The Basics Of Health Savings Accounts

FAQ On HSAs: The Basics Of Health Savings Accounts

TOPICS: HEALTH COSTS, INSURANCE, MARKETPLACE

By SHEFALI S. KULKARNI

KHN Staff Writer

NOV 04, 2011

Note: This story was corrected Nov. 9, 2011 to clarify the tax treatment of HSA funds used for general expenses by people older than age 65.

It's open enrollment season for many employer-sponsored health plans. Employees look for the most cost-effective option that promises high quality health care, and employers attempt to control their costs. Meanwhile, those who seek insurance in the individual market are simply looking for affordable health coverage.

Health savings accounts, coupled with high deductible health plans, increasingly are on the list of choices. The insurance industry trade group America's Health Insurance Plans reports that the number of people with these plans "rose to more than 11.4 million in January 2011, up from 10 million in January 2010."

FAQs

See our collection of FAQs on health care terminology

• FAQs: Explaining Health Care's Hot Topics

Still, HSAs can be confusing, and, many people wonder if this approach to health insurance is good for them. Here are some answers to frequently asked questions:

What is a health savings account?

HSAs have two basic elements:

• A tax-preferred savings account where money is set aside by the consumer (employers can also contribute) to pay for medical expenses and prescription drugs.
• A high-deductible health insurance plan. In 2012, that deductible will be at least $1,200 for an individual and $2,400 for a family and as high as $6,050 and $12,100, respectively, according to the Treasury Department.

Any adult with a high-deductible health plan and no other form of health care coverage can establish one of these accounts.

How can consumers benefit from HSAs?

Consumers who participate in HSAs receive certain tax benefits. For instance, individual contributions are tax deductible, and employer contributions also are not counted as taxable income. Account withdrawals, when used to pay for qualified medical expenses, also are not taxed.

Meanwhile, the money inside the savings account belongs to the consumer and funds left over at the end of the year are rolled over to the next year. If he or she changes jobs, the HSA stays with that individual. And though not all high deductible plans work the same way, by law plans have the option to cover basic preventive care, such as vaccinations and annual physicals, even if the deductible has not been met.

When participants turn 65, any remaining funds can be used -- without tax penalities -- for general retirement expenses, but are subject to income tax.

What are the benefits for employers?

High-deductible health plans come with lower premiums than more comprehensive coverage, which many employers value as a way to manage the costs of employee benefits. "[They] are essentially the employers' answer to cost control," said Deborah Chollet, a senior fellow at Mathematica Policy Research Center in Washington.

What are some of the drawbacks?

Health care policy experts say that while HSAs give consumers control over their medical spending, they are problematic for low-income individuals, especially those with chronic conditions who use the health care system frequently.

As financially friendly as the HSA-high-dedutible plan combination may appear, Paul Fronstin, who directs the health research and education program of the Employee Benefit Research Institute in Washington, said there's a catch: They have a "straitjacket design" in which consumers are responsible for paying the full-dollar amount of their medical expenses until they meet their deductible. This can be particularly burdensome for people with chronic conditions, like diabetes, that requires ongoing care.

The IRS establishes financial and medical limits on this type of health care plan. There is a limit on the amount of money consumers can contribute to their savings accounts: In 2012, the maximum amount is $3,100 for an individual and $6,250 for a family.

The IRS also determines what medical expenses qualify. Recently, the IRS dropped over-the-counter medications from its list.

One of the biggest concerns expressed by some health policy experts is that this type of coverage could discourage certain types of medical care. Since patients will have to pay for all their medical care out-of-pocket, they may avoid the doctor's office. "The healthy employee tends to like high-deductible plans with low premium contributions," Chollet said, adding that consumers "tend to be young, healthy males who avoid the health care system" and only go to the doctor when it's necessary.

Why are HSAs growing in popularity?

HSA advocates say this approach is an ideal model of consumer-directed health care, because consumers will have "skin in the game" and become informed shoppers when it comes to their medical needs. A recent RAND study notes that "HSAs create a strong financial incentive for the employee to manage health care costs carefully, because the account balance is owned by the employee."

Because the concept of HSAs tracks so closely with Republican principles like consumer-directed care and market-driven reforms, they are a hot topic among this year's GOP presidential candidates. Most of the major candidates have expressed support for tax credits to encourage the use of HSAs and allow consumers more flexibility to contribute to these accounts.

But their market share will ultimately be determined by consumers.

"Every time a leading Republican refers to HSAs as an attractive means to buy health insurance, it's as good for the product as buying an ad in the national media," said Robert Laszewski, president of Health Policy and Strategy Associates, a Washington-based consulting firm. "But in the end, consumers carefully compare health plans … and select the one that gives them the best value."

© 2011 Henry J. Kaiser Family Foundation. All rights reserved.

Court Rules Actual Receipt of COBRA Election Notice Not Required

Court Rules Actual Receipt of COBRA Election Notice Not Required

In Hearst v. Progressive Foam Technologies, Inc., the Eighth Circuit Court of Appeals recently considered whether an employer must ensure that employees who experience a COBRA “Qualifying Event” must actually receive COBRA election notices. Generally speaking, employers that sponsor group health plans are required to provide notices that explain the COBRA election rights to eligible employees and their dependents who experience a Qualifying Event, within 44 days after the occurrence of the event.

In Hearst, an employee was terminated after failing to return to work from a leave of absence. The employee later sued the employer, claiming that he never received the required COBRA election notice. The lower court dismissed the employee’s claim because the employer provided a “mailing manifest” (i.e., log of daily mailings verified and date-stamped by US. Post Office) to show the employee’s COBRA election notice was, in fact, mailed.

