Law Could Boost HSAs

May 1, 2006
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GRAND RAPIDS — As health care costs continue to rise, the good news is that there may be legislative changes on the horizon that would make health savings accounts more attractive to consumers.

Mary Bauman, a partner at law firm Miller Johnson, said she believes proposed legislation that would make HSAs and HSA contributions more flexible may become a reality in the near future.

“Those proposals show that the Bush administration and the representatives in Congress, particularly on the House side, believe that’s the answer to the health care crisis,” she said.

There are different approaches to dealing with health care costs, including making health insurance benefits from an employer taxable, which Bauman said would help employees understand the true cost of health care.

“The proposals are all generally trying to make HSAs more attractive,” she said.

One concern is the amount of money that can be put into HSAs. Currently, contributions are capped at $2,700 for individuals and $5,450 for families; the cap lowers if the deductible is lower.

Bauman said some people would prefer to contribute more than their deductible to help pay for uninsured health costs.

There is also legislation that would make it possible to transfer funds from a 401(k) to an HSA, perhaps as a one-time deal, Bauman said. 

“You can tell they’re really trying to make (HSAs) more appealing,” she said of the government. “While a lot of people have already gone ahead with HSAs, I think they believe there’s a lot of individuals or employee groups who could come on board, and if they sweeten this up a little bit, they could attract those other people.”

Bauman said although she is not sure which proposals might pass, chances are in their favor.

“I think there’s at least a 50 percent chance that at least some of these proposals will pass,” she said.

As HSAs become more flexible, employers may take another look, Bauman said.

“They’re trying to get people’s attention, definitely,” she said.

While legislation for HSAs is still pending, changes involving flexible spending accounts already have been made in the past year. Flexible spending accounts allow participants to deduct pre-tax funds from their paychecks to be used for health care costs.

The accounts, until recently, have been subject to a “use-it-or-lose-it” forfeiture rule, Bauman said. Participants had until the end of the plan year to use the funds in the accounts, or they were forfeited. Now, the IRS has made a change in Notice 2005-42 that allows employers to amend Section 125 plans to provide an optional grace period for up to two-and-a-half months after the plan year, during which time expenses still can be incurred.

Bauman said participants who take the option must be careful to first use the funds for services that occurred during the plan year before using them for services that occurred during the grace period, in order to ensure that they do not run out of funds. 

With the continuing changes in health care, Bauman said much of her practice has shifted from retirement benefits planning to health care issues.

“Now health care is so expensive that a lot of employers spend much more of their time thinking of the health benefits they offer employees,” she said. “We’re really providing counseling and advice on the options that are available that are legal.”    

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