Health Savings Accounts:
Build Wealth with Tax-Free Income
by Miles Ross and Jan LeTourneau
There’s a new way to save on taxes and sock money away for retirement. If your 401(k) or IRA is “maxed-out,” or even if it’s not, you can drop more than $5,000 ever year into a Health Savings Account (HSA).
Think of it as a “Medical IRA”
Let’s take a 50-year-old employee who deposits the IRS maximum ($5,450 in 2006) into her HSA each year and allows it to build tax free until retirement. At age 55, she can add an extra catch up contribu-tion of $700 (2006) per year. This figure will increase annually by $100 until reaching $1,000 in 2009.The money is held in a separate “IRA-like” custodial account at the bank or mutual fund.By stashing the IRS maximum contribution each year for 15 years at 8% growth, this employee’s HSA could increase to more than $230,000.
How Does an HSA Work?
HSA contributions are tax deductible and the account grows on a tax-free basis. The money you withdraw from your HSA is tax free when it’s used to pay qualified medical expenses for you, your spouse and dependents, or to buy long-term care insurance, pay for nursing home care or other long-term care expenses. If you take a distribution for anything else, it will be subject to the same tax and penalties as an IRA. If you’re not retired, you wouldn’t think of using your IRA or 401(k) to finance your day-to-day medical bills. So, why use your HSA to pay today’s bills if you can afford to take care of them out of pocket? Plan to let your HSA grow tax free until you retire and save your current medical receipts in a “shoebox.” Then, give yourself a tax-free reimbursement for all those saved medical bills at retirement, or any time, and spend it on whatever you want.
Who can open an HSA?
Like other retirement plans, the IRS has special rules about who qualifies. To take a tax deduction for an HSA contribution, an individual must be covered by a qualified, high-deductible health insuance policy (HDHP). The HDHP must satisfy minimum deductible amounts with certain out-of-pocket maximums. To qualify, the HDHP plan deductible must be at least $1,050 ($2,100 for a family).
HSAs in the Work Place
If your company already has a Section 125 flexible benefits plan that includes a health flexible spending account (FSA), you can amend the plan to add an HSA. Then, offer an HDHP option, and employees may choose to participate in an either an HSA or FSA. HSAs aren’t for everyone. If cash is tight, and an employee needs that money to pay expenses before the insurance kicks in, then an FSA is usually the best choice. On the other hand, the employee should choose an HSA and invest for the future if she can afford to pay medical expenses without dipping into the HSA. Some employees can save even more by participating in an HSA and a “limited” FSA.
Is an HSA Right for Me?
The amount you can deposit into an HSA depends on the deductible in your HDHP. If you want to put away the IRS maximum ($5,450 in 2006) per year, then the de-ductible on your HDHP must be at least $5,450 (2006). Of course, your premiums should go down as your deductible goes up. With an HDHP, most medical expenses are paid out of your pocket until the de-ductible is met. After that, your insurance may pay 100 percent. Although an HDHP cannot pay for prescriptions or provide co-payments for doctor or hospital visits until after you hit the deductible, some HDHPs will pay for annual wellness exams and preventive care expenses before the deductible is met. The bottom line: if you’re comfortable with a higher deductible, and want to save money for the future—an HSA may be right for you. To get started, talk to your employee benefits consultant and your CPA about a plan that is best for you and your employees.
Miles Ross is a president and Jan LeTourneau is a chief com-pliance officer at CBIZ. Miles
can be reached at 913.234.1070 and Jan at 913.234.1083 or by email at msross@cbiz.com or
jletourneau@cbiz.com