Health-savings accounts optimize employee benefits

Health care continues to be a critical cost issue for employers and employees alike. With health care premiums escalating 73 percent since 2000, according to the Kaiser Family Foundation’s 2005 Employer Health Benefits Annual Survey, many business owners are turning to Health Savings Accounts paired with a high-deductible health plan to control costs, attract quality employees and compete effectively in the marketplace.

Created by the Medicare Modernization Act of 2003, HSAs help individuals save for qualified medical expenses and retiree health expenses on a tax-advantaged basis. Since HSAs first became effective in January 2004, the popularity of these plans is increasing. In January 2006, enrollment topped 3 million, more than triple the number from just eight months prior, according to America’s Health Insurance Plans’ Center for Policy and Research. Industry analysts predict HSA enrollment will grow to 15 million by 2010 and 30 million by 2015, according to “Health Savings Accounts: How will the Stars Align,” published in 2005 by Celent Consulting.

The reasons for the growing popularity of HSAs are simple: They help make health coverage more affordable, encourage more prudent use of health services and allow tax-free spending on a wide range of medical expenses.

Benefits to employers

Whether you are the owner of a small or large business, the benefits of HSAs are the same. HSAs work with a high deductible health insurance plan to:

• Reduce health care benefit costs. By offering a high-deductible health plan, premium costs may be 30 percent to 40 percent less than traditional health plans.

• Control medical costs. Companies can make contributions to employees’ HSAs, up to the annual limit, which is the lesser of the plan deductible or $2,700 for single coverage and $5,450 for family coverage.

• Reduce taxes. Employer contributions are excluded from an employee’s adjusted gross income and can be deducted as a business expense.

• Trim administrative work. Following HSA enrollment, the custodian takes over record-keeping, including reporting to the Internal Revenue Service and regulatory reviews, freeing up staff members for other tasks.

For a small business, a high-deductible health plan bundled with an HSA may be the difference between offering your employees’ health benefits or none at all.

Benefits to employees

Employees will be able to use the aforementioned savings from lower premiums to fund their HSAs, and they will not be taxed for withdrawals used for qualified medical expenses. But there are other employee benefits as well, including portability, flexibility and greater control over health-care decisions.

HSAs also present the opportunity for employees to supplement their retirement incomes. Since the money in an HSA grows tax-deferred, employees have another opportunity to invest their funds to maximize their earning power. Once they are 65, they can withdraw funds for any nonmedical purposes at ordinary income tax rates, in addition to still being able to withdraw tax-free amounts for qualified medical expenses.

Employer considerations

Overall, HSAs present new opportunities for employers interested in pursuing consumer-directed health plans. But the greatest hurdle will be finding a well-designed plan and educating employees on the benefits.

A financial professional can help develop a strategy to increase enrollment rates. The biggest driver of the adoption of high-deductible health plans and HSAs by employees is an employer match or contribution. Roughly one-third of employers who contribute to employee HSAs offer between $250 and $499, according to a survey by the Council of Insurance Agents & Brokers, with 18 percent offering $500 to $749 and 17 percent contributing $750 to $1,000.

Work with a financial professional on contribution amounts from flat dollars or percentages to a tiered approach, and for guidance on how to amend your 125 Cafeteria Plan to allow for pre-tax contributions. Employer contributions are subject to nondiscrimination requirements. In general, you must make comparable contributions for all employees in each coverage category (single coverage or family coverage).

While implementation and adoption of a new health care program is no small task, studies have shown that the level of employer commitment to promote healthy behavior and responsible financial management has a direct effect on the behavior of plan participants and how much money is saved in HSAs. Ultimately, employers will get out as much as they put in.

To learn more about HSAs, contact your business adviser or visit www.treas.gov or www.irs.gov.

Aaron Tanner is a financial representative with Northwestern Mutual Financial Network in Springfield. He may be reached at aaron.tanner@nmfn.com.[[In-content Ad]]