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Benefits Business HSAs receive a presidential boost Proposal follows enactment of 2006 law By Len Strazewski Sell them while they’re hot! And they will be—at least for the remaining years of the George W. Bush presidency. Health Savings Accounts (HSAs), small business health insurance and individual health plans received extraordinary market support from an unlikely source in late 2006 and early this year. Although preoccupied with the war in Iraq and other international matters, President Bush turned his attention to domestic affairs in his January State of the Union address. Highlighting the issue of affordable health care in the United States, Bush proposed tax code reforms that would provide a standard tax deduction for health care of $7,500 for individuals and $15,000 for families. The plan would replace the employer-based exemption of employee benefit plans from payroll taxes. President Bush said the proposal would “level the playing field” for individuals who do not get health insurance from their jobs and would still lower the taxes paid by many of the workers who do receive employee benefits that are valued lower than the tax deductions. “And for the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach. Changing the tax code is a vital and necessary step to making health care affordable for more Americans,” Bush said. The tax plan would also provide some financial support for state-mandated health insurance programs in Massachusetts, California and Pennsylvania. In addition, the president proposed that the U.S. Department of Health and Human Services reallocate existing funds to create “Affordable Choice” grants to states that are creating lower-cost health insurance schemes. President Bush said the tax deductions and grants would be only a part of a comprehensive series of proposals designed to reduce health care costs and improve accessibility of coverage. “There are many other ways that Congress can help. We need to expand Health Savings Accounts. We need to help small businesses through Association Health Plans. We need to reduce costs and medical errors with better information technology. “We will encourage price transparency. And to protect good doctors from junk lawsuits, we [sic] passing medical liability reform. In all we do, we must remember that the best health care decisions are made not by government and insurance companies, but by patients and their doctors,” he said. The proposals, however, are controversial. While the tax breaks may provide some relief and incentives for individuals and small business employees who do not have health insurance, workers from larger employers who already have health benefits may take a financial hit. By creating a limited tax deduction for everyone, the proposals would eliminate some of the tax advantages of present employee benefits plans. Currently, employers and their employees pay no tax on the value of health insurance; if the proposals are enacted into law, benefits would become taxable above the tax credit. Karen Davis, president of The Commonwealth Fund, a nonpartisan health research and policy group in New York, said the proposed tax changes would help primarily individuals who purchase their own health insurance, not the broader group of employees who receive employee benefits. She says the changes would translate into about a 20% tax increase for employees and would lead to an erosion of employer-sponsored health insurance over time. “The president’s plan could actually push people out of employer-sponsored insurance, which has relatively low administrative costs, into high-overhead individual plans,” she wrote in a formal response to the State of the Union address. Davis also said that the nation’s estimated 46 million uninsured, highlighted as a critical problem in the address, would not be helped much by the tax deductions. More than half of the uninsured, she noted, already have such low incomes that they do not pay taxes at all. As a result, they are unable to pay for individual insurance of any sort and receive the deduction. Legislation improves HSAs The State of the Union proposals came only a few weeks after President Bush signed H.R. 6111, The Tax Relief and Health Care Act of 2006, which increases HSA contribution limits and provides new ways for participants to fund their accounts without reducing their take-home pay. Specifically, the new law raises the annual contribution limit to $2,850 per individual and $5,650 per family. To fund those contributions, the law now allows participants to make a one-time transfer from an Individual Retirement Account (IRA) and to make the contributions at any point in a specific year. Plan participants are also allowed to roll over funds from a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA). Several of the HSA provisions are designed to make the accounts more accessible to lower-paid employees. Critics had complained that the previous funding restrictions made HSAs valuable only to higher-paid participants who had available cash to fund the accounts. By freeing IRA assets to fund accounts, the law should allow more individuals to provide initial funding for their HSA without reducing their paycheck or other savings. The law also allows employers to make higher contributions to lower-paid employees to help them fund the accounts. The law also allows HSAs to exceed the deductibles of the high-deductible health plan that pairs with the accounts—up to the new contribution limits. Previously, HSAs were limited to the deductible of the underlying health plan. The new legislation has received high praise from the insurance and employee benefits industry, whose leaders contributed to the development of the provisions included in the law. Charles E. Symington, Jr., senior vice president for government affairs and federal relations of The Independent Insurance Agents & Brokers of America, called the new law “an important win for insurance consumers. “We strongly support improvements to health savings accounts to provide more options for individuals and families to cover their medical expenses,” he said in December. James A. Klein, president of the American Benefits Council in Washington, agreed. “These provisions will help many Americans find affordable and tax-preferred ways to pay for health care costs. “The Council is particularly pleased by this legislation’s passage as our health policy committee and board of directors were instrumental in helping craft several of the HSA proposals,” he said. “These measures were actively advocated by a broad coalition of business and health plan organizations known as the HSA Working Group that worked collaboratively over the past several months.” Employee benefits industry leaders agree, however, that taking advantage of the new health plan opportunities will require agents and brokers to gear up and re-tool to provide the services required by HSAs and the Consumer-Directed Health Plans (CDHP) that accompany them. John Gedney, chief operating officer of Online Benefits, Inc., in Uniondale, New York, a leading employee benefits technology provider, says better consumer information will be required to make CDHPs work effectively—and not much of that information has been available or delivered to plan participants. “CDHP plan participants will have to make regular decisions about their health care spending, and to do that well, they will need a new series of personalized analysis tools,” he says. Insurers are just beginning to provide some of those tools, using health care pricing information being gathered at the state level, he notes, but the various systems will have to be aggregated and coordinated for employers. The most likely prospects for that job are agents, brokers and third-party administrators. “Agents and brokers are still struggling with that a bit as they learn the new technology and match it with their customers’ needs,” he says. Producers will also have to educate their clients about the details of plan options. According to a survey of 283 employers conducted by Online Benefits and Performance Management International in Winchester, Massachusetts, 92% of respondents expressed interest in CDHPs but only 17% have researched the plans and how they work. About two-thirds of respondents said they believe better communi-cation and information will be critical to the success of the new plans, and about one-third fear that employees will be confused by the new plans and their requirements. * The author |
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