Decreasing Healthcare Costs

manufacturing.net ^ | July 1, 2004 | Bart A. Basi and Roman A. Basi

[NotQuiteCricket]

By Bart A. Basi and Roman A. Basi
Industrial Distribution

July 1, 2004

 

No, your eyes are not playing tricks on you, the title of this story does indeed say "decreasing." The Medicare bill that was signed into law on December 8, 2003 established a new and innovative insurance program for employers and employees called an "HSA", otherwise known as a Health Savings Account. This revolutionary vehicle will help many employers, large and small, save taxes and save money on health insurance premiums.What is an HSA?

An HSA is a tax-exempt account that is created for the purpose of paying qualified medical expenses. The HSA can be funded by the employer and/or the employee. To be eligible to create an HSA, you must be an individual who has a high-deductible health plan (HDHP). An HDHP is one in which a single individual has a yearly deductible of no less than $1,000, or if you have family coverage, the deductible can be no less than $2,000. In addition, if you have individual coverage, the out of pocket expenses required to be paid cannot exceed $5,000, and for family coverage, this amount cannot exceed $10,000.

Further requirements are as follows:

• You must not be covered under an insurance plan that is not an HDHP.
• You must not be entitled to Medicare benefits.
• You cannot be claimed as a dependent on another person's return.

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If you meet all of the above requirements, you are an "eligible individual" for a Health Savings Account.The Benefits of an HSA

1. Employee Benefits
   An HSA has many benefits for employees. The first benefit is that 100 percent of the annual deductible for the individual or family can be contributed to an HSA. However, this amount can not exceed $2,600 for an individual, and $5,150 for family coverage. People ages 55 to 64 can make additional contributions to "catch up" in 2004 of $500. This will gradually increase to $1,000 in 2009.
   The contribution to the HSA is tax-free to the employee. The employee can take a deduction for any amount he contributes to the HSA. This deduction is an "Above-the-Line" deduction, and therefore directly reduces an employee's taxable income.
   An HSA is held in an account for the benefit of the individual, his spouse or children. This account is invested, and any gain on the investment is also tax-free. In addition, if an employee changes jobs, the account goes with him, as the employee is allowed to transfer the entire fund balance to his new job.
   Finally, it should not be forgotten that if the deductible increases to $1,000 per person or $2,000 per family, the cost of the health insurance premiums will be less, resulting in cash savings.

2. Employer Benefits
   There are also benefits to the employer. An employer is not taxed on the amounts he contributes to the account, and these amounts are also not subject to withholding for income tax, FICA, or FUTA. Therefore, an employer obtains a direct write off for the amounts paid not only for the health insurance premiums, but for the HSA as well.
   In addition, most employers will see a reduction in the monthly premiums they pay for their employees due to the increase in deductibles (if the employer does not already have an HDHP).
   The reduction in the premiums, and the tax deduction, will help to offset the cost of the employer funding a portion of the HSA, if they so wish to assist their employees with funding the HSA.

The disadvantages of an HSA

1. Disadvantages for Employees
   The disadvantages of an HSA are few and far between. First of all, once you reach the age of 65, you can no longer contribute to an HSA. If you do contribute, all amounts will be taxable to you in addition to a penalty of 6 percent. This also occurs if you are considered an "eligible individual" and exceed the allowable amounts that can be contributed if you are less than 65 years of age.
   If you do not use the funds for "qualified medical expenses," the funds that are used are included in your gross income, and a penalty of
   percent is imposed. The 10 percent penalty is eliminated in the case of a distribution after the account beneficiary's death, disability, or once you have attained the age of 65.
   An HSA can be transferred to a spouse tax free, but when an HSA is transferred to a person other than your spouse, it ceases to exist as an HSA. It is then included in the person's taxable income. This amount, however, is reduced by any amount paid by the HSA for the decedent's qualified medical expenses paid up to one year after their death.
   
   Change in 2003 health care coverage
   
   
   
   
   A problem in 2003 was the dramtic growth in the costs of health care.  In Industrial Distribution's 58th Annual Survey of Distributor Operations, 85 percent of distributors reported that their health care costs had increased.
   
