Health Care and Health Savings Accounts

Saving money is important for most all families and individuals, especially for medical expenses and health care in general. To have multiple options when it comes to finding the best deals financially to cover health costs whether it's dental care, vision needs, prescriptions, or doctor visits, your best bet is to find affordable coverage that helps offset the bills when you have a qualified medical expense. One way to help is to have a Health Savings Account, or HSA. Typically, these are purchased in tandem with a high deductible health plan (HDHP).

Today, you can usually see deductibles in the $5,000 to $25,000 range. But remember, when buying a HDHP, you need to balance the monthly premium against your budget, and what comfort level you have with the amount of the deductible. Many employers offer these types of plans, along with standard PPOs and HMOs for health insurance coverage. You'll want to pick the plan that suits your personal financial needs the best. However, having an HSA with a HDHP is a great way to use pre-tax dollars to offset the day to day health care needs for you and your family.

According to the US Treasury, Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA. For tax implications and IRS regulations about this type of financial vehicle, you can find more details at their site: http://www.treasury.gov/resource-center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx.

According to HSA for America, by allowing you to deposit tax-deductible funds into a health savings account that you can use to cover medical costs, Health Savings Accounts enable you to take control of your own health care decisions. One of the key aspects to health savings accounts is a system that is responsive primarily to individual consumers, rather than to third-party payers. This concept is known as consumer driven health care. First, you must have a high-deductible health insurance plan that qualifies to be partnered with a Health Savings Account. These plans are available through various insurance companies, depending upon what part of the country you live. The plans are all similar in the fact that they have deductibles (for 2012) between $1,200 and $6,050 for singles, and between $2,400 and $12,100 for families. Once your insurance policy has become effective, you may begin to fund your Health Savings Account.

Health Savings Accounts allow you to legally avoid federal income tax by depositing (in 2012) up to $3,100 for singles or $6,250 for families, into your Health Savings Account. For 2011, you could deposit up to $3,050 for singles or $6,150 for families,whatever you deposit into your account up to April 15, 2012 is an "above the line" tax deduction for your 2011 taxes, meaning you get a federal income tax deduction for money you put in even if you take the standard deduction and don’t itemize deductions. If your employer makes a Health Savings Account contribution for you, it is “excluded” from income, and not subject to any income tax or FICA. Either way, this will immediately reduce your federal income tax due for the year. Most states also allow you to take a state income tax deduction for HSA contributions. This website has lots of details about HSAs: http://www.health--savings--accounts.com/.

The Kiplinger Newsletter has detailed FAQs about HSAs:

1.) Who can get an HSA?: Anyone who buys a qualified high-deductible health insurance policy can contribute to an HSA, although you cannot make new contributions to an HSA after you sign up for Medicare.

2.) How and where can I open a health savings account?: It depends on if you're buying coverage on your own or getting it through your employer.

--On your own. You can find HSA-eligible policies from several insurers in most states at eHealthInsurance.com, or can search for a local agent who knows which policies are available in your area at the National Association of Health Underwriters web site.

--Through your employer. If you get health insurance through your employer, you may have seen an HSA-eligible option during last-year's open-enrollment period (generally in the fall). If not, talk to your benefits manager to see if HSAs will be on your health insurance menu. Choosing an HSA could knock down your share of premiums significantly, and some employers may choose to fund all or part of the HSA for you -- perhaps even adding a 401(k)-style match.

3.) Would I fund an HSA with pre- or post-tax dollars?: If your employer offers a high-deductible health insurance policy, you may be able to make pretax contributions, like you would with a flexible-spending account. If you open the HSA on your own, your contributions will be deductible when you file your taxes, even if you don't itemize.

4.) What's the difference between HSAs and the flexible-spending accounts? It seems they are for the same purpose. The tax benefits of both plans are quite similar, but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred. Money in your flex plan (FSA) must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you can open a flexible-spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy. And, usually the entire FSA contribution is available day one of your plan year as opposed to HSA money that is only available after contributions are made throughout the year.

5.) Do contributions to an HSA in any way affect one's ability to contribute to an individual retirement account?: No. Your HSA contributions won't affect your IRA limits. It's just another tax-deferred way to save for retirement. 

Here's an interesting statistic about the popularity of HSAs: The percentage of Individuals contributing $1,500 or more to their Health Savings Account plans has increased from 21% in 2006 to 44% in 2011, according to Employee Benefit Research Institute Press latest survey.

According to the Mayo Clinic, like any health care option, health savings accounts have advantages and disadvantages. When considering a health savings account (HSA), think about your anticipated health care expenses, your financial situation and how much control you want over your health care spending. If you're generally healthy and want to save for future health care expenses, an HSA may be an attractive choice. On the other hand, if you anticipate needing expensive medical care in the next year and would find it hard to meet a high deductible, an HSA might not be your best option. Much  more details about the pros and cons of HSAs can be found at this site: http://www.mayoclinic.com/health/health-savings-accounts/GA00053.

Health Care Reform: Few Changes for Health Savings Accounts, according to this website: http://www.hsainsights.com/health-care-reform-and-hsas.html----

Individuals with Health Savings Accounts (HSAs) will not be greatly affected by the recent enactment of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Tax Credits Reconciliation Act of 2010. Following are the main changes to HSAs:

• A change in the definition of a "qualified medical expense" that impacts reimbursements and withdrawals under HSAs: Beginning last year in 2011, expenses incurred for over-the-counter (OTC) medications without a prescription are no longer be eligible for payment or reimbursement from an HSA.

• An increase in the tax penalty on HSA withdrawals that are not used for qualified medical expenses were increased from 10 percent to 20 percent in 2011. Some of the new law's provisions will have an impact on High Deductible Health Plans (HDHP) sold in the future.

One interesting side note is that when you are paying all qualified medical expenses out of pocket until you reach your deductible with a HDHP, your HSA account can work well with a discount health plan membership. Medical discount plans usually cost less than $30 per month, and they can save you quite a bit of money with participating health care providers for physician visits, prescriptions, dental, vision, chiropractors, diabetes supplies, and much more. Plus, you can use your HSA dollars to pay for the health care expenses at a discounted rate to stretch those pre-tax monies, just not the membership fee.

Health Savings Accounts are a very good way to keep medical costs to a minimum, and they serve a financial purpose also for your tax situation. Always talk to a professional to see how HSAs and other tax deferred instruments affect your personal financial situation. Although HSAs are good for many households, they are not applicable to everyone. Your health care needs are not identical to other families and individuals, so you must make sure that whatever you choose for your health coverage, that it best suits your own situation.

Until next time.