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Should You Consider an HSA?
The Tax Relief and Health Care Act of 2006 (TRHCA) that went
into effect this year made it a bit easier for both employers
and their workers and self-employees to obtain Health Savings
Accounts, a kind of IRA for health care expenses.
Health savings accounts were created as part of the Medicare
Modernization Act of 2003 but have not been wildly popular because
they’re complicated. Anyone under age 65 who buys a qualified
high-deductible health plan (HDHP) can open an HSA. However, you
can still own an HSA and be covered under other types of insurance
policies that cover liability, dental, vision and long-term care
needs, as long as the same expenses are not covered by both your
HSA and the insurance policy.
How do I find a qualified policy? If you’re employed,
your employer obviously selects a qualified option and makes that
available to you. However, for individuals or sole proprietors
buying such policies, you need to put in some research to make
sure you get the right plan for you. You need to ask if your current
insurer has a qualified plan, and there are Web sites you can
search for ideas -- www.hsainsider.com
and www.healthdecisions.org.
Will I automatically qualify for the HSA option at my company?
No. Under the new law, employers have the right to offer such
plans to those who own 5 percent or less of the company or make
less than $100,000 a year. However, if you are self-employed,
there are no income restrictions.
What are the maximum contributions? In 2007, individuals
can deposit up to $2,850 in their HSA, even if the minimum single
person deductible of $1,100 is selected. Insured individuals with
family coverage can deposit up to $5,650, even if the minimum
family deductible of $2,200 is selected. For HSA holders 55 and
up, they’re allowed to make an extra catch-up deposit each year
until the date they enroll in Medicare. In 2007, the maximum allowable
catch-up deposit is $800. This catch-up amount will increase to
$900 in 2008 and will remain at $1,000 beginning in 2009.
How do I get started? The new law allows employees the
one-time opportunity to roll over their existing balances in flexible
spending accounts or health reimbursement accounts into an HSA.
The new rules also allow a one-time opportunity for an individual
to transfer in funds equal to the relevant HSA contribution maximum
for the year.
If I find a policy, should I automatically buy it? No.
Since this is a tax issue as well as an insurance issue, it makes
sense to discuss this decision with your tax adviser or financial
planner.
What’s the difference between an HSA and a medical flexible
spending account (FSA)? One important difference is that HSAs
allow balances to be carried forward year-to-year, growing on
a tax-free basis as long as they’re used for medical expenses.
On the other hand, Medical FSAs generally require that the money
you contribute each year has to be spent by a particular date
(yearend or otherwise) or you’ll lose it. But in certain cases,
such as when you incur medical expenses early in a year, you can
be reimbursed by your FSA without having to fully fund it - so
FSAs might be a better deal. Get help from your tax or human resources
professional.
Can I have both an HSA and a flexible spending account?
It depends. In any one year you may maintain both accounts but
each year the FSA must be used up and can’t be carried forward.
You may want to split your money between both to cover non-qualified
expenses under the HSA rules. If your FSA provides for limited
reimbursement for items not covered by your health insurance plan
(such as dental, vision, or wellness care), you can use an HSA
for items covered by your plan and your FSA for medical expenses
that are not. Obviously, double-check this with an expert.
What happens if I need to use my HSA dollars for any non-medical
reason before age 65? You’ll get hit with additional tax of
10 percent, plus any withdrawals will be taxed at ordinary income
tax rates. After age 65, you’re free to use the funds for any
purpose without penalty, but non-medical withdrawals are still
taxable.
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