Many are predicting that health savings accounts will not fare very well in the upcoming administration. However, this recent Congressional Research Service Report indicates why we should keep them alive:
Whether moving to higher insurance cost sharing would reduce health care spending is not at issue; notwithstanding measurement difficulties, economic theory, actuarial experience, and empirical studies all indicate that it does. Probably the most frequently cited research demonstrating this point is the RAND Health Insurance Experiment (HIE), a carefully designed study of nearly 6,000 people between 1974 and 1982. Among other things, the study showed that per capita expenses for patients with a 95% coinsurance requirement for outpatient services were 31% lower than those for patients without cost-sharing. Reductions were also present but somewhat smaller for patients with lower coinsurance requirements, as they were for those with deductible policies. Reductions occurred for a broad range of conditions, especially for ambulatory care but also for hospitalization.More debatable is what effect reductions in spending have on individuals’ health, which could affect measures of the welfare loss. A common reading of the RAND HIE is that the health outcomes of those with high cost sharing were not different from those having conventional coverage, with several exceptions. (The exceptions included high blood pressure and vision imperfections in adults and anemia in children.) Although more health problems might have arisen for the high cost sharing group had the experiment continued longer, there is no way to prove or disprove this now.
Also, this article here notes:
More than 12 million lives are now covered by a health plan that either includes a health reimbursement arrangement (HRA) or is compatible with an HSA. And with more employers than ever offering such plans to employees during this fall's open-enrollment period, that number is expected to jump on Jan. 1. Plus, banks collectively now hold more than $4 billion in HSA assets.
And finally this from the article:
Jay Savan, an employee benefits consultant in the St. Louis office of Towers Perrin, says the potential for account-based health coverage actually remains as bright as ever. The exclusion of employer contributions for health coverage now is uncapped and is the Treasury Dept.'s third-largest tax expenditure. Savan contends that the tax break will need to be capped at some point, "particularly if Obama intends to have any money left to pay for an expanded [State Children's Health Insurance Program] or other federal subsidies that ensure children have health coverage, as he's maintained as part of his platform."And if a cap is placed on the amount of pretax dollars employees can contribute to their health coverage, employers will be pressed by their employees to offer options that don't exceed the tax cap. Low-premium, account-based plans might be an attractive option, Savan says.
Ramthun says he's encouraged that HSA-based health plans remained available in Massachusetts after the state enacted its landmark health reform efforts. "That is a likely model given the [Sen. Ted Kennedy] connections to Obama. I don't believe Kennedy will go farther than where Massachusetts has gone.
The New York Tmes reports here an increase in the use of HSAs:
But this year, at more than 100 large companies and hundreds of smaller ones, the high-deductible plans are the employee’s single take-it-or-leave-it option.One of those companies is the automaker Nissan, which is offering only high-deductible plans to its 15,000 United States employees for the coming year. Another is Delta Airlines.
Most large companies still do offer a choice between high-deductible plans and more conventional insurance, which means workers must try to decide which approach is best for them.
Regarding whether HSAs will survive the next administration, the article states that "the plans may not have a White House advocate." The article quotes an advisor to the President-elect as saying that "medical benefits that shift costs to employees" would not be consistent with the upcoming President's position on health care.
Update: The Tax Update Blog has a response to the comments quoted in the article. (Great benefits quote, by the way: "Benefits don't grow on magical benefits trees grown in HR Departments.")
From the Wall Street Journal today--"Bush to Seek Bigger Health-Savings Tax Break":
President Bush is expected to propose sweetening the tax breaks associated with health savings accounts, part of an effort to persuade more people to save for their own medical expenses, administration officials said.The proposal under discussion would let people deposit more money into their tax-free HSAs each year and use that tax-free money to pay health-insurance premiums. The proposal is part of a broader array of changes in the health-care system that the president is expected to propose in his State of the Union address Jan. 31.
Also, from this week's radio address:
For the sake of America's small businesses, workers, and families, we must also make health care more affordable and accessible. A new product known as Health Savings Accounts helps control costs by allowing businesses or workers to buy low-cost insurance policies for catastrophic events and then save, tax-free, for routine medical expenses. This year, I will ask Congress to take steps to make these accounts more available, more affordable, and more portable. Congress also needs to pass Association Health Plans, which allow small businesses across the country to join together and pool risk so they can buy insurance at the same discounts big companies get.
