Finally, a tax advantaged health care program that cuts across all income levels and lifestyles – the new Health Savings Accounts (HSAs) – a real boon for people who pay for their insurance coverage.
The HSAs slipped into December 8th The Medicare Prescription Drug Improvement and Modernization Act of 2003 as a rider sponsored by House Speaker, Dennis J. Hastert. .(Title XII, 1201)
The old Medical Savings Accounts (MSAs), created in 1996 were largely ignored by taxpayers due to their restrictions and complexity. Congress limiting MSAs to the first 750,000 participants. Less than 10% of that number ever applied.
Prior to the creation of the Health Savings Accounts, a Treasury ruling was issued a year and a half ago allowing large companies to establish Health Reimbursement Arrangements (HRAs). A step in the right direction, it attracted about 1.5 million employees. It also encouraged employers to move more of the burden of medical insurance costs on their employees. You can see the result of that in California where supermarket workers have been on strike since October 11, 2003.
These new Health Savings Accounts are expected attract millions. One of the main differences is that HSAs may be used by anyone, not just working people. That opens these accounts up to the entire population.
According to Tim Bireley, vice president of small group products at Milwauee-based Fortis Health, this is a potential opportunity for as many as 40 million people.
Especially excited are the folks the non-profit Working Today, who have been advocating for portable health care for workers for years. Elise Koll, membership services manager, says HSAs are “more than just portability in health care. They are like IRAs, letting you put the unused money away towards retirement. They remove the employer-ownership of the plan, and put the control into the employees’ hands.”
Though the bill was just passed, some companies are already starting taking advantage of the provisions in this tax bill. South Carolina CPA Carol C. Lawlor tells of one corporation that has already implemented an HSA which is expected to save the company over $65,000 in 2004 in reduced insurance premums.
WHERE DO THE SAVINGS COME FROM?
Benefits come from two sources – taxes and lower insurance costs.
The tax benefits start with the contributions to the HSAs, which are fully deductible, even when you don’t itemize. They act just like IRAs in that respect. You even get the same deadline, April 15th, to make your final contributions for the previous year.
You may contribute up to $2,600 if you are single, or up to $5,150 with a family. There’s an additional catch up contribution of $500 if you are age 55 or older in 2004. (See table for details)
In a 25% tax bracket, the savings range from $650 to $1287.50. In addition, being able to deduct your medical expenses may even drop you into a lower bracket.
Aside from requiring a minimum deductible of at least $1,000, HSA medical coverage permits no co-payments for treatments. Finally, you can walk into a doctor’s appointment without your checkbook.
|Who is eligible?||1) You are covered under a high deductible health plan (HDHP)|
|2) You have no other coverage that is not a high deductible plan|
|3) You are not eligible for Medicare coverage|
|4) You may not be claimed as a dependent on someone else’s return|
|What is a high deductible plan?||1) Your annual deductible is $1,000 or more ($2,000 for families), and|
|2) Annual co-pays may not exceed $5,000 ($10,000 for families)|
|Medical Insurance Coverage that
won’t conflict with your HSA
|1) The medical portion of your automobile insurance|
|2) Workers compensation|
|3) Insurance for a specified disease or illness|
|4) Insurance that pays a flat daily rate for hospitalization|
|Where can you get one?||1) Insurance companies or banks|
|2) Any other company previously approved to be an MSA trustee|
|How much can you contribute?||Individuals – one half of the lesser of 100% of the annual deductible in your HDHP (minimum $1000 deductible), but no more than $2,600 (pro-rated by month)|
|Families – one half of the lesser of 100% of the annual deductible in your HDHP (minimum $1000 deductible), but no more than $5,150 (pro-rated by month)|
|Over 55 but under 65 – may contribute an extra $500|
|How may you fund the account?||Cash only, no stock, securities or other assets|
|Through an employer’s cafeteria plan|
|Rollovers from an MSA, which may remain in the form of securities or other investments already in the account (You may not roll over funds from an IRA, HRA or a flexible spending account.)|
HOW DOES THE PLAN WORK?
Fortis Health compiled an excellent comparison of of HSAs, HRAs, and MSAs, You can see which one you prefer.
If the HSA is your own plan, take the deduction for qualified medical expenses you’ve paid, the same way you report an IRA. You don’t get to deduct costs of regular medical insurance. (You may deduct them as itemized deductions.) You may deduct the cost of long-term care insurance, COBRA insurance and health insurance paid while you are collecting unemployment benefits. And you deduct all your out of pocket medical costs.
If your employer offers a flexible spending account, you may chose to take the deduction for your contributions to the plan on your tax return. Or you may contribute the money from your wages before they are taxed. (Hint: Use the cafeteria plan option – they won’t take Social Security or state disability out of your money – about 8% savings.)
There’s no risk to putting your money in. You can draw it out whenever you need it. Unlike the regular cafeteria plan accounts, you don’t lose your contributions to the account, if you don’t use them to pay for medical expenses. The money stays in your HSA account forever. Talk about building up savings!
That ‘use it or lose it’ clause of the IRC Section 125 plans is what makes so many employees distrust their employers. That one aspect alone is what has discouraged participation in those plans. Realizing this, Congress wisely included an provision in the Health Reimbursement Arrangement plans introduced last year to let the employer decide if they wanted to give their employees any unused portion of their medical spending account. That may explain why 1 million and half employees jumped on it.
