Health Savings Account – Good for Employee, Good for Company

Health Savings Account Benefit Plans (“HSA”) have become in vogue over the past 5 -10 years. This is a direct result of the Affordable Care Act, which emphasizes consumer driven health, and encourage individuals to take a more active role in the entire benefit process. What many don’t realize is that these types of benefit programs have actually been in existence since 2003, well before the inception of the Affordable Care Act (in 2010).

Why were HSA programs originally created? Ironically, they were not conceived as a vehicle to provide “cheap” benefits and save companies money (although this is an upside of an HSA). From the inception, they were designed as another form of a retirement vehicle, where the participant can potentially save money for their health needs at retirement.

An HSA program is one of the few remaining true Tax Shelters, where money is saved on a pre-tax basis, grows pre-tax, and as long as the money is spent on qualified medical expenses, the employee never pays taxes!

The concept is quite simple. The typical “younger” employee uses one or less medicine on a regular basis. As they get older, that number increases to five to six meds at retirement, which can take a toll on someone who is on a fixed income! The choice then becomes relatively easy…one can participate in a traditional PPO plan with a low deductible, save money in a traditional 401(k), and when retired pay taxes on the money and buy medicine with post-tax money; or one can participate in an HSA, and when retired buy your medicine with pre-tax money!

An HSA generally cannot be used to reimburse the cost of health insurance premiums. One exception to this rule is the cost of COBRA. For those that have separated from their employer and are relying on COBRA for health benefits, these costs can be reimbursed with an HSA, according to the IRS. HSA can also be used to pay for Medicare Part B, Part D and Medicare Advantage premiums, so long as you are 65 or older. An HSA can also cover an employee’s premiums at work if they are 65 or older.

Many are aware of Flexible Spending Accounts (“FSA”), and wonder why should they save money in an HSA? While both plans have a number of components that are similar, there are a variety of differences that are advantageous to employees in the long run:

Usage Qualified Medical Expenses Qualified Medical Expenses
Rollover NO YES
2018 Maximum Annual Contribution (Employee Only) $2,650 $3,450
Use It or Lose It YES NO
Keep Upon Termination NO YES
Investment Options NO YES*

* Investment options depend on the carrier you select

As an example of how this might work, if an employee contributes the maximum amount (in 2018 dollars), for 10 years, and does not use any of the savings during the same period, that employee would end the 10 years with savings of $34,500 (not including any growth from investment). Once that employee retires (or at any point before retirement), that employee could use the money towards any qualified medical expense. If done right, the employee could save enough in the HSA account to conceivably cover all or almost all of the medical expenses incurred during retirement.

As mentioned previously, HSA designed benefit plans also have an additional upside, in that they are typically less expensive to offer, and therefore have a lower premium. Beware, however, that there is a perceived (and in many cases real) downside to offering an HSA. Because they have higher deductibles (at least $1,345 in 2018 for employee only), and because the employee is responsible for all medical expenses until the deductible is met (besides expenses mandated by law to be covered at 100%), employees may not view these plans as “real” medical benefits. Much of this adversity can be met with education and explanation of how to maximize benefits, but concerns may still exist!

Keep in mind, the trend of offering an HSA product, whether as a compliment to a traditional PPO or as the only product offered, continues to grow in popularity. In 2017, almost 25% of companies offered an HSA product, up from 22% in 2012, and participation in HSA plans have increased from 13.5% in 2015 to 17% in 2017. With these growth numbers, it is likely that these HSA programs will, in the next few years, become the norm of products, replacing PPO plans (which replaced EPO plans!).

Disclaimer:          The materials contained in this paper are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.