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Health Savings Accounts: A New Way to Handle Health Care

By Fred Yager
ConsumerAffairs.com

November 20, 2006

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You know you should save for retirement. You know you should save for your children's education. But did you know you could also be saving for your medical expenses and health care?

Three years ago the federal government created something called a Health Savings Account (HSA) to help you pay any medical costs your health plan doesn't cover and to do it tax-free.

There's a small catch though. In order to qualify, you have to be covered by one of those so-called "catastrophic" health plans that have a high deductible. That means you're responsible for paying the first $1,000 to as much as $10,500 in health care expenses (depending on your deductible). Those numbers may scare some people.

Still, high deductible health plans are becoming more and more popular because they're a lot less expensive than their low-deductible counterparts -- as much as 40% less. So you could take the money you save on premiums and fund a tax deductible health savings account.

Now, why would you do that? Well, money invested in an HSA grows and remains tax-free as long as you use it for medical and health-related expenses. You also get to decide on how to spend the money. You don't need to get permission from an HMO or your health plan advisor. You can even use it for vitamins and non-prescription drugs or for one of those programs to help you stop smoking. How many health plans let you do that?

You can also decide how to invest the money, such as putting into a mutual fund. And unlike one of those flexible savings accounts which some employees use to help pay uncovered medical costs, with an HSA, you don't lose it if you don't use it. In fact, if you change jobs, your HSA funds go with you.

Since its inception, the number of banks offering Health Savings Accounts has grown to close to 1,100. This in turn is expected to boost their popularity even more and triple the total number of accounts by the end of this year to 3.6 million.

The question now is, if banks seem to think HSAs are a good investment, how come so many companies are failing to tell their employees about them.

According to survey sponsored by WageWorks, a provider of tax-advantaged consumer spending and savings programs, more than 1,100 adult employees from one thousand companies found that only half ever received any information about HSAs and only 41% received a list of banks where they could set up a health savings account.

The one thing you can't use an HSA for is pay your health insurance premiums unless you're on unemployment. You can also use HSAs to pay premiums on long-term care insurance. And if you are 65 or older, you can use it to pay for a Medicare supplemental policy, such as Medigap.

Interested? Here's what you'll need to know.

To be eligible, you must participate in a health plan that has a deductible of at least $1,050 for individuals, $2,100 for families, with a maximum out-of-pocket limit of no more than $5,250 for individuals and $10,500 for families. The maximum you can contribute is $2,700 for singles and $5,450 for families, but these numbers will go up each year based on the rate of inflation.

If you work for a company that offers an HSA, you can have money deducted from your paycheck on a pretax basis and deposited into the account.

Or, if you want to do this on your own, you can contribute after-tax dollars and then get a tax deduction when you file your tax return. To do this, you need to get Form 8889.

Just as the number of banks offering HSAs has grown, so too have their little differences. For example, some will make you keep a portion of your account in safe and accessible cash or money market deposits to you can pay for medical expenses as they occur.

There are some costs involved such as maintenance fees but these tend to be small and are getting smaller now that more banks are competing for this business as health savings plans grow in popularity.

For more information about the tax details, see www.ustreas.gov/offices/public-affairs/hsa

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