Just what the doctor ordered: is ut time for your bank to start offering a health savings account (HSA)? Here's what you need to know about this new product.

• Author: Baran, Mark R.
• Position: Fundamentals: Health Savings

In recent years, the ever-increasing cost of health insurance has left many consumers and employers desperate for lower-cost coverage options. As a result, employers are moving away from expensive defined-benefit plans to alternatives that offer higher deductibles in exchange for a reduction in premium costs. The health savings account (HSA) grew out of this quest for choice. The HSA was designed as a tax-efficient way for consumers with high-deductible plans to pay for health costs accrued before the insurance kicked in. These high-deductible plans are touted as being more affordable for both employers and consumers--as well as for having the potential to reduce the number of uninsured and underinsured Americans.

In 2003, the Medicare Modernization Act paved the way for expansion of the consumer-directed health plan industry by authorizing the creation of HSAs. These instruments are tax-advantaged accounts for healthcare that combine the benefits of traditional IRAs, Roth IRAs and 401(k) plans. Contributions to HSAs are either tax-deductible or, in the case of an employee, excluded from income. Withdrawals used to pay for qualified medical expenses at any time are tax-free.

Some refer to HSAs as the "tax trifecta" in benefit plans--the tax breaks are available for amounts contributed, earnings within the plan, and upon distribution for qualified medical expenses. The only catch is that HSAs are available only to consumers enrolled in high-deductible health plans (HDHPs), and contributions are limited to a statutory amount. Nonetheless, given the powerful tax benefits, experts estimate that HSAs will be the largest growth area within the consumer-directed health insurance market.

Since insurance carriers continue to offer a variety of HDHPs, and more employers are adopting them, both employers and their employees currently are searching for qualified HSA trustees. As a trusted adviser experienced with IRAs, banks are uniquely qualified to perform the HSA trustee role, and the HSA statute specifically authorizes banks to serve as trustees. But the industry has been reacting slowly to new HSA market opportunities. With more consumers enrolling in HDHPs every day, banks can no longer afford to ignore this emerging sector of the healthcare economy.

What are HSAs?

HSAs are savings accounts designed to help individuals take more control of their healthcare expenses. Eligible individuals, or anyone acting on their behalf, may contribute a set...