Health Savings Accounts: Cost-Saving Mechanism and an Executive Benefit

The Health Savings Account (HSA) is capturing an ever-larger share of the health insurance marketplace.

Today it is commonly used by larger companies, but creative, profit-minded companies of any size should consider it. It is a unique opportunity both to save money and to benefit employees, particularly executives.

Background

The Health Savings Account was born out of one of the problems of American health care: the average person is triply removed from the true cost of healthcare.

Most employees only pay some of their health insurance costs-employers pay an average of 70 to 75 percent-so they don't appreciate the enormity of the cost. Employees often feel as if they've "paid the price of admission; might as well enjoy the show." The premiums they've paid make them feel that they deserve some benefits; they don't worry about the wastefulness or need.

Employees don't have any "skin in the game." They aren't rewarded if they remain healthy, control their weight, stop smoking, etc. Sick or healthy, their premium remains the same, so why should they worry?

The HSA helps solve this problem by allowing employees to accumulate dollars for healthcare costs, almost a triply-tax-favored healthcare IRA:

1. Contributions go into his/her account tax deductibly, reducing today's taxes
2. The money is invested until used for medical expenses, and there's no tax on the earnings
3. If withdrawn to pay for medical expenses, the money comes out income tax-free

To qualify for a HAS, however, the employee must be insured by a "Qualified High-Deductible Health Plan." This is a plan with a minimum deductible (currently $1,100 for a single and $2,200 for a family).

No claims (other than preventive) can be paid until the employee meets the full deductible. The idea is that employees pay for the smaller, manageable health costs-doctor visits, lab tests, etc-and insurance companies insure the catastrophic costs.

Both the employer and the employee can contribute to the savings account portion of the plan; however, as soon a contribution is made, it belongs to the employee, irrespective of who contributed.

There are maximum amounts that can be deposited into the HSA. In 2008, a single employee can put up to $2,900, and a family employee can put up to $5,800, even if the deductible of the plan is lower than those amounts. There is also a "catch-up" provision for employees over the age of 55.

The HSA in Most Construction Companies

As generally described, an HSA isn't one plan. Rather, it's a combination of two components-the high-deductible health insurance plan and a HSA.

The HSA can be obtained via the health insurer, but we generally suggest that our clients offer the HSA portion through a separate financial institution. Employers occasionally switch insurance carriers, so it makes sense to separate the employee's HSA accounts.

HSAs still represent a small portion of health coverage in the US. Most employers who offer it are large, public companies, and it is usually part of a "cafeteria plan" in which employees can select from multiple health coverage options.

Increasingly, smaller, forward-thinking firms are taking advantage of its alluring attributes. The examples in this article use Massachusetts-based insurance plans. Types of plans and carriers vary widely throughout the US, so discuss any suggestions with your local broker to determine if they work where you're located.

Why HSAs Save Money

Very simply, the less risk a carrier assumes, the lower the premium. Most claims are small-a routine doctor's visit to a non-specialist, for example, costs less than $100. In the HSA high-deductible health plan, the most common deductible is $1,500 for a single and $3,000 for a family. Nothing is paid until the employee has met the full deductible.

One carrier's study noted that 65 percent of single employees spend less than $1,500 a year and 52 percent of families spend less than $3,000. This means the carrier will pay nothing toward the healthcare of two-thirds of your single employees and half of your families.

With the high deductible plan, all the carrier must collect is the total cost of claims in excess of either $1,500 or $3,000 plus the cost of administering and tracking the smaller claims. When they spread that cost across everyone, that will generate a much lower premium cost than the traditional plan.

The typical high-end plan in Massachusetts (where most coverage here is HMO based, so co pays are more common than deductibles) is a $15 doctor-visit-co-pay plan with 100 percent coverage in hospital or for surgery after a $150 or $250 co-pay. There are also drug co-pays, typically $10, $25 or $45.

