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Health savings accounts expand coverage options

Looking for a way to retain full health care coverage, choose your own doctor, cut your federal income tax and keep part of that annual insurance premium for yourself in a tax-advantaged IRA-like account?

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Now you can, with a Health Savings Account.

But don't rush out to open one just yet. If you are covered by your employer's health insurance, in most cases you won't be eligible for an HSA. And since HSA-qualified policies come with a higher deductible, if your family has frequent or ongoing medical expenses, this might not be the right health care option for you.

HSAs, the latest in the long list of health care acronyms, became available Jan. 1, 2004, as part of the Medicare reform law. They are the newest version of the Archer Medical Savings Account, which was designed to help meet medical costs of self-employed persons and employees of smaller businesses. Existing MSAs will be rolled over into HSAs and phased out during the next year.

Like the MSA, which was launched as a pilot program under the 1996 Health Insurance Portability and Accountability Act, HSAs enable those with a qualified high-deductible health insurance policy to make pretax contributions into an IRA-like account to pay for health care costs. Most of the new health savings accounts allow you to spend your dollars on a wide variety of doctors from within a preferred provider organization.

Unlike flexible spending accounts, unused balances in MSAs and HSAs roll year to year, accruing interest or investment earnings. Money in HSAs can be withdrawn tax- and penalty-free at any time to pay for medical, dental and vision care, although dental and vision payments will not count toward your deductible.

Expanded options
Health savings accounts also feature a number of improvements over medical savings accounts:

  • Availability -- Anyone under age 65 with a high-deductible health plan and who is not a Medicare beneficiary can open an HSA. MSAs were restricted to the self-employed and those working for businesses with 50 or fewer employees.
  • Higher deductible contribution limits -- HSA participants can deduct from their gross income contributions equal to 100 percent of their policy deductible. The maximum amounts for 2005 are $2,650 per individual (up from $2,600 in 2004) and $5,250 per family (a $100 increase from the 2004 limit). MSAs were only deductible up to 65 percent of the policy's deductible amount for individuals and 75 percent for families.
  • Expanded contributor options -- Both employers and employees can put money into an HSA. With MSAs, only the employer or the employee could contribute.
  • Lower deductible threshold -- High-deductible plans are defined as those with $1,000 or higher deductible for individuals, $2,000 or higher deductible for families. Under MSAs, covered individuals and families had to meet significantly higher deductible thresholds.
  • Age 55 catch-up provision -- Those reaching age 55 by the end of the tax year may increase their annual HSA contributions by $500 in 2004, $600 in 2005, $700 in 2006, $800 in 2007, $900 in 2008 and $1,000 in 2009 and thereafter. Contributions cease, however, when the policyholder retires.

"It's actually a step forward in a bunch of different ways," says Kent Utsey, president of American Health Resources, a Chicago-based HSA management company. "They made it available to a lot more people and expanded the range of deductibles to make it a little easier for low-income people to get involved. They made it possible for both employees and employers to make deposits into accounts, which is a really good situation."

The battle for acceptance
MSAs have struggled for widespread acceptance in the marketplace for a number of reasons. Expect the same with HSAs.

Consumers who are accustomed to low-deductible, co-pay health plans have been unconvinced so far that a high-deductible plan paired with a tax-advantaged health savings account can save them money. Insurance agents, whose commissions are based on premiums, were cool to the relatively low premium levels of high-deductible health plans. And insurance carriers were leery of designing plans around a pilot program.

Perhaps more fundamentally, MSA supporters have met with limited success in changing America's thinking about health insurance. Here's how C. Dean Richard, a 25-year veteran of the insurance industry who offers the new plans at, characterizes HSAs:



-- Posted: Jan. 10, 2005




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