In their first year on the market, HSAs attracted thousands of individuals and business owners eager to escape the runaway costs of health insurance. Now, more than 1.5 million people are enrolled in HSAs. William Boyles, publisher of an insurance industry newsletter, predicts that 20 million people will be enrolled within five years. The new law makes HSAs permanent and available to everyone - individuals, business owners, and employees. And don't confuse HSAs with their predecessor, the Flexible Savings Account. HSAs are the next generation of tax-favored medical insurance.
HOW HSAs WORKHere's how they work: HSAs come in two parts. First, you must purchase a low-cost, high-deductible health insurance policy available through a growing number of providers including such giants as Aetna, United Health Group, Blue Cross, Golden Rule Insurance, and many others.
In conjunction with the insurance policy, you open a dedicated savings account in which you make tax-deductible deposits to pay for your medical care. Each year, you may deposit up to the amount of the deductible on your insurance policy. You then use the money in the account to pay for your medical care. Once your expense reaches the amount of your deductible, if it does, the insurance policy kicks in.
Consider this example: Contractor Smith enrolls himself and his family in a plan with a $5,250 deductible policy. He then deposits $400 tax-deductible dollars per month in his HSA savings account. That year, his family's out of pocket medical expense, paid from funds in his HSA account, comes to $3,200. Since his total deposits for the year were $4,800, the balance of $1,600 rolls over in the account. It compounds tax-free (as long as it is used to pay for qualified medical expenses).
As the money in the account grows, it becomes a resource available to cover the cost of routine or future medical care. This is an important feature that makes HSAs far more attractive than their predecessors.
In another example, contractor Jones enrolls in a similar plan with the same deductible. He also deposits $400 per month in his tax-favored HSA account. However, one of Jones' children had expensive surgery raising the family's total medical expense for the year to $15,500. Once Jones' out-of-pocket reached the family deductible of $5,250, the insurance paid the balance of $10,250. In this case, the HSA protected the family against a catastrophic medical expense.
ADDED BENEFITSIn addition to the tax incentives, HSAs offer complete control over choice of doctors and eliminate the often annoying referral requirements of some health plans.
Current law requires a health insurance policy with a deductible of at least $1,000 for individuals and $2,000 for families to open an HSA. The law also limits the maximum out-of-pocket expenses to $5,100 for an individual and $10,200 for a family. That means the deductible can be as much as $5,100 or $10,200 for individuals and families, respectively.
Golden Rule Insurance Co. was one of the first providers of HSAs. Today, one out of every three plans purchased from Golden Rule is an HSA. "Our customers have accumulated more than $116 million in their tax-advantaged savings accounts," said Golden Rule spokesperson Ellen Laden. "Who is buying? Self-employed men and women, families with children and early retirees are leading the way," said Laden. "We feel the reasons why are clear: premiums typically 45 percent to 55 percent lower than traditional plans, discounted health care costs through preferred networks, one annual deductible per family, and the 4 percent annual interest that Golden Rule pays on its health savings accounts."
Golden Rule's current deductibles for HSA policies are $1,000, $1,750, and $2,650 for singles and $2,000, $3,550, and $5,250 for families. "Our Golden Rule HSA 100 pays 100 percent of covered medical expenses once the deductible is met and there is no co-insurance," said Laden. "The policies of other providers offer similar, but not necessarily the same, provisions."
The tax advantages of HSA along with control over choice of doctors makes them appealing to small business owners and the self-employed, as well as the uninsured. "Nearly all of the policies I sell now are HSAs," said Tom Rogala, Custom Benefit Solutions, Northville, Mich. "All of my plans provide 100 percent coverage after the deductible. I can't imagine why any business owner or individual would want to go any other route."
Rogala, an independent health insurance broker, said that many of his clients are small business owners who need coverage for themselves and would like to make coverage available to their employees at little or no cost to themselves. HSAs make that possible.