The $1,500/$3,000 HSA will cost 31 to 32 percent less than that plan. So if that plan costs $524 for a single and $1,375 for a family, the HSA plan will cost $360 and $940 respectively-saving $164 per month for single coverage and $435 for the family plan. Some quick math reveals that this seemingly small monthly amount is significantly more than $1,500 and $3,000 per year.

Few employers offer such a rich plan however. Most offer plans with $20 doctor co pays rather than $15, and they require hospital co-pays of $500 and surgical co-pays of $250. That plan will cost less than the $15 plan, about $475/$1,246 in a recent case.

Even then the numbers are still compelling. The HSA premium of $360 is still $115 a month less than the existing plan, and the family plan is $306 less. Put the difference into the HSA, and it totals $1,380 for a single ($115x12 months) and more than $3,000 for the family.

 

Any unused money in the HSA belongs to the employee. Tax-free.

So the creative business owner and his broker can say to the employees:

"Our new plan is arguably better than the current plan. Here's how it will work for you:

• Your contribution is the same as your current plan (the employer will keep the savings from the lower family premium).
• Money goes into an account that you can use for medical costs.
• When you visit the doctor (except for preventive checkups, which are typically covered by the plan), the cost of that visit will be deducted from your cash account. The same goes for prescriptions, lab tests and hospital visits and surgery.
• You don't face the co-pays you currently do for surgical, doctor and hospital bills-all the money comes out of the HSA account.
• If you're healthy, there will be money left in your account at the end of the year, and it carries forward to the following year and so on.
• Note that if you're healthy on the current plan, you get nothing back.
• If you do spend more than $1,500 as a single or $3,000 as a family, co-pays won't begin until after the deductible, so you've saved whatever co pays you would have incurred."

In the recent, real-life example from which these numbers come, the employer pocketed 4.5 percent savings, and employees were happy with the new plan because it was well introduced.

The Executive Benefit

Employee contributions aren't limited to the deductible amount. They can deposit up to $2,900 as a single or $5,800 as a family into the plan. This money goes in tax-free, compounds tax-free and comes out tax-free.

We suggest that highly paid executives use the "shoebox" method of accumulation:

1. Deposit the full amount into the plan each year.
2. Pay all deductibles, co-pays, etc., out of your own pocket.
3. Put the receipts into a "shoebox"
4. When you retire and go on Medicare, tally up all your receipts and withdraw that amount in one lump sum, tax-free distribution.

There's no other way an executive can put tax-deductible money into an investment account, have it compound tax-free and withdraw it tax-free at the end. Neither the IRA, the Roth IRA nor any other form of deferred compensation gets these tax breaks. All are either taxed as money goes in or when it comes out.

The Caveat

There is one hitch, and you've probably already thought of it. Yes, $250 per month deposited into the family account totals $3,000 by the end of the year. And yes, random doctor visits and lab experiences throughout the year will be easily covered.

But what happens if a family employee is admitted into the hospital in the first month of the plan?  He faces a $3,000 deductible with only $250 in the account. What does he do? He doesn't have $3,000 sitting around.

This is the major stumbling block of the plan, but you have the power to overcome it. Employers we've worked with have implemented an interest-free loan to cover any shortage an employee faces.

In the extreme example, the employee who has a hospitalization on day one owes $3,000 and has nothing in his account. The employer agrees to advance the employee the $3,000 and withhold it in equal installments at zero interest over the balance of the plan year. If it happens midway through the year, the employer advances whatever the shortfall is at that time.

The employee now has two payroll deductions-one for his share of the premium and one for the loan repayment. He also has $250 a month building up in his account, tax-free. Repayment of the loan is tied to a medical expense, so the employee can recoup the loan repayment by making a tax-free withdrawal each month.

You, of course, face the question of what to do if the employee leaves for another job or is laid off. The remaining amount can be withheld from the final paycheck, but that consideration may be a challenge for many employers.

Loaning your employee money may not work for you-for example, if you have high turnover at your company-but it is a new, different, creative approach that will often save you money on health insurance, while enhancing your plan's value and increasing your employees' sense of "partnership" with you.

 

Construction Business Owner, November 2008