Health Savings Accounts—A Healthcare Solution?

by Brian Johnston

Although the Presidential debates rage on about the correct steps for resolving the current “healthcare crisis”, at least one other alternative already exists to potentially assist in reaching key objectives in making healthcare more available and more affordable: health savings accounts (also known as an “HSA”).

While the general concept has been around since the mid-1990’s (then known as a “medical savings account”), HSA programs were approved by the current Bush administration beginning in 2004 to provide a mechanism for individuals and employers to reduce their short-term and long-term health insurance costs in a way that also provides more individual control over the contributions made to their HSA account in a tax-advantaged manner.
Whether this type of arrangement is the healthcare “solution” has yet to be determined.

Under the Internal Revenue Code for 2008, a basic employer-sponsored HSA arrangement allows
contributions of up to the annual allowable limit of $2,900 for single coverage or $5,900 for family
coverage. These contributions are made on a pretax basis to a qualifying HSA account, as long as
such accounts are provided in conjunction with the employee’s participation in a “high deductible health plan” (or “HDHP”, with a minimum annual deductible of $1,100 for single coverage and $2,200 for family coverage, or a maximum annual deductible of up to $5,600 and $11,200 respectively). Any HSA amounts then used for qualifying medical expenditures can be paid for on a tax-free basis. Individuals can also establish an HSA and accomplish similar objectives and claim applicable deductions for “after-tax” contributions on their individual tax return.

Unused amounts and accumulated earnings that remain within the HSA account during the current year would “roll over” to the next year and be available for future use, or be added to additional contributions made to the HSA account in that next year. HSA amounts used by the individual for any
other purpose other than for the payment of qualifying medical expenses are subject to applicable income tax and possible excise tax consequences, similar to distributions from an individual retirement
account or “qualified” retirement distribution.

In theory, an HSA is the ultimate “win-win-win” situation. Based on the higher deductible under the HDHP, monthly health insurance premiums should be less, and the employee is able to make contributions to the HSA without fear of “losing” their contributed amounts even if not “used” by the end of the year. The employer is able to offer a lower-cost health insurance option to its employees, and the
employee has the freedom to decide how best to use their HSA account balance while also being able to
take their HSA account balance with them if they leave their current employment. Moreover, like other
“consumer driven healthcare” models, because the individual has a true financial stake in their HSA
account balance, the presumption is that the individual will start making better healthcare decisions by
asking more questions of their doctors and hospitals about the cost of medical procedures, and modify their behavior to improve their health condition. Changes in diet or exercise could ultimately result in less medical costs, and provide more money for other purposes.

In reality, although general medical cost trends do appear to be generally lower than traditional health
plan models, employers are finding the myriad of HSA qualification rules to be far more complicated than
desired. Likewise, the employee is often not educated about how to properly utilize the HSA for their benefit, so its unique advantages are often lost. Also, because the use of HSA account funds are controlled by the individual, unintended abuses of the “qualifying medical expenses” requirement can create unnecessary and unreported tax liabilities to the individual as well.

Employers and individual HSA account sponsors need to realize the trouble spots that presently exist.
Legislative modifications can be made that would provide greater satisfaction and participation, such as the addition of further responsibilities of HSA custodians, proper adjudication of claims submitted, as well as expanding current provisions to allow prescription drug coverage for chronic health conditions. 

Brian Johnston is Member Attorney at Lathrop & Gage L.C., in the Employee Benefits Department.  
P     |     816.460.5805
E     |     bjohnston@lathropgage.com