The Treasury and IRS have issued Notice 2005-86 which provides guidance regarding the interaction of the?2-1/2 month?flexible spending arrangement ("FSA") grace period (established earlier this year by Notice 2005-42) and eligibility to contribute to health savings accounts ("HSA"). The guidance confirms that coverage by the FSA grace period disqualifies an individual to contribute to an HSA during the grace period.? However, the notice also provides some limited ways that an FSA can be amended to enable a covered individual to contribute to an HSA during the grace period and clarifies a number of technical questions concerning the grace period.
The notice provides a special transition rule for?coverage years ending before June 5, 2006.? For those years, an otherwise eligible individual may contribute to an HSA during coverage by a health FSA grace period if the?individual's?health FSA has no unused contributions or if the employer amends the cafeteria plan to provide that the grace period is not available to individuals electing HDHP coverage during the grace period.
Read the press release here.
From the Washington Policy Center (via The Heartland Institute), The How-To Guide to Health Savings Accounts.
Pennsylvania legislators have effectively overturned the controversial Commonwealth Court decision in Ignatz v. Commonwealth of Pennsylvania, 2004 WL 1057453 (Pa. Commw. May 12, 2004) through enactment of House Bill No. 176. (You can read the text of the bill here.) The bill was approved by Governor Rendell on July 7, 2005. Buchanon Ingersoll has a great summary of the development here.
Also, legislation was passed in Pennsylvania removing a state law mandate which was a barrier to insurers offering high deductible health plans in connection with health savings accounts. The legislation, House Bill 107, was approved by the Governor on July 14, 2005. (Access the text of the legislation here.) The bill also provides that the following shall be exempt from taxation in Pennsylvania:
Read more about the impact of state law mandates on health savings accounts in this previous post here.
Rev. Rul. 2005-25 (via Benefitslink.com) answers two questions:
(1) Is a married individual eligible to contribute to a Health Savings Account (HSA) if the individual’s spouse has non-HDHP family coverage that does not cover the individual? Answer: An individual who otherwise qualifies as an eligible individual does not fail to be an eligible individual merely because the individual’s spouse has non-HDHP family coverage, if the spouse’s non-HDHP does not cover the individual. Accordingly, that individual may contribute to an HSA.
(2) If the individual is eligible to contribute to an HSA, what is the maximum contribution limit? Answer: The maximum amount under section 223(b) that an eligible individual may contribute to an HSA is based on whether the individual has self-only or family HDHP coverage.
Today's Wall Street Journal provides a good article discussing the challenges individuals face in adopting and implementing the new health savings accounts ("HSAs") which are growing in popularity: "Savings Accounts for Health Care Cause Confusion." The article makes the point that "early adopters" of the accounts may encounter glitches, as "consumers, banks and insurers are still figuring out the details on just how these new accounts are supposed to work." One such glitch mentioned in the article is "figuring out just what the patient is expected to pay":
Though consumers must pay for their own care until they meet their policy's deductible, they're still supposed to be able to take advantage of any discounted price that their insurer has negotiated, from doctor rates to drug costs. But already some patients and doctors are confusing HSAs with direct, full-price payments consumers make when they don't have insurance.Generally, payment with HSAs should work the same way payments generally work for patients with insurance. The doctor informs the insurer of the charges, the insurer sends the patient a statement explaining how much the patient owes, and the patient then has to pay the doctor that amount. Patients using HSAs should wait to pay until the doctor submits the information to their insurer, says Mr. Engel of Mellon Financial. . .
Some insurers, like UnitedHealthcare, are already working to minimize this hassle, for example, by allowing consumers to authorize the insurer to deduct directly from their HSAs to pay medical bills.
Obviously, if consumers are not allowed to take advantage of discounted prices, this will put a damper on the use of HSAs. The issue is not really even mentioned in this recent article from Forbes.com--"Saving for Your Health"--which makes the statement that "[f]or the right customer an HSA can save thousands of dollars a year." However, according to the article in Forbes, those who can afford it, shouldn't even use their HSA accounts to pay for medical bills now, but should use their "HSAs to compound tax-free as de facto IRAs":
If the money is ultimately used decades later to pay postretirement medical bills, so much the better: The account is better than an IRA because the funds are untaxed.A 40-year-old person putting $5,150 a year into an HSA returning 5% and making no use of the account would end up at age 65 with $268,000. The best interest currently being offered by HSA vendors is only 4.15%, but that will surely improve as balances get bigger and competition heats up.
