Health Savings Accounts

We all know the cost of healthcare has been exploding over the years, far outpacing the rise in general inflation. The 2005 annual survey of employer health benefits conducted by the Kaiser Family Foundation and the Health Research Educational Trust found the average cost of health insurance for a family of four has grown to over $10,800 per year - nearly doubling since 1998. The survey also reported that in 2006 Starbucks will spend more on health insurance for its employees than it will spend on raw materials to brew coffee. An alternative that merits attention is Health Savings Accounts or HSA's.

Health Savings Accounts we created as a part of the Medicare Prescription Drug Improvement and Modernization Act signed into law by president Bush in 2003. HSA's are designed to help individuals save for qualified medical and retiree health expenses on a tax advantaged basis.

Any adult who is covered by a high deductible health plan (minimum deductible of $1,000), and has no other first dollar coverage may establish an HSA. Tax advantaged contributions can be made in three ways:

1. The individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions.
2. The individuals employer can make contributions that are not taxed to either the business or the individual
3. Companies that offer cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

Once an individual enrolls in Medicare they can no longer contribute to an HSA. Amounts contributed to an HSA are the property of the individual and are fully portable. Funds in the account grow tax deferred and are tax free when used for qualified medical expenses.

Using myself as an example I currently pay about $1,100 per month for a family of five. I have a deductible of $400 per individual, or $2,000 per year maximum out of pocket expense. The high deductible policy I am likely to buy will cost about $680 per month have a deductible of $3,000 with a $6,000 maximum out of pocket expense per calendar year.

Initially I expect to save about $420 per month in premium expense. With this savings I expect to contribute the $3,000 per year tax free in about 7 months. This means I expect to save about $2,100 net ( 5 months x $420). If I add in the tax benefit of the HSA, $3,000 x my tax rate 28%, I can expect to save another $840 each year in reduced tax liability. So my total saving works out to around $2,900 each year - sweet! This assumes I spend the entire $3,000 in deductibles each year - not likely. So maybe the HSA account will grow and leave me with some extra funds to cover expenses I will surely have when I reach Medicare eligibility age.

Resources:
US Treasury FAQ's
The Heritage Foundation

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