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
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.
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 Money in HSAs can be withdrawn tax- and penalty-free at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.
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.
contributor options -- Both employers and employees can put money into an HSA.
With MSAs, only the employer or the employee could contribute.
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
- 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.
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
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.
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 MSAHealthPlans.com,