HSA Summary

[TromboneAl]

I sent in my first HSA investment today, and I thought I'd summarize my research and findings for others who are considering it.

Conclusion: Having an HSA is a Good Idea.

With a trad IRA you deduct your contribution, but your withdrawals are taxable.  With a Roth, you pay taxes on your contributions.

With an HSA you never pay tax on the money, as long as you use it for medical expenses at some point in your life.  Even if you don't, there's no penalty after age 65, and there are no RMD's.

Also, I believe you can contribute even if you have no earned income.

HSA's were designed to help people with medical expenses, but in fact, their real value is as a retirement account.   That is, I think the legislators planned to have people put money in their account, and use it every time they go to the doctor, thus getting a n% discount (where n is their tax rate) on medical expenses.   But people who aren't living hand to mouth can let their HSA account compound tax free.

Conclusion: HSA Compatible Health Plans Are Good

If you're healthy,  take care of yourself, and have enough money to absorb non-catastrophic medical costs, an HSA compatible plan is probably cheaper than other plans, even if you don't use an HSA account.  My plan is 19% cheaper than the roughly comparable non-HSA plan.

Conclusion: If you shop around, the fees and hassles aren't too bad.

The main drawback to an HSA account is that the fees are generally higher, and the investment choices more limited than is the case for an IRA.

95% of HSA administrators just give you a bank account, with interest such as 1%.   The remainder give you the ability to invest in some mutual funds, and you usually incur extra brokerage fees if you choose this.  There are a few who make it easy to invest in mutual funds.

The fees are usually around $50-70/year.

Conclusion: The company Health Savings Administrators is a good choice.

This company seemed far better than others I investigated.  You can invest in one of 20 different Vanguard funds, and doing so is as easy as selecting a fund on the enrollment form.  Every time I phone their 800 number I got a knowledgeable rep immediately.  They have online access to your account info.

They have a $20 setup and a $35 annual fee, plus they charge 0.5% above the Vanguard expense ratio.

------------------------

Overall Conclusion: HSA Accounts make a good retirement account, although many people don't even know about them.

 

[cute fuzzy bunny]

Al - who can qualify for an HSA?

 

[TromboneAl]

Anyone who has an HSA compatible high-deductible health insurance plan.

 

[maddythebeagle]

thanks, al, good summary. For your individual situation, have you figured a cost point that you would use the money. I believe the things charge fees when you actually draw the money out, right? I would think that 100-200 bills you would just pay out of pocket but higher bills, you would think about using it.

 

[Robert the Red]

An HSA is a good idea, for those who are

• pretty healthy (so they're unlikely to need much of the money soon for health care)
• and can afford to make the max contribution for several years
• and you're in a high enough tax bracket for this to make sense

If health/luck holds for a few years, then you'll have built up a large buffer in the HSA for a bad health year (when you have to pay the high deductible and co-pay a lot more past that).  If health/luck holds for quite a while, then your HSA will be a tidy sum.  For when your body starts to decrepitizify.

I started one last year, thru FEHB (Federal Employee Health Benefits).  Most of my part of the premiums was deposited to the HSA, so that as long as our health was good, we were effectively paying almost nothing for health insurance.  That first year or two is the gamble; after that, we have enough in the HSA to cover the max out-of-pocket expenses for one year.

 

[Sheryl]

...and can afford to make the max contribution for several years

How much is the max. contribution?

 

[maddythebeagle]

2005 Maximum Annual Tax-Deductible Contribution to Health Savings Account
Individual: the lesser of 100 percent of deductible or $2,650 ($2,700 in 2006)

Family: the lesser of 100 percent of deductible or $5,250 ($5,450 in 2006)

Individuals between the ages of 55 and 65 may make a catch-up contribution of up to $600 in 2005 ($700 in 2006). The "catch-up" contribution amount increases annually until it reaches $1,000 in 2009.

http://www.ici.org/new/bro_hsa.html

 

[Targeting40]

Great Summary. We just switched to an HSA plan with United Healthcare. Right now the only investment option is a savings account but it is currently paying 4%. They also expect to offer some mutual funds in the near future.

 

[cute fuzzy bunny]

Two questions off the top of my head.

What happens if the US enacts a nationalized or state by state 'everybody is covered' plan like canada. I suppose you could use it for stuff they dont cover, like cosmetic/elective surgery and in home care or expensive nursing homes.

What happens to the balance when you die...is it passed on to your heirs intact and can become THEIR HSA or does it get cashed out and becomes taxable.

 

[cute fuzzy bunny]

By the way, this might be perfect for us whenever my wife retires, even though she has asthma and is on medication. Our monthly meds would only be ~100 out of pocket, and its been a long time since she had a major attack and had to take a trip to the hospital...which our current plan wouldnt cover anyhow as the existing "regular deductible" is high enough to make us pay for a single visit out of pocket. Due to the preexisting condition, we'd either have to cobra/hipaa into something or end up in the state risk pool. Either way, we'd be looking at 800-1000 a month and up in todays dollars.

