Health Savings Accounts

The Health Savings Account Allows You A Lot of Flexibility in Controlling Your Health Costs

The Evolution of the Health Saving Account

Over the last 50 years or so, consumers have lost control over medical care and expenses. When I was a child, it was not unusual to pay for your own medical care - even hospital stays - out of your own pocket. Health inurance was available and affordable.

But for many complex reasons, all this has changed.

Medicare and Medicaid were created, bringing with them new complicated rules that had the effect of driving up health costs and limiting its availability.

For a while group health policies were cheap and everyone had health insurance paid by their employers. This contributed to overuse of medical resources and ran up expenses.

And medical malpractice claims did a lot to drive up doctor's insurance premiums, which also contributed to skyrocketing medical costs, while driving many doctors out of practice, again limiting choice and availability.

Employers have begun to cut back on their medical expenses, which means the employee has to shoulder more of the costs himself. And doctors have apparently surrendered their role in medical care decisions to insurance company adjusters and HMO administrators.

Most people with health insurance, especially employer paid health insurance, really don’t know what their health care costs are. Furthermore, in many, if not most, cases, they are limited in which health providers (doctors, hospitals, pharmacies etc) they can use.

Most people are locked into a network of doctors. They know what the co-pay is, but have no idea what the doctor actually charges.

When insured consumers are hospitalized, they rarely see the bill. They don’t know if their insurance company was overcharged or not.

There are firms that audit hospital bills for insurers and self insured companies. They get paid a percentage of what they save on the bill by finding overcharges, duplicate charges and the like. The last I heard these firms were still making lots of money.

Overcharging, whether deliberate or not, by doctors and hospitals drive up health care costs for all.

In order to give consumers more direct control, not only over their health costs, but in the choice of which doctor they can see or which hospital they can enter, Congress enacted the Health Savings Account Availability Act. As of 2004, individuals who are not otherwise insured can have Health Savings Accounts (HSA) , which offer some very attractive tax benefits.

Health Saving Account Rules

An individual can set up an HSA for himself or his family. An employer can add an Health Savings Account option to the so-called cafeteria benefit plan it may already offer.

The money put into the plan is before taxes, including Social Security, if part of an employer plan. Otherwise it is a above-the-line deduction, meaning you don’t have to itemize your deductions to get the tax break and that the deduction is not subject to the phase-out rules that make many itemized deductions unavailable to high wage earners.

The Health Savings Account is set up like an IRA. A trustee approved by the IRS must be used. Money put in the plan grows tax free and funds withdrawn for qualified medical expenses are also tax free.

Unlike the older Flexible Savings Accounts offered in employer cafeteria plans, you don’t have to spend the money put into the account by year end or otherwise lose whatever’s left. [Note: On May 18, 2005, the Treasury Department allowed employees an extra two and a half months to spend their contributions. So if the plan runs on a calendar basis, which most do, you have until mid-March to spend the money. Unused funds still cannot be rolled over into the following year.] Unspent money can be rolled over from year to year.

This can allow for a nice chunk of money to accumulate and grow without taxation that can be withdraw tax free at age 65.

In order to qualify for a Health Savings Account, the individual or family must purchase a high deducible health insurance policy. These are special policies that have a minimum deductible of $1000 to a maximum of $5000 for an individual and $2000 to $10,000 for a family. The higher the deductible, the lower the health insurance premium.

Individuals can contribute and deduct the lesser of $2250 or the deductible on the policy: for married couples or families it is double that. If over 55, the contribution and deduction is $600 higher for individuals and $1200 higher for couples and will continue to rise at $100 a year until 2009, where it will be capped at $1000 for individuals and $2000 for families or couples.

The money in the Health Savings Account cannot be used to pay the premiums for this policy except in certain circumstances (basically when you’re unemployed). It is meant to meet the deductible on the policy, co-pays, drug costs, eyeglasses or any other medical expense that could be itemized on an individual tax return as a medical expense.

Money used to pay qualified medical costs is withdrawn tax free. Money withdrawn in excess of qualified medical expenses is taxed as income and subject to a 10% penalty, unless the owner is disabled or over 65. Any money in the account at death is added to the taxable estate.

There are no income limits on Health Savings Accounts. If started early, when you are still young and healthy, a substantial amount of money could accumulate to either meet higher medical costs as you get older or to use to supplement your income in retirement.

It pays to compare the costs of Health Saving Plans with whatever your insurance you have now. It might turn out that your employer’s plan is still cheaper and you might want to keep it. But you might want to consider HSA’s for their portability (you carry it from job to job without cost or loss of any contributions) and the tax benefit of having another vehicle to shelter income and capital growth, while giving you more control over the cost and quality of your health care.

If you live in one of the states that is trying to mandate that all its citizens buy health coverage, this would be a good choice for the young and healthy who have been the main sector of the population avoiding health insurance. Instead of just writing insurance premium checks, you can maintain some control of your health care costs will taking advantage of the tax savings.

Health Savings Accounts or something like them will probably eventually be used to solve the mess that medical care is in right now.

You can use this link to get comparative health insurance quotes: Health Insurance - Choose and compare leading insurance plans and companies. Apply and buy online.

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