Health Savings Accounts

An H.S.A. (Health Savings Account) is made up of two parts: 1.) A high deductible health insurance plan, and 2.) A savings account. The employer sponsors the health insurance product. The employee is responsible for setting up the savings account. The employee can fund the savings account with pre-tax contributions from the company payroll.

Health insurance product

The regional health insurance companies (example: Blue Cross, Harvard Pilgrim, Tufts, Fallon) market H.S.A. plans. An example is a plan that would have a $1500 deductible for a single, $3000 deductible for a family. Preventive care services including routine physical exams, vision and hearing screenings, annual gynecological exams would be subject to a $20 copayment. All non-preventive care treatment including prescriptions would hit the deductible. For example, once a single employee has reached the $1500 deductible then all medical services would be paid 100% by the insurance company. The prescriptions would be subject to the generic / formulary / nonformulary three tier copayment schedule set by the plan (Example: $10 generic / $30 formulary / $50 nonformulary)

The employee can pay for the deductible out of his own pocket with after-tax dollars, or he can set up a Savings Account and fund it with pre-tax dollars.

The Savings Account

The Savings Account has to be sponsored by a bank or credit union. Several insurance carriers prefer to work with Sovereign Bank. The employee is responsible for setting up the account. The employee will tell the employer how much money should be taken out of his paycheck to deposit into the account. The employer then sends a payroll file to Sovereign and the funds would be deposited into each participant’s account.

In 2009 the I.R.S. allows employees to deposit up to $3,000 for a single, and $5,950 for a family based on a calendar year. Note this amount is not dependent on the dollar value of the deductible on the health insurance product. That is, a single employee could have a $1500 deductible plan and deposit $3000 into his account.

What happens if an employee starts an H.S.A. plan October 1st? The employee has two choices: 1.) He could contribute funds on a pro-rated basis. In this example, October is ¾ of the way through the year, so the employee could contribute up to 1/4 of $3000 = $750. or 2.) The employee can deposit more than the pro-rated amount. In this case greater than $750, BUT, the participant would have to be remain on an H.S.A. product through December 31st of the following year regardless of his company’s plan anniversary date. If the person leaves the H.S.A. before that time then the employee will have to pay taxes on the amount of money that exceeded the pro-rated amount.

Why should I even consider a Health Savings Account product?

1.) An H.S.A. has more value for the dollar compared to other high deductible plans.
The increasing cost of health insurance has forced employers to investigate $500, $1000, and $2000 deductible plans. Following the law of diminishing returns, to go from a $1000 to a $2000 plan would produce about a –5% savings in premium. If the current premium for a single person is $400 per month then the $20 per month (5% of $400), $240 annual savings looks small compared to the extra $1000 exposure ($2,000- $1000) of the deductible. For about the same cost as the $2000 plan the employer could take an H.S.A. with a $1500 deductible.

2.) An H.S.A. allows an employee to rollover any account balances into the next year. Hence, the H.S.A. is better than a Flexible Spending Account which has the “use it or lose it rule.” On the other hand, in an H.S.A. you can only spend the amount of money that you actually have on deposit.

3.) An H.S.A. allows highly compensated employees to put money away on a pre-tax basis regardless of the contributions of non-highly compensated personnel. So, if you are an executive you could think of the $3000 single, $5950 family contribution as a “tax deferred savings account,” The money can be invested in a range of highly rated mutual funds with the financial institution.

4.) An H.S.A. can be offered to both employees and to owners. With an F.S.A, partners, and shareholder employees of a Subchapter S corporation who directly or indirectly own more than two percent of the company's stock are ineligible to participate. The owner of an LLC cannot participate in an F.S.A. The H.S.A. offers the owners pre-tax deductions, the ability to pay for medical, dental, and vision expenses on a tax advantaged basis, and to have the unused dollars grow on a tax deferred basis in highly rated mutual funds.

When should I set up a Health Savings Account?

The answer to this question depends on whether the insurance product has a “plan year” deductible or a “calendar year” deductible. If the insurance product has a $1500 “plan year” deductible and you started the plan effective October 1st then the deductible would apply from 10/1/2009 – 9/30/2010. The single employee would know that his financial liability would be $1500. On the other hand if the insurance product has a $1500 “calendar year” deductible then the deductible would apply from 10/1/2009 – 12/31/2009 and re-set on 1/1/2010 and run from 1/1/2010 – 12/31/2010. So the risk to the employee is that in the first year he would be potentially liable for two deductibles within a 12 month period of time. Consequently, the employee would have to think about the pro-rated funding strategy and having to stay in the plan the following year, and the potential tax penalties.

Miscellaneous notes

One member of the family could account for the entire family deductible.
The employee can only spend what he/she actually has in the H.S.A.

Andrew Gordon, Gordon Analytic, 781-891-7283, Andrew_Gordon@GordonAnalytic.com