We’re your HSA experts…

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 authorized the establishment of health savings accounts (HSAs), effective January 1, 2004. In addition to tremendous tax benefits, these accounts provide a means to finance healthcare costs with dollars you are already spending!!

How they work: (In Layman’s Terms)

I am going to spell this out in layman terms for those that prefer the short-winded explanation.  (If you prefer the Full Technical version, scroll down half a page to see it.)

In short, a Health Savings Account is like your Checking and Savings account that you have with your bank, but the monies that goes into this account, goes in Tax Free (or Tax deducted) and grows interest Tax Free.

In order to open an H.S.A account, you will need to have an H.S.A Compatible Health plan, which is a High Deductible Health Plan (HDHP) that meets the Federal IRS guidelines.

Why would this benefit me? I will save a ton of money in premium, and I can take that savings and put it into a Tax Free H.S.A account, that will allow me to spend money that I would’ve spent in premium anyway, on care when I need it.

Let’s do the Math:

A Female – age 32 wants a plan with a $10 copay plan with $10/$25/$45 copay for prescription and a $250 copay for In-patient hospitalization visits.

This plan will cost her $302 / Month.

Now, for an H.S.A compatible plan with a $1200 Deductible, and then $20 copay for office visits and $5/$25/$45 Rx copay after the deductible has been met; this plan will cost her $117 per month.

By Choosing the H.S.A plan, she saves $185 per month. That’s: $2220 Per Year!

Now, let’s take $1200 from that savings and put that into her H.S.A account to match her Deductible.

She will still save $1020 annually even if she maxes out her Deductible!

But let’s say she has a good year, and only had a couple office visits and prescriptions and paid out $400 in medical expenses.

Now, 5 years later, with a couple good and bad years in there, (assuming she has been contributing $1200 per year), she has accumulated $3000 in her H.S.A account. Then she cancels the health plan b/c she got married and enrolled in her spouse’s group plan that has copays.

She gets to keeps her account (with the bank), also keeps the funds in there, however she cannot contribute anymore funds into her account (tax free).

How they work: (in full technical detail)

Health Savings Accounts are composed of two parts, a High-Deductible Health Plan (HDHP) and a Health Savings Account (HSA). The HDHP is provided by the insurance carrier, and meets the Federal guidelines for qualification (i.e. a deductible of no less than $1,150 for individuals and $2,300 for families, 2009 year). As a result of the higher deductibles, the monthly premiums are drastically reduced (as compared to fully-insured, low or no-deductible plans). The HSA is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee. It’s an account that you own, and it’s used to deposit tax-preferred contributions by you, and to pay qualified medical expenses you and your family members incur. The accounts are portable, and the contributions remain in the account FROM YEAR TO YEAR UNTIL YOU USE THEM!! This is in stark contrast to traditional insurance plans that start over from scratch each year, WHETHER YOU USE THE INSURANCE OR NOT!!

Tax benefits:

Contributions to the HSA (limited to $3,000 for an individual or $5,950 for a family, 2009 year) are fully deductible from gross income, EVEN IF you do not itemize deductions. If you are 55 years of age or older, you are allowed an additional $1000 in catch-up contributions. In addition, the contributions are not subject to the 7.5% AGI floor for medical expense deduction. Earnings in the account are completely tax-free, provided that distributions from the account are used for qualified medical expenses (i.e. allowed by Section 213 (d) of the Internal Revenue Code).

Eligibility:

Anyone can set up an HSA, but there are a few restrictions:

• You must not be eligible for or enrolled in Medicare
• You cannot be claimed as a dependent on someone else’s Federal income tax return
• You cannot have other general health insurance coverage (including a healthcare flexible spending account)

Recordkeeping:

You need to keep receipts, EOBs, etc. for all covered medical expenses you incur. These do not need to be filed with your annual income tax return, but should be kept with your tax records. In addition, you will receive FORM 1099-SA from your trustee, which details distributions made from your account during the year. The amounts shown on FORM 1099-SA need to be reported on FORM 8889 (filed with your FORM 1040). It is important that good records are maintained, because distributions used for other than qualified medical expenses are subject to income tax and a 10% penalty. In addition, excess contributions to your account are subject to a 6% excise tax—making it imperative that you chose a reputable trustee.

Our spin:

Although very advantageous, the tax consequences of HSAs should receive secondary consideration to the primary advantage of these accounts -- the control and financial flexibility they afford you in determining how to spend your healthcare dollar. Because these accounts can grow year after year, they should be part of any sound financial planning that you do.

There is a minimal one-time account setup fee associated with the HSA (typically $25), and there are monthly fees associated with maintaining the account (ranging anywhere from $2.00-$4.50, depending on your selection of trustee) – but don’t lose sight of the big picture!! By getting emotionally attached to these minor fees, you run the risk of missing out on taking advantage of a government-provided subsidy. It’s one of the few instances where the Federal government is giving, rather than taking….

For additional information, visit the IRS forms and publications website at www.irs.gov/formspubs/index.html, you can download/view the following HSA-related topics:

Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans

Publication 502 – Medical and Dental Expenses