HSAs - Alphabet Soup or the Next Best Thing in Health Plans?

by Dan Stalp

Having worked in the healthcare benefits field for the past 15 years, I have become a bit leery about the "next best thing" in health plans. Yet, I believe the new Health Savings Accounts (HSA) may be more than a fad. HSAs were approved by the federal government January 1, 2004. However, on a state level, Kansas did not approve the plans until late May 2004 and Missouri approved the plans shortly before that. Postponing the availability of HSA plans further, many insurers were not able to get their plans approved until each state's logistics were approved. Therefore, Jan-uary 1, 2005 appears to be the magic date when multiple insurance companies will have HSA plans to offer employers.

When Medical Savings Accounts (MSA) entered the market January 1, 1997, only a few insurance companies chose to offer the plans. The federal government initially limited 750,000 insureds to be written over the next three years. Additionally, only self employed individuals and small businesses with less than 50 employees were eligible for the MSA plans.

In 1997, the federal government was so concerned the MSA plans would negatively impact the amount of income taxes collected, they put limitations on MSA plans. For example, the annual amount contributed to the MSA on a tax-advantaged basis was 65% of the individual deductible or 75% of the family deductible. The other limitation concerning the MSA was that the employer or employee (but not both) could contribute to the MSA savings account. Therefore, if the employer was not willing to contribute the maximum amount into the savings account, then the employee could not make up the difference.

Also, in 1997 many medical plans had little or no deductible with $10 copays for physician office visits. So the idea of having a $1,700 - $2,500 individual deductible or a $3,350 - $6,150 family deductible and having to pay for physician office visits until the deductible was satisfied, was seen as extreme. Fast forward to the year 2004. The average deductible for employer groups has climbed to $1,000 and office physician copays are $30 or more. The new HSA plans have individual deductibles of $1,000 - $5,000 and family deductible of $2,000 - $10,000. As you can see, the minimum deductibles are more in line with what most employers are already offering.

Additionally, the annual amount which can be contributed to the HSA savings account on a tax advantaged basis has increased to $2,600 for individuals and $5,150 for families. Another advantage is that any combination of employer, employee or family member can fund the HSA savings account up to the above maximums. What happens to the HSA savings if the money is not spent on qualified medical expenses (QME) by the end of the year? Unlike Flexible Spending Accounts (FSA), you do not have the "use or lose it" rule. Therefore, whatever is remaining in the HSA savings account on December 31 of one year, can automatically be rolled over into the following year.

What happens if I have several thousand dollars in my HSA and my employer (for whatever reason) terminates the plan--do I lose the money in my HSA savings account? As long as you continue to have QME and/or certain health insurance premiums like long term care, continuation coverage, Medicare Part A/B, or retiree premiums, you can continue to draw on the savings account until it is spent. Lastly, what happens if I terminate employment and have several thousand dollars in my HSA? The savings account is completely portable and can be drawn on as mentioned in the previous paragraph, even if you're with another employer or even if you're on an individual plan.

In closing, based on changes in the medical insurance market since MSA plans came out in 1997 and improvements to the HSA plan as compared to the MSA--I believe the time is right for these plans. Most major players in the medical insurance market will have plans available in 2005. I see this as a strong indication that HSA plans are here to stay.

Daniel J. Stalp is a partner with the employee benefits consulting firm Dessonville Boler Wood Murray & Stalp Inc. located in Overland Park, Kan. He can be reached by phone at 913.451.7700 or by e-mail at Stalp@aol.com or dstalp@dessonville-kc.com.