You should prepare yourself now, as health savings accounts (HSAs) will be more attractive to employers and 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, more commonly known as 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 medical coverage may establish an HSA. A popular selling point, contributions to this product are tax-advantaged, and can be made in three ways:

1. The individual or family can make tax-deductible contributions to the HSA even if they do not itemize deductions.

2. The individual’s employer can make contributions that are not taxed either to the employer or the employee..

3. Employers sponsoring cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

Individuals aged 55 and older are allowed to make additional catch-up contributions to their HSAs; however, once an individual enrolls in Medicare they are no longer eligible to contribute to their HSA. Any 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 for qualified medical expenses. Unlike funds held in flexible spending arrangements (FSAs) that are forfeited if they’re not used by the end of the plan year, unused funds remain available for use in later years.

The main disadvantages to the HSA/HDHP plan design is that all nonpreventive care must first be paid by the member up to the deductible limits, including prescription drugs.  Additionally, the family deductible amount is a true deductible so that the full family deductible must be satisfied prior to the HDHP paying for [a non-preventive care expense] for any member in a family plan — no per-member limit on the family deductible exists in most non-HDHP deductible plans.

In calendar year 2012, HSA contribution limits will 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 aged 55 and older will remain at $1,000.

For HDHPs, the 2012 out-of-pocket maximums will 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)

There is no change to the minimum annual deductibles required in an HDHP, 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 health care flexible spending account to $2,500 annually beginning in January 2013.  HSAs, however, 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 means that they will be only eligible for reimbursement with a prescription — a restriction that 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 amounts 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 (cost limit amounts may be adjusted for geography and demographics).

Another attractive feature of HSAs brokers should emphasize to both employees and employers that employees can use the accumulated balance to save for certain retirement medical insurance premiums and eligible medical expenses. Many smaller employers do not offer retiree medical coverage, and larger employers that do offer this coverage are restricting eligibility or not allowing new retirees to participate.

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