Prescription for dwindling deposits

Northwestern Financial Review, May 1-May 14, 2005 by Regan, Shawn

Will health savings accounts become the next great source of core deposits?

Health Savings Accounts will not be the next big thing. HSAs are the now big thing.

The new tax-advantaged accounts are already bringing millions of dollars in deposits to community banks and the flow of funds is just beginning. HSAs are a great community bank product, say a growing chorus made up of bankers already in the business, the American Bankers Association, the U.S. Treasury Department and lawyers consulting with financial institutions.

Created as part of the Medicare Modernization Act, HSAs became available in January 2004. They are coupled with High Deductible Health Plans (HDHPs), and - unlike Medical Savings Accounts - almost everybody can qualify for them.

The demand for HDHPs and their HSAs is driven by individuals who lack health insurance, by small businesses that cannot afford to offer their employees more comprehensive health benefits, and by companies seeking to slow the growth of their health care costs.

Also, HSAs are tax-advantaged like no other instrument, given their taxfree-times-three structure: Contributions to the HSA are not taxed, nor are the earnings, nor are withdrawals if they are spent to pay qualified medical expenses. What's not to like?

To date, hundreds of thousands of people have fallen in love with HSAs: At the end of 2004, there were some 560,000 accounts, with deposits totaling about $840 million. Projections are that in five years the accounts will number 8.2 million with $50 billion in assets.

"Consumer-driven health insurance is picking up steam rapidly," said Kirk Hoewisch, president of HSA Bank in Sheboygan, Wis. "When open enrollment [for company health care benefits] comes up at the end of this year, every insurer will be prepared to educate employees who are choosing among health plans. January 2006 is going to be huge for HSAs."

With 106,000 HSAs currently holding $171 million, HSA Bank was the State Bank of Howards Grove, Wis., prior to February 28. State Bank of Howards Grove was purchased by Webster Financial Corp. of Waterbury, Conn., for $26 million. The $17 billion holding company changed the name to HSA Bank and divested the non-HSA assets to Exchange National Bank of Fond du Lac, Wis., in a deal that closed April 15.

When the sale to Webster was announced last September, Bradley Yocum, then president and CEO of State Bank of Howards Grove, explained that the consumer-driven health care business, which the bank has been in for five years, had grown too big. "We'd taken it as far as our capital would allow," he told the Milwaukee Journal-Sentinal.

Mark Baran, counsel in the financial institutions group at Powell Goldstein LLP, a Washington, B.C. law firm, agrees that HSAs are ripe. "The growth has been phenomenal. They've created some powerful tax incentives to promote HSAs. It's going to be big."

Banks should be able to share in this market by serving as the custodial trustees of HSAs, thereby improving customer relationships while increasing deposits and fee income. But banks did not rush into the arms of the HSA market last year.

"There are not a lot of early adopters among banks," Baran said. "Local insurance agents are selling HDHPs to small businesses and turning to their community bank and saying, 'These people need a place to park their money.' And the banks are saying, 'We don't know enough about HSAs.'"

The banks' hesitation is understandable. Account holders are required to have an HDHP, and "health care is not something banks think about in much detail," Baran said. "So they want to see the rules and know what kind of exposure they have before they invest in the program. Well, HSAs don't create any additional liability beyond the exposure that comes with the management of the account, similar to trustee or custodial services provided with an IRA."

HSA details

Bankers' anxiety may be eased by knowing what HSAs do not entail. According to two officials at the U.S. Department of the Treasury, one a tax counsel and the other a health care policy advisor, banks are not responsible for determining:

* Whether the account holder qualifies;

* Whether the HDHP qualifies;

* Whether the contributions are being made by the holder or the employer; nor

* Whether the withdrawals are spent on qualified medical expenses. Banks are responsible for:

* Determining the tax year for the contributions;

* Reporting the contributions and distributions to the holder and the IRS; and

* Determining if the annual, statutory contribution limit has been exceeded.

"We've stressed over and over again that there is no obligation by the bank to provide information about things that are normally answered on the insurance side," said one Treasury official. "Banks are not the policemen here."

To assist banks in educating their HSA clients about HDHPs, the U.S. Treasury Department has posted a brochure on its web site www.ustreasury.gov/offices/public-affairs/hsa/ - that explains how the insurance part of the program works.

Different approaches