Health Insurance

By Sylvia Rosen

Health Savings Accounts, or HSAs, and their attendant high-deductible health plans (HDHPs), have been embraced by over 10 million Americans. Consumers are looking for ways to keep premiums affordable, while businesses are looking for ways to control health care expenses. HSA/HDHP combinations have been immensely successful at containing the rate of growth in health care costs, reducing the rate of increase in medical insurance expenses to 2% per year, compared to the 12% rate of inflation in traditional major medical plans since 2000.

In return, however, workers and policy owners have had to pick up more of the risk - you can only use HSAs if your plan qualifies with a minimum deductible of $1,200 (or $2,400 for family plans.)

What is an HSA?

An HSA is a tax-exempt account that is created for the purpose of paying qualified medical expenses. The HSA can be funded by the employer and/or the employee. To be eligible to create an HSA, you must be an individual who has a high-deductible health plan (HDHP). An HDHP is one in which a single individual has a yearly deductible of no less than $1,250 (2014). Further requirements are as follows:

• HSA holders can choose to save up to $3,300 for an individual and $6,550 for a family (HSA holders 55 and older get to save an extra $1,000 which means $4,300 for an individual and $7,550 for a family) - and these contributions are 100% tax deductible from gross income.
• Minimum annual deductibles are $1,250 for self-only coverage or $2,500 for family coverage.
• Annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) cannot exceed $6,350 for self-only coverage and $12,700 for family coverage.
• You must not be covered under any other insurance plan that is not an HDHP.
• You must not be entitled to Medicare benefits.
• You cannot be claimed as a dependent on another person's return.

If you meet all of the above requirements, you are an "eligible individual" for a Health Savings Account.

The benefits of an HSA

Employee benefits
An HSA has many benefits for employees. The first benefit is that 100 percent of the annual deductible for the individual or family can be contributed to an HSA. However, this amount cannot exceed $3,300 for an individual, and $6,550 for family coverage. People ages 55 to 64 can make additional contributions to "catch up" in 2014 of $1,000.

The contribution to the HSA is tax-free to the employee. The employee can take a deduction for any amount he contributes to the HSA. This deduction is an "Above-the-Line" deduction, and therefore directly reduces an employee's taxable income.

An HSA is held in an account for the benefit of the individual, his spouse or children. This account is invested, and any gain on the investment is also tax-free. In addition, if an employee changes jobs, the account goes with him, as the employee is allowed to transfer the entire fund balance to his new job.

Employer benefits
There are also benefits to the employer. An employer is not taxed on the amounts he contributes to the account, and these amounts are also not subject to withholding for income tax, FICA, or FUTA. Therefore, an employer obtains a direct write off for the amounts paid not only for the health insurance premiums, but for the HSA as well.

In addition, most employers will see a reduction in the monthly premiums they pay for their employees due to the increase in deductibles (if the employer does not already have an HDHP).

The reduction in the premiums, and the tax deduction, will help to offset the cost of the employer funding a portion of the HSA, if they so wish to assist their employees with funding the HSA.

The disadvantages of an HSA

Disadvantages for employees
The disadvantages of an HSA are few and far between. First of all, once you reach the age of 65, you can no longer contribute to an HSA. If you do contribute, all amounts will be taxable to you in addition to a penalty of 6 percent. This also occurs if you are considered an "eligible individual" and exceed the allowable amounts that can be contributed if you are less than 65 years of age.

If you do not use the funds for "qualified medical expenses," the funds that are used are included in your gross income, and a penalty of 10 percent is imposed. The 10 percent penalty is eliminated in the case of a distribution after the account beneficiary's death, disability, or once you have attained the age of 65.

An HSA can be transferred to a spouse tax free, but when an HSA is transferred to a person other than your spouse, it ceases to exist as an HSA. It is then included in the person's taxable income. This amount, however, is reduced by any amount paid by the HSA for the decedent's qualified medical expenses paid up to one year after their death.

Disadvantages for an employer
One disadvantage for an employer is that a "comparability" rule applies. An employer must make comparable contributions to each individual's HSA. They must be either the same amount or same percentage of the deductible of an HDHP for each employee. No discrimination is allowed as to employees.

A second disadvantage is that the employee is deemed the owner of the HSA, and therefore if they were to quit or be terminated from employment, all employer-funded amounts remain the property of the employee. The employee is free to transfer their HSA to another employer, including all payments made by their former employer and all interest accumulated on those payments.

The employer can contribute throughout the year, as he pays the medical premiums for his employees. Thus, an employer can save on the cost of the premiums, spread the payment amount over the year and save payroll taxes on the money contributed. This is in addition to making the employee happy.

Who can administer an HSA?

An HSA must be administered by a qualified HSA trustee or custodian. This includes an insurance company, bank, or a person approved by the IRS (approval may be difficult to obtain). The Trustee can be different than the company that provides the HDHP, but you should first check with your insurance carrier to determine if they carry HSAs, and the cost of such plans.

A refreshing option

Health Savings Accounts (HSA) are as good as they sound. Decreasing the cost of health insurance is a refreshing option in today's rising inflationary economy. Small and large employers alike can now benefit from a quality health program. It is not often that we have the ability to reduce our health insurance costs. Therefore, it is imperative to reassess your employer-sponsored health insurance plan, and determine if an HSA is appropriate for your company.