Spiraling health-care costs are a fact of life for many American businesses and workers. Premiums for employer-sponsored health plans have risen 10% or more annually over the last several years. Faced with an aging workforce, a sluggish economic recovery and pressure on profits, many employers wonder whether they can continue to provide health coverage and still remain competitive in their industries.
Health savings accounts (HSAs) are emerging as a partial solution to this economic puzzle. Created by federal law in December 2003, HSAs are tax-advantaged investment accounts for medical expenses, available to participants in qualified high-deductible health insurance plans. A recent survey by Mercer Human Resources Consulting found that more than 70% of employers are likely to add HSAs to their benefit mix by 2006, while high-deductible plans have more than tripled since the introduction of HSAs.
HSAs not only help employees deal with escalating costs, they also have the potential to gather significant assets over time. While annual contributions cannot exceed the amount of the deductible (a minimum $1,000 for individuals or $2,000 for families in 2005) or the Internal Revenue Service cap ($2,650 for individuals or $5,250 for families in 2005), whichever is less, unused funds can be rolled over from year to year and saved for future health-care costs or retirement. Some industry experts project assets in HSAs to total $15 billion by year-end 2006.
For investment management and broker/dealer firms that seek to address the full scope of investment needs, HSAs are becoming an important product. Just as 401(k) and 529 plans have evolved to offer a range of investments to meet short- and long-term goals, HSAs will be expected to provide a menu of investment choices.
The distinct requirements of HSAs, however, could pose challenges for entry into this market. First, an HSA must be offered along with a federally qualified high deductible health plan. Second, a firm needs the infrastructure to properly administer accounts, including automatic payroll deduction, a selection of mutual funds and money market investments, custody and recordkeeping capabilities and customer service, to name a few. And a robust HSA platform must have three key elements:
Debit Card Access: Debit card or checkbook account access makes an HSA easier to use and simplifies tax reporting. Since both contributions and distributions for qualifying expenses are exempt from federal taxes, it can be more efficient for a participant to pay claims under the deductible directly with a card or checkbook for that account, rather than wait for reimbursement from the HSA.
Automatic claims reimbursement: The platform should integrate the HSA and the high deductible health plan to quickly resolve claims. An automated system cuts down on paperwork and time and keeps both participant and provider updated on the status of the deductible and available funds in the HSA.
Multiple investment options: While claims are paid out of a checking or money market account, amounts over $1,000 in an HSA can be invested in a variety of mutual funds. Depending on the health needs of the participant, a range of investment options should be offered.
A unique aspect of HSA administration is the hybrid bank-mutual fund account, which must accommodate frequent transactions and long-term investments. While asset managers and broker/dealers have expertise with retirement accounts, they may find it difficult to transfer those capabilities to accounts with high levels of activity. Insurance providers and plan sponsors may require two financial partners to cover their banking and investment option needs for an HSA offering.
A third-party administrative service provider can tie all of the pieces together into one best-of-breed, open architecture offering with Web capabilities, to improve an HSA product's chances of success.
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