Health care reform, the rising cost of insurance and HSAs

BY RUTH MAHONEY

In September 2012, the Kaiser Family Foundation released the results of its annual Employer Health Benefits Survey. Not surprisingly, annual premiums for employer-sponsored health coverage again outpaced the growth of worker wages. In fact, according to the Kaiser Family Foundation, since 2002 premiums have increased at three times the rate of wages and inflation.

To combat rising costs and offer employees a more flexible approach to funding their health care, businesses in recent years have been turning to a combination of the High Deductible Health Plan (HDHP) and health savings account (HSA). However, with the Affordable Care Act ramping up in 2013, we”™ve seen a lot of talk and speculation about the future of this increasingly popular approach to health insurance.

Here”™s what we know about HSAs in 2013:

1. The HSA will continue to serve as a special purpose account that enables individuals to pay for current health expenses and save for future qualified medical expenses, including retiree health expenses, tax free.

2. In order to contribute to an HSA, an individual must be enrolled in an HDHP, which is a health insurance plan that generally does not pay for the first several thousand dollars of health care expenses. After that, expenses are generally covered.

3. Contribution limits are $3,250 for single coverage and $6,450 for family coverage. Those older than age 55 can contribute an additional $1,000.

4. Rollovers and transfers from other HSAs are not subject to contribution limits.

We also know, based on a recent report issued by America”™s Health Insurance Plans, that there are currently 13.5 million HSAs/HDHPs in the United States””more than twice the number just five years ago.

HSA and HDHP accounts benefit both employees and employers

That HSA and HDHP accounts have become so popular should come as little surprise, as they offer benefits for both employees and employers.

Employees can make deposits into an HSA checking account with a tiered interest-rate structure on a tax-advantaged basis. Once the money is deposited into the account, they can then make tax-free withdrawals to pay for qualified medical expenses. Banks provide convenient check writing and online banking services, along with dedicated and restricted debit cards and investment opportunities. Qualified medical expenses include but are not limited to:

Ӣ Physician visit copays

Ӣ Prescription medication

Ӣ Eyeglasses and contact lenses

Ӣ X-rays and

Ӣ Physical therapy

Any unused funds are carried over year after year, with no “use-it-or-lose-it” rules.

In addition to being enrolled in an HDHP, eligible individuals must not be covered by another health care insurance plan, must not be covered by Medicare and must not be a dependent on someone else”™s tax return.

Employers like HSAs and HDHPs because in 2012 they contributed an average of $11,429 toward the cost of employer-sponsored family health coverage for each employee. HSAs and HDHPs help drive that number down, which helps companies lower their operating costs. Also, studies suggest that employees tend to be more careful with health care costs when they make direct contributions to paying for their costs.

For a number of companies, the cost savings is so significant they incentivize employees to select high-deductible plans by making direct contributions to their employees”™ HSAs.

If you”™re an employer and you”™d like to participate in your employees”™ HSAs, here are a couple of things you need to know:

1. Employees fully own the contributions to the account as soon as they are deposited, which means employers do not have any control over how employees spend the money in them.

2. Employer contributions must be “comparable.” That is, they must be in the same dollar amount or same percentage of the employee”™s deductible for all employees in the same “class.”

Owners and shareholders of S corporations, at least those with a share greater than 2 percent, as well as partners in a partnership or limited liability company (L.L.C.) cannot make pretax contributions to their HSAs by salary reduction. However, they can make their own personal contributions to their HSAs and take the “above the line” deduction on their personal income taxes.

The Affordable Care Act and HSAs

When the Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act it changed two things with HSAs. First, HSA funds cannot be used for over-the-counter medications without a prescription. Second, taxes on funds used for noneligible expenses will increase from 10 percent to 20 percent.

Also, individuals with existing HSAs will continue to benefit from their account. The Affordable Care Act as it currently stands does not touch them. The bigger question for many is the long-term viability of HDHPs under the Affordable Care Act. Only the future can bring answers to that.

In the meantime, the combination of HSAs and HDHPs continue to offer employers and employees a flexible way to manage and reduce health care costs, especially as banks continue to develop more sophisticated and convenient product sets that benefit both business and personal banking customers.

Ruth Mahoney is president of KeyBank”™s Hudson Valley/Metro NY District, and has more than 20 years”™ experience in financial services. She may be reached at 333-5721 or ruth.mahoney@keybank.com.