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Donna Wood
Donna Wood
Health Savings Accounts

A lighthouse in this healthcare storm?

December 17, 2009
by Donna Wood, CPA, PFS

Healthcare is on everyone’s minds right now. The cost of healthcare and the numbers of uninsured people are in the news on a daily basis. A growing type of insurance coverage, combined with a tax-deductible savings account may be a solution to the high cost of healthcare: The Health Savings Account (HSA) with a High Deductible Health Plan (HDHP).

Established in 2003 by President George W. Bush, the HSA and HDHP were designed to enable more Americans to gain access to health coverage, while improving the efficiency of the healthcare system. Employers would save money on healthcare costs and patients would have more control over their healthcare dollars.

Specifically, the HSA is a tax-deductible savings account that may be funded by employees, employers or both. It must be coupled with a Health Insurance Plan that requires the insured to first pay a deductible (the amount of money which the insured party must pay) before the insurance company’s coverage begins. This is called a “High Deductible or Catastrophic” Health Plan. The policy can be in the form of an HMO, PPO or indemnity plan, as long as it meets the HDHP requirements. The deductible amount has a minimum and maximum which is determined by the Internal Revenue Service (IRS) each year. The beauty of the HSA is that unused funds may be rolled over year after year and employers may offer HSAs as an alternative to traditional health plans by paying into the accounts as well. Everyone may participate in an HSA, including people who have no earned income. There is no age limit for withdrawals from the account, as compared to the Traditional IRA which requires minimum distributions at age 70½.

Since its inception in 2003, the growth in people covered under HSAs and HDHPs has been increasing steadily. From one million in early 2005 to over eight million in 2009, more individuals and companies are finding their way to this lower cost, tax-advantaged plan. The product has evolved as well, with insurers reducing the premiums; while tax advantages have increased. One early issue was that people had to fund their HSA accounts while still paying significant monthly insurance premiums. In 2006, the Health Opportunity Empowerment Act included a provision for one-time funding to the HSA Account from an individual retirement account (IRA). Additionally, employers were allowed greater contributions for nonhighly compensated employees (NHCE).

The established HSA account can be funded as often as the holder desires, up to the maximum annual amount allowed by law. It is most effective if the holder contributes a regular amount into the account and then uses it to pay for doctor visits, prescriptions and other medical care. These accounts may have a nominal monthly cost and earn interest.

What makes it a good choice for some people?

  • Provides more control over your healthcare dollars and enables people to be smart consumers of their healthcare by comparing costs and services provided;
  • Provides a tax advantage for many who might not be able to deduct these healthcare dollars on their income tax returns;
  • Enables flexibility to save and keep your contributions for future use, including healthcare costs in retirement (such as Medicare and long-term-care insurance premiums);
  • Lowers overall insurance costs for the average healthy person;
  • Payments to healthcare providers are generally at the insurance company’s negotiated rates;
  • Provides a safety net for the unforeseen accident or illness, with the plan typically covering all costs once the deductible is met;
  • Can be invested as an additional retirement plan once established beyond deductible requirements and can be used tax-free for approved healthcare expenses;
  • Provides for HSA funds to pay for Consolidated Omnibus Budget Reconciliation Act (COBRA) and other health insurance premiums if you are unemployed; and
  • HSA accounts are portable; if you lose HDHP coverage, you can continue to use the HSA account although you cannot add funds

The HSA/HDHP is ideal for people of all ages who are generally healthy and don’t use medical care regularly and entrepreneurs and small businesses who can better provide coverage for themselves and their employees at a lower cost. College students no longer covered under their parents’ policies may find this a low-cost effective solution.

The preferred tax treatment of the HSA comes with some conditions. There are forms to be filed with tax returns and employers with plans will include information on employee W-2s. As long as the account is held and used for medical costs, it is not taxable to the account holder. Use for nonmedical reasons prior to age 65 may be subject to penalties. Taxpayers should retain all receipts as proof that spending is for approved healthcare costs. Other restrictions apply. More information is available here.

The cost savings are real. One self-employed couple switched to an HSA from a traditional preferred provider organization (PPO) plan in 2009. The PPO Premium had increased 20 percent for coverage with co-pays of $30, a deductible of $2,000 and co-insurance of 20 percent after the deductible would be met. They decided to switch to an HSA/HDHP with a $5,000 deductible. By “doing the math,” they compared their out of pocket costs and found that the HSA/HDHP plan saved them 45 percent over their prior year’s insurance and healthcare costs! At a minimum, the cost of premiums and deductibles alone resulted in a 15-percent savings over the PPO plan.

Conclusion

Healthcare costs have been a major concern in this country for many years. One way to provide adequate healthcare to many, with efficient delivery and consumer control is to provide a Health Savings Account benefit. Given the growth in this form of insurance plan and coverage, it may continue to provide healthcare to many who might otherwise not have coverage. The healthcare reform bill being debated in Congress may subject the HSA account to changes and its future is unknown. This type of plan should be continued and enhanced as our country moves forward to solve our healthcare issues.

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Donna Wood, CPA/PFS, CFP, at Wood Smith Advisors, specializes in financial planning and investment advisory services, focusing on life financial planning for entrepreneurs and women. She brings more than 30 years’ experience in business management, financial planning and financial consulting to her clients. Wood’s work experience includes KPMG. She is a member of the American Institute of CPA's (AICPA) Personal Financial Planning section and the Financial Planning Association (FPA).