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Legislation not enough to boost HSA appeal to retirees

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WASHINGTON—Legislation that President Bush has signed into law will boost the appeal of health savings accounts, but the welcome changes still aren't enough to turn HSAs into a widely used retiree health care savings vehicle, experts say.

"I don't think HSAs are necessarily the solution" for retiree health savings, said Paul Fronstin, research director at the Employee Benefit Research Institute in Washington. "There are too many strings attached and the savings potential is questionable."

The most significant HSA-related change in the Tax Relief and Health Care Act of 2006, which President Bush signed in December, affects the maximum annual contributions that can be made to HSAs.

Previously, the maximum HSA contribution was either the lesser of the deductible of the health insurance plan linked to the HSA or an indexed amount set by law. Under the new law, 2007 contribution limits are set at an indexed amount, which is $2,850 for employees with single coverage and $5,650 for those with family coverage, and health insurance plan deductibles are disregarded.

In some cases, that could mean hundreds of additional dollars could be contributed to employees' HSAs each year, resulting in bigger account balances that employees could draw on to meet future health care expenses, including those incurred during retirement.

The new law also allows the maximum contribution regardless of when during a year an individual becomes eligible. Previously, contributions were prorated to reflect a new employee's starting date.

Additionally, the new law allows a one-time tax-free transfer of balances from health reimbursement arrangements and flexible spending accounts to HSAs. The amount transferred can't exceed the balance in the HRA or FSA at the time of the transfer or as of Sept. 21, 2006--whichever is less.

A one-time transfer from an individual retirement account also is allowed, with the amount capped at the annual HSA contribution limit.

All such transfers to HSAs must be completed before Jan. 1, 2012.

"These changes make it easy for people to accumulate dollars in a tax-free account," said John C. Goodman, president and chief executive officer of the National Center for Policy Analysis in Dallas and a strong HSA advocate.

While it may appear that a lot of money can be contributed to the accounts, skeptics see participants using the HSA dollars to cover current health care costs with little left to pay for such costs during retirement.

Over an employee's 20-year career, "they're unlikely to have a huge HSA account because there will be needs along the way," said Bill Sharon, senior vp at Aon Consulting in Tampa, Fla. HSAs will give workers "additional protection in working years--not retiree years."

"It is likely that HSA owners will tap their accounts to a significant extent for medical expenses incurred during their working years," Mr. Fronstin said in last summer's EBRI study.

Even if current health care bills don't eat up employees' HSA balances, the accumulated money in HSAs may fall well short of post-retirement needs.

If an individual contributed $2,700 annually to an HSA, contributions were indexed for inflation and assuming a 5% rate of return, the account would have only $34,700 after 10 years, EBRI's analysis concludes.

That wouldn't come close to the $115,000 that EBRI estimates would be needed each year to pay health insurance premiums and out-of-pocket medical expenses for a 65-year-old retiring in 2006 who lives to age 80.

In addition, a good chunk of HSA contributions likely would be eaten up by uncovered medical expenses prior to retirement, experts say.

"HSAs are marginally helpful in saving for retiree health care," said Tom Billet, a senior consultant at Watson Wyatt Worldwide in Stamford, Conn.

Still, experts say that HSAs should not entirely be discounted at a retiree health care savings vehicle. Employees who start to contribute--at the maximum amount allowed--to the arrangements early in their working careers and who incur few medical expenses will amass fairly hefty balances.

Then at retirement, enrollees will be able--on a tax-free basis--to withdraw funds from their HSAs to pay for retiree health care expenses, such as Medicare premiums. By contrast, distributions from other employment-linked savings plans, such as 401(k) plans, are taxed when withdrawn, regardless of how they are used.

At the same time, HSAs are portable and controlled by employees. If, for example, an employee changes jobs and his or her new employer doesn't offer health insurance, that person can continue to contribute to the HSA.

That makes HSAs very different from HRAs or FSAs, which employees lose when they end employment with a given company.

"We want very low hurdles for people to get access to health care," said Gregg Larson, national product leader of ACS/Mellon HSA Solution in Minneapolis, which offers HSAs to about 6,000 of its employers.

HSAs tied to high-deductible health plans often reduce employers' health care costs by about one-third, Mr. Larson said. That savings often is passed onto the employee through a company contribution that can help cover the employee's deductible. About two-thirds of companies offering HSAs through ACS/Mellon contribute to the HSA, Mr. Larson said.

According to a December 2006 EBRI survey on health care use, 43% of people in family or individual employer-sponsored, consumer-driven health plans said employers contributed $1,000 or more.

Meanwhile, HSA investment options are becoming more sophisticated, advocates say.

Last summer, Golden Rule Insurance Co., a unit of UnitedHealthcare Insurance Co., started offering mutual fund investment options to HSA customers with balances of more than $2,000. Assets under $2,000 earn 4% to 5%, while assets in the mutual funds could expect a higher rate of return, a spokeswoman for the company said.

"The mutual fund options greatly enhance the long-term savings potential for our HSA customers," Golden Rule CEO Rich Collins, who is based in Indianapolis, said in a statement.

Even with the changes in federal law, several observers don't expect usage to increase dramatically, mostly because HSAs still are relatively new and employers traditionally have been slow to adopt new benefit arrangements. Congress authorized HSAs, effective in 2004, as part of a 2003 law that largely involved expanding Medicare to cover prescription drug expenses.

While HSAs may be the best retiree health savings vehicle now available, Congress has a long way to go in addressing the retiree health needs of the baby boom generation, experts say.

"None of the current (health care savings) programs offer real savings," Mr. Goodman of the NCPA said. The "HSA is a vehicle that could be used to solve a lot of problems."