Something like this coupled with the 4800/8000 deductible blue shield plan, which we might be able to hipaa into or might take us even with the pre-existing condition, we pay a few thousand out of pocket from the HSA, reserve some money annually, and we're covered for a huge thing like a car accident or cancer (god forbid).

 

[lazyday]

With a Roth, you pay taxes on your contributions.

Are you saying this isn't the case for an HSA? You can't deduct the contribution, can you?

...they charge 0.5% above the Vanguard expense ratio.

Per year? Ouch!


Thanks for keeping us up to date.

 

[cute fuzzy bunny]

Looks like you can deduct the contribution, perhaps even if you dont itemize.

The annual contribution upper limit is a bit weak though. A lot of the reasonably priced plans I looked at carried 5-8k deductibles. I'd like to be able to contribute the full deductible limit if I wished to. Just in case.

 

[Targeting40]

Contributions are tax deductible.  Here is an excerpt from the FAQ's at:
http://www.treasury.gov/offices/public-affairs/hsa/faq.shtml

Do my contributions provide any tax benefits?
Your personal contributions offer you an “above-the-line” deduction.  An "above-the-line" deduction allows you to reduce your taxable income by the amount you contribute to your HSA.  You do not have to itemize your deductions to benefit.  Contributions can also be made to your HSA by others (e.g., relatives).  However, you receive the benefit of the tax deduction.

 

[Cb]

Nice work, Al...thanks!

Cb

 

[ESRBob]

Al, Thanks --

You got me thinking when you talked about letting the funds ride over the long run for 'eventual use' on healthcare related matters. Would it make sense to fund one of these things at some point in your middle years, put the money in some Vanguard investments (sucking up the additional .5%, oh well, life in the big city) and planning to use the accumulated compounded funds to pay for nursing care in your old age? Could this become like a self-administered tax-advantaged long term care insurance?

And am I right that these are tax-deductible going in, then compound tax-free and are not taxed when you spend the $ on approved healthcare expenses?

 

[Targeting40]

All money put in is tax deductable.

All money spent on qualified purchases is not taxed.

You can use the money for unqualified purchases but you must then pay taxes on the money.  You also pay a penalty of 10% if you are under 65 and use the money for unqualified expenses.

 

[lazyday]

Thanks for replies on deductability. Hopefully not a problem that I have no earned income, just investments and Roth conversions.

So, an HSA is like a super-Roth! Almost too good to be true. (But, so is a Roth for that matter.)

My biggest problems with it:

-I don't trust congress to not screw with this someday. So, those who dilligently contribute the max for years, and never withdraw, are at risk of some nasty "success tax" in the future, in my opinion.

-Fees are high.

-Complicates life, for what at first will be a small amount of money. (If HSA's are here to stay, then this eventually won't be true. If they go away quickly, could be a big nuisance if fees go up, especially for those who are extremely healthy and can't spend the money even if they wanted to.)

In spite of those concerns, an HSA seems like a good risk. Will have to look into it some more...

 

[Oliver]

Good link to HSA Administrators. (from Kramer) http://www.health--savings--accounts.com/admins.htm

Oliver

PS Posted this on another forum but you might find it interesting.

Rumor has President Bush will push for increasing the incentives for these accounts.

Oliver

NYT - Health Savings Accounts Attract Wall St. http://tinyurl.com/boscg

Banks, credit unions and money management firms are now quietly positioning themselves to become central players in the business of health care, offering 401(k)-type accounts to cover future medical expenses.
...
Two years ago, not a single major bank offered a health savings account. Only seven small banks had any sort of plan. Today, more than 300 financial services companies, including big banks, are taking deposits or will be soon. About 150 more are on the way. Some of the country's biggest health insurance providers have started their own banks.
....
The idea behind the accounts is simple: forced to pay out of pocket for medical care, Americans workers will spend health care dollars more wisely. The way it works is more complex. Americans under the age of 65 with a high-deductible health care plan can contribute tax-free to the new 401(k)-like account as much as $2,700 this year for individuals and $5,450 for families, or the amount of their deductible if it is less. Unlike health reimbursement plans, which were controlled by the employer, health savings accounts belong to employees even if they change jobs.
...
Four years ago, United Healthcare started Exante Financial Services, a Utah-based bank that allowed it to become the first company to offer its customers the high-deductible health insurance policies as well as savings accounts. In December, the Blue Cross Blue Shield Association said it was planning to charter a similar institution, Blue Healthcare Bank, an online bank.
...
Now, some financial institutions are urging the Bush administration and Congress to raise the tax-deductible contribution limit to encourage consumers to put more money in their accounts — a proposal that President Bush is expected to endorse in his State of the Union speech.

http://www.msainfo.net/deductible.html

Some people believe that because there is no “co-pay” that the Dr. visits and Rx drugs are “not covered”. This is incorrect (at least with most HSA-qualified policies--there are a FEW such policies that allow you to "carve-out" certain out-patient expenses, such as Rx drugs--our network of agents do NOT endorse or recommend such policies). With most HSA-qualified policies, Dr. visits and Rx drug expenses are “covered,” they are just not reimbursable until such point as the deductible is satisfied for the year (only covered expenses accumulate toward the deductible so be sure you know what expenses are actually covered under your insurance contract).

