Health Savings Accounts can benefit employers and employees

By Craig Vaughn Tuesday, December 2, 2008 2:58 PM CST - Like many people, maybe you’ve read and heard about health savings accounts, but may still be asking: What exactly are they?

In a nutshell, they are an alternative to traditional health insurance plans that can offer certain tax advantages and the potential for added control over health care dollars and expenses. With a health savings account you can pay for current medical expenses, and save for future qualified and retiree health expenses, all on a tax-free basis.

There can be certain advantages to both employers and employees to having an HSA, but they should not be considered to be a one-size-fits-all solution. What may work well for one employer may not necessarily be the best benefit solution for the next.

To open an HSA, an eligible person must first be covered by a qualified high deductible health plan. The two are designed to work together, with one providing the underlying health insurance plan while the other is an account where you can accumulate money for future qualified expenses. I realize some people can be confused by the technical jargon at first, but hopefully after some further explanation, the concept will start to become clear. Rather than traditional co-payments which many people are familiar with, under an HDHP most covered medical services will track towards a person’s deductible, which is typically higher than most traditional plans. A person can then use pre-tax dollars accumulated in their HSA account to pay for those qualified medical expenses.

Some of the benefits to employers who offer HSAs can include:

■ Potential for greater premiums savings offered by an HDHP versus a more traditional plan with co-payments.

■ Flexibility. You can choose whether or not you would like to contribute to employee accounts, and how much you would like to contribute, subject to IRS limits.

■ Enhancing your overall benefits plan by offering attractive options that help attract and retain good employees.

Employees also can benefit from an HSA by:

■ Paying less for insurance premiums with an HDHP, and using the savings to help fund a health savings account.

■ Tax savings — pre-tax contributions, tax-free interest earnings and tax-free withdrawals when used for qualified medical expenses.

■ Ownership. You own the HSA, and it is yours to keep even when you change jobs or retire.

■ Unused balances and interest are carried over, without limit, from year to year.

As I mentioned earlier, the HDHP features a deductible that is typically higher than most traditional health insurance plans. Starting in 2009, the minimum deductibles are $1,150 for single and $2,300 for family coverage. Except for preventive care, you must meet the annual deductible before the plan begins to pay benefits. Many plans today cover many preventive services up front at 100 percent with no deductible, which is another attractive feature of these plans.

The IRS also puts a limit on the out-of-pocket maximum a plan can have, which in 2009 is $5,800 for single and $11,600 for family coverage.

The IRS has also raised the amount that can be contributed to an HSA account starting in 2009. For single people the contribution limit is $3,000, and for a family the limit is $5,950. In addition, there are catch-up provisions for people 55 and over, of an extra $1,000 per year.

As you can see, there are potential benefits of health savings accounts and high-deductible health plans, but as I mentioned, they may not be the right fit for every workplace and every employee. Discussing these and other options with an experienced and trusted benefits professional can be a good first step in determining if these options are right for you.

Craig Vaughn is director of sales for David Benefit Consulting, a division of David Insurance Agency