August 9, 2005
Volume 1 Issue 22        

Health Savings Accounts. A Win/Win Reduction of Costs

          As I was doing my Internet reading looking for new ideas to share with you, I ran across an article from an issue printed last year in “Industrial Distribution”, written by Bart and Roman Basi, attorneys specializing in financial affairs.

The article focused on the new HSA laws that we mentioned in our June issue #15. I would like to go into more detail, because as you will see from the points made, if you are qualified, HSA’s can present real savings for you and you employees. I will not focus on how you qualify, that’s for your health care consultant to help you figure out. I want to focus on cutting costs because that is my goal, and I think the HSA can work for you.

If you are familiar with a 401K and how it works, the HSA from a tax standpoint is very similar. The employee contributes to the HSA to cover his deductible but he uses pre-tax dollars for that contribution. The HSA is invested, like the 401K, and that investment income is tax free. If the employee changes jobs the HSA goes with him that includes the employer contribution. How nice is that!

Now let’s look at the employer advantages. Let’s say we move our plan from a $500 deductible plan to a $1000 plan. Based on current averages the single employee premium would go from $250/mo. to $200/mo. That represents an employer savings of $600. Here’s the “catch”. The HSA law says the employer must contribute the same % or dollar amount as the employee. Well if he gives $500 and you give $500 he gains back the increase in deductible and gets to keep the money if he doesn’t use the deductible for his health care.

So the net advantage to the employer is he saves $100 ($600 premium saving - $500 contribution to the employee HSA) that’s a net of $100. Well $100 bucks time 20 employees, that sure adds up fast. The employer also gains in a complete expense of his contribution and no FICA, state or UC tax on the distribution to the employee. That’s more savings yet.

This sounds to good to be true, below we will review the pluses and minuses for both sides and you can see it’s a real slam dunk when it all  washes out.

1. Employee Benefits
   • 100% of the annual deductible for the individual or family can be contributed to an HSA
   • Contribution to the HSA is tax-free
   • The account is invested
   • If an employee changes jobs, the account goes with him
2. Employer Benefits
   • The employer is not taxed
   • Employer has reduced premium costs
   • Employer obtains a direct write off for the amounts paid not only for the health premiums, but for the HSA as well
3. Employee Disadvantages
   • Disadvantages are few and far between
   • If you do not use the funds for “qualified medical expenses,” the funds that are used are included in your gross income, and a penalty of ten percent is imposed (in the case of  death, the penalty is waived).
   • HSA is transferable to a spouse tax-free, but to anyone else it ceases to exist as an HSA and becomes taxable income.
4. Employer Disadvantages
   • The employer must make comparable contributions to each individual’s HSA (same amount or same percentage of the deductible).
   • All employer-funded amounts remain the property of the employee

HSA’S SAVE MONEY NOW!

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