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Should You Consider an HSA?
The Tax Relief and Health Care Act of 2006 (TRHCA) that went
into effect this year made it a bit easier for both employers
and their workers and self-employees to obtain Health Savings
Accounts, a kind of IRA for health care expenses.
Health savings accounts were created as part of the Medicare
Modernization Act of 2003 but have not been wildly popular
because they're complicated. Anyone under age 65 who buys a qualified
high-deductible health plan (HDHP) can open an HSA. However, you
can still own an HSA and be covered under other types of
insurance policies that cover liability, dental, vision and
long-term care needs, as long as the same expenses are not
covered by both your HSA and the insurance policy.
How do I find a qualified policy? If you're employed,
your employer obviously selects a qualified option and makes
that available to you. However, for individuals or sole
proprietors buying such policies, you need to put in some
research to make sure you get the right plan for you. You need
to ask if your current insurer has a qualified plan, and there
are Web sites you can search for ideas — www.hsainsider.com
and www.healthdecisions.org.
Will I automatically qualify for the HSA option at my
company? No. Under the new law, employers have the right to
offer such plans to those who own 5 percent or less of the
company or make less than $100,000 a year. However, if you are
self-employed, there are no income restrictions.
What are the maximum contributions? In 2007,
individuals can deposit up to $2,850 in their HSA, even if the
minimum single person deductible of $1,100 is selected. Insured
individuals with family coverage can deposit up to $5,650, even
if the minimum family deductible of $2,200 is selected. For HSA
holders 55 and up, they're allowed to make an extra catch-up
deposit each year until the date they enroll in Medicare. In
2007, the maximum allowable catch-up deposit is $800. This
catch-up amount will increase to $900 in 2008 and will remain at
$1,000 beginning in 2009.
How do I get started? The new law allows employees the
one-time opportunity to roll over their existing balances in
flexible spending accounts or health reimbursement accounts into
an HSA. The new rules also allow a one-time opportunity for an
individual to transfer in funds equal to the relevant HSA
contribution maximum for the year.
If I find a policy, should I automatically buy it? No.
Since this is a tax issue as well as an insurance issue, it
makes sense to discuss this decision with your tax adviser or
financial planner.
What's the difference between an HSA and a medical
flexible spending account (FSA)? One important difference is
that HSAs allow balances to be carried forward year-to-year,
growing on a tax-free basis as long as they're used for medical
expenses. On the other hand, Medical FSAs generally require that
the money you contribute each year has to be spent by a
particular date (year-end or otherwise) or you'll lose it. But in
certain cases, such as when you incur medical expenses early in
a year, you can be reimbursed by your FSA without having to
fully fund it — so FSAs might be a better deal. Get help from
your tax or human resources professional.
Can I have both an HSA and a flexible spending account?
It depends. In any one year you may maintain both accounts but
each year the FSA must be used up and can't be carried forward.
You may want to split your money between both to cover
non-qualified expenses under the HSA rules. If your FSA provides
for limited reimbursement for items not covered by your health
insurance plan (such as dental, vision, or wellness care), you
can use an HSA for items covered by your plan and your FSA for
medical expenses that are not. Obviously, double-check this with
an expert.
What happens if I need to use my HSA dollars for any
non-medical reason before age 65? You'll get hit with
additional tax of 10 percent, plus any withdrawals will be taxed
at ordinary income tax rates. After age 65, you're free to use
the funds for any purpose without penalty, but non-medical
withdrawals are still taxable.
August 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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