Health Account Savings-Are They Right for You?

By Nancy Zambell, BrokerAdviser.com | Nov 26, 2007 | comment

Growing up, my parents' medical insurance was provided by their employers, and I don't ever recall them having to pay anything out-of-pocket for the numerous doctor and emergency room visits that my four siblings and I made routinely.

Those days, of course, are long gone. Medical costs and health insurance premiums continue to soar.  Hardly any employer is able to bear the full cost of his/her employees' health insurance.  Many families, frankly, can't afford the premiums themselves. Consequently, many folks go uninsured.

The medical and insurance industry, as well as the Federal and state governments have spent untold dollars and thousands of hours trying to come up with various workable solutions.  So far, progress is being made in little steps.

A plan that has caught on like wildfire, are Health Savings Accounts (HSAs).  In 2003, President Bush signed the Medicare bill which created HSAs, vehicles that allow individuals to save—tax-free, for future qualified medical and retiree health expenses.

According to America Health Insurance Providers, 438,000 individuals were covered by HSA-like plans in November 2004.  By December 2005, that number had soared to 3.2 million—a seven-fold increase.  Inside Consumer-Directed Care newsletter reported that the total invested in HSAs was a whopping $1 billion!

As an alternative to traditional health insurance, HSAs allow the individual to own and control the money in the account and, very importantly, enable you, not a health insurer, to determine how to spend it.  Additionally, you will have the opportunity to select the various vehicles in which your funds will be invested, so you will also control the growth of the account.

Who is Eligible?

The growth in HSAs has been tremendous, yet not everyone can take advantage of these savings vehicles.

To be eligible, you must be covered by a High Deductible Health Plan (HDHP).

Also called a “catastrophic” health insurance plan because you, not the insurance, usually have to pay for the first several thousand dollars of health care expenses (your deductible).  They are characterized by their relatively inexpensive premiums, as compared to a traditional health insurance plan.

The savings on premiums can be invested in an HSA, which is then available to help you pay for expenses that your plan does not cover.

Here are the 2007 requirements for an HDHP:

Minimum deductible:
– $1,100 (self-only coverage)
– $2,200 (family coverage)

Annual out-of-pocket (including deductibles and co-pays) cannot exceed:
– $5,500 (self-only coverage)
– $11,000 (family coverage)

These amounts are indexed annually for inflation.

With the advent of HSAs, High Deductible Health Plans have also taken flight.  According to America's Health Insurance Plans, an insurance industry trade association, low-premium, high-deductible plans offered in conjunction with HSAs, tripled from 2005 to 2006.

In most cases, if you have additional insurance that pays your medical bills, you won't be eligible to buy an HDHP.  However, if your other coverage consists of automobile, dental, vision, disability and long-term care insurance, or pays a specific dollar amount for a specific disease or illness, you may still be eligible.

Additionally, if you are enrolled in Medicare (unless you had an HSA prior to your enrollment), you will not be eligible for an HSA.  If you did have an HSA prior to Medicare, you can no longer make contributions to it once you have Medicare.

The good news is that you don't have to be employed and you don't have to have earned income to open an HSA.  But if you don't file a federal income tax return, you may not receive all the tax benefits that come with HSAs.

How Do You Open an HSA?

Banks, credit unions, and insurance companies are all among the list of approved companies for opening HSAs.  You may also find that your employer has initiated an HSA for his/her employees.

2007 HSA Contribution Levels

For this year, the maximum annual individual HSA contribution for self-only coverage is $2,850.  The maximum for family coverage is $5,650.

For folks 55 or older, catch-up contributions have been increased to $800 for 2007.

HSA contributions can be made by the employer or the individual, or both.  If made by the employer, it is not taxable to the employee (excluded from income and wages).  And if made by the individual, it is an “above-the-line”deduction, effectively reducing your income eligible for taxation.

And that can add up to sizable savings.  For example, according to the IRS, a $2,850 HSA contribution by a single taxpayer, earning $80,000 in 2007, will reduce his income taxes by $713.  To see the table depicting a range of tax savings from HSA contributions, please go to:

http://www.ustreas.gov/offices/public-affairs/hsa/pdf/hsa-examples_2007.pdf

Additionally, contributions may be made by others on your behalf and deducted by you.  Beginning of this year, individuals can make a one-time transfer from their IRA to an HSA, subject to the contribution limits applicable for the year of the transfer.

Bottom line, HSAs offer a way for the individual investor to save upfront on health insurance premiums through HDHPs and at the same time—set aside tax-free dollars for future health expenses.

They are not perfect vehicles, but their flexibility in addition with the ability to retain some control in choosing premium packages, as well as investment options, has made them very attractive to millions of individuals.

Our advice: Shop around for the best HDHP and HSA that suits you and your family's needs; you are sure to find plenty of options.

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