The Fiscal Benefits of an HSA for Businesses and Consumers

by Debbie Smith

Health Savings Accounts (HSAs), introduced in 2003 as part of the Medicare Modernization Act, are designed to help people obtain affordable health insurance, and budget for near term and future medical expenses.

HSAs have financial advantages that extend beyond covering immediate medical needs including tax benefits and the ability to build up long-term savings and plan for the future.

HSAs are special pre-tax savings accounts, while accumulating tax-free interest or investment income. HSA funds can be withdrawn to pay for qualified medical costs, even some not ordinarily covered by health insurance.

You must be enrolled in a high-deductible health plan (HDHP) to be eligible for an HSA as well as meet the following criteria:

• Not be claimed as a dependent on anyone else’s tax return;

• Not enrolled in Medicare benefits;

• Not covered by another health plan that does not qualify as an HDHP.

HSAs are not subject to the “use it or lose it” rule of other healthcare accounts. Just like a 401(k) or an IRA, funds can grow year after year. The money does not have to be used for healthcare, but you will owe income tax if it is withdrawn for other purposes. In addition, a 10 percent penalty will be imposed on any non-qualified withdrawals made before you reach age 65. After age 65, money can be withdrawn penalty free for any purpose, but taxes will apply if the money is not used to pay for qualified medical expenses.

HSAs are commonly regarded as one of the most tax-efficient tools currently available.

Contributions to an HSA can lower your overall tax burden, and they can help lower your adjusted gross income—the amount of money you make before taxes are deducted from your paycheck. Under established tax rates, the more money you make, the more you pay in taxes. A lower gross income potentially can mean less money that you will owe in taxes. State treatment may vary, so be sure to check with your tax advisor.

The younger you are when you start saving, the more your HSA dollars will have increased by the time you need it, whether it be for medical expenses or as a supplemental retirement account. For example, leaving $2,000 a year in an HSA for 20 years, with a modest four percent annual return, will build more than $61,000 in the account. Many HSAs offer investment options once you have reached a minimum balance.

Starting early is also important because the government limits the amount you can contribute per year. In 2005, your annual contributions cannot outpace your health insurance deductible, and can’t exceed $2,650 for singles and $5,250 for people with family coverage.

If you are 55 and over and have not yet started contributing to your HSA, you still can. The U.S. government allows contributions above and beyond the annual maximums. People in this age group can make “catch-up” payments of $600 this year, which will increase by $100 a year until they reach $1,000 in 2009.

People receiving Medicare benefits, typically at age 65, no longer can contribute to an HSA. How-ever, money still can be withdrawn to pay for qualified medical expenses not covered by Medicare. Additionally, those 65 or older can treat insurance premiums (other than premiums for a Medicare supplemental plan, such as Medigap) as qualified medical expenses for HSAs.

For many self-employed people, early retirees and part-time workers, an HSA often will prove to be the best choice for healthcare coverage. If you decide that an HSA is right for you, set one up with a bank or private insurer. Something to look for is a one-step enrollment process, allowing enrollment in both the HSA and high-deductible health plan in one simple phone call. This is a significant benefit because it helps you avoid confusion and time-consuming paperwork. It also reduces the lag time between the HSA set-up and the HDHP effective date.

As you can imagine, HSAs have varying set-up, maintenance and service fees, as well as investment fund options, so it makes sense to shop around.

Debbie Smith is President, Kansas/Missouri Market Sales for Humana. She can be reached at 913.217.333 or via e-mail at dsmith1@humana.com.