Like most businesses, law firms providing health care benefits to employees find their budgets strained by spiraling medical insurance premiums. One solution, the Health Savings Account (HSA), which was created as part of the 2003 Medicare Act, is a relatively affordable—and tax efficient—alternative to traditional managed-care group plans.
The HSA is the more flexible successor to the Archer Medical Savings Account, which was introduced several years ago to help employees of small businesses get health coverage. Available since January 1, 2004, HSAs are being offered by a growing number of banks and insurance companies. While experiences among employers vary, early adopters of HSAs have generally found the plans to be effective in lowering or arresting health benefit costs.
An HSA may be opened by anyone who has a qualified health insurance policy with an annual deductible of not less than $1,050 for individuals, or $2,100 for families. A firm may choose to offer a high deductible health plan (HDHP) to partners and staff, or employees can be encouraged to sign up for policies on their own. Employers are permitted to contribute to the accounts of individual employees or may offer staff incentives to put money in themselves.
Since HSA funds are intended to pay for out-of-pocket medical expenses not covered by insurance, participants are permitted to make tax-exempt yearly contributions equivalent to the annual deductible of the insurance policy, up to a maximum of $2,700 for individuals and $5,450 for families in 2006. HSA enrollees age 55 or older may make additional contributions of up to $700 a year. The accounts are owned by the individual, and are fully portable from job to job.
The tax advantages of the HSA are substantial. Contributions to and withdrawals from an HSA are tax free, provided the funds are used to pay for qualified medical expenses. The investment earnings within the account also grow tax free.
Any funds left over in an HSA at the end of the year can remain in the account, and the participant may start all over with contributions the following year. Enrollees who use little of the money in the account while continuing to make deposits could end up with substantial savings in retirement. Prior to age 65, non-medical distributions are taxed as part of gross income and are subject to a 10% penalty. After age 65, however, account holders are permitted to withdraw funds from an HSA for non-medical reasons by simply paying the income tax due.
Like any insurance plan, HSAs may not be the best choice for everyone. Lower income employees may find it difficult to contribute the funds necessary to cover the insurance deductible. And employees who use medical services frequently, such as young families or people with chronic health conditions, would derive little benefit from the tax advantages associated with the HSA. For these types of employees, traditional managed-care plans may be preferable. To meet the varying needs of partners and staff, law firms may want to provide several health insurance options.
When launching an HSA plan as a benefit offering, it is essential that practice managers explain to employees how the accounts work. Some employees may initially balk at the high insurance deductibles associated with HSAs, but may be persuaded to sign up if the firm assumes part of the cost. Higher earning associates, in particular, may be drawn to the considerable tax breaks provided by the HSA. Over time, employees should come to appreciate the advantages of having greater control over their health care spending, and possibly seeing their account balances grow through regular saving.