A New Kind of Savings Account


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The past three years have seen double-digit increases in group health insurance premiums and these increases were largest for the smallest companies. If you work for a small business, chances are you’ve seen your health insurance premiums reach skyward. The rising cost of providing health insurance for employees is regularly cited as the number one concern of smaller companies. If you work for a small company or are independently employed, you’ve probably felt the pinch in the pocketbook of increasing health insurance rates.

A new alternative to this scenario is a Health Savings Account. The program was created to offer individuals a tax-advantaged way to accumulate savings for medical expenses. Business owners who offer such a plan to their employees can benefit modestly from tax relief and, most importantly, can realize substantial health care cost savings on a day-to-day basis. For the self-employed and for many other small business employers and their employees, HSAs represent a breakthrough strategy that can lower health care costs today and increase retirement savings for future health care needs. But this program may not be right for everyone.

So we asked Jody Stivers of HollandStivers & Associates to give us an HSA primer. We hope this will help you navigate the twists and turns of the HSA decision-making process.

What are Health Savings Accounts?

HSAs pair a high-deductible health insurance plan (HDHP) with a health savings account to cover medical expenses until the deductible is reached. HSA contributions are from pre-tax dollars and can be made by the company and/or the individual/employee. They are controlled and owned by the individual, and accumulate from year to year (not use it or lose it) and are portable. HSA payouts for qualified medical expenses are tax-free and the accumulated capital, interest and dividends are tax-free until retirement. HSAs were created to encourage participants to become better health care consumers.

How does it work?

To those familiar with IRA, Keogh and 401(k) plans, HSAs operate in much the same manner with several important differences. The most important difference is that money placed into an HSA can be withdrawn at any time, before as well as after retirement, if the money is used for medical care expenses. What constitutes a medical expense is pretty basic. Treating a broken nose is okay. Getting wrinkles removed is not. Equally as important, money not spent in one year may rollover to the next year and even beyond age 65.

Who qualifies?

Any taxpayer under the age of 65 can open an HSA provided he or she has also contracted for a high-deductible insurance policy. Self- employed or those employed by others can participate. Spouses or dependents covered by other insurance may not be able to participate.

What’s covered?

Dollars put into an HSA can be used for any medical expense that qualifies as a “medical expense” as defined in the U.S. tax code. Expenses usually not covered under a standard health insurance policy, such as contact lenses, dental treatment, eyeglasses and nursing home care, do qualify here and can be paid for out of the HSA. Because the HSA is tied to a high-deductible health insurance policy, the individual will “pay as they go” for medical care until they spend up to the deductible. Once the deductible is met, the health insurance policy kicks in and pays for everything else after that. HSAs don’t “replace” a normal or typical health insurance policy. They are meant to be used as a supplement to a qualified high-deductible health plan. HSAs can only be set up if you already have a high-deductible health insurance coverage policy.

What can it pay for?

• dental and optical care
• self-pay COBRA health care continuation when you leave a job • long-term care insurance coverage for family members
• fertility treatments, birth control, well-baby care
• physical therapy, chiropractic care, psychoanalysis, acupuncture • other services

What are some of the parameters for utilizing HSAs?

For individuals, the maximum amount of money that can be deposited into an HSA is $2,700. If the account has been set up for a family group, the maximum that can be deposited is $5,450. The actual amounts allowable for contributions that qualify as a tax

deduction depend on a few factors, such as the deductible on your health insurance plan.

Who is best suited for an HSA?

Clearly, those who would prefer, or already have a high-deductible on their health insurance policy are poised to get the most benefit from this new program. For the self-employed who don’t have any insurance policy, a low-cost, high-deductible plan that qualifies for an HSA is a good starting point. Even older adults may find that this plan is of benefit. We have actually seen cases where folks with a number of medical conditions are better off with an HSA because their insurance premiums are so high that the dollar savings is substantial going to an HDHP.

How much can you contribute to an HSA on an annual basis? Can you invest in mutual funds, stocks, bonds, etc., with the money in the HSA?
There are limits to setting aside for an HSA: $5,450 for a family and $2,700 for an individual. Also, there are catch-up provisions for people over 55. As long as the account is being handled by an IRS- approved account custodian, you may invest in all of those you wish.

Who can be claimed as a dependent for an HSA?

If you are talking about the dependent status of the taxpayer’s child under age 19 (or a child who is a full-time student under age 24), there is no limit on the amount of income that the child can earn— they can still be claimed as a dependent, but the child cannot provide more than half of his or her own support. With other individuals, a dependent cannot make more than $3,100. Whether someone is a dependent or not is somewhat involved and discussed in IRS Publication 501.