   

2. Disadvantages for an Employer
   One disadvantage for an employer is that a "comparability" rule applies. An employer must make comparable contributions to each individual's HSA. They must be either the same amount or same percentage of the deductible of an HDHP for each employee. No discrimination is allowed as to employees.
   A second disadvantage is that the employee is deemed the owner of the HSA, and therefore if they were to quit or be terminated from employment, all employer-funded amounts remain the property of the employee. The employee is free to transfer their HSA to another employer, including all payments made by their former employer and all interest accumulated on those payments.

The Practical Effect

The practical effect for both an employer and an employee is a reduction in the overall cost of qualified medical expenses. The following example identifies the savings that are created by setting up an HSA:

Facts: An employer pays the premium for a single individual with a deductible of $500. This premium equals $250 per month.

The employer then increases the deductible to $1,000 in order to set up a qualified HSA. The premium is now reduced to $200 per month.

Results: The employer sees an immediate savings of $50 per month, or $600 per year. The employer then contributes $500 during the year to the HSA and obtains a tax deduction. The employee contributes $500 during the year to the HSA and has this amount deducted from his gross payroll. The employer saved $600, contributed $500 to the HSA tax free (thereby realizing a net savings of $100 + all payroll taxes on the $600). The employee contributed $500 to the HSA before taxes.

The greatest benefit to the employee is that normally the $500 deductible would be paid with after-tax income. Now the $500 deductible can be paid with pre-tax income. In addition, the employee can contribute his $500 at anytime, and therefore, does not have to contribute the money if he does not incur any expenses. Funds can be contributed as needed during the year, subject to the maximum amount allowed.

Remember, the employee also reaps the investment income from the entire amount, and can take this account with him as his employment may change from year to year.

The employer can contribute throughout the year, as he pays the medical premiums for his employees. Thus, an employer can save on the cost of the premiums, spread the payment amount over the year and save payroll taxes on the money contributed. This is in addition to making the employee happy.Who Can Administer an HSA?

An HSA must be administered by a qualified HSA trustee or custodian. This includes an insurance company, bank, or a person approved by the IRS (approval may be difficult to obtain). It is important to check the cost of administration or approval and add that cost into the example above to determine the net savings to the parties involved. The Trustee can be different than the company that provides the HDHP, but you should first check with your insurance carrier to determine if they carry HSAs, and the cost of such plans.A refreshing option

Health Savings Accounts (HSA) are as good as they sound. Decreasing the cost of health insurance is a refreshing option in today's rising inflationary economy. Small and large employers alike can now benefit from a quality health program. It is not often that we have the ability to reduce our health insurance costs. Therefore, it is imperative to reassess your employer-sponsored health insurance plan, and determine if an HSA is appropriate for your company.

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Author Information

Bart and Roman Basi are attorneys with The Center for Financial, Legal, & Tax Planning, Inc. They can be contacted at (618) 997-3436.

[eno_]

A dagger at the heart of managed care and socialized medicine. Drive it in!

[NotQuiteCricket]

What is funny is that I don't remember this getting played up when the medicare bill was being passed. It was all about how it was going to cost more & also cover prescription drugs, nothing about these health savings accounts (which I think is a great idea).

[Reagan Man]

Health Savings Account is great reform for Medicare and overall healthcare plans for all Americans. But spending $400-$550 billion (maybe as high as one-trillion dollars) on a federal sanctioned prescription drug program for all seniors, is an outrage and something only a political liberal or a big govt Republican could support.

[SunkenCiv]

There used to be Family Care Accounts, under which employees could put money away (a la an IRA, 401k, 457k, 403c, etc) but had to use the money by the end of the year or it went to the gov't. Budgeting it wasn't that hard, and enabled people to put money away out of pre-tax earnings, reducing the overall tax burden, and covering various out of pocket expenses (could be orthodontic work, or deductibles, various other qualifying expenses).

Clinton tried to get rid of those as part of GATT I think it was.

[My2Cents]

***Ping***

[Miss Marple]

I am going to have my husband look into this and see if our company has it available. We have a $1000 deductible per individual on our health care plan.

[Paleo Conservative]

The main problem I have with my MSA is that the personnel in doctors' offices don't understand how to process invoices for patients with them. They seem to assume that just because you have an insurance card, that they should just go ahead and submit invoices to the insurance provider. If you pay your invoice yourself at the time the services are rendered, most doctors' offices will give a 20%-30% discount on the the bill.

