The
open enrollment season for next year's benefits elections is already underway.
Whether you're an employee being faced with new health insurance options through your company plan, run your own company like me, or purchase individual health insurance, the choices you make regarding your health insurance are an important part of your 2008 financial strategy.
A Misinterpreted Benefit
Last month, I spent some time looking into health insurance options for my small group of employees and myself. It was an unsettling exercise as I reviewed the various plans and calculated the increase in premiums (which, according to Hewitt Associates, are set to rise an average of 8.7 percent this year).
Around the same time, I caught
an episode of ABC's "20/20" that profiled the success popular grocery chain Whole Foods has had with the health savings accounts (HSAs) they offer their employees. After watching the show, I decided to do a little more digging to see if an HSA might make sense here at FinishRich Media.
What I found is that there are a lot of misconceptions about HSAs, including that if you don't use the entire balance of your HSA before the end of the year, you forfeit it. That's not true -- with an HSA, there's no "use it or lose it" rule.
What You Need to Know
Here are the top seven things I discovered about HSAs that might help you determine if this type of account is right for you:
1. HSAs are essentially tax-free medical savings accounts.
You can think of an HSA as a 401(k) or an IRA dedicated to paying for your medical expenses. You contribute to the account with pre-tax dollars if you save through your employer's plan, or your contributions are tax-deductible if you have an individual plan. Contributions are invested much like your retirement savings (investment options vary by provider), which allows for compounded growth of your savings over time.
When you have qualified medical expenses, you can use the money you've built up in your HSA to pay for them without incurring any tax consequences.
2. You need a high-deductible health plan to qualify.
To be eligible for an HSA, you also need to have medical coverage under what's called a high-deductible health plan (HDHP). For 2008, an HDHP is defined as any health plan with an annual deductible of at least $1,100 and annual out-of-pocket expenses not exceeding $5,600 for individuals.
For family coverage, an HDHP must have an annual deductible of at least $2,200 and annual out-of-pocket expenses not exceeding $11,200. You also can't be over 65 or have any other medical coverage other than your HDHP.
According to Hewitt's research, more than 20 percent of companies already offer, or plan to offer, an HDHP with an HSA this year. Combining the two lessens the pain of having to shell out so much money from your own pocket before your coverage kicks in.
3. You contribute to HSAs just like retirement accounts.
If your employer offers a plan, you can make payroll-deducted contributions on a pre-tax basis. If you're not going through an employer, you make ordinary contributions with after-tax money, which you can then deduct from your taxes.
What's even better is that some employers -- like Whole Foods -- also make contributions to HSAs on behalf of their employees. Does yours?
For 2008, the maximum amount you and/or your employer can contribute to an HSA is $2,900 for individuals and $5,800 for families. Those age 55 or older can make additional catch-up contributions of up to $900 for 2008.
As with IRA contributions, you have until April 15 of the following year to make your annual contributions. For instance, you have until April 15, 2008, to make your 2007 contributions (or establish a new account for this year). Note that
2007 contribution limits are slightly less than the 2008 limits I already mentioned.
And as I mentioned above, your unused contributions aren't lost if you don't use them within a given year. Rather, they simply remain in your HSA and continue to grow over time with interest or investment earnings (depending on how you have them invested) until you use them.
4. Eligible expenses go beyond those that count against your deductible.
Many of the expenses you can pay for with money from your HSA go to cover the high deductible you must meet before your insurance starts paying. But you can also use the funds in your HSA to pay for other medical expenses not typically counted toward your deductible -- such as some over-the-counter medications, COBRA insurance, or qualified long-term care insurance.
You can find a complete list of qualified medical expenses in
IRS Publication 502.
If you're younger than 65, you can use the money in your HSA for anything other than these qualified expenses. However, much like with an IRA, you'll be responsible for ordinary income taxes -- and there's a 10 percent tax penalty on the amounts you use.
5. HSAs offer real flexibility, and portability.
Who hasn't felt confined by their HMO or PPO plan when they need to see a doctor who isn't in the plan's network?
When you contribute to an HSA, you have a lot more freedom to shop around for medical care, as high-deductible health plans typically don't use doctor networks. If you're like me, you may find that some doctors aren't even taking insurance any more.
Paying for your doctor visits through an HSA also encourages smart consumers to actually start asking doctors about their fees. This, in turn, could even create an incentive for medical providers to keep their fees competitive. Imagine that!
Another huge benefit of HSAs is that they're portable from employer to employer, or from one provider to another. When you leave your job, you get to take the balance of your HSA with you and either roll it over to your new employer's HSA plan or open an individual plan with another provider. With an HSA, you're in control of your money.
6. Once you hit 65, the money is all yours -- penalty free.
Let's say you contribute to your HSA for years and years, and actually have lower medical expenses than you expected. When you turn 65, you can start tapping into your HSA for any reason, not just qualified medical expenses.
You'll still pay ordinary income taxes on non-qualified expenses because you funded it with pre-tax dollars, but there's no penalty.
7. HSAs aren't the same as HRAs or FSAs.
I know, all that alphabet soup can be confusing. Let me break it down for you.
HRAs are health reimbursement accounts much like HSAs, with two major differences: Only employers fund HRAs, and HRAs aren't portable. In other words, if you change jobs or health insurance companies, you may lose any balance in your HRA.
FSAs are flexible spending accounts, and there are generally two types. First is the health care spending account, which is used almost identically as an HSA, but with one major difference: Whatever you don't use at the end of a calendar year is forfeited (commonly known as a "use it or lose it" plan).
Next, there's the dependent care spending account, which is used for tax-advantaged payment for child- or elder-care. Neither of these plans are portable from one employer to another.
How to Find Out More
Ask your benefits department if your company offers an HSA. Then see if you need to switch health plans and enroll in a high-deductible option (if you're not in one already).
If you're in an eligible medical plan but your employer doesn't offer an HSA, inquire about opening one on your own. They're now being offered by some banks, brokerage firms, mutual fund companies, and even insurance companies. To find out more, check out
First HSA or
HSA Bank online.
For more details about health savings accounts and high-deductible health plans, the Treasury Department offers
an easy-to-read brochure. Check it out, and get ready to take control of your medical care and how you pay for it. Taking advantage of tax benefits like this one -- for expenses you'll have anyway -- is an excellent way to save today for a better tomorrow.
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