"A business owner can sign up for an HSA for himself and make them available to any employee on a voluntary basis," said Rogala. "That way, the employee deals directly with the provider. The employer is not involved and makes no contribution.
COSTS AND THE DETRACTORSThe employer can also sign up for a group plan in which the company pays a portion of the cost for each covered employee. The required employer contribution for group plans varies by state. In Michigan, employers are required to contribute a minimum of 25 percent of the cost of the high-deductible insurance policy.
"That's still a lot less than it would cost the employer for any other type of plan," said Rogala.
Rogala talked about one of his clients, a small business owner who was paying $900 per month for coverage for himself and his family. "With his HSA, his cost is $250 per month for the high-deductible insurance policy. Plus, he deposits $295 tax-deductible dollars in his HSA to pay for medical care as needed. If his costs for the year exceed the amount of his deposits, the insurance kicks in with 100 percent coverage. If his costs are less than his deposits for any year, the balance will roll over, accumulating a kitty to pay for future care."
Business owner Steve Sclater, Saline, Mich., signed up for an HSA for himself and three employees. "I've been paying about $2,600 a month for health coverage for the four families," he said. "My new HSA will save me at least 25 percent and we'll have better coverage than we have now." Sclater bought his policy from Golden Rule.
"I researched it on the Internet and found that they have a better rating than my present company. Also, I'll now be able to offer the insurance to other employees who may not have been eligible under my old plan."
As might be expected, not everyone is enthusiastic about HSA. Skeptics argue that the high-deductible policies will deter some from buying an HSA plan and that others will be reluctant to dip into their HSA savings to pay for medical care with what amounts to their own money. At a congressional hearing in the spring of 2004, Rep. Pete Stark (D., CA) said that he believed that high-deductible plans are not consumer driven. "They simply shift costs to so-called consumers who pay more out of pocket."
"That's ludicrous," said Tom Rogala. "My files are full of examples of individuals who are thrilled with the savings and the service they're getting through their HSAs. Knowing what I know after 15 years in this business, I just can't imagine that there is a better deal available to consumers today."
One disadvantage for some prospective enrollees is the reluctance or refusal of some insurance providers to issue policies to people with serious pre-existing medical conditions.
Still, despite the reluctance of some to jump on the HSA bandwagon, there is no denying the rapidly growing popularity of this new approach to health care insurance. Employees like the way HSAs give them more choices and more control over their health care. Small business owners say they like HSAs because they help to control spiraling health care costs, putting more money on their bottom lines.
As a business owner, you may well benefit from a comparison between an HSA and your present health insurance for you and your employees.
Bill Lynott is a prize-winning writer. His background in management consulting, marketing, and finance has provided him with the credentials needed to produce more than 800 articles appearing in a wide range of consumer magazines, trade publications, and newspapers in 17 countries. Visit www.blynott.com.
Sidebar: FAQ About HSAWho is eligible to open an HSA?
Anyone may apply for an HSA and its companion high-deductible health insurance policy, though individuals with serious pre-existing medical conditions may find it difficult to find a provider willing to accept them.
Where can I open an account?
There are now scores of insurance companies and brokerage firms offering HSA coverage including such major providers as Aetna, UnitedHealth Group, Blue Cross, and Golden Rule Insurance Co. In addition, HSAs can be obtained through thousands of independent health insurance brokers.
Does an HSA pay for the same things that regular insurance pays for?
HSA funds can be used to pay for any qualified medical expense, even if they are not covered by your health insurance. For example, most health insurance does not cover the cost of over-the-counter medicines, but HSAs can. If the money from the HSA is used for qualified medical expenses, the money spent is tax-free.
Do unused funds in a Health Savings Account roll over year after year?
Yes, the unused balance in a Health Savings Account automatically rolls over year after year. You won't lose your money if you don't spend it within the year.
Where can I get more detailed information about HSAs?
www.goldenrule.com or 1-800-974-4472
Publication date: 03/20/2006