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Health Savings Accounts

Q. What is a Health Savings Account?

A. An HSA works like an IRA, except that money is used to pay health care costs. Participants enroll in a relatively inexpensive high deductible insurance plan. Then, a tax-deductible savings account may be opened to cover current and future medical expenses. The money deposited, as well as the earnings, is tax-deferred. The money can then be withdrawn to cover qualified medical expenses tax-free. Unused balances roll over from year to year.

Business owners who offer such a plan to their employees can benefit modestly from tax relief, and, most importantly, can realize substantial healthcare cost savings on a day-to-day basis. HSAs represent a breakthrough strategy that can lower healthcare costs today and increase retirement savings for future health care needs.

Q. Who can qualify?

A. Everyone (not just self-employed or small businesses) with a qualified high deductible insurance plan will be eligible for a tax-deductible HSA.

Q. How does an HSA Work?

A. You obtain coverage under a qualified high-deductible health insurance plan. Take the premiums you currently spend on a high cost traditional individual or group plan and split it into 2 parts. One part will go to pay for the lower cost higher deductible health insurance plan and the other part. "The amount saved" would go into the medical IRA. Each year you deposit the money you saved on lower premiums into the tax-favored medical savings account. You use the savings account to pay for your deductible with tax-free dollars. Once you meet the deductible, the insurance starts paying for your medical expenses. Any money left over at the end of the year is yours to keep.

Q. What is a high deductible insurance plan?

A. For 2004, a high deductible insurance plan is a health plan with a minimum deductible of $1000 for self-only coverage and $2,000 for family coverage. The maximum out-of-pocket expenses for allowed costs must be no more than $5,000 for self-only coverage and no more than $10,000 for family.

Q. What are the new maximum contribution limits?

A. Annual contribution limits for 2004 are capped at either the high deductible plan deductible or $2,600 for individual or $5,150 for family - whichever amount is less.

Q. What's Covered?

A. Dollars put into an HSA account can be used for any medical expense that qualifies as a "medical expense" as defined in U.S. tax code. Expenses usually not covered under a standard health insurance policy, such as contact lenses, chiropractic care, physical therapy, 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 (HD) 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 plan. HSAs can only be set up if you've already got a high-deductible health insurance coverage policy.

Q. What Can It Pay For?

  • Dental and Optical care, including glasses, contact lenses and Lasik surgery
  • Self-pay for COBRA health care continuation when you leave a job
  • Long-term care insurance coverage for family members
  • Fertility treatments, birth control prescriptions, well-baby care
  • Physical therapy, chiropractic care, psychoanalysis, acupuncture

Q. How Do HSAs Compare to Other Tax Advantage Programs?

A. 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 be rolled over to the next and even beyond age 65.

Q. What Are Some Of The Parameters of HSAs?

A. For individuals, the maximum amount of money that can be deposited into an HSA account is $2,600. If the account has been set up for a family group, the maximum that can be deposited is $5,150. 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.

Q. But I like my doctor. Will I have to change?

A. Absolutely not! One of the great things about the HSA is that you can change doctors any time you want for any reason, or no reason at all. Your choice of doctors is completely up to you.