Got
the sniffles?
Many
of us do these days. Might as well go to the
doctor and get it checked out. And, in many
cases, for a mere $10 co-payment, why not?
Well,
President Bush would prefer you consider an over-the-counter
medicine first.
That's
why he introduced Health Savings Accounts at the
end of 2003. He was hoping that these glorified
IRA accounts would do two things: Help people
be more conscientious of their medical expenses
and allow them to save money for health care in
their old age. (Takes the pressure off having
to deal with the Medicare/Medicaid issue, I guess.)
What's
not to like about HSAs? Contributions are
deductible, the account accumulates tax-free, and
withdrawals used for medical expenses are tax-free.
The president's practically giving away money.
Nevertheless,
hardly anyone was using them in 2004. Prior
to Jan. 1, 2005, Aetna had a mere 10 companies
with 51 or more employees signed up, according to
Robin Downey, head of product development at Aetna.
Part
of the reason was timing. “These accounts
were authorized in December 2003 -- too late for
many companies to get their benefit packages together.
Most do that in the fall or late summer,” says
Mark Luscombe, principal federal tax analyst with
CCH Inc., a provider of tax and business law information.
The
other culprit was the unfinished rulebook.
“The Treasury didn't finish guidance in time,”
notes Downey. In other words, no one fully
understood the rules.
But
even with the rules ironed out, the numbers still
aren't staggering. Aetna now has 70 companies
with 51 or more employees signed on and Cigna
has around 30, according to Jake Biscoglia, an assistant
vice president at Cigna.
But
both insurers say there is definitely more chatter
among their clients about offering these products
in the future, so you may start to see HSAs the
next time your benefits department has open enrollment.
HSA-IRA's
cousin
Health
Savings Accounts are very similar to their relative,
the IRA -- with one small catch. You have
to participate in your company's high-deductible
health insurance plan to begin to be eligible.
According
to the Treasury Department, your plan must have
a minimum deductible of at least $1,050 for an individual
or $2,100 for family coverage. The annual
out-of-pocket expenses (including deductibles and
co-payments) cannot exceed $5,250 for a single person
or $10,500 for a family. (Check out 
's
-- HSA Information page
-- for more details.)
And
note: Your high-deductible plan won't qualify
if your company offers you a separate pharmacy plan.
Your prescriptions have to be a part of your deductible
plan.
Assuming
your high-deductible plan meets those requirements,
you then can participate in an HSA and start contributing.
For
2006, the maximum contribution for a single person
is the amount of your deductible or $2,700, depending
on which is the lesser of the two. In other
words, if your deductible is $3,000, you can contribute
a maximum of $2,700; if your deductible is $2,000,
then that is the maximum. For families, the
operative cutoff is $5,450.
If
you're 55 and older, you can put in an extra $700
catch-up contribution because once you hit 65, you
can no longer contribute.
The
biggest benefit of an HSA is that you can make tax-free
withdrawals at any time to pay medical expenses.
If
the money is withdrawn for nonmedical purposes before
age 65, you'll get hit with a 10% early-withdrawal
penalty and the money will be taxed as income.
Once you hit 65, the money is yours to do with as
you wish. So use it for medical expenses or
that long-awaited trip around the world. It's
your tax-free money.
And
unlike a flexible spending account in which you
have to use it or lose it by the end of the year,
you can roll these contributions into the next year;
so in theory, you can make contributions and just
save the money.
Even
better, you can designate the leftover account to
someone at death, says Neesha Das, a tax analyst
at RIA, a Thomson unit providing tax information
and software to tax professionals. So you
can transfer the account to a beneficiary and that
person then can use the account for his medical
expenses.
And
there are certainly incentives for employers.
To start with, it obviously costs your employer
less to offer a high-deductible plan than a cafeteria-style
offering of HMOs and PPOs. And your employer
would like you to take more responsibility for your
health care, says Downey. If you're more aware
of the costs, you might be wiser about utilizing
services and racking up expenses.
The
upside is that some employers are taking the money
they're saving by offering high-deductible plans
and throwing a portion of it in your HSA as an added
incentive. Once that money goes in your account,
it's yours. Your employer no longer has control
of it.
So
Should You Consider an HSA?
The
president wants people to start thinking about their
health care. If the expense is coming out
of your pocket, you might think twice about going
to the emergency room the next time you have a cold.
And be honest, do you ever take the generic drug
when your insurance company will pay for the name
brand?
That
affects your company's bottom line. “Employers
are dealing with increasing health care costs so
they are turning to consumer-driven plans to try
to get employees involved in their health care,”
says Biscoglia.
You
can spend weeks analyzing what kind of car to buy,
yet we decide on health care the night before all
the forms are due after an all-too-brief company
enrollment period. So maybe we all need to
spend some more time thinking about this.
If
you're a relatively healthy person with moderate
to low medical expenses, then a high-deductible
plan coupled with an HSA may be a good option for
you. So the money you don't use because you're
healthy and making wiser decisions will accumulate
-- with interest -- and be there when you need it
-- even if its for retirement.
Keep
in mind that you can use your contributions to the
HSA to pay for any out-of-pocket costs. And
the money you don't use because you're healthy and
making wiser decisions will just accumulate and
be there for you in retirement.
On
the flip side, if you have health problems or are
approaching 65, a high deductible plan might not
be your best option. Check out a health savings
account calculator to see if a high deductible plan
coupled with an HSA makes financial sense for you.
If
you are interested, contact your benefits department.
While there are some banks and state organizations
offering HSAs to individuals, for the most part,
you'll need to go through your company to get one.
And
going forward, providers are likely to choose to
automatically package high-deductible insurance
plans with HSAs. Cigna and Aetna already sell
the combination to companies now.
So
it might make sense to consider it. If so,
then you'll think twice about visiting your doctor
every time your toe hurts.
