Health insurance used to be a benefit that only the most highly paid officers at Carpenter Erosion Control and its sister companies, Ground Source Innovations and Storm Water Consultants, could afford. Now, using health savings accounts, about 80 percent of the employees of the Ankeny-based construction technology companies have health coverage, some for the first time in their working lives.

“It works, but it’s an adjustment,” said Lavonne Fernatt, business manager for the companies, which together employ about 50 people. Rather than going without insurance or paying nearly $900 a month for a family policy, employees pay between $350 and $400 monthly for the high-deductible plan under the HSA. The big adjustment, however, is that the HSA participants must first pay their annual deductible — in this case $5,000— using pre-tax money they put away in a tax-free account.

Despite the opportunity to gain coverage where none was possible before, the HSA plan was a “tough sell,” Fernatt said, since most people view insurance as a product that should require you to make only a nominal co-payment when you visit the doctor.

“It is a total mindset change in health care,” said David VanAhn, an Ankeny insurance broker. VanAhn, who figures he’s presented the concept to more than 300 Central Iowa companies in the past few months, has sold 14 plans to small employers, with another five in the underwriting process.

The most recent plan he sold, to a small group of 14 employees, will save that company $35,500 per year in total premiums, he said. The size of companies he’s sold plans to have ranged from two employees to 71.

“The knock against the HSAs is that only the healthy will sign up for it, or the employers who want a big tax break,” VanAhn said. “I don’t see that with the groups I’m signing up; I see everybody winning.”

Love them or hate them, HSAs are increasingly being viewed by businesses as the future face of insurance coverage. According to a national survey of 208 benefits managers released last week by Aon Consulting, the management consulting division of Chicago-based Aon Corp., 22 percent of the companies that responded now offer a consumer-driven health plan option such as an HSA, with three-fourths of those having been implemented since the beginning of 2004. Of the employers not currently offering such options, 50 percent plan to offer them in the future, with 13 percent of the respondents indicating that will happen this year or next.

Of those employers anticipating a change in the near future, 49 percent expect to offer health savings accounts either as an option (38 percent) or as a total replacement for their existing health plans (11 percent), according to the survey.

After federal regulations were finalized in June 2004, Iowa-based insurers such as Principal Financial Group Inc., Coventry Health Care of Iowa Inc. and Wellmark Blue Cross and Blue Shield began offering the plans last fall for employers to enroll for the current coverage year.

Wellmark has seen “a lot of activity” in the small group market for HSAs, said spokeswoman Angela Feig. As of mid-February, the insurer had enrolled nearly 200 Iowa companies in small group HSA plans, covering 468 employees. In comparison, Wellmark covers about 1.4 million Iowans with its conventional group and individual health plans.

After this initial year, it’s likely more companies will progress from the “kicking the tires” stage to signing up for HSAs at an increasing rate, said Jerry Ripperger, Principal’s HSA product director.

“We have been very pleased with the interest and adoption of the high-deductible plans and health savings accounts,” Ripperger said. “Clearly, what’s happening is that people are beginning to understand that (HSAs) don’t have to be a lesser benefit plan, a takeaway.”

Insurers face a “huge educational challenge” in making employers and employers aware of HSAs’ benefits, said Greg Johnson, Coventry’s vice president of sales and marketing. “Most people don’t take a great degree of participative interest in how their health-care dollars are spent. But they’ve got that availability now with HSAs.”

One of the biggest selling points for HSAs is their “triple tax advantage,” Johnson said. “The amount you’re putting in is pre-tax dollars; if you do have to pay expenses you take it out and it’s not taxed, and if you don’t use it, it’s like a savings account and the interest is not taxed either.”

In addition to the individual tax benefit, employers realize a savings because the premiums paid on a pre-tax basis into HSAs reduce companies’ taxable payroll and consequently their tax liability.

To be eligible to open a health savings account, a person must enroll in a plan with a deductible of at least $1,000, but no more than $2,650. The minimum family deductible is $2,000, with an upper limit of $5,250. Those maximum deductibles, which will be adjusted in future years for inflation, are also the limit on how much can be socked away annually in the account.

Unlike the “use it or lose it” provisions of flexible spending plans, with an HSA, any amount remaining in the accounts at the end of the year rolls over to the next year and continues accumulating tax-free. After the participant turns 65, the account can also be tapped tax-free to pay Medicare premiums, or may be withdrawn on a taxable basis if used for non-medical expenses.

“Really, what’s going to make the difference (in acceptance) is the extent of how much employers are willing to pay into them,” Ripperger said. “We’ve seen everything from 100 percent to contributing nothing. Obviously, we encourage the employer to contribute at least some amount to the health savings account, to show the employee there is some money in there, and to encourage the employees to contribute as well.”

When it started its HSA in February, ABC Virtual Communications, a West Des Moines e-business software company, chose to contribute the amount it saved per employee by adopting an HSA into each participating employee’s account — about $50 per month. About half the company’s 56 employees have opted for the HSA plan.

“Actually, I was quite surprised (that enrollment was that high),” said Shelley Hill the company’s human resources manager.

“It actually turns out to be a terrific deal for those employees who are extremely healthy, because they’re building up an account for when they may need it,” she said. “And meanwhile, that money is invested tax-free. So I think many of our younger employees were seeing it with dollar signs for investment purposes.”

Of the companies VanAhn has worked with, the employer is on average paying 70 percent of the single premium rate for the high-deductible plan, and is averaging an $85 monthly contribution to employees’ accounts. The total savings compared to conventional plans has been averaging 27 percent, he said.

Groups that have older employees, with average ages getting above 45, won’t realize as much savings as younger groups under HSAs, VanAhn said.

“It demands the agents be more consultative,” he said. “There are more personal factors to consider, and it’s a longer process than it was to build the right plan for a company, and to ensure you have everything in order so you’re not putting them in jeopardy of getting a worse plan.”

From an employee perspective, “you have to realize you have to take the responsibility for your share,” Carpenter Erosion Control’s Fernatt said. “It makes you check the prices on your prescriptions, and check with your doctor. Getting that first $5,000 in, it makes you tell (your doctors that you’re paying it), and they listen to that. It is a big learning process, and education is the only way to get people to understand it.”

Health Savings Account FAQs

Q: Does an HSA pay for the same things that regular insurance pays for?

A: HSA funds can pay for any “qualified medical expense,” even if the expense is not by paid by your high-deductible health plan. For example, most health insurance does not cover the cost of over-the-counter medicines, but HSAs can. If the money from the HSA is used for qualified medical expenses, then the money spent is tax-free.

Q: Who decides whether the money I’m spending from my HSA is for a “qualified expense”?

A: You are responsible for that decision, and therefore should familiarize yourself with qualified medical expenses (as partially defined in IRS Publication 502) and also keep your receipts in case you need to defend your expenditures or decisions during an audit.

Q: What happens if I don’t use the money in the HSA for medical expenses?

A: If the money is used for anything other than qualified medical expenses, the expenditure will be taxable, and for individuals who are not disabled or over age 65, be subject to a 10 percent tax penalty.

Q: As an employer, do I own my employees’ HSAs? Can I control how they spend money in them?

A: No, you do not own your employees’ HSAs. The employee fully owns the contributions to the account as soon as they are deposited, just as with a personal checking or savings account to which you would deposit their compensation.

Q: Can HSA funds be invested?

A: HSA funds can be invested in the same types of investments as individual retirement arrangements. Financial institutions do not have to offer all investment options to account holders.