Thursday, February 17, 2005

HSA's in plain English

With the Medicare Prescription Drug, Improvement and Modernization Act, the government created Health Savings Accounts (HSA's). This is money put into an account, owned by an individual, to pay for future medical expenses. This money is tax deductible "above the line" (you don't have to itemize), has tax deferred growth (no tax while it grows), and is tax free if used for qualifying medical expenses.* (The qualifying expenses are more liberal than what any health insurance policy will pay.) In order to contribute to an HSA, you must be enrolled in a "High Deductible Health Plan" (HDHP). The name is misleading in that not just any high deductible health plan will do. The HDHP plans do not have co-pays for doctor visits or prescriptions. You will be subject to the plan deductible and have to be prepared to pay the full medical bills until the deductible is reached. (Preventative care can be paid prior to the deductible.) On the other hand, the doctor visits and prescriptions are counted towards your deductible. Doctor and prescription co-pays generally do not. The key to using this type of arrangement is to have the HSA set up immediately when the HDHP plan is approved and make regular, automatic deposits.

With this type of health care coverage, you have the insurance plan (HDHP) and the tax deductible savings account (HSA). The HSA plans have a minimum deductible of $1000 for individuals and $2000 for family (2 or more). The family deductible is an aggregate deductible. When the medical bills for all family members together reach the deductible, the plan kicks in. They also have a maximum out of pocket (including the deductible) of $5100 individual and $10,200 family. The amount that you are able to contribute to your HSA and deduct from your taxes is the lesser of the plan deductible and the maximum allowed by law, $2650 individual and $5250 family. (These maximums will be indexed annually). For individuals age 55 and over, there is a "catch-up" provision that allows additional deposits into your HSA. For 2005, it’s $600. The "catch-up" increases $100 each year until it levels off at $1000 in 2009.
The idea of an HSA with a qualifying health plan (HDHP) means that consumers have to look at their health insurance a different way. In actuality, you have to look at annual health care costs and not just insurance premium to determine what is best for you. To demonstrate this, I've included a typical comparison. This is how I would present it to any client.

For this example I will use a family; Husband, 45 and Wife, 40 with two children, 10 and 7, living in Miami-Dade County, Florida. Let’s use a standard PPO plan with a doctor co-pay of $25, a $750 deductible and 80/20 co-insurance to $10,000. This plan would have a monthly premium of about $1300. In the best case scenario, where no one needs medical care, the annual health care costs would be $15,600 ($1300 X 12 month’s premium). In a worst case scenario, where two or more family members spend beyond the deductible and co-insurance, the health care costs would look like this:
$15,600 - Insurance Premium
$ 1500 - Deductible ($750 X two individuals)
$ 4000 - Co-insurance (20% of $10,000 X 2 people)
$21,100 - Maximum health care cost for the year (plus an unlimited amount of co-pays)

Obviously their health care cost would probably be somewhere between the minimum of $15,600 and the maximum of $21,100.

Now let’s take the same family and see how they do with an HSA plan. We are going to use a $5150 deductible so we can maximize the tax deduction. The plan will pay 100% after that. This plan would have a monthly premium of about $600. If we go again with the best case scenario, the family health care costs would be $7200 ($600 premium X 12 months). In the worst case scenario the health care cost would be $12,350 ($7200 in premium and $5150 in deductible). As you can see, with the HSA plan, even the worst case scenario would be less expensive than the best possible case with the standard PPO plan.

In order for this family to utilize this plan properly, they would pay the monthly HDHP premium of about $600 to the insurance company. They would also deposit $429.16 ($5150X12 months) into an HSA account that they set up at the inception of the HDHP. (Remember there are no doctor or prescription co-pays. You must be prepared to pay the full amount prior to reaching the deductible.) The family needs to budget $1030 (Premium and HSA deposit) every month. You can use the monies in the HSA to pay the medical charges you incur throughout the year. Whatever you don't spend of the $5150 (HSA money) at the end of the year, you keep! If you can afford to pay for any or your entire share of the medical expenses with other money, you can do it. You don’t have to spend your HSA money. The HSA money grows tax deferred. (You do not pay tax on the interest while it grows.) When you are eligible for Medicare, you can withdrawal the money without penalty. You pay tax on the withdrawals as earned income. If you use the money for medical expenses, its still tax free.If you would like to see if an HSA plan is right for you, you can request information. See some of the fequently asked questions, and the answers.
Request for an HSA Plan Quote

* For tax advice please consult your accountant or tax attorney. It is not my intention to offer or provide tax advice

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