As some U.S corporations struggle to make a profit, they've started to look at employee benefit packages as a quick cost-cutting solution. Just as corporate pension plans begin to disappear, you'll soon see other parts of the employee benefit package deteriorate as corporations shift these responsibilities to their employees. In order to make group health insurance coverage more affordable for the employer, insurance companies are approaching them with high-deductible plans, which make employees pay more out-of-pocket expenses before the insurance coverage kicks in. While there's not much you can do to change a large employer's group insurance policy, you can take some steps to prepare for the rising cost of medical care. In this article, we'll show you one way to do this using a health savings accounts (HSA).
What Are HSAs?
The health savings account legislation was signed into law by President George W. Bush on December 8, 2003. The HSA is a tax-sheltered savings account similar to an IRA, but funded for future medical purposes. Some financial professionals refer to these accounts as a new type of "medical IRA". HSAs were developed to help individuals currently covered under a high-deductible health insurance plan to set money aside in a savings account to pay for medical expenses that are not covered by insurance. (For further reading, see Long-Term Care Insurance: Who Needs It? and Taking The Surprise Out Of Long-Term Care.)
As defined in the new Medicare legislation, a high-deductible health insurance policy is one with a deductible of at least $1,150 for individual coverage and $2,300 for a family for 2009 and at least $1,200 for individual coverage and $2,400 for a family for 2010. (See Medicare: Defining The Lines and Getting Through The Medicare Part D Maze.)
In order to be eligible for the new HSA, an individual must meet the following criteria:
- Must have a high-deductible health plan policy
- Cannot be the dependent of another taxpayer
- Cannot be enrolled in or eligible for Medicare or other health insurance
- Must be under the age of 65
Reasons You Should Have an HSA
The new HSA has the flexibility to be under your control. Even if you change jobs, your HSA funds go with you.
- Reduction of Insurance Premiums
By selecting a high-deductible health insurance plan, you can reduce your annual premiums and then use the savings to fund your own HSA.
- Tax Deduction
Federally qualified HSA contributions can be deducted from gross income on your federal tax return, providing you with a nice tax break. Some states even allow the deduction on the state income tax return.
- Long-Term Savings
You control the contributions and the investments in the plan. It's a great way to save long term for unexpected medical costs, or you can use the funds for retirement after age 65. (For additional insight, see The Fundamentals Of A Successful Savings Program and Determining Your Post-Work Income.)
- Tax-Free Growth
Contributions, investment growth and withdrawals for health-related expenses are all tax free.
The amount of your annual HSA contribution cannot exceed the deductible on your high-deductible heath plan or the HSA plan limits, whichever is lower. In 2006, the limits are $2,700 if you have single coverage and $5,450 for a family. These amounts will be increased for inflation in future years. For example, if you have a health plan with a deductible of $1,500, you may not deposit more than $1,500 in your HSA plan for that year.
The chart below details the HSA contribution limits:
Both you and your employer can make contributions to the HSA as long as they don't exceed the maximum allowable amount. An additional "catch-up" provision is also available for individuals who are age 55 or older.
When needed, the HSA provides for a broad range of tax-free withdrawals for services, including the following:
- Nursing home costs
- Physical therapy
- Doctor, dentist and hospital visits
- Eyeglasses and contact lenses
- Chiropractic care
- Artificial limbs
- Laboratory expenses
- Over-the-counter drugs
Restrictions and Penalties
In order to contribute to an HSA, you must be a participant in a high-deductible health plan and be under age 65. You can use the funds in the plan tax free for health-related issues at any time. An HSA holder who uses the money for a non-health expenditure must pay tax on the withdrawal, plus a 10% penalty. After age 65, a withdrawal used for a non-health purpose will be fully taxable, but not penalized.
There is nothing else available that combines the broad flexibility and generous tax benefits that are provided through HSAs. For many, they can be great savings vehicles.
For complete information, see IRS Publication 969.