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As health insurance prices continue to rise, replacement contractors may want to consider health savings accounts (HSAs). They're no cure-all, but some companies have successfully switched to this lower-cost alternative to PPOs and HMOs.

HSAs are tax-sheltered savings accounts for medical expenses. They're set up in tandem with a high-deductible health insurance policy: $1,000 minimum for individuals, $2,000 for a family. The policy also must have maximum out-of-pocket expenses of no more than $5,000 per year for an individual and $10,000 for a family. Annual contributions — made by employer, employee, or both —are limited to $2,600 for individuals, $5,150 for families. Withdrawals for medical expenses aren't taxed. The money in the account belongs to the employee and doesn't have to be used by the end of the year.

Lower Costs

For employers, HSAs offer lower costs and additional flexibility. “I can put in any money for anyone, or put in money as a bonus for select employees, or some money for all employees,” says Bob DuBree, president and owner of Creative Contracting in North Wales, Pa. “It can be a way to reward people.”

Gibson Roubal Construction in Lake Leelanau, Mich., opted for HSAs as a way to save money. Office manager Jana Kiessel says the company pays less now than it did for Blue Cross Blue Shield three years ago. From the employee point of view, Kiessel says, “it's a good deal if you don't incur a lot of medical expenses the first few years. If you're healthy, you can build up a nice cushion for later medical expenses and theoretically never have anything come out of pocket.”

Compare and Contrast

Appleby Window Systems in York, Pa., also planned to set up HSAs for its employees, but once underwriting was completed, the cost was 20% more than the company had expected, says Kyle Swartz, human resources manager. For now, Appleby will stick with its PPO plan through the state home builders association, though Swartz says that might change when PPO costs rise again.

Contractors who already have a high-deductible policy may want to give employees the opportunity to put aside money on a tax-deferred basis in HSAs, says Alwyn Cassil, spokesperson for the nonprofit Center for Studying Health System Change. “But moving from a comprehensive policy to this probably won't be real popular with employees.” Employees may see a switch to HSAs as a benefits cut. And HSAs cost employees with monthly expenses, and older workers with chronic medical conditions, considerably more.

If the goal is to cut costs, HSAs will do it, says Paul Fronstin, senior research associate at the nonprofit Employee Benefit Research Institute. There are, however, other questions, Fronstin says. “Will people perceive it as a compensation cut? Will there be an effect on recruitment and retention? There is no way to know the overall effect.”

Employer interest in HSAs

Likelihood of offering a high-deductible health plan with an HSA

Source: Mercer Human Resource Consulting