Your group health clients may think that setting up a health savings account program is a no-brainer.
Thanks to media coverage, statements by politicians and insurance company advertising, HSAs and HSA tax breaks are starting to get employers’ attention. Some employers may think that HSA programs will be even better than their current Section 125 plans.
While this may be true in a small percentage of cases, the vast majority of employers will still be better served with a Section 125 plan or a health reimbursement arrangement.
Education is the key to making an informed decision about whether to go with an HSA, an HRA or a Section 125 flexible spending account.
In a nutshell:
A HSA offers attractive tax breaks, but the HSA program law requires employers who want to offer HSAs to buy high-deductible health insurance and give employees control over the assets in their HSAs.
A HRA also offers tax breaks, gives employers control over personal account assets, and lets employers choose between providing high-deductible health coverage and coverage with lower deductible levels. But the tax breaks are not quite as attractive as HSA tax breaks, and employers have to provide all of the account contributions themselves.
Section 125 plans are better established and better understood. FSAs offer some tax breaks and coordinate nicely with all types of health coverage, but employees who fund the plans face the possibility they might lose their share of plan assets at the end of the year.
Be careful not to let the excitement surrounding HSAs cause you or your group health clients to make hasty decisions. You should help group health clients take their overall business development strategy into account when analyzing HSAs and other options.
For some employers, HSAs and the high-deductible health insurance plans that go with HSAs may be a great fit.
Other employers will hesitate to implement an HSA plan because of the additional work and coordination costs associated with switching from their current plan. Some employers also will worry about the possible elimination of co-pays and other changes to their benefit structures.
Still other employers might decide that setting up a HRA or a Section 125 plan is a better way to give employees a stake in holding down health care costs.
Lets take a look at 2 scenarios.
Scenario 1: John Doe’s factory currently has a Section 125 plan and is considering HSAs.
My recommendation: Doe should stick with the Section 125 plan.
Why? Removing the Section 125 plan will feel like a takeaway to employees, as they will lose the tax savings earned by deducting their dependent care and transportation expenses. In addition, without the Section 125 plan, the employees will no longer be able to pay their health insurance premiums with pre-tax dollars.
Now, lets suppose Doe is motivated to lower his premium payments by switching to a high-deductible health plan. By switching to the HDHP, he is increasing exposure to medical expenses.
Who does Doe want to burden with this increased exposure?
If Doe chooses himself, then the 2 options available are the HSA or HRA.
For the employer, the HRA is the better deal.
When an employer decides to fund an HSA for each employee, that money now belongs to the employee. If the employee doesnt use it in the first year, he can carry it over to the next. And, if the employee leaves the company, the money goes with him. All of what the employer places in an HSA is spent.
However, if Doe sets up an HRA program, he only has to pay for actual expenses up to a preset limit. If the employee doesnt reach that limit, the employer retains the unused funds.
Finally, if this employer wants the HDHP and also wants to place the burden of increased exposure to medical expenses entirely on the shoulders of his employees, the best route is to keep the Section 125 plan, either by itself or with the HSA feature.
If the employer keeps the Section 125 plan, employees still can pay for their insurance premiums, dependent care and transportation expenses pre-tax through the Section 125 plan. If the employees wish, they also can place some additional pre-tax funds in their HSAs to pay for out-of-pocket medical expenses without being subject to the use-it-or-lose-it rule. However, remember that an FSA and an HSA cannot cover the same type of expenses. Employees will have to be careful to limit their Section 125 elections if they decide to use their HSA funds to pay for out-of-pocket medical expenses.
Scenario 2: Jane Smith does not have a Section 125 plan for her real estate agency and wants to reduce health care costs any way she can.
Is Smith motivated by tax savings as a method for reducing health care costs? If yes, once again a Section 125 plan is the best bet.
If Smith is more motivated by an interest in reducing premiums by increasing the risk of high exposure to health care expenses, then you must move back to the question about where the employer wants to place this burden.
Regardless of where the employer wishes to place the burden, the tax savings provided by a Section 125 plan are more dependable at reducing the cost of health care.
So, when should an employer consider setting up an HSA plan?
I think that, for now, most employers should stick with Section 125 plans and HRAs.
Uncertainties surrounding HSAs still remain, and I would not recommend an HSA plan to group health clients unless the clients feel strongly that an HSA plan will fit in with their companies’ objectives.
is CEO of Total Administrative Services Corp., Madison, Wis., a benefit plan administrator and compliance firm. He can be reached at firstname.lastname@example.org.
Reproduced from National Underwriter Edition, March 17, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.