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Health Savings Accounts - Whats Not to Like?

Why opt for a health savings account

By: Carl Fischer, Entrust CAMA

Control — You can use the HSA to pay for any qualified medical expense as defined by the IRS. There’s no need for preauthorization of services unless explicitly stated by the plan.

No “use-it-or-lose-it” — Unlike Flexible Spending Plans, unused HSA dollars remain in the HSA and continue to earn interest.

Flexibility — “Health Care” dollars can pay not only for items identified by the health insurance plan, but also for a much broader variety of healthcare needs which includes dental, vision, orthodontia, over the counter medicine and more.

Portability — If you leave your current employer or change insurance provider, your Health Savings Account stays with you.

Tax savings — Your contributions to HSA are made with pre-tax dollars, and earnings on the account are taxfree. Alexander Pope, a 16th century poet, wrote an essay that gave us the famous quote “A little learning is a dangerous thing”. These timeless words of advice seem appropriate when contemplating Health Savings Accounts.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 authorized the establishment of new Health Savings Accounts effective January 1, 2004. These accounts are similar to Archer Medical Savings Accounts in that they permit eligible individuals to save for and pay health care expenses on a tax-free basis. Health Savings Accounts were introduced at the end of 2003, hoping that these glorified IRA accounts would do two things: Help people be more conscientious of their medical expenses and allow them to build wealth for health care in their old age thus relieving pressure on the Medicare/Medicaid systems.

To qualify for an HSA, you must meet the following requirements:•

• You have a high deductible health plan (HDHP), minimum individual deductible is $1,100 for 2008 and $1150 for 2009; family is $2,200 for 2008 and $2,300 for 2009.
• You have no other health coverage except what is permitted under other health coverage
• You are not enrolled in Medicare. Assuming your high-deductible plan meets the requirements, you then can participate in an HSA and start contributing.
  

For 2008, the maximum contribution for a single person is $2,900 (and $3,000 for 2009) , depending on which is the lesser of the two. For families, it’s $5,800 for 2008 and $5,950 for 2009. If you’re 55 and older, you may contribute an extra $900 as a catch-up contribution for 2008 and $1,000 for 2009 . After 65 years of age you may no longer contribute to an HSA and there is no penalty for withdrawal of the money.

The primary document for information of the HSA is Publication 969. It is 17 pages and like most IRS publications, it's a good solution to insomnia. However, many experts have written articles discussing the pros and cons of Health Savings Plans Thomas Fogarty in an article for USA TODAY that headlined “Health Services Can be a Tax Shelter” states, “but there is a catch, the new accounts are linked to high deductible health insurance plans.” The article also quotes Greg Scandlen, a health care expert, “that the HSAs have the potential to become the dominant health care financing in the next five to ten years”. But they aren’t for everyone, says Scandlen. Families with young children probably will benefit more from traditional managed care options, such as preferred provider organizations. Additionally, he says HSAs demand more planning than many people are willing to give.

Why aren’t more people using HSAs?

Prior to January 1, 2005, Aetna (AET NYSE–commentary–research) 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 – 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. Even with the rules ironed out, the numbers still aren’t staggering.

Aetna has 70 companies with 51 or more employees signed on and Cigna (CI :NYSE commentary– research) has around 30, according to Jake Biscoglia, an assistant vice president at Cigna. Aetna and Cigna recognize there is definitely more chatter among their clients about offering these products. In the future, as companies become more knowledgeable, you may see HSAs the next time your benefits department has open enrollment. Many selfemployed individuals are beginning to take advantage of this tool.

We 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. What’s not to like about HSAs? Contributions are deductible, the account accumulates tax-free, and withdrawals used for medical expenses are tax-free. You’re in control with flexibility and portability. Remember—do your research and consult with the professionals to determine if HSAs should be another wealth building tool to be used in your financial plan.

Carl Fischer, is Managing Member of Entrust CAMA. Entrust CAMA serves the states of Delaware, Pennsylvania, and Southern New Jersey.

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