The Forbes article provides a very helpful chart of the different HSA providers and the interest that can be earned on such accounts as well as whether the accounts allow investments in securities.
There are confusing state law implications as well, as mentioned in this article from SFGate.com--"State rules complicate health savings accounts":
As if the new health savings accounts weren't complicated enough, employers and individuals who open one in California should arm themselves with a big bottle of aspirin.. . . California has not conformed to the federal tax law that created the accounts. That means they provide fewer tax benefits and more record-keeping headaches for Californians than for residents of states that automatically conform to federal tax legislation.
But for an interesting sideline on the use of HSAs, don't miss this additional article from Forbes.com: "Doctor Your Tax Return."
(You can read previous posts on the topic of HSAs here.)
Bloomberg.com is reporting: "Wal-Mart, General Motors May Use Bush Plan to Cut Health Costs." The article quotes Richard Berner, chief U.S. economist at Morgan Stanley in New York , as saying that "t]he surge in health-care costs has damped economic growth because companies are wary of raising salaries or adding workers." According to the article, companies like General Motors, Wal-Mart, Intel Corp. and Textron Inc are now considering HSAs. Excerpt:
"The data is crystal clear,'' said Chief Executive Rick Wagoner of General Motors, the nation's largest buyer of health care through its employee-benefits program. "The U.S. is spending more on health care than any other country.''While General Motors says health care adds $1,400 to the cost of each car, Honda Motor Co. of Japan, which has a national health-care system, spends only about $400 extra, said Sung Won- Sohn, chief economist at Wells Fargo & Co. in Minneapolis.
"That hurts jobs,'' Sohn said. "It's like any other cost; like we see the cost of oil is hurting economic growth and raising prices. Health care slows economic growth.''
More from the article:
Aetna Inc., the third-largest U.S. health insurer, said employers using plans similar to the savings accounts held health-care cost increases to 3.7 percent.
According to a New York Times article--"Weighing the Risks in a Health Savings Account", health savings accounts ("HSAs') are starting "to shake up the group insurance market for small businesses." The article notes how "[a]lmost half of small businesses with 50 or fewer employees do not offer health insurance to their workers" and that HSAs are providing a way for small businesses to provide at least some insurance for employees, whereas before they were not offering any health insurance. The article provides an interesting example of a small business that has opted for the HSA for its employees:
Currently, the management consulting firm started last year by Rich Phillips, an entrepreneur in Austin, Tex., falls into that group [of a small business without health insurance for employees.] But Mr. Phillips said that he planned to add coverage next year for his five employees and their families, using health savings accounts.Mr. Phillips has purchased an individual H.S.A.-eligible policy for his family, which costs $380 a month and has an annual deductible of $3,250; a traditional policy would have run $900 to $1,100 monthly. For a single person, an H.S.A.-eligible policy can cost as little as $100 a month or less, compared with $400 or $500 for a traditional plan.
The article goes on to quote the business owner as saying that while he couldn't afford to pay $1,000 a month per employee for coverage, he could afford the $300 or $400 that an HSA plan costs, and that being able to pay 100 percent of the premiums for employees and their families is very attractive to employees and "rare" for small businesses in an era when health insurance costs can be prohibitive for the small business owner.
There is an informative article in the Wall Street Journal today summarizing how health savings accounts are being utilized: "Health Savings Accounts Gain Momentum." The article reports that about "20 financial institutions, including J.P. Morgan Chase & Co. and Mellon Financial Corp., are marketing HSAs" and that "[s]ome 50 insurers, including Aetna Inc., Cigna Corp. and Anthem Blue Cross & Blue Shield . . have introduced the high-deductible health policies that people must have to open an HSA." Regarding the types of investment choices being offered, the article reports:
The HSAs themselves are available either through the health insurer or an independent "trustee," such as First HSA, Entrust New Direction IRA and Health Savings Administrators. . . Insurers generally offer simple interest-bearing accounts that don't offer investment choices. But some are also teaming up with financial-services firms that act as trustees and offer accounts with more investment options. For instance, J.P. Morgan Chase has joined with several insurers, including Cigna and Anthem, to offer HSAs that invest in stocks, bonds and mutual funds. The independent trustees also offer a range of investment options.
(You can access previous posts about HSAs here.)
The IRS today in a press release announced that it has issued proposed model documents that can be used as trust or custodial agreements for Health Savings Accounts (HSAs). These documents "are being released in proposed form in order to give the public the opportunity to comment on the content before being issued in final form." The public comment period is 30 days.
