MAGAZINE   November Magazine Contents Web Links Past Issues Try a Free Issue Customer Service Feedback GETTING STARTED Life Insurance Made Simple Smart Shopper's Guide to Auto Insurance Fill the Holes in Your Homeowners Insurance Buying Your Own Health Insurance Health Savings Account Answers Why You Need Long-Term Care Insurance MORE... INSURANCE TOOLS How much should I put in my flexible spending account? Estimate your medicare prescription drug savings How much life insurance do I need? How can I reduce mortgage insurance costs? HSA Q&A   Still have questions about HSAs? Share them in the Kiplinger.com Community.

INSURANCE
A New Way to Save on Premiums
by Mary Beth Franklin & Kimberly Lankford

Looking for relief from soaring health-insurance costs? You just might find it this fall as more employers -- including the federal government -- begin offering a new choice: a high-deductible policy tied to a health savings account (HSA). The high-deductible policy will cut your monthly premiums while the savings account will cut your taxes.

If your employer doesn't offer the option during this year's open season, you might want to start agitating to have it added ASAP. If you're self-employed and buy insurance on your own, you may already have a high-deductible policy because anything else can be prohibitively expensive. If so, you may open a tax-saving HSA on your own.

The plans became available this past January, but you're forgiven if you know little about them. Employers are just beginning to build them into benefit plans. By this time next year, though, HSAs will be widespread. A survey of nearly 1,000 employers, conducted by Mercer Human Resource Consulting, found that three-fourths of them expect to offer HSAs for 2006. "We're looking at a major market change unlike anything we have seen before," predicts Linda Havlin of Mercer's health-care and group-benefits consulting practice.

Whether you'll face the HSA choice within the next few weeks or later, you need to understand how the plans work to know whether they're the best option for you and your family.

The basics

HSAs are the latest in the move toward "consumer driven" health care. The theory behind the concept: The more of your own money that you have to spend, the more likely you are to make financially smart decisions, such as skipping a visit to an emergency room for a minor problem or choosing generic rather than brand-name drugs. The high-deductible policy means paying more out of pocket before your insurance kicks in; the tax-favored savings account holds the money to pay those bills.

To qualify for an HSA, you must be under age 65 and purchase a policy with an annual deductible of at least $1,000 for an individual or $2,000 for a family. This policy must be your only health insurance. Once the policy is in place, you may set up an HSA and contribute up to the amount of your policy's deductible -- to a maximum of $2,600 for singles and $5,150 for families. If you are 55 or older by the end of the year, you can contribute $500 more than the policy deductible.

Money you put into the account can be deducted on your tax return -- whether or not you itemize deductions. In the lowest tax bracket, a $1,000 contribution will save you $100 in federal income tax; in the top tax bracket, a $5,000 contribution will save $1,750. You'll get state income-tax savings, too, and if your HSA is part of a group plan, your deposits will also dodge the 7.65% social security and medicare tax. Another potential plus of group HSAs: Employers can contribute pretax money to your account, just as they put money into your 401(k). Because a high-deductible policy saves the employer money, such contributions let it share the wealth.

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