Paying more upfront

Is high-deductible insurance coupled with a health savings account a good deal? For whom?

Sep 1, 2013 @ 12:01 am

By Richard F. Stolz

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AS HIGH-DEDUCTIBLE health plans with associated health savings accounts grow in popularity, more financial advisers are fielding questions from clients about their benefits and drawbacks.

Advisers can play an important role in guiding clients on whether to choose a high-deductible health plan with an HSA option and how to invest those funds. Advisers also can help business-owner clients weigh the merits of HDHPs with associated HSAs relative to traditional plan designs, such as preferred provider organizations and health maintenance organizations, for their companies' employees.

As the Patient Protection and Affordable Care Act's multiple components take effect and as health care inflation maintains its tradition of exceeding the consumer price index, employers and employees are under increasing pressure to keep expenditures in check. For example, in 2018, employers will face a 40% surtax on the value of health plans exceeding $10,200 for individual coverage and $27,500 for family coverage — cost levels that could easily be exceeded by typical health plans today without aggressive counter-measures.

AS HIGH-DEDUCTIBLE health plans with associated health savings accounts grow in popularity, more financial advisers are fielding questions from clients about their benefits and drawbacks.

Advisers can play an important role in guiding clients on whether to choose a high-deductible health plan with an HSA option and how to invest those funds. Advisers also can help business-owner clients weigh the merits of HDHPs with associated HSAs relative to traditional plan designs, such as preferred provider organizations and health maintenance organizations, for their companies' employees.

As the Patient Protection and Affordable Care Act's multiple components take effect and as health care inflation maintains its tradition of exceeding the consumer price index, employers and employees are under increasing pressure to keep expenditures in check. For example, in 2018, employers will face a 40% surtax on the value of health plans exceeding $10,200 for individual coverage and $27,500 for family coverage — cost levels that could easily be exceeded by typical health plans today without aggressive counter-measures.

GROWTH IN POPULARITY

For many, these forces have led to the adoption and utilization of less expensive plans that include a higher deductible but allow the partnering of a health savings account to make it easier or more attractive for people to save money to pay for that deductible.

Last year, $13 billion (up 27% from 2011) was contributed to about 8.2 million individual HSAs (up 22%), according to Devenir Group LLC, a large provider of HSA-related services to financial institutions. HSAs also are available in conjunction with certain types of flexible-spending-account plans.

Though popularity of the plans, which are generally cheaper for employers, has grown in recent years, HDHPs with HSAs actually began gaining steam back in 2005, five years prior to the enactment of the sweeping health-care-reform law.

Today, Devenir estimates nearly $19 billion is sitting in HSAs, and projects that figure will grow to $27 billion by 2015. While 80% of those assets are expected to be held in bank accounts to facilitate immediate payment for medical services, another $5.6 billion will be invested, according to Devenir's projections. Clients can establish HSA accounts wherever they choose — financial planners can advise them on how best to manage those dollars.

THE INNER WORKINGS

The biggest lure of HSAs is their generous tax benefits: Employee contributions are tax deductible, and withdrawals are not taxable when used to pay for approved health services and products.

This year, an employee with family coverage can put up to $6,450 into an HSA, and an employee with single coverage has a $3,250 limit. Employees 55 and older are eligible for an additional annual $1,000 “catch-up” contribution.

The price paid when HSA funds are used for non-health purposes is steep: a 20% penalty on top of in-come tax. However, that penalty is removed when a person reaches age 65 — though they'll still face income tax. Nevertheless, it would not make sense for most 65-plus-year-olds to waste the tax benefit on non-health expenses.

HSAs can be passed on to a spouse without losing their favored tax status. However, they cannot be passed on to the next generation, as individual retirement accounts can be. They simply become part of the remaining spouse's estate upon death.

Once an employee separates from the employer, he or she cannot maintain contributions to that HSA.

CHOICE CONSIDERATIONS

Clearly, an employee whose only health care option is a high-deductible plan would be foolish not to exploit an HSA. Advisers have more analysis to do for employees choosing among multiple health plans.

It is widely assumed that the HDHP/HSA package works best for young, healthy employees or such employees with similarly healthy and young families. The theory, of course, is that they are less likely to sustain heavy health expenses and can benefit from the lower cost of such plans — using the savings to fund their HSA.

While that is often true, other factors can come into play for that employee demographic, and others. For example, when Devenir president Eric Remjeske analyzes choices for employees with chronic health conditions, the HDHP/HSA option often turns out to be the better deal.

Besides employee health, these additional variables should be taken into account:

Scope of benefits. While the Affordable Care Act prescribes “minimum essential benefits” for all plans, the fine print of what is covered under the different plans requires scrutiny. A PPO or HMO might provide more value, even for a low-risk employee.

Risk tolerance. “It's similar to how people buy homeowner's insurance,” noted David Kudla, founder and chief executive of Mainstay Capital Management LLC, which advises employees of large corporations, including on management of their 401(k) assets. “Does the em-ployee have a low deductible so that the homeowner's policy will pay every time a window gets broken?” Mr. Kudla asked.

Net worth. If the employee's goal is to carry over HSA contributions into retirement, the employee needs enough after-tax cash outside the HSA to cover significant health expenditures before reaching an HDHP plan's annual out-of-pocket maximum. Em-ployees may get sticker shock when they switch to an HDHP plan and begin paying the full price of prescription drugs, warns Sean Keegan, the senior group accounts manager for AEPG Wealth Strategies.

Discipline. Suppose an employee plans to allow HSA funds to accumulate, and not to tap them for routine health expenses. On that basis, an adviser recommends investing a large portion of HSA assets. Market volatility ensues and the account balance de-creases. At that time, the employee's circumstances change and he or she elects to liquidate most of the HSA to cover a large medical bill. While such clients might, in theory, benefit from a HDHP/HSA, advisers must have confidence in the client's ability to stay the course. “It's all part of the planning process,” Mr. Kudla said.

When advising clients who own their own businesses and are considering the HDHP/HSA model, they should be willing to spend some money upfront, contributing to employees accounts. “You often need to do that to get the plan cooking,” said Bill Corson, AEPG's vice president of group benefits.

Ultimately, employers are looking for “how to get more bang for their buck,” Mr. Keegan said.

To that end, a final analytical task for employers and their advisers is to make their best guess about how these plans will be regulated in the future. It is not out of the realm of possibility that, given budget pressures, HSAs' tax benefits will be trimmed before long, Mr. Keegan noted.

Richard F. Stolz is a freelance financial writer based in Rockville, Md.

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