The link to the model Health Savings Custodial Account is here [pdf] and the link to the model Health Savings Trust Account is here [pdf] .
The IRS has issued yet additional guidance smoothing the path for taxpayers who want to avail themselves of the new health savings accounts ("HSAs"). The guidance is Notice 2004-43 which addresses the road-block of state-law mandates, and provides for a transition period as follows:
Several states currently require that health plans provide certain benefits without regard to a deductible or with a deductible below the minimum annual deductible requirements of section 223(c)(2) (e.g., first-dollar coverage or coverage with a low deductible). These health plans are not HDHPs [High Deductible Health Plans] under section 223(c)(2) and individuals covered under these health plans are not eligible to contribute to HSAs. Because of the short period between the enactment of HSAs and the effective date of section 223, these states have had insufficient time to modify their laws to conform to the standards of section 223. Thus, it is appropriate to provide transition relief that treats HDHPs as qualifying under section 223(c)(2) when the sole reason the plans are not HDHPs is because of state-mandated benefits. During the transition period, otherwise eligible individuals covered under these plans will be treated as eligible individuals for purposes of section 223(c)(1) and may contribute to an HSA.The transition relief runs out on January 1, 2006, and will not apply to state mandates that were not in effect on January 1, 2004.
Previous post on the subject: "Health Savings Accounts and the Barrier of State Mandates."
Legislation was passed in Kansas last week allowing health savings accounts to be utilized in that state. Apparently, according to this article, the problem was this: State law mandated that mental and nervous conditions be covered for 100 percent of the first $100 of expenses, 80 percent of the next $100, and 50 percent of the next $1,640. Thus, if an insurance carrier had to provide this first dollar coverage, the plan no longer would meet the federal definition of a "High Deductible Health Plan" ("HDHP"), meaning that health savings accounts could not be utilized in that state. The old Medical Savings Accounts were available in Kansas because the state exempted them from this requirement. The Kansas legislature was quick to remedy the problem by enacting legislation. Good for them.
Other states with similar issues should follow suit, enacting legislation to make HSAs viable in their states. Please note the following language in IRS Notice 2004-23 pertaining to mandated state law requirements:
Section 220(c)(2)(B)(ii) allows a high deductible health plan for purposes of an Archer Medical Savings Account to provide preventive care for this purpose. Section 223(c)(2)(C), for purposes of an HSA, does not condition the exception for preventive care on State law requirements. State insurance laws often require health plans to provide certain health care without regard to a deductible or on terms no less favorable than other care provided by the health plan. The determination of whether health care that is required by State law to be provided by an HDHP without regard to a deductible is "preventive" for purposes of the exception for preventive care under section 223(c)(2)(C) will be based on the standards set forth in this notice and other guidance issued by the IRS, rather than on how that care is characterized by State law.
In other words, the IRS has stated it will not automatically consider state law mandated coverage to be “preventive” under the HSA requirements. As a result, plans that would otherwise be HDHPs could fail to qualify if they provide a state-mandated benefit that must be paid before the high deductible applies, unless that mandated benefit qualifies as “preventive” under the IRS safe harbor definition. The IRS has a whole laundry list of what constitutes "preventive" care in IRS Notice 2004-23 (in the Appendix). They have also asked for comments regarding other items which should be added to the list, indicating that the list may grow in the future.
The U.S. Senate Special Committee on Aging held a hearing today on the topic of health savings accounts. You can read testimony from the hearing or view the hearing at this link. (There is some good information here for those interested in HSAs, especially this survey from Mercer.)
The Department of Labor has issued Field Assistance Bulletin 2004-1 ("FAB"), providing some important guidance pertaining to the application of Title I of ERISA to health savings accounts ("HSAs"). Here is what the DOL had to say in the FAB:
Congress, in enacting the Medicare Modernization Act, recognized that HSAs would be established in conjunction with employment-based health plans and specifically provided for employer contributions. However, neither the Medicare Modernization Act nor section 223 of the Code specifically address the application of Title I of ERISA to HSAs. Based on our review of Title I, and taking into account the provisions of the Code as amended by the Medicare Modernization Act, we believe that HSAs generally will not constitute employee welfare benefit plans established or maintained by an employer where employer involvement with the HSA is limited, whether or not the employee's HDHP [High Deductible Health Plan] is sponsored by an employer or obtained as individual coverage.
