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HR Magazine, April 2004 - Assessing the Health Savings Option

By Jay Greene  4/1/2004
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HR Magazine, June 2004
Vol. 49, No. 4

Health savings accounts are now on the radar as HR starts formulating next year's benefits.

For many HR professionals, the task of choosing next year’s health plan offerings has already begun.

As health plan providers scramble to develop and market products for the newest approach to employee health coverage—the health savings account (HSA)—HR departments are assessing how HSAs can be worked into their mix of employee benefits.

HSAs, created by Congress in last year’s Medicare reform law, are tax-sheltered savings accounts for medical expenses of individuals and their dependents. An HSA can be set up only in conjunction with a high-deductible health insurance policy. Withdrawals for medical expenses are not taxed.

While benefits experts have the core facts about HSAs in hand for deciding whether to offer such plans, decisions on a few details may have to wait until June, when the Internal Revenue Service (IRS) is expected to issue further guidance on HSAs.

One issue that the IRS plans to address is how HSAs can be meshed with coverage that offers flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). The agency says it also intends to supply guidance on whether some types of preventive care “can be offered without a deductible in a high-deductible health plan” and whether such plans used with HSAs can limit lifetime benefits.

Although the IRS will have more to say on HSAs, it’s crucial for HR professionals—facing open enrollment season in six months or so—to start deciding now whether to add the HSA approach in their health benefit menus, says Barry Barnett, a principal with PricewaterhouseCoopers HR Services in New York.

Finding HSAs’ Niche

Part of HR’s decision-making process, of course, involves understanding how HSAs work. In some respects they resemble other health coverage arrangements, and in other respects they are different, Barnett notes. Unlike FSAs, for example, HSAs can be rolled over from year to year and are portable—employees can take them if they change jobs. And unlike HRAs, which are funded solely by the employer, HSAs can be funded by either the employee, the employer or both.

HSAs offer a plus for employers because the arrangements “can help encourage medical cost savings by empowering employees to think closely about their health care,” says Serena Simons, an employee benefits attorney at Miller & Chevalier in Washington, D.C. In effect, HSAs are consistent with the consumer-directed approach to health coverage, in which employees are encouraged to think of the money spent on their health care as their own and thus to be especially careful about their spending decisions.

And since HSA funds are not taxed on withdrawal unless they’re used for some purpose other than to pay for qualified medical expenses, the accounts can be useful for employees who want to salt away tax-advantaged sums for use later in meeting health costs during retirement. (After becoming eligible for Medicare at 65, a person cannot contribute to an HSA but can withdraw funds from one.)

What HR Has To Weigh

Major aspects of HSAs that HR professionals will have to examine closely include their structure and their fit with other company health coverage offerings.

A significant requirement—for employers as well as employees—is that HSAs be used in conjunction with a high-deductible insurance policy, one that sets minimum annual deductibles of $1,000 for an individual or $2,000 for a family, and sets maximum out-of-pocket expenses—such as deductibles and co-payments, but not health premiums—of $5,000 per year for an individual or $10,000 for a family.

Adding a high-deductible health plan to a company’s benefit offerings can raise a big issue for HR, says Barnett. If the company’s current health plan or insurer doesn’t offer a high-deductible policy, it could be necessary for HR to find a vendor that does, he says. But he adds that “if you go with an outside vendor, it will be more difficult to integrate your benefit package.”

Barnett adds that many provider options should be available soon. “We are just seeing the large insurers, like Aetna and Cigna, enter the market to offer HSAs and high-deductible plans. You will have banks, financial service companies and a whole array of vendors competing for business.” Although some vendors are moving fast and will offer HSA plans for next year, he says, others “will wait for the rules to become clear, gauge employee interest and [for] the market to shake out.”

Another decision for HR centers on who funds the HSAs. With both the employer and the employee eligible to contribute, “employers may want to encourage participation by offering matching amounts” for employees’ contributions, Barnett says.

Annual contributions, regardless of who makes them, currently are limited to $2,600 for an individual and $5,150 for a family.

Nondiscrimination, or comparability, rules also come into play in crafting HSAs for a company’s benefits package. “With HSAs, you have to make comparable contributions for all participating employees,” Simons says. “You can’t contribute more for a manager than a regular employee.

