HSAs likely to be under fire in next Congress: Will their loss be LTC's gain under Democrats?

Nov 20, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Floundering health savings account legislation in a Democratic-controlled Congress might affect long-term-care insurance, industry observers say.

One scenario is that LTC sales could go up if people decide to buy the insurance instead of establishing an HSA to pay LTC costs.

A sales jump-start would be welcomed by advisers and LTC brokers. A survey of 1,025 U.S. adults released this month by the Life and Health Insurance Foundation for Education in Washington found that only 15% of them had the coverage.

On the other hand, sales could decrease if people decide to forgo the HSA and its advantage of paying LTC insurance premiums with pretax dollars.

Congress might take away some of the tax advantages of the accounts or not increase the maximum annual contributions beyond the built-in inflation guards, according to Michael Kerley, senior vice president of federal government relations for the National Association of Insurance and Financial Advisors in Falls Church, Va.

Eulogies are premature

The demise of HSAs has been greatly exaggerated, according to Jerry Ripperger, director of consumer health for The Principal Financial Group Inc. in Des Moines, Iowa.

President Bush has veto power over anti-HSA bills - for the next two years - and the Democrats probably could not muster enough votes to override, he noted.

The issue is being "over-

politicized," Mr. Ripperger said. "There's also a misconception that these accounts are tax breaks for the wealthy," he said.

"I think that HSAs will, in fact, grow as people become more educated about how they work," Mr. Ripperger added.

"Planning to pay LTC expenses from accumulated savings in an HSA would be like replacing your homeowners insurance with a penny jar," said Jesse Slome, executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif. The maximum amount that can be saved by individuals will be $2,850 in 2007 - that would buy fewer than 20 days of care in most geographic areas, he added.

The average cost of a private room in a nursing home is $204 a day - over $74,000 a year - according to a study released this month by New York Life Insurance Co.

Nevertheless, 12% of people are planning to pay for LTC expenses out of their accumulated savings - including HSAs - the LIFE survey found.

"The concept of paying LTC insurance premiums from the HSA account has been slow to catch on," said Tom Riekse Sr., chairman of Madison, Wis.-based LTCI Partners LLC. That's mainly because clients - and even their financial advisers - are not aware that this can be done, added Mr. Riekse, who works in the firm's Libertyville, Ill., office.

No strategy change

Because the vast majority of clients aren't funding their LTC premiums with HSA money, it is unlikely that legislation unfavorable to HSAs would make them change their strategy, added James Gandolfo, senior director and vice president of health savings accounts for PNC Financial Services Group Inc. in Wilmington, Del.

Paying LTC premiums with pretax HSA dollars is especially attractive to individuals who can't deduct premiums from their taxes because they don't meet the threshold of spending more than 7.5% of their income on health-care-related costs, said NAIFA's Mr. Kerley.

A factor discouraging use of HSAs to pay LTC premiums is that most balances are relatively small because the accounts have been around only since 2003, Mr. Riekse noted. "When they get bigger, advisers will realize this is an ideal source of paying the premium with tax-advantaged dollars - if the concept of HSAs is not completely killed," he said.

Rather than paying LTC premiums from an HSA, some small-business owners - such as owners of C corporations - can deduct up to 100% of the premium from their taxes under Internal Revenue Service rules, Mr. Slome noted. The IRS this month announced increases in those deductions.

"I don't think that people have really made the connection between LTC expenses and HSAs," said Paul Fronstin, director of the health research and education program for the Employee Benefit Research Institute in Washington. "I doubt at this point that languishing HSA legislation will have any impact on LTC insurance sales."

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