In general terms, what is an HSA and how does it work?
A Health Savings Account (or HSA) is a trust or custodial account (similar to an individual retirement account, or IRA) to which an individual (or his or her employer) may contribute cash on a tax-preferred basis while that individual is covered solely by high deductible health insurance. In simple terms, the individual self-insures up to the high deductible amount, and purchases relatively low-cost insurance in case health care claims are very high during a year. The HSA serves as a savings account to ensure that money is available to pay health claims that fall under the deductible. The federal government encourages HSA funding by making HSA contributions deductible (or excludible, if paid by an employer) from federal taxable income.

The general policy objective of an HSA is to reestablish the consumer of health care services (for example you, if you are the HSA account holder) as also the payor of those services. In theory, at least, this should reduce your cost of health care because you will:

• seek out health care service providers who charge reasonable rates;
• avoid paying an insurance company for the risk of insuring amounts up to the policy deductible;
• care to question mistakes that are made on your medical bills;
• have additional incentive to live a healthy lifestyle; and
• be less likely to seek inappropriate treatment (such as going to the emergency room when a next-day appointment will do).

What are the contribution limits?
For 2008, up to $2,900 may be contributed to your HSA if you have self-only coverage and up to $5,800 may be contributed to your HSA if you have family coverage. If you will have attained age 55 by the end of 2008, these amounts are increased by $900.

What is a high deductible health plan (HDHP)?
You may have contributions made to your HSA only for periods you are covered solely by a high deductible health plan. For 2008, an HDHP generally is health insurance with a minimum annual deductible of $1,100 for self-only coverage and $2,200 for family coverage. Also, the HDHP must provide for a maximum annual out-of-pocket limit of $5,600 for self-only coverage and $11,200 for family coverage. Thus, under an HDHP you will be responsible for paying all of your health care costs during a year up to your policy’s high deductible amount, but never more than the maximum out-of-pocket amount.

What might an employer HSA-program look like?
An employer may be able to reduce significantly its benefit outlays by implementing an HSA-based program for its employees. There are many possible approaches to designing such a program. Here are three:

Approach 1: employer pays most or all costs. An employer might pay all group HDHP premium costs for employees, and contribute cash on a tax-free basis to the HSAs of its employees covered under the HDHP in an amount equal or close to the contribution limits described above. This approach might be appropriate for an employer that has traditionally paid most or all of its employees’ health care costs.

Approach 2: employer pays much of the cost along with employees. An employer might pay all of the group HDHP premium for its employees, and agree to match contributions that employees pay into their own HSAs on a tax-free basis (similar to matching contributions many employers make to employee 401(k) accounts). This approach might be appropriate for an employer that tends to share health care costs with employees.

Approach 3: employer requires employees to pay most costs. An employer might agree to pay much less of the group HDHP premium (for example, 50% of the employee’s premium and none of the premium for spouses and dependents), and require employees to fund their own HSAs with tax preferred contributions. This approach might be appropriate for an employer that requires employees to pay most or all health care costs, or even for employers looking to provide group health insurance when none is provided currently.

If you are an employee participating in an employer-sponsored HSA program, you enjoy at least one major advantage over individuals who fund their HSAs outside of the employment relationship (even apart from access to coverage that is provided under a group policy). That advantage is that the dollars your employer and you use to pay the HDHP premiums and contribute to your HSA are not subject to social security taxes. Typically, this provides a benefit equal to 15.3% (shared by you and your employer) of the dollars used for premiums and contributions.

What might an individual HSA arrangement look like?
You may, of course, be able to obtain high deductible health insurance under an individual health insurance policy instead of having coverage provided under your employer’s group policy. If your individual policy meets the requirements of an HDHP, and if you are neither covered by non-HDHP insurance nor taken as a personal exemption on another taxpayer’s tax return, then you will generally be able to make tax deductible contributions to your HSA.

How does the claim and reimbursement process typically work?
In general, if you are covered by an HDHP you will use health services in the same manner as if your policy were a traditional low deductible policy. If the policy is a preferred provider organization (“PPO”) policy, you will ordinarily select and use physicians, hospitals and other health care providers that are associated with the PPO network. You will provide information about your HDHP coverage as you request services, and the provider will inform the insurer that services were used. The insurer will send you a statement noting the negotiated rate, and if the year-to-date charges remain under the deductible amount (which will ordinarily be so), you will need to pay the service provider directly. If you have made HSA contributions and funds remain in your HSA, you may pay the provider directly from the HSA, or you may reimburse yourself for payments made from your non-HSA funds. Alternatively, you may pay for health care services with your non-HSA funds if, for example, you either wanted to build a balance within your HSA or if your HSA contained insufficient funds to pay the provider.

Distributions you receive from your HSA will generally not be taxable to you if they are used to pay for qualified medical expenses for you and your family or if they reimburse you for qualified expenses you paid from your non-HSA funds, provided you incurred those expenses in the past while you were an HSA account holder.

What are the nitty gritty HSA details?
There are many details governing HSAs that are beyond the scope of an overview. Click below for a detailed outline that discusses those details. You can also read IRS Publication 969 at http://www.irs.gov/publications/p969/ar02.html for more information.

Can Echelon help me sort through the HSA issues?
Yes. Whether you are an employer thinking about establishing an HSA program for your employees, or an individual looking for individual HDHP coverage, Echelon can explain how HSAs work, explain their potential benefits and risks, and help you select both the right HDHP policy and HSA vendor.

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