Legislation increases HSA flexibility

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Opening a health savings account will be easier in 2007, thanks to a bill signed by President Bush in December.
The law, known as the Tax Relief and Health Care Act of 2006, makes “very positive changes,” to health savings accounts, said Tom Voakes, president of Effective Choices, a Colorado Springs-based benefits team that is part of Strategic Financial Partners.
“The biggest change is that they unhitched the maximum contribution from the deductible,” he said. “Before you could only contribute $2,700 or your deductible — whichever was lower. Now you can contribute a maximum of $2,850 for individuals. It makes a difference. It makes it easier to use for things like dental work that are outside the health plan.”
Health savings accounts are generally combined with a high-deductible health insurance plan. Once the deductible is met — using the monthly contributions an employee puts into the account — the insurance companies pay 100 percent of covered medical costs.
In the two and a half years since HSAs were created as part of the Medicare Prescription Drug, Improvement and Modernization Act, consumers and employers have embraced the insurance alternative. In Colorado, more than 26,000 people have health savings accounts, according to the Department of Insurance.
The changes to the HSA plans “open the plans to a wider swath,” said Regis University associate professor of business Mike Fisher. “These changes will definitely push the 3 million people who use the plans to higher numbers.”
Congress also made it possible to move money from Roth IRAs to the health savings account. Voakes said this option likely will not be used by many people.
“I don’t advocate taking money out of your retirement plan for any reason,” he said. “But it could be a good thing for some people, particularly if there’s a big claim the first year. Its application is just going to be limited.”
However, another change makes it easier to make contributions to the HSA. Before the law changed, if someone signed up for an HSA in October, they could contribute for three months the first year of the program.
“And moving to a high deductible plan makes it very scary,” Voakes said. “If you have a medical emergency with just a few months in the account, it can be difficult to make that change.”
But the new law allows people to put the full amount allowed into the HSA, no matter what time of the year they sign up for the plan.
“This is a very positive thing,” he said. “A person can contribute $2,850 even if they are only in the plan for a month.”
However, Voakes cautions that there’s a caveat for the plan. If a person drops their high deductible coverage before the year is up, they will have to claim the remainder of the money on their income taxes.
“They removed the penalty from the front end, but they put it at the back end,” he said.
The changes make it easier for large employers to offer HSA plans, but they only increase the plans’ complicated structure, he said.
“When we’re talking to an employer, we schedule at least four meetings to talk about the HSAs,” he said. “They’re just that complicated. And for very large employers, with more than one site, it can be too difficult to sign up for them.”
Despite the complicated language in HSA and high-deductible health plans, a survey by Colorado-based Mountain States Employers Council found that premiums for HSA plans are 30 percent lower than HMO plans. The Deloitte Center for Health Solutions found that the cost of HSA and other consumer-driving health plans went up only 2.8 percent in 2005, compared to a 7.3 percent increase for average health insurance plans.
That difference in premium costs will be the main thing that drives employers to offer HSAs, Fisher said. But he’s not completely convinced the plans benefit every individual.
“I don’t think they’re an option for the lower wage earner,” he said. “And they’re definitely not an option for the uninsured. They will have difficulty paying those premiums. For higher-wage earners, any change in the tax law — where you can claim less as earned income — is a good thing.”
Voakes said that HSAs are one of the ways to address escalating health insurance costs. However, the plans require a shift in thinking for most consumers.
“People have to realize how much it really costs to go to the doctor,” Voakes said. “Not just their $20 co-pay, but what it actually costs. For some people, it’s too much trouble. But this plan allows people to become educated about what it costs and how controlling that cost benefits them — it’s their money. The biggest hurdle is giving up the prescription cards and taking control of where their money goes. It definitely requires a different thought process to have a strategy to pay the out-of-pocket costs from a traditional plan.”
Fisher predicts that employers will move to HSAs as traditional health insurance premiums grow. During the next few years, HSAs could become the only option available to employees.
Voakes agrees, saying HSAs can save employers millions in escalating insurance costs — particularly those that pay an employee’s entire premium.
“Although we have some employers who just won’t use them,” he said, “the option is definitely gaining ground.”