By Donald R. Saxon and Susan B. Hollinger*
Community banks have long demonstrated their commitment to meeting the financial needs of the small business community. Because of a recently enacted law, these banks are able to offer their business customers, both large and small, as well as their employees and their families, a new health care option which makes health care more affordable and provides individuals greater control in the spending of their health care dollars.
Banks are now able to offer a kind of “super-charged” IRA for health care in the form of Health Savings Accounts (HSA). HSA’s were created by the Medicare Prescription Drug, Improvement, and Modernization Act signed into law in December, 2003 by President Bush. HSAs are similar to IRAs in that the contributions to the HSAs are deductible to the contributors (whether employers or employees) and generate earnings tax-free. An employer, family member or any other person, including a state government employer, may make contributions to an HSA on behalf of an eligible individual. HSAs differ from IRAs in that distributions from HSAs for eligible health care purposes are not taxable to the HSA owner and, after age 65, may be distributed to the HSA owner subject only to income tax (no penalty). Like an IRA, an HSA is established for the benefit of an individual, is owned by the individual and is completely portable if the employee changes jobs or leaves the workforce completely.
Banks are qualified HSA providers, and HSAs are relatively easy to administer. Account forms are simple and bank compliance requirements are minimal. The forms, just released in final form by the Treasury Department, can be found here. Using these forms is not required and a bank may choose to use its own account forms or incorporate some of the language of the model forms into existing forms. A bank is not required to determine whether the individual qualifies for an HSA (other than tracking the beneficiary’s age) or whether the distributions made by the bank are spent on eligible medical expenses. Banks are not responsible for determining whether an individual’s contributions to an HSA exceed the maximum annual limitations. Banks are, however, responsible for filing 1099s each year indicating the amount of withdrawals from the account and for only accepting contributions within the maximum annual limit set for HSAs generally.
HSAs, however, cannot stand alone. In order to offer an HSA, the individual must be covered by a high deductible health plan (HDHP). An HDHP is a plan with a minimum deductible of $1000 for an individual plan and $2,000 for a family plan. At present, the maximum annual contributions to HSAs are the lesser of the actual deductible under the policy, or $2600, for an individual plan and $5,150 for a family plan. These amounts are adjustable to account for inflation. As trustees and custodians of HSAs, banks are free to tailor the account so that distributions from the account are received through debit, credit or stored-value cards. Banks may also place reasonable restrictions on both the frequency and the minimum amount of distributions from an HSA, and account fees can be set by the bank. These items are matters of contract between the bank trustee/custodian and the account beneficiary.
Banks wishing to broaden their participation in the consumer-driven health care benefits market can do so by offering HSAs. Banks that are licensed by the State of New Hampshire insurance department to sell health insurance are in an even better position to work with their business customer to find low premium, high deductible insurance products which meet the HDHP requirements. At present, competitive HDHPs are difficult to find. Until they become more readily available, banks may suggest that business customers with sufficient employee populations may want to consider establishing self-insured HDHPs. Self-insured plans qualify as HDHPs under Internal Revenue Code Section 223. Banks can then work with such business customers to find both individual and aggregate stop-loss coverage for the plan.
*Susan B. Hollinger is admitted in New Hampshire, Vermont and Massachusetts.