From the February 2009 issue of Boomer Market Advisor • Subscribe!

February 1, 2009

Retirement's health care fail-safe

If you are not on the HSA bandwagon yet, you better hurry. Health Savings Accounts are hot. They aren't going to earn you the highest commission, but with expensive health insurance during retirement, you need to offer HSAs in order to be a truly comprehensive advisor.

Enacted by the Bush administration in December 2003, HSAs are changing the way millions of Americans meet health care needs because they are designed to help individuals save for qualified medical and retiree health expenses on a tax-advantaged basis. Any adult who is covered by a high-deductible health plan (HDHP) and has no other first-dollar coverage may establish an HSA.

By 2007, HSA/HDHP-covered lives numbered 4.5 million. But as more small businesses turn to HSAs, the U.S. Treasury Department predicts that HSA/HDHP-covered lives could surmount to 45 million by 2010. Even that figure may prove conservative, as more small businesses are turning to HSAs, including those that didn't previously offer insurance plans. And according to JoAnn Mills Laing, author of two HSA books and creator of HSAfinder.com, most firms that switch from traditional plans to HSAs cut costs by one-third.

The HSA marketplace is growing fast, despite the fact that many brokers are still ignoring it completely.

"I believe many brokers aren't selling HSAs because they feel it's a more difficult sale in exchange for more headaches and lower compensation," says Kevin Pailet RHU, REBC, CBC, principal of Prescott Pailet Benefits LP in Dallas. "I think carriers should consider paying a higher commission on HDHP plans. That being said, brokers need to do what's right for their clients regardless of the difference in commissions."

Pailet adds that HSAs now make up a significant portion of his firm's new business, and they come with some attractive benefits. "Clients are less likely to change carriers at renewal, and they're more willing than others to proactively refer business to us because they believe we're offering some new and innovative products that their friend probably hasn't seen yet. They can't wait to share the good news."

Experts predict at least 25 percent of businesses in the U.S. will offer HSAs by the end of 2010. "It will become even more popular as attempts for single-payor, government mandated universal health care fails to be legislated," says Rob J. Thurston, president of Provo, Utah-based HR Consulting Group (www.hrconsultinggroup.com), who has written an article, "How to implement an HSA in 10 easy steps."

Thurston and Pailet agree HSAs are hot for small business owners.
"Small businesses are more price-sensitive and more likely to offer a plan like this as an option or as an outright replacement. The smaller the business, the more likely they are to offer an HSA," Pailet says. "Owners are likely to want the HSA for themselves and smaller businesses are more likely to make benefit decisions based on what the business owner wants."

Large companies have less incentive to provide this option. "I still think the mega employers will be more difficult to penetrate because HRAs and self-funded consumer-driven options may make more sense at their size. They can cover the additional fees associated with administering an HRA and are unlikely to want to give funds to an employee in a HSA (which is portable) when then they keep the savings via an HRA and potentially use the HRA as a retention tool if any of the funds roll over."

Learn before you leap
Before you sell an HSA, learn to speak the language. "I would recommend listening in on one of the many webinars and seminars," Thurston says. "Then there are HSAs for Dummie's kits and books. You can learn enough to be dangerous. Then it's time to talk to the company's CFO on why an HSA makes financial sense."

Amy O'Meara Chambers, JD, AVP, Market Development for Priority Health, (who happens to be the author of "HSAs for Dummies") says there is a definite hurdle of making these plans understandable, but it can easily be overcome with a little effort.<

"Some folks can make these plans out to be so complicated, but they are really not," Chambers says. "All drugs and medical services track towards the deductible; once you've met your deductible, the insurance plan starts paying benefits according to their plan document; once the total of what you've paid adds up to a certain dollar amount (the out-of-pocket maximum), the insurance company picks up all of your covered drug and medical bills for the remainder of the plan year. Done. Easy.

"We have great presentations that seem to make these plans clear to the majority of our members," Chambers adds. "But I have seen folks outside my organization fail to explain these plans clearly. I think that anyone can learn the details of these plans -- it's just a matter of finding clear explanations and committing a little time. And, in light of all the tax breaks you can get using these plans, it's worth the time and effort."

Objections and counters
Unfamiliarity with HSAs is still a problem for many people - including employees, employers and advisors. It's just a matter of creating more awareness and providing simple plan education.

"Employee resistance is the primary issue. This resistance is also of grave concern to the employer due to their need to recruit and retain employees, which is made more difficult if morale is low due to the benefits program," says Pailet. He believes better HSA education and improved marketing efforts to employers, employees, providers and the media could alleviate employee resistance.

Chambers says she finds it effective to remind people that HSAs provide freedom.

"The money in your HSA is entirely yours. You decide how much to put in it. You decide what to spend it on and when to spend it. Any balance in your HSA rolls over year to year. The account goes with you if you change health plans, change jobs or retire," Chambers says. "How often does a tax-preferred vehicle offer you this kind of freedom?"

The second biggest challenge, Pailet says, has to do with cash flow for the employees. "Unlike FSAs where the employee has access to their entire election up front, HSA participants only have access to the actual funded amount at that time. Many employees see the light and believe that an HSA is better over the course of the plan, but are worried that they won't have enough funds in the account if they incur a large claim early in the plan year," Pailet says.

"A possible solution would be carriers offering a rider (at the employee level) to first-year plan participants which reduces the deductible in a pro-rata manner in month one and then increases to the normal deductible by month 12. Of course, the benefit couldn't reduce the deductible below the statutory limit. But with HDHP deductibles of $2,500 and $3,000, etc., this would really help get more to enter the plans," Pailet says. "This would also help new hires that enter mid-plan year (they get stuck with the full deductible but reduced HSA funds from the employer if the employer funds monthly). Many of our clients have agreed to fund quarterly in the first year in order to make the transition easier for plan participants."

Thurston says he thinks most advisors get caught up in all the minor details and forget to explain to a company's decision-maker this one key selling point: "It's the only group benefit where the money from both the employer and employee is contributed tax-free, the HSA funds grow tax-free, and when it's withdrawn for health expenses it's tax-free."

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