“One of the big unknowns is how these plans fit in with FSAs,” Simons says. The question is whether FSAs would be allowed alongside HSAs so that employees could use their pre-tax FSA funds for costs not covered by an HSA.

Consider the example of a single person with a $2,600 HSA—the maximum—and a policy requiring the maximum $5,000 in out-of-pocket expenses. That person faces $2,400 in outlays. Simons notes that “many flexible spending accounts have $2,000 to $5,000 limits for expenses not otherwise paid by the health plan.” Thus, with an FSA of at least $2,400, the person in the example could use pre-tax money to cover health expenses that fall between the HSA and the out-of-pocket maximum.

“My personal view is they both should be allowed,” Simons says of the two types of accounts. “HSA [contribution] limits are not high enough to always cover out-of-pocket expense for high-deductible policies.”

A Question of Prevention

Employers considering an HSA benefit package with their broker, insurer or benefits consulting firm also face a key question—expected to be discussed further by the IRS—on the types of preventive services that can be covered by an HSA without being subject to the high deductible. Preventive procedures can include physical examinations, Pap smears, vision services and dental exams. “HR people will be involved in making decisions on which type of preventive services would be excluded from the deductible and whether they would be covered at 100 percent” or at a lesser amount, Barnett says.

Health plan experts have voiced concern that employees who want to build up their HRAs or, now, their HSAs, would forego preventive services, thus placing themselves at risk for illnesses later on that could have been found and treated in earlier, more-manageable, less-costly stages.

Not for Everyone

Although employers should not be advising employees on which health benefits to choose, Barnett says, HR professionals should be aware that HSAs are probably right for some people and wrong for others. The young and the healthy may be able to save more than they spend, while those with health conditions “may go right through these plans” and incur heavy out-of-pocket expenses.

Barnett advises companies to offer disease management programs to supplement the HSA and high-deductible policy. “We think population management is a good tool, and HSAs add another tweak to that approach,” he says. He is recommending to employers that they set up their HSA arrangements so they can say to employees: “When you enroll in this plan, you get a health risk assessment. We will pay you $25 cash to do it, or we will put this in your HSA.” He adds that “there are a whole range of preventive things we can encourage through incentives like this that can support HSA-type products.”

Framing the Decision

Most companies will take one to two months to determine whether they want to include HSAs in their package of benefits, says Kathleen Strukoff, a vice president with Aon Consulting’s health and welfare practice in Baltimore. Once a company decides to go with an HSA plan, however, it’s time to start communicating with employees. But timing is important, Strukoff adds. “If you communicate too far ahead, they will forget about it before making choices. If you decide in March, April or May to offer [an HSA], give employees teaser information [during the year] so they have some knowledge of the coming new options for health benefits.” She recommends that a full-scale employee information campaign begin several weeks before open enrollment.

As they plan their benefit offerings, Simons says, HR professionals should think about what they are trying to accomplish. “If they are interested in a defined contribution approach, and they think it will help them meet their strategic goals of cost containment and employee responsibility, HSA is a good option,” she says.

In explaining HSAs, Simons says, HR professionals shouldn’t push them over other types of health benefits. “HR should construct a general education program to explain the advantages and disadvantages of the various types of product offerings,” she says, using methods such as discussion groups, brochures and informational web sites—all designed to help employees make knowledgeable choices. With the variety of health coverage products now available, she says, “HR people have a lot of flexibility in what to offer in their plan.”

Jay Greene is a freelance writer in St. Paul, Minn., who specializes in health topics.
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Familiar Approaches

Health savings accounts (HSAs) join the ranks of other arrangements designed to help employees pay for health care. Among the best-known arrangements are the flexible spending account (FSA) and the health reimbursement account (HRA).

FSAs are accounts that employees set up with their own pre-tax dollars for use—tax-free—in paying for medical expenses in IRS-approved categories, now including over-the-counter drugs. Unspent FSA amounts at year’s end are forfeited, however, which can lead to health purchases motivated by a use-it-or-lose-it concern rather than medical necessity.

HRAs are employer-funded accounts that employees draw on for medical expenses; typically they are offered with catastrophic coverage that kicks in after substantial out-of-pocket spending by the employee. Employees decide whether and when to tap their HRA funds, and unspent amounts can be carried over to subsequent years.


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