Putnam Investments has started a health reimbursement account specifically designed for labor unions as a way for the Boston asset manager to test the waters for a potential health savings account offering.
Howie Kreutzberg, the director of Taft-Hartley services at Putnam, said the unit of Marsh & McLennan Cos. Inc. launched its health reimbursement account to fill a need that labor unions had identified — to cover health-care costs of their retired members. The Putnam HRA is designed to provide supplemental medical funds for union retirees. Account balances accumulate during working years to cover post-retirement medical expenses.
“You can see that we built this product for a niche marketplace,” he said. “That is why we went with an HRA first, but there are certainly opportunities for us to launch an HSA down the line.”
Through the Putnam HRA, individual accounts are established for union members, and their employers make tax-deductible contributions to the accounts, which are invested in mutual funds. Any gains on account investments are tax-free, even when the funds are withdrawn in retirement to pay medical expenses.
Mr. Kreutzberg said that, unlike companies that are introducing health savings accounts because they are the “hot product,” Putnam started its HRA in response to the interest of its labor union customers.
“The cornerstone of this product is, it was precipitated by a need,” he said. “We are not just building a product to build a product. Labor unions have unique needs, and we are excited to fulfill those needs.”
He met with several labor union clients 18 months ago to discuss the products they were interested in, Mr. Kreutzberg said. Most wanted Putnam to devise alternatives for handling health-care costs. “We think we can handle their needs better with an HRA rather than an HSA,” he said.
The Putnam HRA takes advantage of 2002 Internal Revenue Service guidance that clarified the tax status of HRAs under Taft-Hartley arrangements. The product gives employers and union trustees an alternative way to fund retiree health costs. The tax benefits also apply to employers, whose contributions are tax-deductible. Union members’ medical payments are withdrawn from the account tax-free.
Participants in the Putnam HRA will be able to use a variety of payment methods for qualifying expenses after retirement, including a specially issued debit card. Qualifying expenses include health insurance premiums and medical co-pays, as well as expenses under Internal Revenue Code Section 213(d) not covered by insurance.
Chris Speer, a principal at Deloitte Consulting LLP, said the typical health reimbursement account is different from flexible spending or health savings accounts because there is no annual limit on contributions on behalf of participants. Unused balances can be carried over from year to year.
Mr. Kreutzberg said that, since he works specifically with unions, he took a hard look at this niche customer group before choosing an HRA. But Putnam is looking closely at opportunities to launch a health savings account, he said.
“We are working with the marketing folks and looking for ways to leverage our expertise,” he said. The HRA “may be a prototype for an HSA down the line.”
Plenty of opportunities exist for financial services companies to enter the HSA marketplace, Mr. Speer said. A Deloitte study released last week projects $205 million of financial company revenue from health savings accounts this year, and it forecast growth to $2 billion to $3.6 billion by 2010.
“Right now the market is in its infancy,” he said. “It has only been around for the last two years. It is growing at a good pace, and there is really a lot of upside potential that can be reached over the next four years.”
Mr. Speer said 150 banks offer health savings accounts. “There is a lot of room for growth,” he said, “both in terms of the number of providers and the services those providers are offering.”
“We are in an environment where things are evolving,” he added. “No one has the scale right now to be the dominant player. There are plenty of opportunities to go around. I believe that over time, as was true in banking, there will be a couple of organizations that capture more share than others and there will be firms that have the best HSA offering. But that will happen over time.”
