Like a fine wine coming into its own, health savings accounts (HSAs) are maturing and gaining popularity with employers and employees alike.
Since debuting in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act, HSAs have slowly but steadily gained traction. In January 2007, a survey by America's Health Insurance Plans found that more than 4.5 million Americans were covered by HSAs – an increase of 71 percent over the preceding year.1 While total numbers are still relatively modest, HSAs are becoming an increasingly important component in health care consumerism.
An HSA is a tax-free savings account for medical expenses used in conjunction with a high-deductible health plan. Employees and/or employers set aside pre-tax dollars into a custodial account or trust where they grow tax-free. When spent on qualified medical expenses, funds are also tax-free coming out of the account.2 This structure allows for a triple tax preference that is attractive to employers and employees.
In the early days of HSAs, employers were trying to get their bearings in order to understand – and then utilize – this new savings vehicle. Now, a solid group of HSA devotees has begun pairing other products and programs with HSAs so employees can better maximize the advantages inherent in these plans. These pairings must take into account that HSA-eligible individuals must be covered by a high deductible health plan that meets IRS criteria and can have no other coverage that pays benefits before the IRS-established minimum deductible has been met. There are certain exceptions to the "no other coverage" rule, including insurance for a specified illness (such as cancer), insurance that pays a fixed amount for each day of hospitalization, as well as coverage specifically for accidents, disability, dental, vision or long-term care. These coverage exceptions can be important for pairing purposes since they can pay benefits before the high deductible has been satisfied.
Creative pairing of HSAs with other benefits can result in synergies that deliver better benefits and coverages.
Wellness programs: After a few years of educating employees on the benefits of wellness and lifestyle adjustments, many employers are linking their HIPAA-compliant wellness programs to an HSA. Such combinations often come in two forms: conditioning an employer's HSA contribution on participation in a wellness program or giving an employee extra HSA dollars for doing so. A couple words of caution – first, giving different people different HSA contributions can cause employers to fail HSA "comparability" rules, which require that all similarly situated employees receive either an equal dollar amount or an equal percentage of the deductible under the high-deductible health plans. A solution may be to make the employer contributions through a cafeteria plan, which has different – and more flexible – non-discrimination rules. Second, wellness programs cannot offer much in the way of actual medical benefits (most don’t); otherwise it could be considered impermissible "other coverage" unless the deductible has already been satisfied.
Matching contributions: Employers who want to encourage employee contributions to HSAs are sometimes choosing to establish matching contributions--similar to inducements to encourage retirement savings. Such matching programs can be either a straight dollar amount or a percentage. Since matching contributions by definition will not pass the comparability rules, employers must do this through a cafeteria plan. However, because even the more flexible cafeteria plan nondiscrimination rules may be a challenge (highly compensated individuals are likely to save more for their medical care which may mean the lion’s share of matching contributions will be going to these employees), employers must test these contributions for nondiscrimination to make sure they comply.
Supplemental disease and accident benefits: Some insurance policies pay cash benefits when a policyholder has a covered accident, specific disease (such as cancer) or hospital stay. The best known of these are probably through AFLAC, the company with the adamant – and accident-prone – spokesduck. If they fall within the permitted "other coverage" exceptions discussed above, these policies are perfectly paired with HSAs, providing additional coverage in concert with a high-deductible health plan. Their single biggest problem, though, may be affordability. For employees already struggling to make premium payments and to save through their HSAs, this type of supplemental policy may no longer be within financial reach.
Prescription discount cards: Perhaps the most popular of all the pairings, employers often offer prescription discount cards in combination with HSAs. The IRS has made clear that HSA owners can receive benefits through a discount card program regardless of whether they have satisfied the deductible under their high deductible health plan. These discount cards provide either a percentage savings or a flat fee for prescription drugs.
Preventive Care: Employers can also pair preventive care benefits with an HSA. Because Congress did not want HSA account holders to skimp on important preventive care services, IRS rules allow insurers or employers to pay for preventive care even though the HSA owner has not satisfied the deductible under the high deductible health plan. This can include periodic health exams like an annual physical, routine pre-natal and well-child visits as well as immunizations and diagnostic screenings (e.g., mammograms and colonoscopies) and the like.
Limited Purpose FSAs: Cafeteria plan health flexible spending accounts (FSAs) that can reimburse any uninsured medical expenses cannot be used with HSAs because they are considered impermissible other coverage. Employers have responded by converting traditional FSAs into limited-purpose FSAs that cover only dental, vision and preventive care. And once an employee reaches his or her deductible, the limited purpose FSA can reimburse any medical expenses above that deductible.
As health savings accounts continue to grow in popularity, more and better pairings with new and existing products will no doubt emerge. Employers should be inventive and innovative when it comes to maximizing the benefits of HSAs, while recognizing that federal regulations will make certain pairings impractical or impossible.
Sue O. Conway is a partner at Warner Norcross & Judd LLP, one of the largest law firms in Michigan. She concentrates her practice in employee benefits law. She can be reached at 616.752.2153 or firstname.lastname@example.org.
Amy Chambers is the director of consumer-engaged healthcare for Priority Health, a nationally recognized health insurance company based in Michigan. She can be reached at 616.464.8540 or email@example.com.
1America’s Health Insurance Plans, January 2007 Census Shows 4.5 Million People Covered by HSA/High-Deductible Health Plans
2Amy Chambers, Health Savings Accounts for Dummies, Wiley Publishing, pp 5-6.
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