Should You
Consider an HSA?
The Tax Relief
and Health Care Act of 2006 (TRHCA) that went into effect this year made
it a bit easier for both employers and their workers and self-employees to
obtain Health Savings Accounts, a kind of IRA for health care expenses.
Health savings
accounts were created as part of the Medicare Modernization Act of 2003
but have not been wildly popular because they’re complicated. Anyone
under age 65 who buys a qualified high-deductible health plan (HDHP)
can open an HSA. However, you can still own an HSA and be covered under
other types of insurance policies that cover liability, dental, vision and
long-term care needs, as long as the same expenses are not covered by both
your HSA and the insurance policy.
How do I find a
qualified policy? If you’re
employed, your employer obviously selects a qualified option and makes
that available to you. However, for individuals or sole proprietors buying
such policies, you need to put in some research to make sure you get the
right plan for you. You need to ask if your current insurer has a
qualified plan, and there are Web sites you can search for ideas -- www.hsainsider.com
and www.healthdecisions.org.
Will I automatically
qualify for the HSA option at my company?
No. Under the new law, employers have the right to offer such plans to
those who own 5 percent or less of the company or make less than $100,000
a year. However, if you are self-employed, there are no income
restrictions.
What are the maximum
contributions? In 2007,
individuals can deposit up to $2,850 in their HSA, even if the minimum
single person deductible of $1,100 is selected. Insured individuals with
family coverage can deposit up to $5,650, even if the minimum family
deductible of $2,200 is selected. For HSA holders 55 and up, they’re
allowed to make an extra catch-up deposit each year until the date they
enroll in Medicare. In 2007, the maximum allowable catch-up deposit is
$800. This catch-up amount will increase to $900 in 2008 and will remain
at $1,000 beginning in 2009.
How do I get
started? The new law
allows employees the one-time opportunity to roll over their existing
balances in flexible spending accounts or health reimbursement accounts
into an HSA. The new rules also allow a one-time opportunity for an
individual to transfer in funds equal to the relevant HSA contribution
maximum for the year.
If I find a policy,
should I automatically buy it?
No. Since this is a tax issue as well as an insurance issue, it makes
sense to discuss this decision with your tax adviser or financial planner.
What’s the
difference between an HSA and a medical flexible spending account (FSA)? One
important difference is that HSAs allow balances to be carried forward
year-to-year, growing on a tax-free basis as long as they’re used for
medical expenses. On the other hand, Medical FSAs generally require that
the money you contribute each year has to be spent by a particular date
(yearend or otherwise) or you’ll lose it. But in certain cases, such as
when you incur medical expenses early in a year, you can be reimbursed by
your FSA without having to fully fund it – so FSAs might be a better
deal. Get help from your tax or human resources professional.
Can I have both an
HSA and a flexible spending account?
It depends. In any one year you may maintain both accounts but each year
the FSA must be used up and can’t be carried forward. You may want to
split your money between both to cover non-qualified expenses under the
HSA rules. If your FSA provides for limited reimbursement for items not
covered by your health insurance plan (such as dental, vision, or wellness
care), you can use an HSA for items covered by your plan and your FSA for
medical expenses that are not. Obviously, double-check this with an
expert.
What happens if I
need to use my HSA dollars for any non-medical reason before age 65?
You’ll get hit with additional tax of 10 percent, plus any withdrawals
will be taxed at ordinary income tax rates. After age 65, you’re free to
use the funds for any purpose without penalty, but non-medical withdrawals
are still taxable.
August 2007— This column is
produced by the Financial Planning Association, the membership
organization for the financial planning community, and is provided by
McGuire & Co., LLC, a local member of the FPA.
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