January, 2010 Tax Newsletter

Health Savings Accounts Revisited and Updated

Healthcare is, of course, a major concern to everyone.  There’s no escape from the news about its cost and number of uninsured people. The Health Savings Account (HSA) is a rapidly growing type of insurance coverage and, when combined with a tax-deductible savings account, may be a viable solution to the high cost of healthcare.

HSA’s are not new.  They were established in 2003 by President George W. Bush to enable more people to gain access to health coverage, while improving the efficiency of the healthcare system.  The idea was that employers would save money on healthcare costs and patients would have more control over their healthcare expenditures. 

An HSA allows an eligible taxpayer to save for and pay health care expenses on a tax-free basis.  A requirement is that he or she must purchase a low cost, high deductible health insurance policy.  For medical expenses not covered by insurance due to the high deductible, the taxpayer can either make tax deductible contributions to the HSA or an employer can make contributions to the HSA of an employee and exclude the contributions from the employee’s taxable wages.  Once the pre-tax money is in the account, it can be withdrawn tax free to pay for the qualified medical expenses that are not covered by insurance.  The funds can either be withdrawn to pay for medical expenses or they can be accumulated in the account from year to year.  Any interest or other earnings on the funds accumulate tax free.  HSA’s cannot be joint accounts.  Each spouse must open a separate account.  If only one spouse has an account, the funds in that account can be used to pay for expenses incurred by the other spouse

To qualify for an HSA an individual must satisfy the following requirements:

The person must be covered under a high deductible health plan,

The person generally cannot have any other health coverage,

The person cannot be enrolled in medicare, and

The person cannot be claimed as a dependent on another’s return.

A high deductible plan for 2010 is one with a deductible of $1,200 for self only coverage and $2,400 for family coverage.  Annual contributions for 2010 are dependent upon the age of the plan owner.  If under age 55, the limits are $3,050 for self only and $6,150 for family coverage; for age 55 and older the limits are $4,050 for self only and $7,150 for family coverage.  The maximum deductible and out-of-pocket expense limits for 2010 is $5,950 for self only and $11,900 for family coverage.

Not only has the number of HSA’s increased dramatically since 2003, but the plans have evolved quite nicely, as well.  For example, in 2006, the Health Opportunity Empowerment Act included a provision for a one-time funding to an HSA account from an IRA account.  Additionally, employers were allowed greater contributions for non-highly compensated employees.

Funding of an account can be done as often as desired, up to the maximum annual amount allowable.

Here is my assessment of the reasons you may wish to consider an HSA in your future:

1.  It provides a tax advantage if you are not able to deduct medical expenses on your return,

2.  It provides flexibility to save and keep your contributions for future use, including retirement,

3.  It lowers overall insurance costs for the average healthy person.

4.  Payments to healthcare providers are usually at the insurance company’s negotiated rates,

5.  It provides for unforeseen expenses as the plan covers all costs once the deductible is met,

6.  The funds can pay for COBRA premiums if you become unemployed,

7.  The account is portable.  You can continue to use the account funds – but you can’t add funds

CAVEAT:  The healthcare reform bill moving through Congress may subject HSA accounts to changes and, therefore, its future is not clear.  However, these plans should be continued and enhanced as we move toward solving our healthcare issues.