Looking ahead

For Atlanta companies, providing employees with access to affordable health care coverage remains a major business challenge in this new year. Nearly two-thirds of small employers surveyed by the National Federation of Independent Business in May 2004 cited the cost of health insurance as the most critical problem facing small business.

With health care costs continuing to rise at near double-digit levels every year, businesses are looking for new solutions to this age-old problem. One of the answers may be to put health benefits decision-making in the hands of those most affected — the health care consumer.

One option is the introduction of Health Savings Accounts, new to the health care toolkit. There is no use it or lose it rule with HSA funds.

They can be rolled over from year to year, allowing consumers to build a tax-free nest egg for future health care needs. Consumers can use HSA funds to pay for their insurance plan’s deductible, as well as qualified medical expenses their health plan may not cover, such as acupuncture.

How HSAs work

To qualify for an HSA, consumers must purchase a high-deductible health plan policy with annual deductibles of at least $1,000 for an individual or $2,000 for a family. This policy must be the consumer’s only health insurance.

Here are a few other key elements of HSAs.

* Consumers can contribute funds to their HSA year after year, building on unspent money. Consumers can’t make contributions to their HSA once they become enrolled in Medicare, but they can withdraw the accrued funds to pay for approved medical expenses and Medicare Part B premiums.

* Money contributed to the account can be deducted from tax returns, whether or not deductions are itemized.

* Employers can contribute pretax dollars to the HSA, just as they do for 401(k) plans.

* Earnings in an HSA grow tax-free, and consumers can dip into an HSA at any age — again, tax-free — to pay for medical expenses. Those expenses include deductibles and co-payments, as well as many charges that typically aren’t covered by health insurance, such as over-the-counter drugs, vision care, dental care and long-term care insurance premiums.

* Money in an HSA doesn’t have to be used for health care expenses, but consumers must pay income tax on earnings if funds are withdrawn for other purposes. A 10 percent penalty will be imposed on any nonqualified withdrawal before age 65. After 65, funds withdrawn from HSAs can be used to pay for certain insurance premiums, such as Medicare Part A & B, Medicare HMO and the employee’s share of retiree medical insurance premiums.

* If consumers currently use a Flexible Spending Account, they can combine it with an HSA, but it can only be used for permitted coverage, such as dental care, vision care and long-term care. An FSA can be wrapped around an HSA for medical expenses covered under the plan only after the member satisfies the minimum deductible.

Considerations for employers

When designing health benefits, employers can include one spending account or combine spending options. For example, an employee can enroll in both a Health Savings Account and a Flexible Spending Account.

In designing a plan, employers should consider the amount of flexibility they need and whether they will fund an account entirely, share funding with the employee or offer an account with employee-only contributions.

Other considerations include:

* How pharmacy benefits fit in

* The impact of a fund on FICA savings

* The impact of spending accounts on employees ages 55 or older

* Whether the spending account supports employee retention

Alan Guzzino is the president of Humana’s Atlanta, North Carolina and South Carolina market health plan operations and is responsible for the management, strategic planning and growth of those markets. Guzzino, an eight-year veteran of Humana, serves on the board of the Georgia Association of Health Plans. Reach him at [email protected].