February 5, 2004  Email this  Print this
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HEALTH
Health Savings Account Answers
by Kimberly Lankford
Questions about health savings accounts have been pouring in ever since the tax-free savings vehicle was introduced as part of medicare prescription drug plan last year. Below are the most frequently asked questions we've received and the answers we've found:
Who can get an HSA?
Anyone under age 65 who buys a qualified high-deductible policy can open an HSA. You can't be covered by another health insurance policy that isn't a qualified high-deductible plan (either as an individual or a dependent), although you can still have other disability, dental, vision and long-term care insurance policies.
How much can I contribute annually to an HSA?
You can contribute the amount of the deductible, up to $2,650 for singles and $5,250 for families, each year to your HSA. And if you were born before 1950, you can put in an extra $600.
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Can any high-deductible health insurance policy qualify for an HSA?
Any high-deductible health insurance policy can qualify, as long as it meets the IRS requirements. The deductible must be at least $1,000 for individuals or $2,000 for families, and the annual out-of-pocket expenses cannot exceed $5,000 for an individual or $10,000 for a family, including the deductible and co-payments (but not premiums). So individuals can buy high-deductible policies on their own, or through their employers.
If you're buying a plan on your own, be sure to ask your health insurance company if it qualifies, says Victoria Bunce, research and policy director for the Council for Affordable Health Insurance.
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How and where can I open a health savings account?
It depends on if you're buying coverage on your own or getting it through your employer.
On your own. If you currently own a high-deductible health insurance policy and have an Archer medical savings account, the switch probably occurred automatically. Insurance companies could have started offering HSAs as early as January 1. And most insurance companies that offered Archer medical savings accounts have already introduced HSAs, says Bunce. See, Switching to Health Savings Accounts for more information.
If you haven't heard from your insurer yet, ask if it plans to offer HSAs. You can also contact your state insurance department for a list of companies that offer the new plans in your area (although many states are in the process of gathering the information themselves right now). You may want to wait a few months until more options become available.
Many insurance companies avoided medical savings accounts because they were limited to such a small group. Now that eligibility has expanded to anyone under age 65 with a qualified high-deductible health insurance policy, many other companies are expected to introduce HSAs later this year. "I have heard that there are other companies interested in the market but want to wait until the final HSA regulations come out from Treasury later this summer," she says.
That's exactly what the Eastbridge Consulting Group found when it recently surveyed insurers in the employee benefits business. About 42% of the insurers either have an HSA on the market or under development, while 25% are still studying the issue and haven't yet decided whether or not to enter the business. One-third of the insurers surveyed don't plan to offer HSAs.
You can be sure that insurers will be ready to roll out plans by the fall, which is the health insurance open-enrollment season at many workplaces.
Through your employer. The best place to find an HSA is through your employer. All of the companies in the Eastbridge study that plan to offer HSAs said they'll market the plans through employers. Only about half of the companies plan on marketing HSAs to individuals.
If you have health insurance through your employer, you may have the option to buy an HSA-eligible high-deductible policy. Talk to your benefits manager to see if HSAs will be on your health insurance menu. Choosing such an HSA could knock down your share of premiums significantly, and some employers may choose to fund all or part of the HSA for you -- perhaps even adding a 401(k)-style match.
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Would I fund an HSA with pre- or post-tax dollars?
If your employer offers a high-deductible health insurance policy, you may be able to make pretax contributions, like you would with a flexible-spending account. If you open the HSA on your own, your contributions will be deductible when you file your taxes, even if you don't itemize.
You'll be able to deduct the lesser of either
- Your insurance deductible
or
- $2,650 for individuals; $5,250 for families
If you're between the ages of 55 and 65, you can add an additional $600 to the deduction limits in 2005.
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Do the tax benefits phase out at certain income levels?
Unlike many other tax breaks, there aren't any income limits. Anyone under age 65 who buys a qualified high-deductible policy can open an HSA.
What's the difference between the new HSAs and the flexible-spending accounts? It seems they are for the same purpose.
The tax benefits of both plans are quite similar, but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred.
Money in your flex plan must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you can open a flexible-spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy.
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If my employer offers both, can I fund my flexible spending plan, too?
No. You cannot have an HSA if you use a flexible-spending account to pay health-care costs or if you have other medical coverage (say, through a spouse's policy). However, if your flex plan restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA too.
If I set up HSA through my employer, what happens if I switch jobs?
You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 10% penalty -- plus an income-tax bill -- if you use any of the money for nonmedical expenses before age 65.
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What happens if I want to withdraw the money for nonmedical expenses after age 65?
You won't be hit with the 10% penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.
Can a couple who is planning to retire early open an HSA?
Sure. Anyone under age 65 can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $600 in 2005 if you're 55 or older. This catch-up contribution amount will increase by $100 per year until it reaches $1,000 in 2009.
You can't make new HSA contributions after age 65, but you can still use the money in your account tax-free for medical expenses at any age. You'll owe income taxes on the money -- but no penalty -- if you withdraw the money for nonmedical expenses after age 65.
Do contributions to an HSA in any way affect one's ability to contribute to an individual retirement account?
No. Your HSA contributions won't affect your IRA limits -- $3,000 per year or $3,500 for those over 50. It's just another tax-deferred way to save for retirement.
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