Health Savings Accounts
It’s Time to Take a Closer Look
By Julianne Buynak, CPA, J.D., Tax Manager and Cindy H. Mitchell, Tax Supervisor
As healthcare costs continue to skyrocket, there has been a shift to what’s known in the industry as “consumer-driven healthcare.” The concept involves employees taking on more responsibility for their own healthcare by contributing financially to the costs and making more healthcare spending decisions themselves, including whether or not they need care and what kind of care they need.
In the world of consumer-driven healthcare, Health Savings Accounts (HSAs) have become the coin of the realm. These health insurance vehicles allow employees and employers (on behalf of employees) to make tax-deferred contributions to special accounts and withdraw the money tax-free to pay for medical care.
How they work An HSA must be established in conjunction with a high-deductible health plan (HDHP), a separate insurance policy that covers major medical expenses. The minimum HDHP deductible is $1,150 for individuals or $2,300 for families in 2009. Higher deductibles — up to $5,800 for individuals or $11,600 for families — can be purchased in order to lower premiums.
In 2009, employees can contribute up to $3,000 for themselves (or $5,950 for their families) to their HSAs. Unused funds carry over from year to year and employees take their HSAs with them when they change jobs — therefore, healthy individuals can potentially accumulate large sums to pay for healthcare expenses during retirement.
HSAs offer some very attractive tax benefits. For starters, employees receive an immediate tax deduction for contributions. Even better, funds can be withdrawn tax-free if used to pay for qualified medical expenses (these include deductibles, co-payments, vision and dental care, prescription and over-the-counter drugs). Employers can also contribute to their employees’ HSAs, and their contributions are excluded from employees’ incomes for tax purposes.
HSA funds can be deposited into safe, low-yield savings accounts, where they earn market interest rates, or be invested more aggressively in stocks or mutual funds. Earnings grow tax-free like they do in 401(k)s and IRAs. In fact, HSAs are sometimes referred to as “medical IRAs” due to the tremendous tax benefits they offer.
Crunch the numbers HSAs make financial sense for many companies and their employees, especially those where employees pay 100 percent of their health insurance premiums. Consider this example:
Mike Smith currently pays $1,059 a month in health insurance premiums for his family of five. His employer is considering switching to an HSA, in which case Mike would pay $640 a month for an HDHP with a $4,500 deductible. This would leave him with a monthly savings of $419, which he could contribute to his HSA, for a total HSA annual contribution of $5,028. This would be more than enough to cover his HDHP deductible, and he’d receive an immediate tax deduction for the $5,028 HSA contribution, thus reducing his current tax liability.
When you consider that studies indicate two-thirds of Americans spend less than $1,000 a year in out-of-pocket medical expenses, and between 60 and 65 percent of all employees’ HSA balances roll over into the next year, there’s a very good chance that Mike will end up with a large healthcare nest egg in retirement.
In fact, one strategy is to pay current out-of-pocket healthcare expenses with funds other than those in an HSA and let the HSA build up over many years. In this case, an individual could be more aggressive when investing HSA funds, since they wouldn’t be needed for immediate healthcare expenses and there would be more time to recoup potential short-term losses due to stock market downturns.
We can help you determine whether a Health Savings Account is a smart health insurance option for your company. Contact either of us at 330.762.9785 to discuss this in more detail.
Sidebar
Who’s Eligible?
To participate in an HSA, an individual:
- Must be covered by an HDHP.
- May not be covered by any other health insurance plan. Specific injury, accident, disability, dental, vision and long-term care insurance are not considered other health insurance plans.
- May not be eligible for Medicare.
- Cannot be claimed as a dependent on another person’s tax return.
- Must be covered by an HDHP.
- May not be covered by any other health insurance plan. Specific injury, accident, disability, dental, vision and long-term care insurance are not considered other health insurance plans.
- May not be eligible for Medicare.
- Cannot be claimed as a dependent on another person’s tax return.
For more information, please contact Julianne Buynak or Cindy Mitchell at 330.762.9785 or by email.