GROUP HEALTH INSURANCE IS IN TROUBLE!
Inflating premium costs and escalating senior care costs are driving many firms to reevaluate their entire benefit program. Solutions must be found or Group Health Insurance may disappear. The HSA, coupled with a High Deductible health Plan (HDHP) is a solution. Is it time to find out if it would work for your firm?
THE PROBLEM
PREMIUM INFLATION in group health insurance is out of control. Self funded or fully insured; the recent string of double digit increases in cost is unacceptable. Most experts predict this trend will continue for the foreseeable future. Few (if any) firms can continue to absorb those costs. Something must be done.
ESCALATING SENIOR CARE COSTS for medical care are jeopardizing employee.s retirement plans. Most individuals will have the majority of their personal medical expenses during the last few years of their lives. Group health plans usually do not provide post retirement health benefits. Medicare will not pay all of those medical costs. Most employees need to have effective methods of saving for those expenses. Again, something must be done.
THE CAUSE
WHY IS THERE DOUBLE DIGIT INFLATION? The primary cause is overuse of the healthcare system for non-essential medical care. Because most participants are insulated from the cost consequences of care decisions, they do not consider cost when seeking care. Co-payments and low deductibles have converted modern health insurance plans from insurance to pre-paid health care. Pre-paid healthcare encourages overuse and waste of plan assets causing premium increases.
DON.T LARGE CLAIMS CAUSE THE INFLATION? No. One recent study showed that a 50% increase in claims over $100,000 would increase total eligible claims by less than 3%. That same study showed that a 50% increase in eligible claims under $5,000 would increase total eligible claims by 25%.
THE CURE
WHAT IS THE CURE? The participant must be re-involved in the cost consequences of their care decisions. When they have to pay bills from their own resources they are more prudent users of medical care. The HDHP (High Deductible Health Plan) does that. By raising deductibles and co-insurance and raising or eliminating co-payments, HDHP coverage sharply reduces the gross costs of health insurance. However, employee morale will suffer unless there are other adjustments.
DOES MORALE MATTER? In a word, yes. Employers provide benefits to attract and retain employees. Therefore the employee.s perception of the benefit plan is critical. HDHP plans often are viewed poorly and rewards are needed to balance the equation. The HSA is such an award.
WHAT IS AN HSA?
- The HSA is an account, similar to an IRA, which can be funded TAX FREE up to $5,000 (or more) per year.
- The HSA may be used to build post retirement values on a tax deferred basis without reducing eligibility for any other program.
- The HSA may also be used TAX FREE at any time to pay eligible medical, dental or vision expenses (including premiums for long term care, COBRA and Medicare Part A or B premiums).
- The HSA may also be used as taxable income any time, subject to a 10% excise tax if used prior to the age of Medicare eligibility.
- And, the HSA is an estate asset from the date established, passing tax free to a surviving spouse.
- But, to have an HSA an individual must be covered under a HDHP medical plan.
WHO MAY HAVE AN HSA? Anyone may have an HSA, IF their only health insurance is a HDHP with a single deductible of at least $1,000 and a family deductible of at least $2,000. The HDHP must also have an in network Out Of Pocket limit of not more than $5,100 single, $10,200 family and may not have first dollar benefits other than for wellness; i.e., no co-pays. The maximum HSA is 100% of the deductible up to $2,650 single, $5,250 family (limits to be adjusted to changes in the CPI). Additional .catch up. contributions beginning at $600 in 2005 and growing to $1,000 in the future are permitted for each person over the age of 55.
PLAN OPERATIONS
WHAT DOES THE EMPLOYER DO? The employer facilitates the creation of the HSA by offering group health insurance that complies with the HSA rules, ideally as an option. The employer also permits the employee to fund the HSA through a Section 125 plan which allows payment BEFORE taxes (no FICA or Income Taxes, either state or federal). And the employer facilitates the HSA by providing access to custodial and reporting services. The employer MAY also decide to make contributions to the employee.s HSA.
CAN THE EMPLOYER AFFORD TO FACILITATE THE HSA? The employer will save money on the installation of an HDHP instead of a lower deductible plan. By definition, the HDHP will have reduced claims payments which will produce reduced operating costs. Those reduced claims will also mean fewer dollars exposed to future inflation thus controlling future cost increases. Part of the savings can be used as an incentive for those employees who take the HDHP, funding part of the HSA through Premium Reductions and/or Benefit Allowances.
HOW IS THE PLAN SET UP AND OPERATED? The first step is for the employer to set a budget. Using the current plan costs, determine how much is being spent per month per employee and set the target for the coming year. Then secure a HDHP that will deliver the needed savings while still providing adequate protection against large claims. Ideally the plan will offer choices, perhaps matching the current plan as option 1, an .entry level. HSA as option 2 and a .maximum HSA. as option 3. All choices are priced to be cost neutral for the employer.
The plan choices are communicated to the employees as part of a pre-tax section 125 plan. One or more of the choices is the HSA. Employees decide if and how much to participate in the HSA and the employees decide how to use the HSA, saving for long term needs, paying current medical, dental or vision expenses or using it for other (taxable) purposes.
WHO OWNS THE HSA? The HSA is fully vested in the participant.s name from the day it is created. The employer can not put any restrictions on the creation of nor the use of the HSA. Likewise the employer has no responsibility for the HSA other than to facilitate it by providing qualifying medical coverage and permitting payment through the 125 plan, which will provide the employer with FICA savings on the dollars used to fund the HSA.
REPORTING
WHO MUST REPORT ON THE HSA?
- The custodian must make an annual report to the IRS detailing the existence of each individual.s HSA, the amounts deposited, the amounts withdrawn and the year end balance.
- The participant must add a report to their annual income tax return detailing the existence of their HSA, the amount and source of all funds deposited, the earnings on the account, any amounts withdrawn for qualified purposes and the amounts withdrawn for non-qualified purposes. If any non-qualified withdrawals happened the participant must assess the taxes due including the Excise tax (if any).
HOW CAN INDIVIDUALS COMPLY WITH THESE REPORTS? As part of our service we will:
- Provide consulting services to assist participants in properly using the HSA.
- Process all transactions (deposits and withdrawals) to validate withdrawals as qualified or non-qualified.
- Create an .inventory. of qualified claims for future withdrawal when requested.
- Maintain records of all transactions.
- Provide a signature ready report form for participants to file with their 1040.
- Supply detailed information to substantiate withdrawals in the event of an audit.
- If a participant terminates employment they may continue to retain our services for an annual fee.
WILL THIS WORK FOR YOU? The only way to find out is to review an illustration. Most firms find that they will save money AND increase employee benefit satisfaction. However, situations vary. Review your numbers and consider your alternatives. The HDHP with an HSA just might be the way for you to preserve group health insurance for your firm AND control you benefits budget.
