Health Savings Accounts Offer Hope: But Are Companies Buying?
July 16, 2007
CAMBRIDGE, Mass.-Until now, plan providers have been slow to roll out Heath Savings Accounts (HSAs), perhaps because of murky rules, low maximum contribution levels and a seemingly limited business opportunity.
But the opportunity is there, and it's significant, especially among investors approaching retirement, said John B. Vellines, founder and president of Health Savings Administrators in Richmond, Va., at Financial Research Associates' IRA Rollover Retirement Summit here last week.
"More and more employers are offering this as an option," he said of HSAs, which allow pre-tax money to be invested for the purpose of covering medical treatment, whether now or in retirement. As the Department of the Treasury continues to clarify the rules governing these accounts and employers look to control the escalating cost of healthcare benefits, their popularity will likely increase.
Signed into law by President Bush in December 2003, the HSA is the latest incarnation of a string of legislation to encourage workers to better prepare for retirement, using tax advantages as an incentive. But unlike Medical Savings Accounts, which target only small companies or the self-employed and can only be used for future treatment, HSAs are open to large companies, and participants can use the funds to cover expenses now or later.
Unlike the "use or lose" provisions that discouraged many from contributing to flexible spending accounts, HSAs, like their close cousin, the IRA, cap the amount investors can contribute each year, but allow funds to accrue-and compound-year to year. Contributions must cease when investors begin receiving Medicare benefits. After age 65, HSA money can be used for any purpose.
"If you start [saving] at 25, the numbers can be enormous," Vellines said.
But it's not the 25-year-olds who are most interested, it's the Baby Boomers, who are facing the reality of planning for the future in an environment where the cost of healthcare is rising 7% per year, according to Lynette DeWitt, a research associate with Boston-based Financial Research Corp.
That far outpaces the 1.25% rate of inflation consumers can expect in most other day-to-day products, said J. Kevin A. McKechnie, executive director of the American Bankers Insurance Association and director of the American Bankers Association HSA Council, both in Washington.
Add to that concerns that the federal Medicare system will probably be tapped out by the time anyone under 50 reaches eligibility, McKechnie said.
"Remember, healthcare is a tax issue," McKechnie advised. And that's the way to frame it when selling triple-tax-advantaged HSAs.
One of the most attractive features of the HSA for Boomers is the ability to jump-start accounts by rolling IRA money into HSAs, a provision of the 2006 Health Opportunity Patient Empowerment (HOPE) Act.
The act allows a one-time transfer of the maximum-allowed annual contribution to the HSA-for 2007, that figure is $2,850 for a single person and $5,650 for a family-directly from the individual's IRA. Those over 55 are allowed an $800 catch-up contribution. The Internal Revenue Service resets those figures annually.
But the transfer is not without restrictions, Vellines said. For one thing, the transfer must be trustee-to-trustee and come from a traditional IRA only. Another requirement is that the participant has high-deductible health insurance for at least one year before opening an HSA. Like the limits, those deductibles change regularly, but for 2007, to qualify, "high-deductible" means a minimum of $1,100 for an individual and $2,200 for a family, and a maximum out-of-pocket cost of $5,500 or $11,000, respectively.
For another, in the year in which the transfer is made, the participant cannot claim an IRA tax deduction. "Many times, people learn this and walk away," Vellines said.
But not everyone. In fact, the rollover provision came into effect on Jan. 1 this year, and Health Savings Administrators had requests from clients by Jan. 6.
"We were floored," Vellines said. The company was also confused about how to proceed, since the Treasury Department had not issued clear guidance, and many IRA custodians, unaware of the rule change, denied initial requests. Even those companies that did know about the rules lacked even the basic forms to provide to investors.
Such administrative barriers are frustrating for investors, who sometimes have had to wait as long as three months after the money had been removed from their IRA until it was invested in their HSA, Vellines said.
Right now, the average account balance of Vellines' investors is $6,392, and the median age is 56. Last year, 73% of those enrolled through Health Savings Administrators did not draw anything from their accounts. Those who do, however, can use them to pay for anything from doctors' visits to dental work to new glasses or prescription drugs. They can even use the assets to pay deductibles or premiums on long-term care insurance, if they so choose, adding to the tax advantage.
But that advantage is not guaranteed forever, McKechnie said.
"There is a new party in town, and they are looking for money," McKechnie said, referring to the Democratic control of the U.S. House and Senate.
Still, with the escalating cost of healthcare, and federal resources being directed to programs that provide mainly for children, coupled with House Speaker Nancy Pelosi's (D-Calif.) demand that all government budgets provide pay-as-you-go provisions, that means less money for healthcare for the average American worker.
And that means greater business opportunity to HSA providers in upcoming years, despite the seemingly small account sizes, McKechnie said. While saving in a 401(k) or IRA for the long-off goal of retirement may be easy to put off, saving now for healthcare issues that could arise tomorrow-or already exist-may be an easier sell, he said.
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