Health Savings Accounts (HSAs) are a new form of medical expense accounts for
individuals. High adoption rates could result in solid long-term deposit growth
for credit unions that choose to offer HSAs.
Enacted as part of the Medicare legislation in 2003, these accounts became
effective in 2004. Both individuals and businesses may find this to be an attractive
alternative to existing health plan options. Their adoption rate is expected
to rise sharply over the next five years.
What is an HSA?
HSAs are offered with high deductible health plans and give individuals the
ability to deposit up to the deductible amount in their account annually, then
utilize these funds on a tax-free basis for qualified medical expenses. Deposits
can be made by the individual, his employer or even the insurer in some cases,
and are not considered income for federal tax purposes.
Any funds remaining at the end of the year are rolled over (no "use it or lose
it" restriction) along with any interest earned for use in later years. The
accounts are held in individuals' names so that they remain with the person
even if he or she retires or changes employers. Almost anyone can set up an
HAS. The only exception is retirees over age 65 and on Medicare who are not
allowed to contribute but may draw down funds from an HSA.
Why are HSAs an Attractive Option?
Aside from the tax advantages, HSAs are designed to make health care costs more
competitive and transparent. For individuals and businesses that pay for medical
insurance, the high deductibles mean lower insurance premiums - as much as 40
percent below other plans. This aspect is particularly appealing to small businesses
that have faced rising health insurance costs in recent years.
The high deductibles also provide a greater incentive for individuals to compare
costs of heathcare providers and select the most cost-effective treatments.
A broad category of medical expenses, as well as prescription drugs, qualify
under HSAs so many types of treatments can be pursued.
What is the Opportunity for Credit Unions?
Credit unions have an opportunity with to expand member and business relationships
and grow shares by offering HSAs. Currently, HSAs allow for annual deposits
of up to $2,600 for individuals and $5,150 for families. Because these accounts
remain in an individual's name and are not dependent on employment status, they
are likely to be long-term deposits much like IRAs.
HSAs are currently offered to about 3 million federal employees and retirees
as well as some private sector employees. The market will increase, with about
10 percent of employers expected to offer the plans in 2005 and about half of
all firms expected to follow over the next five years, with some offering them
as their only option.
Any credit union is allowed to offer HSAs and the account design, including
minimum deposit and balance requirements, distribution requirements and account
fees, is determined by each institution. HSAs provide a low cost source of long-term
funds along with transaction activity that can generate non-interest income.
The appeal of these accounts to small businesses is an additional incentive
for credit unions that are developing business services.
Learn more about establishing HSAs at your credit union from a webcast of a recent webinar: “Opportunities
in Implementing Health Savings Accounts”