You can access your money easily. Bireley says Fortis Health gives you a debit card and a check book, enabling you to draw the money out of an ATM anytime. As long as you use the money to pay for medical expenses, you get it tax-free. Save the receipts in case you’re ever audited.
If you use the money for anything but qualified medical expenses, you will pay tax on that money, plus a 10% penalty.
WHAT CAN YOU REALLY SAVE?
How much is the savings in medical insurance premiums?
In a group as small as 13 employees – over $35,000. El Paso, attorney, Dan Malone, is a Board member of the The Baptist Standard. This newsmagazine for the Baptist community in Texas only has 13 employees, but they provide full family medical coverage. By increasing their deductible from $250 to $1,000, they saved $2,800 per person.
Looking at a policy for a family of three, Blue Cross’s PPO published rates show a savings of over $1500 when you raise your deductible from $500 to $1,000 per year.
Naturally, if you increase your deductible, you can reduce your premiums even more. This is a good strategy for younger people who are in good health and rarely need medical care.
If you’re self-employed, you get to deduct your contributions to the plan AND you still get to deduct self-employed health insurance – both without itemizing.
EMPLOYERS WIN AND SHARE
HSAs allow employers to dramatically cut their medical insurance premiums. That doesn’t mean they need to pass the cost on to workers. The HSA rules permit employers to make contributions to employees’ HSA accounts. If they make the payments, it will be added to your wages, but those contributions won’t be subject to any of the regular payroll taxes.
Malone tells us that when The Baptist Standard saved $2,800 per employee by raising the employees’ deductible to $1,000, they also contributed $2,000 to their HRA account. The employees came out ahead and the newspaper still saved $800 per employee. (They had already implemented their HRA plan before the new HSAs came out. At this point, they won’t be changing their plan. )
For employers familiar with the the high costs of administering flexible spending accounts, Bireley tells us Fortis Health charges no administration fees whatsoever on HSA plans – to employers or individuals. When pressed about how the company makes money on them, Bireley admits that the costs are built into the premiums. Undoubtedly, most of the major insurance providers will wisely do the same thing.
So when shopping around for plans, compare their rates for the coverage you want. Then, add in any administrative fees to arrive at the real cost of your coverage.
A QUASI-RETIREMENT PLAN DISGUISED AS HEALTH CARE OK, this is what has everyone really raving about. Tim Bireley advises that you can deposit the maximum amount of money into these accounts, take deduction on your taxes, control how the funds are invested and let it grow over time, just like an IRA.
Bireley says the money may be held in any of the same kinds of accounts that hold IRAs: bank accounts, CDs, money markets, even stocks.
There’s no law that says you must draw the money for medical expenses. You may leave the money in and use out of pocket money for the expenses. Then you take the deductions on Schedule A, as usual.
As Elise Kroll points out, “With our Working Today membership mostly in their 20s and 30s, who are generally healthy, they’ll have decades to save up for retirement. ” Just think $2,600 x 30 years is $78,000 – add in interest or dividends and stock growth – there could be well over $100,000 waiting to be used when you retire.
Bireley doesn’t see downside to these accounts.
I only see one – if you play with risky investments in the account and lose the money.
Otherwise, the money will be there when you grow old to cover catastropic care; in-home health care, so you never have to go to an institution; higher medical and medication costs.
Or you can simply use the money to improve your standard of living when you retire. REPORTING IS EASY There are no reporting requirements. There were. But they’re gone.
When the IRS authorized the use of debit/credit cards for health FSAs and HRAs earlier last year, payments made to medical service providers in excess of $600 through the use of such cards were reportable by the employer on Form 1099-MISC. The Medicare Act of 2003 repealed this reporting requirement. Form 1099 reporting isn’t an issue under traditional health FSAs or HRAs where the employer reimburses participants after the medical services are provided, rather than making payments to providers. This change is retroactive to payments made after December 31, 2002 and is likely to make FSA/HRA debit card arrangements more attractive to employers.
All you need to do is to keep track of all your medical expenditures and make sure that you spent at least as much on allowable medical expenses as you took out of your HSA. If you spent more, that’s just fine. If you took nothing out, intending to leave it there for when you get older and medical bills will be higher – that’s just fine and dandy, too.
SO HOW DO YOU GET ONE? It may not be as easy as you think.
Although Dan Malone is a civil litigation attorney, he was forced to do his own research and become an expert in health insurance coverage. Why? Malone tells us, “My experience is that you’re not going to find out about these arrangements from your health insurance salesmen. They are not excited about cutting their commissions due to our lower premiums.”
The insurance carriers may not offer it in your state, yet. Fortis Health only offers the plan in about 40 states. The plan is so new, your carrier may still be trying to get qualified in your state.
I’d start with banks and brokerages – since that’s where you’ll be putting your savings account. Remember, you may invest the money in anything that you works for IRAs – stocks, bonds, municipal funds, certificates of deposits, REITs, etc.
The other component is the insurance – so ASK around. Press your medical insurance carrier about their HSA plans. If they don’t offer it yet, ask if they are in the process of getting approved. Will they have one this year? And if they balk, the Internet is full of information.
NEWS FLASH! I found a place! I got the folks at eHealthInsurance.com to set up a special tool on their site to help you find an HSA provider. Click on this link:
When you get to this site – you’ll see a box letting you search for HSAs in your area, towards the right-hand side of the page.
Copyright Eva Rosenberg 2004
A version of this article first appeared on CBS.MarketWatch.com