PEO Employee Benefits Options: HSA Plan Administration

HSA Plan Administration with a PEO

The Health Savings Account (HSA) is a tax advantaged savings plan available to taxpayers in the United States to deposit money to pay for current and future medical expenses. Money can be depositited to a special savings account before tax is paid on it (or deducted later from ones gross income when income taxes are filed). The money can be used tax free for medical expenses, chiefly one's medical insurance deductible and co-insurance (the amount after which the insurance begins to pay, but less than the amount at which they pay 100% of expenses.) It is unique in the tax code as both income tax deductible on deposit and tax-free on withdrawl (for medical expense).

The account is other-wise simular to a traditional bank account in that checks ( cheques ) can be written against the account and the accounts should be from banks that have FDIC insurance. The account can also be used to pay for medical supplies and care that is not covered by ones medical insurance plan. Examples of these expenses are professional dentistry and ophthalmologist care, including glasses and contact lens. As well as over-the-counter substance and even transportation expenses related to medical care. A complete list is availible from the IRS. Furthermore, it is a little known fact that the checks do not have to be written directly to the pharmacy or provider. Individuals may save reciepts for tax record purposes and reimburse themselves for past expenses. There is no limit on the timeframe for reimbursement except that they cannot reimburse themselve for expenses incurred before the QHDHP (see below) took effect.

The account is simular to an IRA in that money in the account can be invested and grow tax free and the money may be taken out without penalty at age 65 (ordinary income tax would apply). Penalties for non-medical withdrawl before age 65 are usually severe. Accounts can be "rolled over"

Health Savings Account is the new name for the Medical Savings Account (MSA) plans that were previously offered. The new plan decreased minimum deductibles and extended the accounts to more people. The changes were made in legislation signed by George W. Bush on December 8, 2003. The law went into effect on January 1st 2004.

HSAs differ in several ways from MSAs. Perhaps the most significant difference is the ability of employers of all sizes to offer an HSA account and insurance plan to employees. MSAs were limited to employers who employed 50 or fewer people. That change is important, because employers are the sponsor of health benefits for most people in the US.

Both employees and employers may make deposits to a HSA account, but the total of their deposits may not exceed that allowed by federal law. Employers may deposit as much or as little as they wish to an employee's account, but they may not discriminate in any way when making the deposits. Employer contributions in the same dollar amount or same percentage of the employee's deductible for all employees in the same class. Employers can base contributions for on full-time vs. part-time employees, and/or family/single coverage, but no other discrimination is allowed. (Employees who do not participate in the QHDHP do not need to be considered.)

A person must be covered by a Qualified High Deductible Health Plan (QHDHP) to be eligible to make deposits into an HSA account. In 2006, an HDHP has a minimum annual deductible of $1100 for Single coverage and $2200 for Family coverage. This plan cannot allow Copayment (which are entirely different from coinsurance) of any kind, including prescription drug copayments. Services which are often subject to copayments such as doctor's visits or prescription drugs are included under the QHDHP's deductible. A person may not have other health insurance.

The maximum out-of-pocket expense liability is often less than that of a traditional health plan. This is because QHDHP often cover 100% after the deductible, thus eliminating co-insurance.

The premium for a HDHP generally is less than the premium for traditional health care coverage. This is mostly due to the elimination of co-payments. Their elimination lowers premiums because insurance underwriters are betting that Americans will consume less medical care and supplies, be more vigailent to excess and fraud in the healthcare industry, and shop for a bargain on their healthcare if they see a relationship between medical cost and their own bank account. Introducing Consumer-driven supply and demand and controlling inflation in healthcare and health insurance is also the government's main incentive for offering the tax break. It is critical that healthcare inflation is controlled as there has been an 140 percent increase over the last 10 years. It is unknown whether Bush's solution will work.

Critics say that it will increase medical costs in the US, because people facing the prospect of paying the entire cost of a visit to a doctor's office, or a minor but needed surgery, may skimp on, or forego altogether, obtaining needed care for diseases or injuries before the condition becomes more serious (which is usually more costly to treat). Another problem with the theory that it will help control medical inflation is that many employers are buying HSA plans to get the lower premiums, but then funding their employees accounts 100% creating first-dollar coverage; possibly reducing consumer awareness.

Some health care analysts also criticize HSAs for being much more valuable to upper income individuals than lower income individuals. If a person in the 30% tax bracket put $5,000 into an HSA, the government would effectively 'contribute' $1,500 (30% of $5,000). If a person in the 10% tax bracket were able to put $5,000 into an HSA, the government would only be contributing $500. The tax deduction cannot be used against payroll tax. Proponents respond that they fail to see the total benefits of HSA contributions. When a person pays for health costs with his or her HSA account, he or she is now using pre-tax dollars and do not have to have medical bills in excess of 7 1/2% of the Adjusted gross income to deduct expenses.

Funds not used in an HSA account carry over each year and remain in the account, unlike the old flexible spending where a person lost any money remaining at the end of the year. The money in the account is a personal asset of the individual(s) who own the account. If an individual changes their coverage so that it is no longer qualified, they may keep and use the account for expenses, but may not make deposits.

Maximum annual deposit may not exceede the lesser of amount of the deductible or $2700 for individuals and $5450 for families in 2006. This maximum is prorated from the first full month of coverage under a QHDHP so, for example, if you started the plan on July 1st you would only be able to deposit 50% of what would otherwise be your maximum. Individuals 55 years old or older, are allowed an additional "catch up" deposit. Catch up deposits are $700 in 2006 and go up by $100 each year, until the maximum catch up amount of $1,000 is reached. If both the husband and wife on a family plan are 55 or older, they can both use the catch up provision.

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