TAKE A LOOK AT HEALTH SAVINGS ACCOUNTS

February 2006

Last night President Bush encouraged Congress to expand health savings (HSA) accounts. The IRS code has become an amalgam of tax deferred accounts including ROTH IRAs, IRAs, Coverdales, 529s, 401Ks, 403Bs so it is understandable if you are confused of what is an HSA.  A worker may make pretax contributions into an HSA up to $5,250 for individuals and $10,200 for family coverage, and simultaneously signs up for a lower cost high deductible health plan (HDHP).  The HDHP should be viewed as catastrophic coverage since the HDHP does not pay any medical expenses until the amount paid into the HSA is exhausted. Since the HDHP will be offered by a local medical insurance company, you should receive the companies preferred rates with your doctor or hospital.  The premium for the HDHP should be about 40% less than your traditional medical insurance plan.

If you do not use up the HSA contributions in a year, they grow tax free and carry over indefinitely allowing you to absorb future medical expenses.   HSA funds can pay for any “qualified medical expense,” even if the expense is not covered by your HDHP.  Once funds are deposited into your HSA, the funds can be used to pay expenses even if you no longer have HDHP coverage. 

Who should be looking at HSA's? HSAs could benefit an individual or family likely to spend less than $5, 250 or $10,200 respectively in medical in a year.  We are talking about young people without children and significant medical needs. Well young people don’t have any money so this sound likes a nonsensical idea. But parents have been gifting money to their children for years so the child can make a contribution into an IRA. The IRA strategy is a good idea long term but it does not allow the child to tap into the funds for the things they are likely to need first, a house, education for their children. An HSA has the benefit of allowing them to more easily deplete the funds if they are needed. As the young person gets older, adds children and gets employer provided insurance, it will be easy to deplete the HSA with non covered items such as eye care, dental, or over the counter medicines. 

HSAs may also be a better alternative for young employees whose employer allows them to take cash instead of the company provided health plan.  Younger employees are lumped in with older less healthy employees when part of an employer plan thus driving up the cost of their insurance. The overall cost of an HDHP individual policy may be less than the employer provided plan giving the young employee the chance that they may save some of the employer provided dollars for future medical expenses.   Employers may also set up an HSA plan for employees. An HSA may be the answer for small employers who have been unable to afford health coverage for their employees.

To get started, contact an HSA approved provider to set up your account. In Delaware, Blue Cross and Coventry offer plans.  To determine if an HSA is right for you, contact Diane Burke at (302) 656-6632 or DBurke@CoverRossiter.com.  Cover & Rossiter can help with your tax planning and investment planning needs.