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Ask About Health Savings Accounts

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By | May 26, 2012

Dear Toolkit,

Can you give us the inside skinny on the Health Savings Accounts we're starting to hear so much about these days? Will these save us from escalating insurance costs?

Feeling Poor(ly)

Dear Feeling,

Health Savings Accounts (HSAs) are designed to be a new way for individuals and small businesses to obtain affordable health insurance. They've been described as Health Care IRAs. . .a marriage of a high deductible health plan (HDHP) with a tax-exempt savings account.

A Health Savings Account is quite simply a place where an individual can deposit untaxed dollars to be used for current as well as future medical expenses. And contributions to fund the account can come from the employee, the employer, or both.

A self-employed individual may have an HSA, but must pay into it with after-tax dollars. But they will have the advantage of deducting their medical expense on their Form 1040, which employees with untaxed contributions will not have.

Health Savings Accounts were an outgrowth of the Archer MSAs (which can no longer be created, although existing ones can be maintained.) They also have some features of FSAs, but the differences between those pioneer programs and the new HSAs can be extreme. MSAs and FSAs are controlled by the employer. HSAs are owned by the employee. . .hence they're truly portable.

FSAs are "use it or lose it". . .you had to guess what your medical expense might be for the year and, if you overestimated, any funds left on deposit at year's end were forfeited. HSAs, like MSAs, can be carried forward to retirement. And, unlike their MSA predecessors, HSAs are available to almost anyone with a high-deductible insurance plan.

The 2012 annual deductible for the insurance plan must be at least $1,200 for an individual and $2,400 for a family. The annual out-of-pocket (including deductibles and co-pays) cannot exceed $6,050 (individual) or $12,100 (family coverage) for 2012. The 2012 contribution limits are $3,100 for an individual or $6,250 for a family. (An extra $1,000 can be contributed if the account holder is over age 54.)

HSAs can be a trifecta investment. . .triple tax-free: deposits to the account are in tax-free dollars, earnings grow tax-free, and withdrawals are tax-free when used to pay off qualified medical expenses. Their three most admirable properties are affordability, tax-free status and portability.

However, distributions are subject to income tax and a 10 percent penalty if used for non-medical expenses, but the penalty is waived for non-medical distributions made after individuals reach age 65 or become disabled.

One disadvantage of HSAs may be that the ability of the consumer to do comparative shopping for healthcare can be hindered but the unwillingness of many hospitals and other providers to disclose their pricing. Hopefully, over time, consumer pressure may remedy this practice.

The Treasury department has an excellent web site that covers HSAs in much more detail that we can here. Check it out and bookmark it for future reference.

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