High deductible health plans pave the way for health savings accounts

With the costs of health care rising, many employers today have begun offering High Deductible Health Plans (HDHP’s) to their employees in an effort to keep the costs of providing insurance coverage down.  In fact, according to the AHIP (America’s Health Insurance Plans), some 11.4 million people are now enrolled in HDHP plans.  The IRS defines high deductible health plans for 2012 as those which have minimum deductibles of $1,200 for individuals and $2,400 for family coverage, and maximum out-of-pocket expenses of $6,050 for individuals and $12,100 for families. While HDHP’s provide savings in the form of lower premiums, the higher deductibles can levy additional financial stress on family budgets. Enter the Health Savings Account (HSA) – a savings account designed to give individuals a tax advantage to offset healthcare costs.

Health savings accounts defined

First introduced in 2003, a Health Savings Account is a tax-exempt trust or custodial account that taxpayers can set up with a qualified HSA trustee – generally an insurance company or financial institution -- to reimburse or pay and individual’s medical expenses.  HSA’s provide big rewards for contributions, since the dollars set aside earn interest – sometimes higher than general savings accounts offer – and the dollars in the savings account are tax-exempt.  Savings may be used to reimburse or pay for things like office visits, doctor and hospital fees, prescriptions, chiropractic care, therapy, non-cosmetic dental care, vision care and more.  Many trustees offer the flexibility to either pay medical providers directly, reimburse HSA owners for payments, and some, like CitizensFirst, even offer a debit card (also known traditionally as a “check card”) tied to the savings account for convenient purchases directly from the HSA.

Paul Monfils, Manager of Financial Sales and Service for CitizensFirst in Oshkosh, says that nearly 300 members have opened a Health Savings Account at CitizensFirst to help manage their medical expenses, and he expects that number to keep rising.

“With increasing costs, many businesses have offered HDHP’s to try to find ways to save money, so Health Savings Accounts are going to be a more common account in the future,” he explained.

Who can open a Health Savings Account?

 You must be an eligible employee to set up an HSA according to these IRS criteria:

1)     You must be covered by an HDHP (high deductible health plan) on the first day of the month

2)     You have no other health care coverage (there are exceptions*).

3)     You are not enrolled in Medicare.

4)     You cannot be claimed as a dependent on someone else’s tax return.

*See the IRS website for full details.

Benefits of using an HSA

So what’s the big deal about HSA’s? If used correctly, an HSA can provide taxpayers with the following benefits according to the IRS*:

1)     You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA, even if you do not itemize your deductions on Form 1040.

2)     Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

3)     The contributions remain in your account from year to year until you use them.

4)      The interest or other earnings on the assets in the account are tax free.

5)      Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses section of IRS.

6)     An HSA is “portable” so it stays with you if you change employers or leave the work force.

Unlike the medical Flexible Spending Account (FSA), the HSA is not a “use-it-or-lose –it” account, making it a much more popular option for those looking to reduce their burden of health care costs.  Health Savings Account balances can be rolled over from year to year, and generally accrue interest as well.

*Always consult with a professional tax advisor.

Contribution limits

As mentioned above, contributions to your account may be excluded from your gross income and claimed as a tax deduction, but the IRS puts a limit on how much you can contribute each year. For 2012, individual contributions may not exceed $3,100 and family contributions are capped at $6,250.  While those covered by HDHP’s are expected to use savings from lowered premiums to set aside dollars into their Health Savings Accounts to offset medical expenses, there are other ways to get creative about contributions to your account. Employers may make contributions to the plan, family members can contribute to your plan, and now there’s even a way to earn cash-back reward that are contributed directly to your HSA. A relatively new online company called MyHSA® Rewards offers consumers an opportunity to shop with select retailers to earn cash-back contributions via their website. As long as contributions don’t exceed the maximum limits, this option can provide a thrifty way to increase the dollars available for medical costs.

What’s the right amount to contribute?

Obviously you can’t exceed the limits mentioned above, but what is the right amount to set aside each month?  The easiest way is to take a look at prior year’s health care costs. If you use a budget, check your medical expenses there. If you use online bill-paying, identifying your health care costs may be easier than if you traditionally write checks. If you do all your bill-paying by checks, then perhaps take a sample of medical expenses from three or four random months out of the year (each quarter?) and take an average to find your typical monthly expenses. If you have spent $300/month on average, then that’s the amount you want to contribute to your HSA.  Alternatively, you can use a website like this one sponsored by Humana that aids in calculating your healthcare costs from the ground up. The bottom line is that you want to be close in your estimate to cover your out-of-pocket liability and get the biggest tax deduction you possibly can. If you’re wrong, you can always change your contributions next year. Contributing more than what you use in a year is fine, especially since there’s no penalty for rolling over your balance from year to year – and, it earns interest. 

The Bottom Line

The bottom line on Health Savings Accounts is that they provide consumers with a little more control over their health care costs than before. 

“I think it’s a nice option for members to have, especially with so many plans changing at employers these days,” Monfils said. 

They are easy to open and easy to use, and provide a tax benefit for those looking for a little help with managing costs in this uncertain economy.  It’s truly an option that helps make medical costs just a little easier to sw !