|
Open Enrollment on the Way:
Should You Take Advantage of Your Company's
Health Savings Account Option?
Fall is approaching, which means for many workers that open
enrollment is coming. Open enrollment is a specified time period
during which companies let their employees sign up for various
health and retirement savings benefits as well as smaller
benefit options that may be unique to a company.
One of those options might be a health savings account, also
known as an HSA. Health savings accounts were created as part of
the Medicare Modernization Act of 2003. 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.
Why are companies offering these plans? Because a
high-deductible health plan option allows the company to save
money while giving their employees a shot at lower or stable
monthly individual and family premiums. And it's important to
know that in 2007, the contribution rules on these plans
changed. Previously, the maximum contribution was calculated as
the lesser of the deductible of the high-deductible health plan
or a specific indexed amount. Now, the limit is the maximum
annual contribution alone.
What's the big advantage to choosing one? Contributions are
made to HSAs on a pretax basis where they are allowed to grow
tax-deferred and spent out on a tax-free basis for medical
expenses. HSA contributions could be made through a company's
cafeteria plan if allowed by the company's cafeteria plan
document, and can potentially save FICA/Medicare taxes on the
contribution along with federal and state taxes.
Yet there are some critical things to know before you make
the switch:
Get some individual financial advice first. The
enticement of potentially lower or more stable health insurance
premium increases may lead you to jump immediately, but it makes
sense to speak to your tax professional as well as a financial
adviser about how an HSA should fit into your overall financial
strategy.
Understand your 2008 HSA limits. The following cover
the maximum contributions you can place in an HSA and the
minimum and maximum out-of-pocket amounts for an HDHP insurance
plan:
- Maximum HSA
contribution: $2900 for individual, $5800 for families
- Minimum HDHP
deductible: $1100 self-only coverage, $2200 family coverage*
- Annual out-of-pocket maximum: $5600
self-only coverage, $11200 family coverage
- If you are 55 or
older and your HDHP is in effect, you are eligible to
deposit catch-up contributions, and in 2008, the additional
amount is $900.
Know the difference between an HSA and a medical flexible
spending account (FSA). One important difference is that
HSAs allow balances to be rolled over from year-to-year, growing
on a tax-free basis as long as they're used for medical
expenses. On the other hand, Medical FSAs require the money
you contribute each year to be spent by year-end (or a brief
grace period if provided by the plan) 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 bit more flexible in this
regard. Get help from your tax or human resources professional.
Know whether you can have both. In some situations,
you may be able to have both an HSA and an FSA. 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.
Know penalties for non-medical withdrawals. You'll get
hit with a 10 percent penalty, 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.
You may actually use an IRA to fund an HSA on a one-time
basis. The rules let individuals roll over money from an IRA
once so people can use the money tax-free for medical expenses,
but the amount of the rollover is limited to the HSA maximum
contribution for the year minus any contributions already made.
September 2008 — 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.
|
