HEALTH SAVINGS ACCOUNTS: AN ANSWER TO RISING HEALTH CARE COSTS
Mr. Laudien is a financial advisor with Merrill Lynch in Princeton, NJ, member of Securities Investor Protection Corp.
RISING HEALTH CARE COSTS ARE a top concern for many individuals in the <?xml:namespace prefix = st1 />
today. Who should bear the cost of health care that is forecasted to rise at 2 to 3 times inflation?employers or employees? One possible solution to help lessen the burden on both is a health savings account (HSA).
The HSA was established as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The benefit of establishing an HSA is that savings used for qualified medical expenses for employees, spouses, and dependents are free from federal income taxes.
ELIGIBILITY AND CONTRIBUTIONS
Individuals younger than age 65 are eligible to contribute to an HSA if they are covered by a high-deductible health plan (HDHP), not covered by any other health plan, and cannot be claimed as a dependent on another individual?s tax return. An HDHP has a deductible of $1100 for individual coverage or $2200 for family coverage in 2007 and has caps on out-of-pocket expenses. Currently, the contribution limit per year is $2850 for individual coverage and $5650 for family coverage. Individuals aged 55 to 64 years are able to contribute an additional $800 in 2007. Contribution limits are indexed annually for inflation, which is another benefit of the HSA plan. If an individual creates an HSA and later becomes ineligible, additional contributions are prohibited, but they may continue to maintain the existing account. Unused balances can be rolled over from year to year, unlike a flexible spending account (FSA). The Table below is a hypothetical example of how contributions to an HSA could build over time.
Note: Because HSAs must be paired with HDHPs, many participants will need to use these funds annually to satisfy medical expenses below the deductible. The likelihood of building up assets in the account may be very low, as all but the wealthiest participants can afford to both contribute to an HSA and pay several thousand dollars of current medical expenses out of pocket.
Withdrawals from an HSA are tax-free if used for qualified medical expenses?generally those that would qualify for a medical or dental tax deduction. Distributions not used for qualified medical expenses are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death, disability, or distributions made by individuals 65 years of age and older.
ROLLOVERS, TRANSFERS, AND INVESTMENTS
HSAs are portable and allow participants to roll over accounts as long as the process is completed within 60 days. Rollovers also may be made from Archer Medical Savings Accounts and some FSAs or Health Reimbursement Arrangements from 2007-2011 with some restrictions. Permitted investments are similar to those for individual retirement accounts (no insurance, no collectibles, etc). Interested individuals should contact their HSA administrator to understand what restrictions on rollovers or investments may apply.
More information is also available in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, which can be downloaded from www.irs.gov.