Health Savings Accounts in 2012 – More Attractive for Employees?
By Patrick J. Haraden, Longfellow Benefits
Health Savings Accounts (HSAs) will be more attractive to employees in 2012 thanks to a projected increase in the allowed amounts for contributions, as well as the continued implementation of the Patient Protection and Affordable Care Act (PPACA).
Health Savings Accounts (HSAs) were created by Public Law 108-173, the "Medicare Prescription Drug, Improvement and Modernization Act of 2003." Any adult who is covered by a high-deductible health plan (HDHP), and has no other first-dollar coverage, may establish an HSA. Tax-advantaged contributions can be made in three ways:
- The individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions;
- The individual’s employer can make contributions that are not taxed to either the employer or the employee; and,
- Employers sponsoring cafeteria plans can allow employees to contribute untaxed salary through salary reduction.
Individuals age 55 and older are allowed to make additional catch-up contributions to their HSAs. Once an individual enrolls in Medicare they are no longer eligible to contribute to their HSA. Amounts contributed to an HSA belong to the account holder and are completely portable. Funds in the account can grow tax-free through investment earnings, just like an IRA. Funds distributed from the HSA are not taxed if they are used to pay qualified medical expenses. Unlike amounts in Flexible Spending Arrangements that are forfeited if not used by the end of the year, unused funds remain available for use in later years.
In calendar year 2012, HSA contribution limits are expected to increase for both individual and family coverage:
- Individual maximum contribution - $3,100 ($3,050 in 2011)
- Family maximum contribution - $6,250 ($6,150 in 2011)
Catch up contributions for employees 55 and older will remain at $1,000.
For HDHPs, the 2012 out-of-pocket maximums are expected to also increase for individual and family coverage:
- Individual out of pocket maximum - $6,050 ($5,950 in 2011)
- Family out of pocket maximum - $12,100 ($11,900 in 2011)
No change is expected to the minimum annual deductibles, which are currently at $1,200 for single coverage and $2,400 for family coverage.
Additionally, as employers continue to implement PPACA, HSAs are becoming more popular. PPACA will limit the amount employees can contribute to a Flexible Spending Account (FSA) to $2,500 annually beginning in January 2013. HSAs will not have a similar restriction, and the contribution amounts are projected to increase annually. However, the PPACA restriction on over the counter (OTC) medications only being eligible for reimbursement with a prescription applies to both FSAs and HSAs.
In 2014, PPACA will require employers to offer, and employees to be covered by, a health plan that provides “essential benefits” with cost sharing limits no greater than those in an HSA. In 2018, PPACA provides for an additional excise tax that will apply to high cost health plans (the so-called “Cadillac Tax”). Since the HSA cost sharing will be the highest member cost sharing allowed, many employers are looking to this plan design now to plan for the 2018 excise tax. The total plan costs under this HSA/HDHP design need to be under the limits of $10,200 for single coverage and $27,500 for family coverage in order to avoid the tax (amounts may be adjusted for geography and demographics).
Another attractive feature of HSAs is that the accumulated balance can be used by employees to save for certain retirement medical insurance premiums and eligible expenses.
Pat Haraden is a Principal at Longfellow Benefits, an employee benefits brokerage and consulting firm based in Boston, MA. Retirement plan consulting services are offered through Longfellow Advisors.
Pat can be reached at email@example.com or 617-351-6000, x 6054.