HSAs

HSAs are Here to Stay
by Kelly L. Birch

Madonna was performing in New York City dance clubs and conservatism was sweeping the country in the figure of Ronald Reagan. It was the early 1980s. If you can remember those days, then you can remember the last years before 401(k) plans and individual retirement accounts, or IRAs, became part of everyone’s financial vocabulary.

Fast forward to today: Assets in IRAs and defined contribution plans, such as -401(k)s total about $7.5 trillion, according to the Employee Benefit Research Institute. Many companies automatically enroll new employees in their 401(k) plans to impose savings discipline. Workers get the message that responsibility for retirement planning and savings falls squarely on them.
Like the 401(k), the HSA is the child of the tax code. It’s part of a package with a qualified health plan to help employers manage their costs. HSAs provide opportunites for people to save tax-advantaged money for present and future healthcare costs.

Only about 20% of U.S. employers offer HSA-eligible health insurance plans, but 50% of employers anticipate doing so in the future, according to a study by Hewitt Associates. The Treasury Dept. estimates that 25 million to 30 million Americans will have HSAs by 2010.
These trends have the following implications for you and your clients:
• HSA products will mature and expand. Remember, 401(k)s started out largely as depository accounts. Look what’s happened since. Expect product development to take off for HSAs. Stay on top of it in order to offer the best possible options.
• HSA custodians will multiply. More than 450 financial institutions already offer HSAs including major national banks, community banks, and Internet-based providers. You’ll need to scrutinize their products and their service.
• Service and convenience matter more than ever. People want their healthcare finances to be less complicated. Find HSA administrators that put customer satisfaction at the top of their to-do lists.
• Education is paramount in rolling out HSAs to employees. So far, it hasn’t rated a passing grade. Employees lack competency, comfort, understanding, and satisfaction with account-based health plans, according to a 2007 Towers Perrin study. Find partners that can help you turn that around.

HSA products and providers

To be sure, the trillions of dollars in 401(k) plans dwarf HSA assets. HSAs were only written into law in 2003. Tax-deductible limits for HSA contributions are more modest at $2,900 for individuals and $5,800 for families with allowable catch-up contributions of $900 for workers age 55 and older. A person can only open an HSA if their health plan has deductibles that are at least $1,100 for individual coverage or $2,200 for family coverage and if their health plan limits out-of-pocket expenses to $5,500 for an individual and $11,000 for a family. (These figures are for 2008, and they are adjusted annually for inflation by the IRS.)

There are forces that will push HSA administrators to broaden their product offerings and tailor their services. More employers, employees, and individuals who are shopping for health insurance will learn the HSA vocabulary, including the tax advantages.

Employers that are attracted by potential premium savings will be encouraged by the fact that they can lower their payroll taxes when employees make pre-tax contributions to HSAs. Employees will learn to weigh the HSA triple tax advantages. Their contributions are not taxed; their earnings in the accounts are not taxed; and they can spend the money income-tax free on qualified medical expenses.
The benefits of compounding will begin to accrue in HSA accounts and savvy customers will want to earn the best return they can. Last year, OptumHealth Financial Services (formerly Exante Financial Services) analyzed the spending and savings habits of individuals with HSAs and found that they fall into three categories: spenders, savers and investors.

Spenders are using their accounts to pay ongoing expenses, but savers and investors have different needs. Because many of them are healthy or otherwise financially secure, they are using their HSAs to accumulate assets for healthcare expenses in retirement. An Aetna study found that 52% of the company’s HSA members rolled over their entire account in 2005.

To meet their needs, HSA providers are looking past simple interest-bearing accounts. They are offering options that allow account holder to roll out a substantial amount of their savings into investment products, such as mutual funds, which have higher earnings potential over time.

Even account holders who pay medical expenses can benefit from more product sophistication with features like credit lines to help when their savings won’t cover out-of-pocket expenses.

No matter what their spending and savings habits, all savvy account holders demand high quality at the lowest possible cost. In evaluating HSA providers for employers, look for the following:
• Competitive interest rates on savings and low transaction fees.
• Tiered monthly account maintenance charges and possible waiver of charges with minimum balances.
• A variety of investment choices in a range of asset classes to suit different individual risk tolerances.
• Good value in investment choices with low expense ratios and strong historic performance.
• Features designed to make the accounts work for their owners like automatic payroll deduction or bank account transfers and automatic sweeping from cash accounts to investment accounts.

On top of product features, account holders want all the convenience of online banking and bill paying, ATMs, and debit cards. Top HSA custodians provide debit cards and checks for accountholders who want them. Their full-service Websites allow consumers to view account balances, maintain their accounts, and even pay healthcare providers.

You should expect service for yourself as well from enrollment materials to dedicated implementation support for large customers. Be sure to ask HSA custodians how they get behind you from start to finish from requests for proposals through implementation and rollout. The partner should enhance your reputation. Finally, look to the future. Be sure that an HSA custodian is carrier neutral and able to maintain integration with whatever health plans employers may adopt.

Employers and Education

Towers Perrin, the global consultancy, conducted a study that revealed widespread employee dissatisfaction with account-based health plans compared with traditional health benefit plans. One of the reasons for the employee thumbs down was that employers took a minimalist approach to education. Employees who did understand the features of their account-based plans reported much higher satisfaction and better utilization, according to the study.

In other words, you can’t expect people to get up to speed on their own. Benefit programs should be thoughtfully designed and meticulously communicated. They should also address emotional and economic aspects of the changes.
Your HSA administrator can help with the following:
• Educational material in print and online to help families understand their new health plans and accounts.
• Calculators to illustrate how much the employee can save on medical expenses as well as their opportunity to grow their accounts over time.
• Templates and suggestions for successful rollout meetings and communications plans for benefit administrators.

It’s important to share the trends in health insurance with employees. In 2006, Aetna did an analysis of consumer-directed health plans paired with HSAs or health reimbursement accounts (HRAs). Generic drug utilization was 4.5% higher among HRA members compared to PPO members.

In 2007, CIGNA compared members’ habits to those enrolled in HMO or PPO plans. First and second year members of consumer-directed plans increased the use of preventive care. They also accessed online tools more than twice as often, based on experiences of five large employer groups.

Be sure to point out that employers can write their own success stories by contributing to employee HSAs. The greatest single influence on the rates at which employees open accounts is whether employer funding is provided, according to a 2007 study by UnitedHealth Group. When employers provided funding, 91% of eligible employees opened accounts.

Every employer is different and cultures and norms vary widely. But with employers that are engaging employees, there are many ways to drive understanding about HSAs among employees, such as the following:
• Intranet content featuring Webinars and videos with real-life examples of how using HSAs with the health plan helped people maintain health and even manage a chronic disease.
• Newsletters that discuss benefit choices in plain language and address employees’ fears up front.
• Worksite meetings in groups and one-on-one to speak to benefits consultants
• Follow-up communications after open-enrollment to encourage employees who haven’t opened accounts to take advantage of HSAs.
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Kelly L. Birch is vice president of sales and strategic relationships for OptumHealth Financial Services, with headquarters in Minneapolis. She can be reached at 312-382-8487.