How Are HSAs Doing...
Small-business owners, pressed to the wall on health insurance costs, are taking a serious look at health savings accounts (HSAs), a medical coverage alternative that became law on January 1, 2004. According to a study by ehealthinsurance.com, 37% of people using HSAs were previously uninsured.
HSA overview
Health savings accounts combine high-deductible health plans (HDHPs) with savings accounts to cover uninsured medical costs. Premiums on these insurance plans are considerably lower than traditional coverage, giving you savings that can even outstrip contributions to the HSAs. For example, one company that paid $72,000 for a low-deductible (broad coverage) health policy for its 15 employees saved $17,000 by switching to an HDHP (premiums were cut to $40,000 and it paid another $15,000 because of its $1,000 per-employee contribution to the HSA for each employee).
You or your employees contribute to HSAs on a tax-deductible basis. If you contribute to employee accounts, contributions are not subject to payroll taxes (although they are reported on W-2 forms using the new Code W). Earnings in the accounts build up tax deferred; they become tax free when used to pay medical costs.
The main advantage to HSAs is cost savings. Employers switching to HSAs are realizing substantial savings (one Ohio company with 45 employees is saving $56,000 this year).
You can set up an HAS for yourself, even if you don’t provide health coverage for your employees. As long as your personal plan is an HDHP, you can contribute to an HSA and claim a tax deduction on your personal return.
Another advantage of HSAs over other types of medical plans is that you do not have to monitor withdrawals from the accounts to make sure they are used for qualified medical purposes. The employee bears the responsibility for keeping receipts to substantiate the use of withdrawals to pay for uninsured medical costs.
For answers to your questions on HSAs, there is a new Web site. Go to www.hsainsider.com.
More insurance options
You have an ever-growing choice of insurance companies now offering high-deductible health insurance plans that meet HAS requirements. When HSAs started in January of this year, there were only 22 insurance plans available. By the end of June, that number had grown to 40 and HSAs were available in 49 states. This month it is expected that up to 80 such plans may be available.
Talk with your insurance agent, who can help you run the numbers to determine your options and the potential savings to you.
Favorable IRS positions
The federal government is encouraging adoption of HSAs. IRS rulings are creating transition periods and other breaks in order to allow HAS coverage to those who might otherwise be ineligible. For example:
Separate drug plans.An individual covered by both an HDHP that does not cover prescription drugs and a separate non-HDHP prescription drug plan or rider (i.e., a plan that provides coverage for medications before satisfying a minimum annual deductible is not an HDHP) is not eligible to contribute to the HSA. The reason: the drug plan provides coverage before the HDHP minimum annual deductible has been satisfied. But the IRS has provided transitional relief, treating such person as an eligible individual for months before January 1, 2006.
Preventative care.Funds can be used for a wide array of preventive care expenses, including periodic health evaluations, routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs, obesity weight-loss programs and many screening services. Under transition relief, HSAs established for 2004 can cover these preventive care expenses that arise on or after the later of January 1, 2004, or the first day of the month that an individual is eligible for an HAS.
Prior expenses. In certain cases, HSAs can now reimburse expenses incurred before the HSAs are set up. Generally, HSAs can only reimburse on a tax-free basis those expenses incurred after the establishment of the accounts. But the IRS has provided relief for those who set up HSAs for 2004 on or before April 15, 2005. Under this rule, HSAs can reimburse expenses that arise on or after the later of January 1, 2004, or the first day of the month that an individual becomes eligible for an HSA.
State law.Several states, including New Jersey, North Dakota and Pennsylvania, currently require health plans to provide certain benefits without regard to a deductible or to have a deductible that is below the minimum annual HDHP deductible ($1,000 for a self-only plan and $2,000 for family coverage in 2004). Since HSAs only became effective on January 1, 2004, the states have not had time to modify their laws to conform to HAS requirements, so the IRS has given eligible individuals a break. Before January 1, 2006, insurance plans that fail to qualify as HDHPs solely because of state law will nonetheless be treated as HDHPs.
Note: Even if you maintain flexible spending arrangements for health care of health reimbursement arrangements, you may still be eligible for HSAs under special IRS guidance.
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