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Frequently asked questions about health savings accounts
Who can have an HSA? Does any high-deductible policy open the door to an HSA? The policy must have a deductible of at least $1,000 for individuals or $2,000 for families. And annual out-of-pocket expenses for the deductible and co-payments can't exceed $5,000 for an individual or $10,000 for a family. If you already have a high-deductible policy, ask your insurer if it qualifies. How much can I contribute to an HSA? The annual limit on what you can sock away in the savings account is the amount of the deductible you have to pay before benefits kick in--up to $2,600 for singles and $5,150 for families. If you were born before 1950, you can put in an extra $500 a year. What are the tax breaks? You can deduct HSA contributions, even if you don't itemize other deductions. Earnings inside the account grow tax-deferred, just like in an IRA, and withdrawals are tax-free at any time if you use the money to pay qualified medical expenses. Do the tax benefits phase out at higher income levels? Unlike many tax breaks, there aren't any income limits for HSAs. If you're under 65 and buy a qualified insurance policy, you can contribute to an HSA, deduct what you put in and make tax-free withdrawals to pay medical bills. What can I spend the money on? The tax-free nod goes to most medical expenses, including doctors' fees, hospital charges, prescription and nonprescription drugs, vision and dental care, qualified long-term-care insurance premiums and Cobra premiums (to continue coverage under a group plan after you leave a job). Money you don't spend continues to grow in the HSA for use in later years; there's no use-it-or-lose-it rule (such as that applying to flexible spending accounts). There is a 10% penalty--plus a tax bill--if you use HSA money for nonmedical expenses before age 65. You'll pay taxes, but no penalty, for nonmedical withdrawals after that. Where can I open an HSA? HSAs have two parts: the high-deductible insurance policy and the savings account. Shop for the insurance part first. A few companies have already introduced HSAs, including Assurant (formerly Fortis), Golden Rule and several Blue Cross and Blue Shield plans. We expect a flood of firms to follow suit as soon as the Treasury department publishes final regulations this summer. Check out the HSA Insider newsletter for a list of companies that offer plans. You can also shop for HSAs at eHealthInsurance.com. Once you settle on the right insurance policy, check out your investment options. Where can I invest the money? The pickings are pretty slim right now. Some insurers require you to keep the HSA with them--offering a variable interest rate of about 2% to 3%. Others let you combine their insurance plan with an HSA at an investment company or bank, which may give you more options. Only a few companies, including eHealthInsurance and MSAver, offer accounts that let you invest in mutual funds. We expect this option will become common in the near future. How do I compare HSAs? Shop for an HSA just as you would for any other insurance. You'll discover a wide range of prices and coverage. Ask about exclusions and limits on benefits, and find out how the policy is integrated with the savings account. With some plans, you pay a bill yourself, then request reimbursement; others let you transfer payments directly from the account. Also compare investment options and fees. Some HSAs have no fees; others charge a start-up fee plus about $60 per year for the account. How will it work if I get health insurance at work? You may be offered a high-deductible option during your next open-enrollment season. Because premiums may be much lower than the cost of previous coverage, many employers are expected to contribute the savings to employees' HSAs, says Ryan Levin, vice-president of Destiny Health, which offers HSAs in Illinois, Massachusetts and Wisconsin. Here's how it might work, according to Dan Perrin, publisher of HSA Insider: In 2003, the average family policy in the U.S. costs about $9,100, with employers subsidizing about 75% (approximately $6,800) of the premiums. The annual premium for an HSA-qualified policy with a $5,150 deductible for a hypothetical family living in Florida would be $2,808. The employer could pay the full premium and contribute its $4,000 to the employee's HSA. Meanwhile, the employee would save the $2,300 he or she had been paying for the insurance and could contribute half that amount to the HSA. When added to the boss's contribution, that would be enough to cover the deductible and still leave the employee with about $1,100 leftover. And that's on top of the tax savings delivered by the deductible contribution. What's the difference between an HSA and a flexible-spending account? It seems they are designed for the same purpose. The tax benefits of both plans are similar: Both allow you to pay medical bills with pretax dollars. One key difference is that HSA balances can roll over from year to year while flex-plan money left unspent at the end of the year is forfeited. If your employer offers both, take advantage of both. But spend your flex money first: The more money you leave in the HSA tax shelter, the more you'll earn. And once you reach age 65, money in an HSA effectively morphs into a supplemental IRA. You can use it for any purpose, penalty-free. |
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