Health Savings Accounts- A Win-Win Situation for Employer and Employees
• Employers are looking for ways to cut costs and employees are becoming dissatisfied with diminishing health insurance benefits as healthcare costs increase.
What is a Health Savings Account (HSA) in a Nutshell?
• An HSA is like an IRA, except the money you contribute goes to healthcare costs.
• To enroll in an HSA, participants must enroll in a relatively inexpensive, high-deductible health insurance plan
• The employer must have a high-deductible health insurance policy (HDHP) that qualifies to be partnered with the account before establishing the HSA
• An HSA creates a savings opportunity for employers since health insurance plans with higher deductibles typically cost less.
• HSAs roll over from year to year with unused balances.
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Health Savings Accounts- A Win-Win Situation for Employer and Employees
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Summer 2005
Allyson J. Milbrod CPA
Senior Tax Manager
As healthcare costs increase,
employers are looking for
ways to cut costs and
employees are becoming dissatisfied with
diminishing health insurance benefits. The
newly enacted Health Savings Accounts
provisions (HSAs) may be able to strike a
balance.
What is an HSA in a Nutshell?
HSAs were introduced as part of the Medicare
Prescription Drug, Improvement, and Modernization Act
of 2003, effective January 1, 2004. An HSA works very
much like an IRA, except you use the money you
contribute to pay healthcare costs. To qualify, participants
must enroll in a relatively inexpensive, high-deductible
health insurance plan. Once qualified, a tax-deductible
savings account can be opened to cover current and future
medical expenses. The money deposited in the savings
account, as well as the earnings on it, are tax-deferred.
You may withdraw the money as needed, tax-free, to
cover qualified medical expenses. Unused balances in
HSAs roll over from year to year.
Setting Up the HSA & Making Contributions
Before establishing the HSA, the employer must have a high-deductible
health insurance policy (HDHP) that qualifies to be partnered with
the account. A HDHP is a health plan that:
- has an annual deductible
which is not less than
- $ 1,000 for self-only coverage and
- $ 2,000 for family coverage (the minimum is $ 1,000 for individuals
and $2,000 for families) and
- the sum of the annual deductible
and other annual out-of-pocket expenses required to be paid under
the plan for covered benefits does not exceed:
- $5,000 for self-only
coverage, and
- $10,200 for family coverage.
This creates a savings opportunity for employers since health insurance
plans with higher deductibles typically cost less.
The employee then sets up an HSA account, similar to an IRA, and
makes his or her tax-deductible contributions. This relieves the employer
of its fiduciary responsibilities - again creating a cost saving opportunity.
The employee, the employer, or a combination of the two can fund
contributions to an HSA. The amount that can be contributed each year
is:
- the lesser of the annual deductible of the plan, or $2,650 for self-only
coverage; and
- the lesser of the annual deductible or $5,250 for family coverage.
Withdrawals from the HSA
As the employee incurs qualified
medical expenses, he or she will withdraw money from the account.
There is no "use it or lose it" requirement, which in turn, makes
the HSA desirable. The employee can continue to build a tax deferred
balance in the HSA account and it can be used as a retirement vehicle.
When the HSA was first introduced, it was restrictive as to the types
of medical expenses that would qualify for expenditures. In recent
months, the Internal Revenue Service has issued a number of notices
that have liberalized the types of expenses that will qualify. A complete
list of qualified medical expenses can be found in IRS Publication
502.
Tax-free distributions from the HSA can be made to pay for qualified
expenses of:
- the person covered by the HDHP
- the spouse of the individual
(even if not covered by the HDHP), and
- any dependent of the individual (even if not covered by the HDHP)
If distributions are not used for
qualified medical expenses,
- any amount will be included as income,
- and be subject to a 10% penalty
(unless the individual is over age
65 or disabled)
Death of Owner
Upon the death of an owner, the
HSA works similarly to an IRA. If the spouse is named as the beneficiary,
the spouse will become the owner and the HSA will continue. If anyone
other than the spouse is named as the beneficiary, the HSA will terminate
and the unused balance of the account will be taxable to the beneficiary.
HSAs can provide a cost saving alternative to both employer and employees.
There are advantages and disadvantages for both the employer and employee;
however, the advantages seem to outweigh the disadvantages. HSAs are
relatively new, but expected to grow in popularity in the coming years.
| Employer |
| Advantages |
Disadvantages |
High deductible
insurance cost is
less than traditional
health insurance.
Provides flexibility to
employees.
No fiduciary
responsibilities since
ERISA does not apply.
Can provide a match
through a cafeteria
plan similar to a
401(k)plan. |
Must contribute same
amount to all
employees who
participate. |
| Employee |
| Advantages |
Disadvantages |
Provides flexibility.
No "use it or lose" it
provisions.
Provides a lower cost
option for health
insurance.
Provides another
mechanism to defer
funds in a retirement
account. |
Limitation to types of
expenses.
Fiduciary responsibility
on employee. |
|
| |
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