10 Facts You Should Know About Health Savings Accounts (HSA's)
by Tony Novak
Editor' Note: Recently, Medical Savings Accounts were effectively replaced by Health
Savings Accounts. For purposes of the discussion topics in this article,
both terms apply and the two terms are used interchangeably throughout in
this article.
Medical Savings Accounts (MSAs) and
Health Savings Accounts (HSAs) are over-promoted as a solution and
salvation of those in need of affordable health insurance plans. Certainly they offer great tax advantages, especially
for self-employed individuals. Forbes called MSAs "Super-IRAs"
and Business Week wrote "almost too good to be true". Kiplinger’s Personal Finance Magazine
said “if you are self-employed, you should jump at the chance to open an
MSA”. The American Medical
Association published a series of articles strongly supporting MSAs and
these plans are promoted on the AMA's insurance Web site. Both the Clinton and Bush administration
and almost all federal lawmakers on both parties include MSAs as part of
the solution to the national health care crisis. The insurance industry and the employee
benefit industry strongly support the use of MSAs and HSAs. Business think tanks across the
country repeatedly focus on ideas to expand the use of this promising financial
tool in the marketplace.
Here are some things you should know before you consider switching
health plans to a HSA:
- HSAs cut overall long term health costs by about 1/3 for most people but they are not designed to cut your immediate cash outlay for a medical plan. For example, if your family pays $650
per month for total medical and dental coverage right now, you should
still plan to pay $650 per month in a new HSA plan.
The only difference is that about half of your cost will go directly
into your own account and only about half will go to the insurance company. Over the long run, your account will be
spent more effectively on your behalf than the money paid for insurance
premiums. But it takes time
(usually about a year) to build up enough reserve in your account to be
fully secure using higher deductible insurance. HSAs are not
effective if you already have significant pre-existing medical
conditions because the insurance will either not be available or will be
more expensive than other available options. If your primary goal is
to reduce the cost of total monthly health insurance payments, HSAs are
never the best option. Web sites that specialize in low cost health
insurance can point you to some less expensive health insurance
providers. [We recommend InsureMe because of their large network of regional and local independant providers. They will give you several quotes from one form that only takes 1-2 minutes to fill out on their secure server.]
- Many people who apply for a HSA plan do not qualify.
Those most likely to save the most money
and be approved for coverage are young, self-employed, and healthy with
historically few medical expenses.
Those over age 60 generally do not
realize any savings, but may achieve an improvement in the quality of health
care by moving away from the managed care healthcare systems to a private
pay system.
- HSAs put individual consumers and their personal physicians back
in control of their own health care.
These plans do not require use of pre-authorized providers of treatments.
This also means that each individual must be responsible for his/her
own health care decisions. This
approach of self-reliance is not always popular or appropriate for everyone,
especially those who have become comfortable with HMO plans. HSAs are designed to encourage efficiency
and cut waste in health care. But
this also means that there is a chance that you may decide to bypass some
medical testing or treatment in order to save your HSA money.
- HSAs
reduce income taxes. The
amount you elect to deposit into your HSA account each year is deducted
directly from your taxable income in the same manner as an IRA account
– regardless of whether you spend it or just save it. Interest and investment earnings in an
HSA are also tax-free. For
the average person, for every dollar that you put into your MSA, your
taxes will be reduced by about $.25 even if you do not incur any medical
expenses.
- You
must have a qualifying HSA-type health insurance plan in place first before
you can open a Health Savings Account. Otherwise the tax deduction will
not be allowed. [We recommend InsureMe who has a large network of insurers that offer HSA eligible high deductible health insurance plans. They will give you quotes from up to 5 providers.]
- It is possible to open up a HSA Account with a separate company
than your HSA insurance but this is usually not recommended and will certainly
cost you significantly more.
It always makes more sense to have your MSA deposit account and
your insurance with the same company.
- It
takes 3-6 weeks to actually get a HSA plan started and delivered to you.
Short term coverage should
be found during the interim period . Coverage may be bound or issued within 24 hours but it takes longer to receive ID cards and a printed policy. [We recommend eHealthInsurance where you can compare dozens of providers that offer short-term coverage. Again, you can choose a provider and apply securely online.]
-
The most popular type of low cost
HSA plans are not available to individuals and businesses residing in AK,
HI, KY, MA, ME, NJ, NC, NH, NY, RI, UT, VT and WA.
Other options may be available but the cost and benefits are not
as attractive.
- You
should not use a HSA plan when the management of your existing medical
costs is more important to you than achieving a savings in insurance premiums.
Do not change health plans in the middle
of ongoing medical treatments, when a major health issue has been diagnosed,
or when any family member is pregnant.
- There
is usually no fee or commission for health savings accounts although some
custodial firms do charge a fee. The amount that you deposit and withdraw from
your HSA are completely at your discretion (up the maximum deduction allowed
each year).
About the author:
Tony Novak, MBA, MT is a writer and financial adviser in Narberth, PA. His
businesses Medsave and Freedom Benefits Association provide online benefits enrollment and planning advice
to individuals and businesses in 47 states. Medsave offers online enrollment
for short term medical insurance nationwide and professional enrollment
support by telephone at (877)-529-7435.
What are the new contribution limits for 2006?
- For individual coverage, the maximum contribution is the annual deductible under the HDHP (minimum of $1,050), or $2,700*, whichever is less.
- For family coverage, the maximum contribution is the annual deductible under the HDHP (minimum of $2,100), or $5,450*, whichever is less.
- In addition to the maximum contribution amount, catch-up contributions may be made by or on behalf of individuals age 55 or older and younger than 65.
* Amount subject to change (annually) based on the Treasury Department/IRS notice.