Health Savings Accounts

 

 

 

 

 

 

 

Health Savings Accounts (HSA):  The Future of Health Benefits?

I’m sure we’ve all heard people talking about Health Savings Accounts within the last couple of years, whether it’s on the evening news, at your local bank or in the office break room.  Either way, everyone has an opinion but few of us really understand HSAs and how they work.  This month we will delve into the pros and cons of Health Savings Accounts from an employee standpoint and get our facts straight.

Health Savings Accounts (HSAs) were instituted by the Medicare bill signed at the end of 2003 and are designed to help individuals save and pay for qualified medical and retiree health expenses on a tax-free basis.  Employees and individuals must participate in a High Deductible Health Plan (HDHP) to qualify for an HSA and may use the tax-preferred account to pay for out-of-pocket medical and other health care expenses including dental, vision and some over-the-counter items.

A summary of the perceived and real pros and cons of HSAs is listed below:

Pros:

·        Tax-free contributions, earnings and withdrawals (if used for qualified health expenses)

·        Lower insurance premiums for related HDHPs

·        Balances earn interest and can be invested

·        Account holders “own” their HSA balance, therefore, the account is completely portable from employer to employer or to a new insurance provider

·        No “use it or lose it” rules.  Balances roll from year to year and expenses can be reimbursed at any time

·        Participants have greater control of their health care expenses and how they are paid

·        Upon retirement after age 65, funds can be withdrawn for non-medical purposes without penalty.  These “non-qualifying” distributions are treated exactly like a traditional IRA distribution.

Cons:

·        As it states, High Deductible Health Plans (HDHPs) generally have significantly higher deductibles than a standard indemnity health insurance plan

·        HDHPs have no first dollar medical coverage, barring some preventative care exceptions (prenatal care, well-child care, mammograms, etc.).  As such, participants are responsible for 100% of medical costs until the deductible is met

·        Generally requires more administrative work and maintenance than standard health insurance

·        Any withdrawals used for purposes other than to pay for qualified medical expenses are taxed as regular income and, if taken before age 65, are subject to a 10% IRS penalty

·        There are annual HSA contribution limits (For 2009: Single coverage = $3,000 / Family coverage = $5,950)

The truth is that every situation is different and, depending on your personal and/or family health circumstances, HSAs may or may not be the best healthcare option for you.  A few items to consider:

·        How much premium savings will you realize annually with a HDHP vs. a standard plan?  Annual tax savings?

·        What is your annual out-of-pocket maximum and premium expense (annual cost exposure)?

·        Do you regularly meet your annual deductible?

·        If employer provided, what, if anything, does your employer pay for or contribute?

Are HSAs the future of health benefits?  It’s hard to say.  There have been overwhelming increases in their use by both employers and individuals within the last few years due to rapidly increasing premium and provider costs.  However, current governmental leadership is pushing for widespread national healthcare reform, which could make privately administrated health insurance obsolete.  We’ll all just have to wait and see what happens.

If you currently participate in an HSA and have tax or practical questions or are considering this option, please contact your accountant or insurance agent for more information.  You may also visit the websites below for more information:

U.S. Treasury             http://www.ustreas.gov/offices/public-affairs/hsa/

HSA Resource Center         http://www.hsaresourcecenter.com/

 

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