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HEALTH SAVINGS ACCOUNTS: THE NEW
WAVE IN HEALTH CARE?
By Jim Wisdom, CFP
“The Health
Savings Accounts that President Bush recently signed into law may
well be the most important piece of legislation in 2003”, said
Martin Feldstein, a former chairman of the Council of Economic Advisers
and an economics professor at Harvard University. “ These new
tax and medical insurance rules have the potential to transform
health care finances, bringing costs under control and making health
care reflect what patients and their doctors really want.”
To understand the significance of this new legislation, a little
background is in order. Today, health care spending in the United
States represents approximately 14% of Gross Domestic Product, and
annual increases have reached double digits for the last few years
and are projected in the future. Recent studies indicated that for
the first time in many years, insurance costs have replaced taxes
as the biggest challenge facing their businesses.
Until now, the tax law has encouraged employers to offer comprehensive
group health plans with higher premiums because 1) the employer
was able to deduct these expenses and 2) the employee was not taxed
on this benefit. In short, existing tax law has subsidized the use
of insurance to pay for health care. And, because employees have
historically paid a small percentage of their own health care, they
have typically requested or demanded “the best care” that
money can buy.
The new Health Savings Account law will change the current major
distortion in the tax code. “It will give deposits to Health
Savings Accounts the same tax advantages now granted to health insurance
premiums”, says John C. Goodman, president of the National
Center for Policy Analysis. “ Health Savings Accounts will
be the most flexible, consumer friendly accounts yet devised. They
will allow individuals and their employers to make deposits each
year equal to their health insurance deductible. The funds will
grow tax free and people may use them to pay expenses not covered
by insurance, insurance premiums between jobs, and health expenses
during the years of retirement.”
Below is a list of commonly asked questions about Health Savings
Accounts and their corresponding answers:
Question: What are Health Savings Accounts?
Answer: Health Savings Accounts are a new option for health
insurance and they have two parts. The first part is a health insurance
policy that covers large hospital bills. The second part of the
Health Savings Account is an investment account or retirement account
from which you can withdraw money tax-free for medical care. Otherwise,
the money accumulates with tax-free interest until retirement, when
you can withdraw for any purpose and pay normal income taxes.
Question: Who is eligible to contribute to a Health Savings Account?
Answer: Anyone who is working and covered by a high-deductible
health insurance plan. A high deductible plan is defined as one
in which coverage starts after the consumer pays the first $1,000
per calendar year for individual coverage and $2,000 per calendar
year for family coverage. The insurance plan also must limit the
person’s total out-of-pocket costs to no more than $5,000 annually
for an individual or $10,000 for a family.
Question: What’s the maximum amount that can be contributed
to a Health Savings Account each year?
Answer: The maximum contribution is equal to the deductible
on the consumer’s insurance plan, but no more than $2,600 for
individuals and $5,150 for families. Workers age 55 or older can
contribute an additional $500 in 2004. The catch-up contribution
amount will increase by $100 each year until it reaches $1,000 in
2009, said Mark Luscombe, principal tax analyst with CCH, Inc.,
a Riverwoods, Ill.-based publisher of tax information.
Question: What are qualifying medical expenses for Health
Savings Account purposes?
Answer: They are generally defined as costs incurred to diagnose,
cure, treat or prevent a disease. This would include doctor visits
and medications. The plans allow for payments for laser eye surgery
but generally not cosmetic surgery.
Money in a Health Savings Account can also be used for dental expenses
and orthodontia. What’s more, the money can be used to pay
premiums on Medicare coverage, Long-Term Care insurance and Cobra
insurance premiums ( which provides continuing health insurance
for those who are between jobs), Luscombe said.
Health Savings Accounts are frequently compared with Flexible Spending
Accounts, which allow employers and employees to pay for such things
as insurance premiums and health care expenses pre-tax. One of the
biggest differences, however, is that Health Savings Accounts allow
the participant to roll over any unused dollars into his or her
account the following year . Another key difference is that the
account is portable in that it is controlled by the participant
and can be transferred with them from job to job.
Health Savings Accounts appear to be an idea whose time has come.
Some insurance professionals believe that the health insurance industry
is about to experience the same type of change as the retirement
industry experienced when IRA’s and 401(k) retirement plans
were introduced many years ago. In fact, Health Savings Accounts
have many provisions that are similar to these retirement planning
programs.
The message that our government appears to be sending us is clear:
Our country can’t continue to fund health care to the extent
we have in the past, so all of us must take ownership of funding
some of our own future health care expenses. Health Savings Accounts
appear to be a good step in that direction.
Jim Wisdom, CFP is a Certified Financial Planner specializing in
health insurance planning and retirement planning. For more information,
contact Jim at (818)469-6640 or via e-mail at jwisdom@adelphia.net
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