On appeal, the Eighth Circuit determined that the issue presented by Hearst was whether the employer sent the notice by means “reasonably calculated” to be received by the employee and not whether the employee actually received the notice. The Eight Circuit affirmed the lower court’s decision, agreeing that the employee’s claim of not receiving the COBRA election notice was insufficient to overcome the employer’s proof that the notice was mailed.

As a best practice, employers, or their COBRA administrators, should distribute COBRA election notices by using first-class mail, being sure to document such mailings with records that meet a court’s evidentiary requirements. In general, courts accept business records and testimony from individuals with first-hand knowledge of the employer’s compliance practices as sufficient evidence of mailing.

Public Option will increase all taxes beyond the actual costs of the Bill

Consider - one of the health care bill proposals has a 2 year unemployment insurance clause for displaced insurance company employees.

If you think the point I am about to make is not valid - ask yourself why the above provision is in a bill that includes a public option.

Bottom line
- if 15% of the US economy goes from private insurance to a federal insurance program
- the remaining taxpayer and business will have to replace the local, state and federal income and property taxes that are lost when the Fed controls a program.

Before you scoff at these issues - read on to the end
and for those who think this is not an issue - 15% of the economy going from private to public sector will need to see at least a 20% tax increase on the private sector to replace lost revenues

... Today on Fox News Sunday and (I think also not sure) on ABC/ Stefanopoulos show, the figures for 'overhead' by the health insurance industry, ie the amount actually NOT paid out for delivery of health care services, ranged as high as 20%. That would mean up to 20% of a premium payment goes to marketing, salaries, bonuses, and other ancillary expenses...up dramatically from 1990 level. "

Government care - Medicare A is claimed to be a 5 - 8% overhead rate
Government care - Medicare B, and D added in takes total government overhead to somewhere close to 15%

for this dialog let's accept the conservative
15% overhead for government insurance
20% for private insurance overhead,
both sides can argue up to 30% for the other, but it does not matter for this review

Government overhead for insurance pays 0.00 to get buildings or renovate them - GSA pays for building remodeling services and for new facilities in a separate account
those grounds and buildings are not subject to state property taxes
Private insurance hires people or companies to build facilities and remodel them,
those contractors pay taxes that add to government revenue
those grounds and buildings, and the improvements are subject to local and state property taxes
(real property, real land, real assets)

Government overhead for insurance pays 0.00 to facilities management - GSA pays for building services and facilities management in a separate account
Private insurance hires people or companies to manage facilities management,
and those service providers pay taxes that add to local, state and federal government revenue
(boilers, AC, power, light, parking lots etc)

Government overhead for insurance pays 0.00 to property taxes
Private insurance pay local, state's property taxes that add to government revenue

Government overhead for insurance pays for the clerical employees in CMS to manage the program - but the government employee and employer do not pay all of the FICA and tax burdens to federal and state coffers a private person and employer do
the government worker has part of his/her health insurance paid for by taxpayers
the government workers have a part of their retirement funded by the taxpayer
Private insurance hires people to manage all aspects of the insurance program, and the employer pays for unemployment insurance, FICA, and state and federal payroll taxes
the individuals do not have government (taxpayer) funded retirement, so they invest their monies
the individuals pay for their health insurance, at a discount

Government overhead for insurance pays minimal for enrollment, and sub-contracts some work - as most is done thru federal and state employees in other agencies, funded by federal and state taxes, but not paid for by the government insurance agency
(social services is not a part of CMS or Medicare, it's paid for by taxpayers)
Private insurance hires people to manage enrollment into the insurance program, and hires 1099 workers to sell policies
the employer pays for unemployment insurance, FICA, and local, state and federal payroll taxes
the employed individuals pay for their health insurance, at a discount
the 1099 employee pay local, state and federal taxes and FICA, pays property taxes

Government overhead for insurance pays 0.00 toward profit
Private insurance pays taxes on profit that add to local, state and federal government revenue

Government overhead for insurance pays 0.00 toward mandatory reserves and set-asides
to meet financial needs it borrows money and prints money
Private insurance pays toward mandatory reserves and set-asides which make banks profitable, as the interest paid is less than the interest earned in lending those funds
that keeps the economy going
Banks and bank employees pay local, state and federal taxes, and fund the FDIC

Government overhead for insurance pays 0.00 toward mandatory fees, licenses, regulatory costs, audits or market conduct reviews, and pays no fines for non-payment of claims
(6.9% decline rate for part A)
Private insurance pays all costs born by states toward mandatory fees, licenses, regulatory costs, audits or market conduct reviews
Private insurance pays tort costs
Private insurance has a lower decline rate than Government
look up the AMA report for actual numbers

Government insurance is not held accountable for compliance to laws and state regulations
so it never pays a fine
Private insurance is held accountable for compliance to laws and state regulations, and pays state and federal fines when it is found to have not meet those guidelines and laws

Government insurance is not liable - so it rarely gets sued
Private insurance is held accountable for any tort issues, and pays fines when it is found to have not meet those guidelines and laws
the lawyers pay taxes, filing fees, and taxes on settlements that enrich local,state and federal coffers

after you read the analysis, consider if that 20% does go away - from a public option or a Universal mandate
notice all of the taxes and fees that local, state and federal government will have to replace from someone else

can you afford 20% more in taxes on top of what the insurance program would cost?