve the creation of accounts similar to 401(k) accounts, another issue that must be addressed when considering the adoption of an HSA plan is the selection of the custodian of the individual plan accounts and the resulting quality of custodial and investment service alternatives.
HSAs could be a valuable part of a solution to controlling health care benefits costs. Unfortunately, the devil is in the details, and the advantages and disadvantages of these plans are not always obvious to employers. We believe that our clients are best served by a team approach involving their health insurance professionals and their trusted business advisors at Rea & Associates.
In addition to HSAs, other types of plans that should be considered in any comprehensive search for the best solution are cafeteria plans with flexible spending accounts and health reimbursement arrangements, so-called HRA plans. In certain situations, the best solution may be some combination of these plans. Although these plans are not mutually exclusive, there are restrictions on the benefits that can be packaged together when these plans are combined. As CPAs, we are uniquely qualified to evaluate the financial impact of competing alternatives on the employer and its employees. We look forward to working with our clients and their health insurance professionals in addressing the critical problem of escalating health care costs.
This article was originally published in The Rea Report, Winter 2005 issue.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.