Financial Planning
| HSAs may be the solution to help you cover your growing medical expenses |
| Published Wednesday, February 14, 2007 8:00 am |
by Jeff Bolton
A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the HSA.
You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow.
What is a High Deductible Health Plan (HDHP)?You must have an HDHP if you want to open an HSA. Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn’t pay for the first several thousand dollars of health care expenses (i.e., your “deductible”) but will generally cover you after that. Of course, your HSA is available to help you pay for the expenses your plan does not cover.
For 2006, the deductible amounts increase to $1,050 and $2,100, respectively. The annual out-of-pocket (including deductibles and co-pays) for 2005 cannot exceed $5,100 (self-only coverage) or $10,200 (family coverage). For 2006, these amounts increase to $5,250 and $10,500, respectively. HDHPs can have first dollar coverage (no deductible) for preventive care and apply higher out-of-pocket limits (and co pays & coinsurance) for non-network services.
How can I get a Health Savings Account?
Anyone under age 65 who buys a qualified high-deductible policy can open an HSA. You can't be covered by another health insurance policy that isn't a qualified high-deductible plan (either as an individual or a dependent), although you can still have other disability, dental, vision and long-term-care policies. You can sign up for HSAs with banks, credit unions, insurance companies and other approved companies. Your employer may also set up a plan for employees as well.
Can a couple who is planning to retire early open an HSA?
Sure. Anyone under age 65 can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $800 in 2007 if you're 55 or older. This catch-up contribution amount will increase by $100 per year until it reaches $1,000 in 2009. You can't make new HSA contributions after age 65.
How much does an HSA cost?
An HSA is not something you purchase; it’s a savings account into which you can deposit money on a tax-deferred basis. The only product you purchase with an HSA is a High Deductible Health Plan, an inexpensive plan that will cover you should your medical expenses that exceed the funds you have in your HSA.
How much can I contribute annually to an HSA?
In 2007, you can contribute up to $2,850 for individual coverage or $5,650 for families per year. You can now contribute up to the maximum amount allowed no matter how much your deductible is. Individuals age 55 and older can make an extra catch-up contribution of $800 in 2007. These limits are indexed for inflation. The new rules change the indexing base period to the 12-month period ending on March 31 and require that adjusted amounts for a year be published by June 1 of the preceding year. This change provides employers and health plans with more time to design qualifying HSA-eligible plans and individuals with more time to make decisions about their health care for the next year.
How often can I contribute? Is there a limit as to how much I deposit with each contribution?
You can contribute as often or as much as you wish, as long as your total contribution does not exceed the limits specified by the Internal Revenue Service (see above). HSA contribution limits are excludable (if made by your employer) or tax-deductible (if made by you) up to the lesser of either your qualified annual deductible or the statutory maximum amount for single or family coverage, as stated by the IRS.
Am I immediately eligible to make a full annual contribution to my new HSA?
The new provisions allow individuals who become covered under an HSA-eligible plan in a month other than January to make the maximum HSA contribution for the year based on their coverage in the last month of the year. This eliminates a common barrier to switching to HSA-eligible coverage.
Previously, employer contributions under the comparability rules had to be the same amount or percentage of the deductible for all employees with the same category of coverage. Consequently, employers could not contribute higher amounts to lower-paid employees. The new rules provide an exception to the comparability rules allowing employers to contribute more to the HSAs of non-highly compensated individuals. For this purpose, the definition of "highly compensated employee" is based on same definition used for qualified retirement plans.
Would I fund an HSA with pre- or post-tax dollars?
If your employer offers a high-deductible health insurance policy, you may be able to make pretax contributions, like you would with a flexible spending account. If you open the HSA on your own, your contributions will be deductible when you file your taxes, even if you don't itemize.
Do the tax benefits phase out at certain income levels?
Unlike many other tax breaks, there aren't any income limits. Anyone under age 65 who buys a qualified high-deductible policy can open an HSA.
Can any high-deductible health insurance policy qualify for an HSA?
In 2007, your health insurance policy must have a deductible of at least $1,100 for individual coverage or $2,200 for families to qualify as an HSA-eligible policy. You can then contribute up to the amount specified by the IRS every year.
No. Your HSA contributions won't affect your IRA limits -- $4,000 per year or $4,500 for those over 50. It's just another tax-deferred way to save for retirement.
Can I transfer funds from my IRA into my HSA?
The new rules allow for a one-time contribution to an HSA of amounts distributed from an Individual Retirement Account (IRA). The contribution must be made in a direct trustee-to-trustee transfer. The IRA transfer will not be included in income or subject to the early withdrawal additional tax. The transfer is limited to the maximum HSA contribution for the year, and the amount contributed is not allowed as a deduction. Generally, only one transfer may be made during the lifetime of an individual.
What's the difference between the new HSAs and Flexible Spending Accounts (FSAs)?
The tax benefits of both plans are quite similar, but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred. Money in your flexible spending account must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you can open a flexible spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy.
If my employer offers both, can I fund my Flexible Spending Account, too?
Generally not. You cannot have an HSA if you use a flexible-spending account to pay health-care costs or if you have other medical coverage (i.e., through a spouse's policy). However, if your flex plan restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA too.
Can I rollover funds from my FSA into an HSA?
One of the new provisions of the act enables you to rollover funds into an HSA through 2011. Employers can transfer funds from Flexible Spending Accounts (FSAs) or Health Reimbursement Accounts (HRAs) to an HSA for employees switching to coverage under an HSA-compatible health plan. The amounts rolled over to an HSA from FSAs or HRAs are over and above the amounts allowed as annual contributions. The maximum contribution is the balance in the FSA or HRA as of September 21, 2006, or if less, the balance as of the date of the transfer. The provision is limited to one distribution with respect to each health FSA or HRA of the individual.
If I set up an HSA through my employer, what happens if I switch jobs?
You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 10% penalty -- plus an income tax bill -- if you use any of the money for nonmedical expenses before age 65.
You won't be hit with the 10% penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.
For more information about Health Savings Accounts or any other wealth management strategy, please contact us.
Jeffrey A. Bolton, CPA is a co-founder, Partner, and member of the firm's Executive Committee. He works closely with our Tax Services and Strategic Business Solutions groups. As an experienced CPA, Jeff provides expertise in entrepreneurship, tax and accounting. His practice primarily services family-owned, emerging and high-growth companies. Jeff's focus is helping business owners achieve success through the implementation of profit enhancement, expense reduction, asset protection and business process solutions. Contact him at 561.886.5292 or via email at jbolton@daszkalbolton.com.
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