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Health Savings Accounts: The New 'Medical IRA'

A key goal is to help you manage health-care costs

First of five stories

MONDAY, Aug. 22, 2005 (HealthDayNews) -- Sick of costly health insurance premiums? Tired of HMO restrictions? Then maybe an "HSA" is for you.

A health savings account, or HSA, is like an individual retirement account for medical care. You can contribute up to $2,650 for an individual and $5,250 for a family, and that nest egg can be invested to earn additional income.

For many, one attraction is the favored tax treatment HSAs offer, although proponents say they can also help to contain the rising costs of medical care by encouraging consumers to spend their dollars wisely.

"The money is tax-free going in, it accumulates tax-free, and when it comes out, as long as it is spent on qualifying [medical] expenses, it comes out tax-free," said Tom Billet, a senior benefits consultant in the Stamford, Conn., office of Watson Wyatt Worldwide, a benefits consulting firm.

Plus, HSA participants can deduct the entire amount of their annual contribution from their federal income taxes.

To qualify for one of these accounts, you have to be enrolled in a "high-deductible health plan." This is a type of insurance policy that typically has a lower premium than traditional health insurance and a higher-than-usual deductible -- at least $1,000 for an individual or $2,000 for a family, although those minimums can be much higher.

Before a high-deductible plan starts covering expenses, an individual could spend as much as $5,100 out-of-pocket this year, including the deductible and co-payments. The out-of-pocket cap for a family is $10,500 in 2005.

People accustomed to paying, say, $10 or $20 for an office visit under a traditional health insurance plan may be taken aback the first time they see the doctor while using a high-deductible plan.

"They're going to have sticker shock, and that's tough," conceded JoAnn Laing, president of Information Strategies Inc., of Fort Lee, N.J., and author of The Consumer Guide to HSAs.

Still, Laing said, HSAs can make sense because many people often spend more on their annual health insurance premiums than they do on medical treatment. "So if you lower the amount you're paying for your premium, those dollars saved may go into paying for your treatment," she said.

The idea behind HSAs is to get Americans to save money for future medical expenses and, when they spend, to do it judiciously. HSAs are one of President George Bush's options for reigning in the escalating cost of health care in the United States.

Some people use their HSAs to save for future medical expenses, because there's no penalty for carrying funds over from year to year. Others use their accounts to pay for routine medical costs, including doctor visits, hospital bills and prescription and over-the-counter drugs.

There are several ways to open an HSA. If you get health benefits at work, see whether your employer offers an HSA-qualified high-deductible health plan. Sometimes those plans come bundled with an HSA option. And some employers will make annual contributions toward a worker's account.

If your employer does not provide health benefits, you can buy into a high-deductible health plan and set up your own HSA or look for a bundled product on the market. Consumers can sign up for HSAs with banks, credit unions, insurance companies and other approved companies, according to the federal government.

An HSA may not be the best option for everyone, however.

Consumers who can't put aside enough money to fund their HSA or who can't afford high deductibles probably would do better in a traditional health plan. So would chronically ill individuals who typically spend up to or over their annual deductible every year, leaving nothing to carry over year-to-year.

"For younger, healthier people with few medical expenses, this [an HSA] is probably a plan that works pretty well," Billet said.

More information

You can learn more about HSAs by visiting the U.S. Treasury Department.

SOURCES: Tom Billet, senior benefits consultant, Watson Wyatt Worldwide, Stamford, Conn.; JoAnn Laing, author, The Consumer Guide to HSAs, and president, Information Strategies Inc., Fort Lee, N.J.; U.S. Department of the Treasury, Washington, D.C.
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