Other covered expenses generally include the same covered expenses you would expect to be covered under a high-quality comprehensive major medical policy, including but not limited to, physician’s services in and out of the hospital, diagnostic testing in and out of the hospital, hospital charges, surgical expenses, transplants, etc. Of course, exclusions and limitations apply. For instance, dental and vision expenses are typically not covered under the insurance policy (but are allowable expenses for tax-free withdrawals from the savings account).

 

[free4now]

That last quote points out that your HSA funds can be used for both "covered" and non-covered charges. Meaning you can use it for qualified healthcare whether the insurance plan covers it or not. I wonder if this is in some sense a way for healthcare providers to move people towards paying for things themselves that insurance won't cover. Seems like enough weasel room for the insurance companies to start saying "don't worry that we don't cover such and such procedure; your HSA will pay for it".

I'd also wonder how this will affect charges. We all know that healthcare providers charge self-paying people much more than the negotiated fees the insurance companies pay. I wonder if we will be able to continue getting the negotiated fees for things that we are now paying for ourselves out of the HSA. I'd hope we would get negotiated fees for covered expenses, and it would be very cool if we could get negotiated fees for non-covered expenses as well.

 

[Oliver]

2005 Maximum Annual Tax-Deductible Contribution to Health Savings Account
Individual: the lesser of 100 percent of deductible or $2,650 ($2,700 in 2006)

Family: the lesser of 100 percent of deductible or $5,250 ($5,450 in 2006)

Individuals between the ages of 55 and 65 may make a catch-up contribution of up to $600 in 2005 ($700 in 2006). The "catch-up" contribution amount increases annually until it reaches $1,000 in 2009.

http://www.ici.org/new/bro_hsa.html

The amounts listed above are the annual "contribution", assuming you started the plan in January. The amount you can invest is prorated by the number of months in the HSA plan. If you start the plan in March, the amount is the lesser of 10/12 of the annual contribution amount or your deductible -> join in January or early in the year or wait till the following year.

Oliver

 

[MileKing]

I'd also wonder how this will affect charges.  We all know that healthcare providers charge self-paying people much more than the negotiated fees the insurance companies pay.  I wonder if we will be able to continue getting the negotiated fees for things that we are now paying for ourselves out of the HSA.  I'd hope we would get negotiated fees for covered expenses, and it would be very cool if we could get negotiated fees for non-covered expenses as well.

My company offered a high-deductible (HSA) option for the first time this year. The plan works the same way as the other option (an HRA) in that the negotiated fees apply to all services you receive from doctors who are in the plan. You go to the doctor, the doctor sends the info to the insurance company, the negotiated fee for the service is applied, you are notified of the charge, the doctor bills you the negotiated fee, and you pay with your HSA funds.

I don't believe non-covered expenses have a negotiated fee since, by definition, the insurance plan doesn't cover them. You can only use HSA funds for non-covered expenses if they are considered qualified expenses by the IRS. What counts as qualified expenses is covered in one of the IRS publications. So things like over the counter cough medicine, which are not covered by most insurance plans, can't be paid for out of HSA funds either since they are non-qualified expenses under IRS rules.

 

[lazyday]

Bush didn't say much in the speech (http://www.npr.org/templates/story/story.php?storyId=5181905 see paragraph with text "health care")
but NPR http://www.npr.org/templates/story/story.php?storyId=5181934 also looked at

Background materials provided by the White House

and said that

The president's proposals would give HSAs -- already tax free -- even more tax advantages. It would allow individuals who buy their own insurance the ability to deduct premiums for the high deductible insurance that accompanies an HSA.

The President will also propose tax credits for low-income Americans to buy insurance -- again, only insurance that goes with an HSA.

(some FIRE's are low-income Americans)

 

[ESRBob]

What I liked (read in WSJ today) was his efforts to push for a national market for health insurance. As one living in the two 'worst' states for healthcare insurance (NY and NJ) I was intrigued to read that healthcare costs here are as much as 10x higher than in other states. The whole movement to make health insurance less of an employer-model and more portable like a 401k will help early retirees (along with plenty of others).

 

[maddythebeagle]

The president's proposals would give HSAs -- already tax free -- even more tax advantages. It would allow individuals who buy their own insurance the ability to deduct premiums for the high deductible insurance that accompanies an HSA.

If you have a small business cant you do this anyway? I thought that was one of the issues people brought up here to do in FIRE.

 

[wabmester]

If you have a small business cant you do this anyway? I thought that was one of the issues people brought up here to do in FIRE.

Yes, if you have self-employement income, your health insurance premiums are fully deductible.