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Health Savings Accounts: The Next Generation in Health Insurance
By Scott Becker, Esq.
Health Savings Accounts (HSAs) became law effective January 1, 2004 as part of the Medicare Act passed by Congress last fall. HSAs are designed to reduce health insurance premiums and to give individuals greater control over the spending of their health care dollars. In addition to providing an alternative to high premiums, Congress enacted HSAs because America currently has approximately 43 million uninsured people. HSAs can be a way for these people to get at least a minimal level of health insurance coverage at affordable premiums.
HSAs are really a two-part program combining a High Deductible Health Policy (HDHP) with a pre-tax savings account (the actual HSA). The HSA can be used to pay for medical expenses not covered by the HDHP or for other non-medical related purposes as the individual determines.
An HDHP must carry a minimum deductible of $1000 for individuals, or $2000 for families. The maximum that individuals may be obligated to pay out-of-pocket for medical expenses under the HDHP is $5,000, or $10,000 for families. This maximum out-of-pocket cost includes the deductible, coinsurance, copayments, and other expenses for medical care otherwise covered by the HDHP.
The HSA may then be funded up to the amount of the deductible. Individual HSAs may receive a maximum of $2600. Family HSAs may receive a maximum of $5150. Individuals age 55 or older may contribute an additional, “catch-up” amount. Contributions to HSAs may be invested similar to IRAs, or used on a pre-tax basis to pay for medical expenses. If HSA funds are used for non-medical expenses, ordinary income taxes apply as well as a 10% penalty for individuals younger than age 65. Amounts not used from the HSA in the current year are not taxed and are carried forward to subsequent years. The account balance may increase due to future contributions and investment earnings.
To be eligible to contribute to an HSA during the year, individuals must not be insured by any other major medical or full coverage-type of health insurance plan other than the HDHP. Individuals must not be enrolled in Medicare nor be a dependent of another taxpayer. However, in addition to HDHPs, individuals may still have limited types of medical coverage such as dental and vision coverage, certain accident or illness policies, or long-term care policies. HDHPs may also provide preventative care coverage and opportunities for payment for wellness programs such as smoking cessation, cholesterol awareness, and obesity control.
If individuals or families are not covered by HDHPs in future years, funds remaining in their respective HSAs from prior years’ contributions may still be used for medical expenses not covered by medical insurance or another third party in that future year.
Future articles in this series will address additional specific issues about HSAs. For now, it should be understood that HSAs offer individuals and families an opportunity to monitor health care expenses and to benefit financially from that monitoring. With this opportunity comes responsibility. Individuals concerned with cost must often inquire about the price of medical procedures and decide whether the cost of the procedure is worth the benefit received. When there is no opportunity to decide about receiving coverage, such as in the event of an emergency or when treatment is required for a life threatening illness, the HDHP will likely be utilized to pay for medical expenses.
The concept of individual responsibility found in HSAs dramatically diverts from the way Americans have become trained to use medical insurance over the past 30 years. For some people, this individual responsibility will be more than they can or care to handle as it has become very convenient to simply pay a premium to an insurance company and not worry about a medical billing statement. For others, HSAs will be an excellent opportunity and even a reward of sorts for practicing good money management as well as taking care of themselves from a health care standpoint. In the end, HSAs offer an exciting alternative not seen before in the medical insurance industry that could prove successful for individuals and employers alike.
For more information on this subject, sign up for the upcoming HSA seminar in Milwaukee or Madison. |
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