Health Savings Accounts:
First Aid for Health-Care Bills?
by Marcia Weuve
Health-care costs in the U.S. topped $900 billion last year, leaving many Americans wondering if they were paying more out of their pocket for health care or simply were paying through the nose. In an attempt to ease this growing burden, the Medicare Modernization Act of 2003 included a plan that allows consumers to use tax-free savings for current or future medical costs.
Health savings accounts (HSAs) are designed to give consumers more control over their health coverage, enabling them to choose their own doctors and shop around for the best deal on other services and procedures while receiving tax breaks at the same time. But even though a wide variety of people (including the unemployed) potentially are eligible to sign up for an HSA, the savings program may not be the best option for everyone.
High deductible policy required
The new accounts must be connected to a high-deductible health policy (HDHP)--high deductible considered to be at least $1,000 annually for an individual plan and $2,000 annually for a family plan. Even though higher deductibles usually mean much lower premiums, critics say HSAs would seem to be a better deal for families or individuals who have very few health problems and who can afford higher out-of-pocket costs. They may not work as well for families on a tight budget or for those who have frequent or ongoing medical issues.
Once you open an HSA, you can contribute up to the annual deductible under the HDHP, subject to an annual contribution limit set by Congress. The annual contribution limits for 2005 are $2,650 for an individual plan or $5,250 for a family plan. Those who turn 55 by the end of the tax year can contribute an additional $600 in 2005, with that amount rising to $1,000 by 2009 and thereafter. A taxpayer covered by Medicare is not eligible to contribute to an HSA. Eligibility is determined monthly, and the above amounts apply to a member who is eligible in all twelve months of a year.
Dollars fund broad range of services
You can withdraw the money tax-free and penalty-free at any time and use it to cover a variety of medical costs, including:
Doctors
Hospitals
Drugs
Lab expenses
Physical therapy
X-rays
Nursing home insurance premiums
Nursing home costs
Psychotherapy
Dental
Chiropractic
Artificial limbs
Eyeglasses and contacts
Unlike an employer's flexible spending account that must include a "use it or lose it" rule, you can roll over money saved in an HSA from year to year.
Unlike an employer's flexible spending account that must include a "use it or lose it" rule, you can roll over money you save in an HSA from year to year. HSAs have the potential to build large balances over years of contributions and some strong investment gains. That means participants theoretically could be in a position to pay for their own health care in their later years, when it is needed most. This fact was underscored recently when the Employee Benefit Research Institute, Seattle, estimated that retirees will need to save anywhere from $40,000 to $1.5 million to cover out-of-pocket medical expenses, not including the costs of long-term care such as nursing homes.
Tempting tax breaks
Contributions to an HSA are either tax free (if made by an employer) or tax deductible (if made by the accountholder), and investment growth and withdrawals are tax free. This gives this savings program a slight advantage over an IRA (individual retirement account) contribution, which is taxed either before it goes into the account or as it is taken out.Employees who change jobs keep their HSA, including any employer contributions.
HSAs' growing popularity
HSAs first became available in early 2004 and insurers report selling only a few thousand of the plans to individuals and small businesses that year. However, analysts are expecting those numbers to jump as more individuals discover the plan and more medium- and large-sized companies begin buying into the program. According to one national human resource consulting survey, more than 70% of employers are considering offering HSAs by 2006.
"We're seeing growing interest in HSAs among the general public and within credit unions as more businesses begin to offer high-deductible health plans to their employees," confirms Dennis Zuehlke, compliance manager with the CUNA Mutual Group in Madison, Wis.
"Employers like the cost savings provided by high-deductible plans," says Zuehlke, "and employees like the portability that an HSA provides. Any employee who changes jobs keeps his or her HSA, including any employer contributions."
In addition, third parties may act as HSA administrators, meaning credit unions can offer HSAs to members as either a trust or a custodial account. Health America Credit Union in Jacksonville, Fla., is one of the first credit unions in the country to offer the new savings plan.
Contributions to an HSA, investment growth, and withdrawals are all tax free if used to pay qualified medical expenses.
"We are seeing a great deal of interest in HSAs," says HACU President Maury Pilver. "Even though it is a kind of specialized offering, more and more people are coming into the credit union to open health savings accounts.
"We're also seeing many rollovers from [Archer Medical Savings Accounts]," Pilver adds. "Some of these members have built up substantial accounts and are now rolling them over to take advantage of the many benefits a health savings account can offer."
While HSAs are relatively new, they seem to be here to stay and appear to present a good option to controlling excessive health-care costs. If you believe an HSA would be a good alternative for you and your family, consider both your financial situation and health status. Experts recommend comparison shopping, as programs and fees can vary. Ask the people at your credit union if it offers or is considering offering HSAs, or contact a professional financial adviser to find out more.
June 20, 2005
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