If you've ever lost money in your medical flexible-spending account at year's end or feel as if you're paying too much for medical insurance you don't use, a health savings account, or HSA, may be the answer. Health savings accounts, created for people under age 65 and not on Medicare by the Medicare Modernization Act of 2003, allow individuals and employers to make tax-free contributions to a savings account to be used for medical costs.
Unlike flexible-spending accounts, money in HSAs earns interest and can be rolled over from year to year. It passes on to a spouse or beneficiary should an account holder die.
Available since early 2004, the HSA is the latest option for people fed up with or unable to afford traditional heThursday, November 04, 2004 9:38:15 PMve health coverage through the combination of a health savings account and a mandatory high-deductible health insurance plan (HDHP), up from 438,000 in September 2004, according to a recent study by a national insurance trade association.
An HDHP is an inexpensive insurance plan with a high deductible, intended to cover only major medical expenses. People with other basic medical insurance, such as an HMO or PPO, are not eligible for HSAs.
A big part of their appeal is that HSAs carry a "triple tax advantage," said Ellen Laden, a spokeswoman for Golden Rule Insurance Co. in Indiana, one of the first companies to offer HSAs and a pioneer of their predecessor, the medical savings account.
Contributions to an HSA, earnings or interest that accrues and withdrawals for medical expenses are all free of taxation, she said.
Other appealing aspects of the HSA are that it is portable and belongs to the individual, even if it was offered through an employer. If a person leaves a job or a state, the account goes with him.
The funds can be used for nonmedical purposes, but the withdrawal would be taxed and penalized 10 percent. After age 65, the money can be used for any purpose, and normal tax rules apply.
Arizona is among Golden Rules' five fastest-growing markets for HSAs, Laden said.
Tucson small-business owners Dean and Jolinda McCook began offering an HSA and associated health plan to employees at McCook Boiler & Pump Co. more than a year ago.
The business went through a lot of insurance companies as premiums went higher and higher, Jolinda McCook said.
"None of us here was satisfied with what they were giving, their plans, anything, how they did their paperwork. We just weren't happy with them," she said.
They were facing tough decisions, including whether to have employees pay part of the premium for the first time and not offering insurance to new employees, McCook said.
"We just weren't sure what we were going to do. It was not feasible that we could continue," she said.
After doing research, the company went with HSAs offered by Tucson-based HealthEquity, an HSA administrator.
McCook Boiler & Pump pays the premium on the health insurance and makes a contribution to the eligible employee's HSA of $111 a month for those with accounts covering only themselves and $211 for those with family coverage. Employees can make additional, untaxed contributions to their HSAs.
It's far more economical and has eliminated the unpleasant surprises in premium increases that inevitably accompanied insurance renewals, McCook said. It's also the insurance option the McCooks have for themselves, and they love the opportunity to save and the convenience of the plan, McCook said.
"It works great because HealthEquity gives us a little charge card thing. So when we go into a doctor's office, a hospital, an emergency room, you give them your card, they swipe it, and it comes right out of that (account)," she said.
Evan Wise of the Tucson consulting firm Management One has a similar plan. He said insurance that covers only major medical care encourages people to make considered decisions about their health care and is less likely to be abused than other plans.
HSAs are not a new concept. They were preceded by the medical savings account, a similar account that was allowed by the government on a trial basis for a few limited groups, including small businesses and the self-employed.
The HSA's initial market has been similar, the self-employed, doctors and lawyers and employees of small businesses. But HSAs are also making inroads with early retirees having to buy individual health insurance for the first time and with large employers.
HealthEquity is signing contracts to offer HSAs to Glendale Union High School District employees and to 12 rural school districts in the state, as well as at southern Arizona's largest accounting firm, Beach Fleischman & Co., according to CEO Dr. Stephen Neeleman.
He believes people will increasingly find them practical and choose them over traditional managed-care plans once they see how much they already are spending on the ever-increasing premiums, co-pays and deductibles.
An HSA is best for healthy people because they keep all the unspent money, but people spending a lot out of pocket for health care should also consider an HSA because they could be making those expenditures with tax-free dollars, Neeleman said.
Under tax law, the health insurance deductible must be at least $1,000 for single coverage and $2,000 for family coverage.
The law also caps out-of-pocket costs, including deductible, co-pays and co-insurance, at $5,100 for single coverage and $10,200 for families.
Because of the high deductible, the cost of such a plan can run less than half of a traditional plan, said Steven Pielacha, a Tucson insurance broker.
Then people can contribute to an HSA up to the amount of their deductible, with all amounts adjusted annually.
Laden of Golden Rule showed how a family of four could benefit from an HSA.
A young Tucson family of four choosing a policy with a $5,250 family deductible would pay about $196 in monthly premiums for high-deductible insurance with Golden Rule. That compares to $536 a month for a preferred provider organization plan that pays 80 percent of medical costs after a $500 deductible. The savings from the insurance premium could then be contributed to the HSA up to the $5,250 limit.
Not everybody is a fan of HSAs.
Critics such as the Center for Budget and Policy Priorities, a nonpartisan research group in Washington, D.C., said the accounts will lure healthy people with higher incomes out of traditional, employer-based, comprehensive insurance plans and leave only the sickest. That in turn will drive the cost of group insurance even higher and price some employers and their employees out of the insurance market entirely, they said.
Those marketing the HSAs said the option is bringing uninsured people into the ranks of the insured.
Pielacha said one-third of his clients who open an HSA were previously uninsured.
Neeleman said on a national level, 40 percent of people with HSAs previously were uninsured.