Health Savings and Flex Spending Accts

 In November, 2007, Back In Action hosted a health education class on health savings accounts.  Many clients continue to ask about this health insurance feature.  We have included the following article and references, to better educate our clients about available options.  Health savings accounts give you better control of how you spend your health care dollars.  Read on...

Paying for health care can be one of the biggest financial challenges an individual or family can face.  Health Savings Accounts (HSAs) might be able to help.  HSAs have only been around since 2003, so they are still relatively unfamiliar to many people.  But if you are concerned about providing health care for yourself and your loved ones, they might be worth a closer look.  Here is an overview of how they work.

If you have an Individual Retirement Account (IRA) or a 401(k) plan, then you already know the basics of how HSAs work. You and/or your employer can contribute to an HSA, just as with a 401(k). And the money in your HSA can grow tax-free through investment and interest earnings, just as with an IRA. You can use the money saved in an HSA to pay for qualified medical and health care expenses. To open an account, though, you must first be covered under a high-deductible health plan (HDHP), a type of insurance that normally does not reimburse you for the first several thousand dollars in expenses (an amount known as the “deductible”).

The advantage of an HDHP is that monthly premiums drop as deductibles rise. A policy with a $3,000 deductible, for example, will be less expensive than a policy with a $1,000 deductible. That’s because the higher the deductible, the less an insurer will have to pay in case of a claim. The flip side is, of course, that the higher your deductible, the more you will have to pay from your own funds before your insurance kicks in.

Say, for example, that the deductible on your HDHP is $2,000. You face medical bills of $6,000. Your HDHP covers everything above the $2,000 deductible; in this case, that amounts to $4,000. But you still have to pay that first $2,000 yourself. This is where your HSA comes in. You can use the money saved in your account to pay these bills, as well as other expenses that may not be covered at all under your HDHP.

HSAs can only be used for “qualified” medical expenses. That means that the money can pay for broken bones, but not for Botox injections. If you use the funds in your HSA for anything else, watch out: The money will be taxed. And, unless you are disabled or over the age of 65, you will also be hit with a 10% penalty. If you are in any doubt about what expenses qualify, consult Publication 502 on the Web site of the Internal Revenue Service.

Once you reach the age of 65, you are permitted to use the funds in your HSA for non-medical expenses, but the money then becomes subject to tax. If you are already enrolled in Medicare, you are not eligible for an HSA. But if you had an HSA before enrolling in Medicare, you can still use it, though you can no longer make fresh contributions after you begin taking Medicare benefits. If you designate your spouse as the beneficiary of your HSA, then it will be transferred to his or her name after you die.

Just as with a traditional savings account, you decide how much money to deposit in your HSA, how to invest it, and how to spend it. (There is an upper limit on how much you can contribute in any one year. For 2007, this is $2,850 for individuals and $5,650 for families. Those aged 55 and over can make extra “catch-up” contributions, up to $800 for 2007.) If you don’t use the funds in your HSA at all in any single year, the money rolls over into next year — and continues to grow, tax-free.

Not everyone thinks HSAs are a good idea. Critics have said that HSAs favor those with high incomes, who are already more likely to have health insurance than those on low incomes. Another criticism is that the tax benefits are too small to make the accounts attractive to low-income individuals, who are also least able to set aside money every month for an HSA. Before deciding whether an HSA is right for you, be sure to consult a qualified financial advisor.

If you would like to know more, the Consumer Guide To Health Savings Accounts, from the National Association of Health Underwriters contains full details on how HSAs work and what you need to do to open an account. The U.S. Department of the Treasury has a comprehensive list of Frequently Asked Questions that address many of the details related to setting up and managing HSAs.

Online Resources
HSAs are available from banks, credit unions, and insurance companies. Here is a selection of Web sites that feature information on how to set up an HSA. Be sure to consult a qualified financial advisor before deciding whether an HSA is right for you.

IRS Informational Package

HSAFinder.com
Marketing and media firm Information Strategies, Inc. manages this Web site, which features a wide range of information on HSAs for both individuals and employers. The site has a state-by-state guide to obtaining HDHPs as well as a comparative list of banks offering HSAs.

HSA Information Center
The Council for Affordable Health Insurance (CAHI), an advocacy group for market-oriented health care solutions, manages this Web site, which has a broad range of resources for both consumers and employers. It also features links to HSA-related material on the Web sites of the Internal Revenue Service and the U.S. Department of the Treasury.