Health Savings Accounts (HSA’s) were approved by Congress in 2003—part of the largest expansion of government intervention in medicine in 40 years—and became law in January 2004. Almost six years later, most American still don’t understand their health insurance choices. You can’t overlook considering whether an HSA is right for your family. Remember that an HSA is a different plan than the Medical Savings Accounts (MSA’s) which were introduced in 1996.
A Health Savings Account is a savings product that offers a different way for consumers to pay for their health care. HSA’s enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.
You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSA’s. An HDHP generally costs less than what traditional health care coverage costs (like a PPO/HOM), so the money that you save on insurance can therefore be put into the Health Savings Account.
You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow (generally when your balance exceeds $2,000). Most importantly, the expenses that you pay for on a tax-free basis can be medical, dental, and vision.
The advantages of HSA’s
These plans can be extremely advantageous to the individual. Contributions by an employer are not taxable to the employee. Employee contributions may be made on a pre-tax basis through a cafeteria plan. Individuals may contribute additional funds at any time during the year up to the government-imposed caps and—unlike the 401(k)—the account is owned by the individual, not by the employer. These plans carry a high deductible (maximum in 2009 is $5,800 for an individual and $11,600 for a family/ minimum in 2009 is $1150 for an individual and $2,300 for a family), but this can substantially reduce your health insurance premiums especially for a family who is traditionally very healthy. Your health insurance carrier will establish your deductible.
For 2009, the maximum annual HSA contribution for an eligible individual with self-only coverage is $3,000. For family coverage, the maximum annual HSA contribution is $5,950. Catch up contribution for individual who are 55 or older is increased by statute to $1,000 for 2009 and all years going forward.
The HSA is portable from job to job, remaining cash balances roll over to the next year, and earned interest may be tax-free. Additionally, the account owner may use the funds to pay for qualified medical expenses, as determined by the government (IRS publication 969), but the account owner is not required to spend the money. Currently eligible expenses for tax-free reimbursement from the account under the IRS code include: doctors visits, hospital expenses, lab, x-ray, and diagnostic services, prescription drugs, dental care, vision care, and hearing aids.
A qualified contribution can be made from your IRA or Roth IRA to your HSA. You will want to consult your financial advisor and/or accountant before taking action on this strategy.
The disadvantages of HSA’s
Funds used for other purposes beyond what is listed as qualified medical expenses, is regarded by the government as taxable income, and there is an additional 10 percent penalty for what is defined as non-medical expenditures.
You cannot be enrolled in Medicare, be claimed as a dependent on someone else’s tax return in 2009, or have other health coverage which is not a high deductible health plan. If you are married, you may still be able to qualify under certain circumstances outlined in publication 969.
You should be prepared that if you have significant medical expenses, the out of pocket expenses between your deductible and Health Savings Account could be more than using a traditional plan. These plans could be very problematic if you have a pre-existing conditions due to the out of pocket expenses.
It can take time to build up your HSA account with funds, and not all carriers are offered in every state. Once you build up the HSA funds, you should seek appropriate advice on how to invest the funds as you will generally have choices similar to what you would see in a 401(k) plan.
What does this mean to you?
Whether you own a business or work for a company, making a health insurance decision can be one of the toughest choices to make. There are many more rules to know about HSA’s, and I recommend you read the IRS publication 969. After that, seek the counsel of a qualified financial advisor, insurance agent, or benefits consultant who can help you decide if the HSA plan can help your family improve your bottom line.
For a FREE consultation to discuss HSA’s and much more, call oXYGen Financial at 1-800-355-9318 or visit us at www.oxygenfinancial.net
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.