Health Savings Account Law Takes Effect January 1, 2004
Congress passed a little known health savings account (HSA) law last year that promises relief for employers from the high cost of health insurance premiums while creating a new source of retirement savings for employees.
According to Bill Lehnertz, a professional business consultant in Minneapolis, the new HSA law is also an incentive for small businesses that couldn’t afford high insurance premiums in the past to now offer health insurance for their employees.
"The IRS is naturally involved in the new law and has published Notice 2004-2 as of January 12, 2004. It’s a lot to digest. The bottom line is the fact that health insurance premiums can now be used as an integral part of your retirement plan," Lehnertz said.
To quote the IRS announcement:
"Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, added section 223 to the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts (HSAs) for taxable years beginning after December 31, 2003. HSAs are established to receive tax-favored contributions by or on behalf of eligible individuals and amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse qualified medical expenses."
Lehnertz urges small businesses to take a good look at the new law that allows them to create a retirement savings plan for each employee and also acts as a buffer against rising health insurance costs.
Lehnertz offered an actual case history of how the new HSA law works:
Two person professional firm
Shareholder 1 is age 44 with spouse and 2 children
Shareholder 2 is age 46 with spouse and 4 children
BEFORE HSA
The pre-HSA health plan design for this firm was a popular one with a $15.00 co-pay for doctor visits and essentially 100% coverage on all medical costs.
Total Cost Shareholder 1 $ 746.20
Total Cost Shareholder 2 $1,009.20
TOTAL COST TO FIRM $1,755.40 per month
In the year previous to the rate increase at renewal, the firm had paid in $16,450 in premiums to the pre-HSA health plan. The claims paid totaled less than $6500.00. After including all of the other costs necessarily associated with a group health plan, the total costs borne by the group carrier was less than $9,500.
AFTER HSA
Individual HSA with $5,000 family deductible, 100% coverage thereafter
Total Cost Shareholder 1 $267.00
Total Cost Shareholder 2 $355.00
TOTAL COST: $622.00 per month
MONTHLY SAVINGS: $1,133.40 per month
"This actual example provides savings more than necessary to fund a $5,000.00 new Health Savings Account (HSA) for each shareholder and still have money left over.
Why spend $1755.40 on a non-HSA health plan every month with no chance of ever getting any returned? It makes more sense to spend $622.00 for a new HSA health plan and $1,000 for the Health Savings Account each month to build a fund for your retirement," Lehnertz added.
According to Lehnertz, the cost savings could run into thousands of dollars per month for the typical small business while providing a new source of significant retirement savings for their employees that works very much like the now familiar IRA’s (individual retirement accounts).
"We have done quite a bit of research on the new law and we believe it’s a win-win situation for both business and workers. Although insurance is not a large part of the business services we offer, we felt it so important that we have created a website (www.hsamn.com) that provides specific information about the new law and how it works," Lehnertz said.
"Health insurance is a volatile issue. Anytime you mix government and large insurance corporation bureaucracies, you’re going to have exceptions and confusion. However, the basic goal of the new law is positive and very valuable to small businesses and their employees. An HSA could spell the difference between life-saving medical treatments that may now be unaffordable for some. That’s why we urge small businesses to look into it as soon as possible," Lehnertz said.
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