HSAs:The Best News In Health Care Cost Containment Ever!

That is a bold headline, but Health Savings Account legislation expanded in 2003 really does deliver very good news.  You should know about these accounts, and your many options to integrate their benefits into your life.  This is an example of your Congress really serving your needs well!

span style="font-weight: bold;">What is a HSA?  Congress, in an attempt to put you in charge of your health cost management created an expansion of an earlier concept, called medical savings account.  In this case, Congress really got it right.  An HSA is basically a trust, into which you may contribute your money, and take a tax deduction, up to certain limits for the contribution.  You may manage this account similar to an IRA.  You may dip into your savings account at any time.  Any dollars utilized for approved medical expenses come out tax free.  Any amount left over at the end of the year rolls back into the account.  If you withdraw for any non-approved purpose, you must pay your normal tax rate, plus a ten percent penalty.

What is the top limit of deductible contribution?  The current annual deductible for your health insurance policy, or $2650 whichever is less.  A family plan may contribute up to $5250.  If you are 55 or older, you can make additional deductible contributions.  In 2006 the additional amount is $600.  This amount is scheduled to increase each year until 2009.

What are the guidelines for participation?  HSAs can be offered by your employer to employees as part of a cafeteria plan.  Both employers and employees can make a contribution to the account, and the deduction flows to the contributor.  In order to qualify for participation in such a plan, you must be covered by a health plan that has a high deductible, and the plan must be your only coverage.  The requirement is for a deductible of at least $1000 for an individual and not less than $2000 for a family plan.  As this is the trend in employer sponsored insurance, most will qualify for participation.

How does a person typically pay for participation in an HSA?  Though your employer can contribute, most will not.  The trend in business is for employers to pass on to their employees the added cost of insurance coverage.  As a result, most employer plans are now allowing employees to elect to absorb higher deductibles for coverage, or individually pay the cost of the lower deductible coverage.  By electing to take a higher deductible, you generally reduce your annual cost of insurance.  You then redirect those savings, plus any supplement you wish to add to the account (within the limits).

What can you utilize the HSA account resources to pay?  Routine doctor  visits, lab tests, dental, eye, and even elective surgery.  The individual's use of their own funds within their HSA account is much broader than the  ever decreasing covered items under the typical  health insurance plan.  Therefore, it is more flexible, but there are still some limitations.

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Why participate in an HSA?  You are in control of your distributions for health care costs, your contributions are tax deductible, the account earnings are tax deferred, and if used for medical expense are tax free, and it opens up other opportunities for wise integration of need planning for your future.

How about a simple illustration?  A young couple have the option of selecting one of two policies offered by their employer:  A $500 deductible which will cost a little over $650 per month, or a $5000 deductible that will cost about $260 per month.  By electing to go with the higher deductible plan, they will save in premiums $4800 per year.  Because this is their only plan, and it is a family plan, they may contribute the entire premium savings into this HSA.  In fact, they could add an additional $200 if they were so inclined  These contributions are tax deductible.  If they are in the 35% tax bracket, they are going to save $1680 in taxes.  Of course they may and will experience health costs during the year.  But this is the important point.  Until their costs exceed their contribution plus their tax savings, they are money ahead.  At the end of the year whatever they did not utilize simply rolls over, continues to compound tax free, and they of course keep the additional tax savings.

Exlore your options for participation in an HSA.  Speak with your plan provider about your specific situation.

Next Article:  How to wisely integrate an HSA account into your overall retirement planning strategies.

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