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Health Savings Account offers peace of mind

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Health Savings Account offers peace of mind

Web Posted: 04/12/2004 12:00 AM CDT

San Antonio Express-News

The newly created Health Savings Account became available in January this year after President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

There's been abundant discussion about its costs and benefits, but the section of the law providing for HSAs will be very beneficial to many families and individuals. They're a considerable expansion over the Medical Savings Accounts they replaced.

HSAs work like IRAs and, once your account has had some time to build up, the benefits will give you great peace of mind. For instance, an HSA can pay for qualified medical expenses until you reach the higher deductible required for an HSA.

It can pay for dental expenses or medical expenses not typically covered by health insurance, such as eyeglasses and some over-the-counter drugs. It can make COBRA payments or premiums for nursing home insurance.

If you're over 65, your HSA can pay premiums for Medicare Part A or B, Medicare HMO or your share of employer-sponsored health insurance.

We're all familiar with IRAs. You can put money in an IRA each year (up to certain limits that depend on age and earned income) and deduct that contribution from your taxable income (as long as you're below a certain income ceiling).

Even if your IRA isn't deductible due to higher income, it's still a good deal as your account grows tax-free until you begin taking withdrawals that are penalty-free from age 591/2 but must be taken at age 701/2 as minimum required distributions, or MRDs.

Withdrawals from traditional and deductible IRAs are taxed as ordinary income though probably at a lower rate at that point. Roth IRA withdrawals, of course, have no MRD and always are tax-free.

IRAs are, without doubt, the best way to accumulate funds for retirement. The compound effect of delayed income taxes and capital gains taxes is very powerful.

It's important to note that HSAs are brand new and still an evolving product. The questions still are being answered. Very briefly, here's how they work:

Like traditional IRAs, contributions to HSAs (up to certain limits) are before tax, and earnings are tax free. The big plus is withdrawals also are tax-free as long as they are for "qualified" health-related expenses.

An HSA is something you own, it's portable and permanent. It doesn't have the "use it or lose it" feature that's a negative with other flexible health reimbursement accounts. Your contributions will carry over for future needs if not used for current expenses. Unlike IRAs, there are no required distributions.

If you're not eligible for Medicare (under 65), you are eligible for an HSA. An initial requirement is you must carry "qualified, high-deductible health insurance," but this will significantly cut your insurance premiums, which can then be funneled to your HSA instead.

For 2004, a "qualified" plan has a minimum deductible of $1,000 for singles or $2,000 for a family and limits out-of-pocket expenses to no more than $5,000 for an individual or $10,000 for a family. Premiums are significantly lower than typical coverage with a deductible of $250 or $500.

Your existing health insurance may qualify for an HSA simply by raising your current minimums and limits. On the other hand, you may need to convert to a new plan. The best way to find out is to consult your health insurance provider.

With the qualified insurance side in place, you can open a cash account for your HSA through a qualified HSA custodian — your insurance company, for example, or your financial institution — much as you would an IRA. Withdrawals are easy — check, debit card, custodian check — depending on where you set up your account.

Anyone can contribute to an HSA as long as the aggregate annual contribution amount does not exceed the capped amount. This adjusts every January based on the Consumer Price Index.

For 2004, the capped amount is the lesser of the high deductible or $2,600 for an individual and $5,150 for a family. If you are 55 or older in 2004, you're eligible to make an additional $500, tax-deductible contribution, but contributions cease once you're eligible for Medicare.

If you make withdrawals for nonhealth-care-related expenses, this will be taxed as ordinary income and, if you're under 65 and take out funds for a noneligible expense, you'll also pay a 10 percent penalty.

The return on the investment in an HSA depends on where you set up your account — some offer a fixed interest rate and others allow you to invest in mutual funds or other securities. In addition to producing income, contributions to an HSA reduce your taxable income and give you a cushion for future needs.

So where do you sign up? Since this is a brand-new ball game, there still are big questions. Start with your health insurance provider or your employer to see if they offer a plan that qualifies for an HSA.

The good news is that a recent Hewitt Associates survey indicated over 60 percent of employers are likely to offer their employees access to HSAs. Since these are more likely to be part of 2005 benefit plans, the IRS will allow qualified expenses incurred in 2004 to be paid in 2005, provided the HSA is opened by no later than April 15, 2005.

HSAs allow you to cut your insurance premiums, save the extra money to grow tax-free and best of all to benefit from this long-term savings plan now. Since the only negative I could find is they don't cover premiums for Medicare supplemental insurance, HSAs sound like a rare deal to me.


Jeanie Wyatt is a CFA and CEO of South Texas Money Management.

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