IRS Rule Changes Sweeten HSA Pot for Employers, Employees

Health savings accounts (HSAs) will likely prove even more popular than ever due to a sweetening of favorable tax treatments and more funding options.

Readers may want to check with their financial advisor about the new IRS guidelines that allow a transfer of individual retirement account (IRA) funds to an HSA; this transfer is tax-free. Second, employees are no longer subject to the 10 percent additional tax if they use their IRA funds to pay for medical benefits -- referring to IRC Sec. 72(t). Thirdly, qualified employees may contribute IRA funds to their HSA without tax.

Q: If I already have an HSA for myself and want to put some money into a high-deductible health plan (HDHP) for my family, can I do that?
A: Yes. If you have an HSA for yourself and you buy a family HDHPan HSA owner has a self-only high deductible health plan (HDHP) and buys a family HDHP, you can make that second transfer during the same taxable year. The fund distribution will still be without tax. One big advantage to doing this is that you will reduce your tax liability AND lower your health insurance premium. That is potentially, at least -- it will all still depend on your total financial picture and for that, you ought to go in to see your own financial advisor.

Fourth, the IRS also raised the ceiling for individuals and families to their HSAs for the 2009 tax year. Individuals will now be able to contribute up to $3,000 per year; families can contribute a maximum of $5,800 per year. (NOTE: The current maximum limit is $2,900 for individuals and $5,650 for families. The catch-up contribution for people who are 55 years old and up is increasing to $1000, from the current $900.)

The IRS released other new guidelines expected to boost the HSA market by further increasing employers’ adoption of HSA-linked consumer-driven health-care plans (CDHP).

Employers received much-clamored-for clarifying guidelines such as these (and employees will probably have to get the full details from your Employee Benefits department):

-- ON-SITE CLINICS that provide free or low-cost services will NOT affect an employees’ eligibility for an HSA. ALLOWED SERVICES INCLUDE: treating on-the-job injuries, immunizations, annual exams.

-- HOWEVER, if the clinic provides more significant medical benefits, you, the employee, are not eligible for an HSA. Example: a hospital permits its employees to receive medical treatment at its facilities for all of their medical needs for either no cost or at a reduced rate. (I and probably millions of you would probably give our eyeteeth to have such a generous employer.)

-- If an employer mistakenly contributes to your HSA, the employer is allowed to retrieve the funds by asking the financial institution holding the account (ie the bank or other seller) to return them. Otherwise, the employer may treat this amount as part of your income. (ie that means this could raise your IRS obligation; you are probably better off returning the money to the employer!)

A special note to HSA holders age 65 and up: You may use money in your HSA to cover Medicare Part D prescription drug PREMIUMS. If your spouse is older than 65 but you yourself are younger than 65, the enrollee’s HSA funds can NOT be used to cover your spouse’s Medicare Part D premiums without being part of your taxable income.

Hybrid financing is new and is expected fuel further growth in HSA accounts. Under this strategy, your employer pays ALL of an HDHP for you and your fellow workers AND gives each employee a defined cash allowance. Employees can decide how to use that cash.

Example: an employer provides a $2,000 deductible HDHP. You (employee) pay all costs under $2,000 while the insurance company covers EVERYTHING above that -- ie, your maximum out-of-pocket amount is $2,000 if you need surgery or pay a hospital bill – an amount similar to many traditional PPO plans. (Actually a lot of PPOs or indemnity policies may have limits of $2500, $3000, or even $5000. That may seem like a lot, but often that is the only way to keep the premiums down.)

Your monthly cash allowance of $125 (or $1,500 a year) also from your employer? You may choose to put that into your HSA, OR use it to buy a better health plan.

An unnamed small company in the communications sector used this hybrid financing strategy to walk away from a traditional insurer that quoted monthly premiums of $1800 per employee. It is no wonder that the employer switched to a high-deductible plan and an HSA, is it? This company is very generous and provides a $10,000 deductible for their employees plus the HSA, which is owned by the company.

Employees who had high medical expenses and depleted their HSAs, were reimbursed up to the deductible out of the HRA. This company pays a premium of only about $600 a month per employee (family coverage). The employees do pay toward the premium; the amount varies depending on whether it is a single or family plan.

It is hoped that the IRS changes will help both employers and employees contain the cost of healthcare. As an example, the above employer calculated that even if every employee got sick, the company would still save 18 percent compared to traditional healthcare insurance. And HSAs are much less likely to suffer annual hikes in premiums like those that plagued small businesses in the past decade.

Industry statistics show that HSAs grew by 73 percent from late 2006 to the beginning of 2008. The total dollar amounts in those HSAs also increased by 140 percent during the same time frame. It is a bit of a mystery why this popularity has not been evenly expressed across the country.

For example, a study showed that only 2.4 percent of residents enrolled in private health insurance in Missouri, 2.1 percent in Oklahoma, and 3.2 percent in Kansas have used HSAs.

Possible reasons that people are not switching to HSAs or other high-deductible plans: 1) they opt to stay with traditional, low-deductible healthcare plans, 2) the HSA is still pretty new, and perhaps they do not have anyone to familiarize them with it.