[ebersole]

They are called flexible spending accounts (pre-tax dollars) and can be used for childcare and out of pocket healthcare expenses. There are limits to how much an employee can contribute based on the IRS code. Of course when you reach a certain income level, your contributions are limited, which was determined by a demoncratic congress (imagine that).

[My2Cents]

Some companies are apparently using HSAs to allow employees to pay for deductibles, as well as any other costs which insurance doesn't pay for. HSAs will, I believe, become a viable option for small businesses which cannot afford comprehensive medical coverage, but, say, might pay for catastrophic coverage; HSAs can providing funding for non-catastrophic care like annual check-ups, minor visits to the doctor, and the like.

[prairiebreeze]

Thanks for the Ping!

[vharlow]

HSA's aren't flexible spending accounts. They are different.

[vharlow]

The big problem with HSA's so far that my husband, immediate past president of Association of Health Insurance Advisors, has seen is that agents and advisors aren't terribly interested in marketing them because there's not much commission involved. He's written articles for industry magazines exhorting professionals to push HSA's aggressively as a worthy solution to health care costs.

If you are interested in these plans, tell your employer to check out the AHIA.net website and search for an agent in your area to call. Don't expect them to call your boss. It's not a high profit thing.

One of the beautiful things about HSA's is that the consumer is in charge of choosing how to spend that money he saves from the account....they will be less frivolous with running off to the doctor for minor things, and want to save their money. That should send a message to medical practicioners too that they have to give better value for the dollars they receive.

One of the greatest culprits in the high health cost realm is the third party payer system that we have. Employers gave health insurance coverage, very major medical stuff, not first dollar coverage, back when it wasn't deemed good to give raises. It caught on, and now it has snowballed into a monster. State governments have been passing bills to mandate coverage for this and that health problem for many decades, leaving people in their late 50's still paying for maternity coverage, and birth control coverage where it's mandated.

People need to be able to choose the benefits and coverages they feel they need, so they can spend their money where it's needed. One family may need coverage for maternity and child care whereas another family might not need that at all. That whole first $1,000 people spend on medical care will be carefully considered, and some visits not necessary in the first place won't take place. People will have the money invested for later. If people are spending their own money, they are more careful with it. If it's someone elses money, they get pretty frivolous. How much goes on Viagra these days? That's your premiums going up.... think about it.

[SunkenCiv]

Yeah, they are different.

George W. Bush will be reelected by a margin of at least ten per cent

[Moonman62]

Employers gave health insurance coverage, very major medical stuff, not first dollar coverage, back when it wasn't deemed good to give raises.

I believe it was during WWII when there was wage controls.

[JZoback]

bump

[SierraWasp]

"It's not a high profit thing."

Excellent, accurate commentary!!! Don't bother your broker with this one. He/she will definitely not want the current plan disturbed and take a huge cut in commission. They make nothing on the part going into savings accounts and probably a single didget percentage on the remaining HDHP premium.

I'm really pushing it since I dropped out of that end of the business a decade ago when Hitlery was trying to nationalize it and got involved in politics, myself. Now I'm back and have nothing to lose and everything to gain by encouraging employers to do the idea whose time has come!!!

[vharlow]

So is my husband. There's something about doing what is best for the client?? If you do enough of that, you make enough money anyway. We never got rich, but then what is rich? I get to stay home and home school my grandchildren, so I feel very rich. HillaryCare drove many out of the business. We aren't getting health clients like in the past, but the life business has been picking up lately.

[SierraWasp]

Well, the business got so screwed up out here I had to finally pick up my securities license. That helped once the market got well in '03! Give my best regards to your husband. I just started my second 40 years in this business of rugged individualism.

Ever hear that little ditty: "No one has endurance like the one who sells insurance..." God bless you for educating those grandchildren the RIGHT way!!! You'll get your reward in heaven!!! There's quite a few home schoolers on this site. I'm gonna ping one of 'em, just for fun. Maybe he'll come around and say something.

[SierraWasp]

Thanks for posting this clear and concise article. This is an idea whose time is way overdue. Thank you Republicans!!!