Again, the issue is employer involvement (as discussed in a previous post) and whether the particular benefit offered meets the exception under 29 C.F.R. § 2510.3-1(j)(1)-(4). Here is how the DOL decided to define employer involvement with respect to HSAs, as noted in their FAB:
Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 C.F.R. § 2510.3-1(j)(1)-(4) would not be employee welfare benefit plans within the meaning of section 3(1) of ERISA. . . [W]e would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA.
Even though the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (which includes new tax provisions allowing the establishment of Health Savings Accounts ("HSAs") starting in 2004) was only signed into law on December 8, 2003, the Treasury and IRS have already so far issued a fairly good round of guidance pertaining to the new HSAs. As you may recall, the first guidance that was issued regarding HSAs was Notice 2004-2. As predicted, the Treasury and IRS have issued some additional guidance pertaining to HSAs today. The Treasury Department has issued its press release regarding the guidance here. You can read Secretary of Treasury John Snow's prepared remarks regarding HSAs here in which he states:
An individual can only make a contribution to a HSA if the individual is covered by a High Deductible Health Plan and no other coverage. Generally a High Deductible Health Plan only pays for benefits after the deductible is met. Our guidance states that this deductible applies to prescription drug coverage as well as other types of health coverage. Therefore, a plan that provides first-dollar benefit coverage for prescription drugs by either a flat dollar amount or percentage co payment for all prescription drug expenses, even those underneath the deductible will not be considered a high deductible plan and a person covered by such a plan could not make a contribution to an HSA.However, we understand that some have been selling such policies to individuals thinking that the individuals could make contributions to an HSA. We have provided transition relief so that those people who purchase a high deductible health plan with a separate lower deductible prescription drug policy will be able to contribute to contribute to an HSA in 2004 and 2005. We do not want to penalize those people who bought products thinking that they could contribute to an HSA.
The guidance issued by the Treasury and the IRS is as follows:
For those with questions regarding HSAs, the IRS has set up an e-mail address – hsainfo@do.treas.gov – as well as a voice mailbox at 202-622-4HSA. You can also access information on their website regarding HSAs here.
(Access an earlier post regarding HSAs here.)
Henry Aaron of the Brookings Institution has this to say regarding the significance of health savings accounts:
". . .[T]he claims that HSAs will lower medical cost inflation and the fears that they will undermine coverage are probably overstated. But the larger point is that the appeal of HSAs should not be considered within the confines of company-financed health insurance, but in the larger context of total labor compensation. The principle effect of the new HSA provisions is to break down the distinction between health and pension benefits. Much retirement saving is devoted to paying for health care. HSA balances that remain unused during an employee's working years may be used under extremely favorable terms to pay for health care during retirement, and they may be used on terms identical to those of tax-sheltered savings plans to pay for general consumption. Those options mean that HSAs are just defined contribution pension plans, with particularly advantageous tax treatment and particularly generous rules for withdrawal.
Thanks to RothCPA.com for the pointer.
The American Benefits Council has published its comments to the Internal Revenue Service regarding HSAs and Notice 2004-2.
A couple of helpful articles on HSAs:
Earlier this year, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which includes new tax provisions allowing the establishment of Health Savings Accounts ("HSAs") starting in 2004. The Bill was signed into law by President Bush on December 8, 2003. You can access the Conference Report here.
The IRS has now provided some limited guidance for the new Health Savings Accounts in this Notice 2004-2 (via Benefitslink.com).
In addition, this would be a good place to provide a list of all of the articles I have collected so far discussing the new HSAs. These links will be added in the "Recent Hot Topics" Section of links on the right. The articles were written before the IRS guidance was issued:
Chart by the Groom Law Group: "How Health Savings Accounts Compare To Health Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs)."
Kilpatrick Stockton LLP: "Health Savings Accounts: Medicare Reform Reshapes the Landscape for Active Employee Health Coverage."
Alston & Bird LLP: "Health Savings Accounts (HSAs): New Option for Consumer Drive Health Care."
The Galen Institute: "Health Savings Accounts."
Faegre & Benson: "Health Savings Accounts Under the New Medicare Law."
Gardner Carton & Douglas: "What the New Medicare Law Means to Employers."
Kirkpatrick & Lockhart LLP: "Medicare Bill Includes New Health Savings Accounts."
McDermott Will & Emory: "Impact of the Medicare Prescription Drug Act on Plan Sponsors."
Roth CPA.com: "The New Health Savings Accounts: How They Work."
You can also access the IRS Treasury Fact Sheet here.