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Basics of health savings accounts from the FPA

If the White House gets its way, health savings accounts (HSAs) might finally get serious attention from employers, workers and self-employed businesspeople looking for a way to blunt the high cost of health insurance.

The Bush Administration has proposed a $91-billion expansion of HSAs, which allow workers to save and spend money tax-free for medical needs if they buy high-deductible health insurance policies. Significantly, the administration wants to allow additional tax breaks for individuals who set up the accounts on their own instead of through their employers.

Also, the proposal would allow better portability of these accounts when an individual changes jobs or moves to a new state. The effort has drawn controversy from those who believe HSAs will only benefit wealthier taxpayers.

Regardless of the outcome of the debate, here’s an overview of what HSAs are and how they presently work:

What is an HSA?

Health savings accounts were created as part of the Medicare Modernization Act of 2003 but have not been wildly popular because they’re complicated. Anyone under age 65 who buys a qualified high-deductible health plan (HDHP) can open an HSA. However, you can still own an HSA and be covered under other types of insurance policies that cover liability, dental, vision and long-term care needs, as long as the same expenses are not covered by both your HSA and the insurance policy.

How do I find a qualified policy?

If you’re employed, your employer obviously selects a qualified option and makes that available to you. However, for individuals or sole proprietors buying such policies, you need to put in some search time since HSAs haven’t gotten much of a marketing push. Obviously, ask if your current insurer has a qualified plan, and there are Web sites you can search for ideas — www.hsainsider.com and www.healthdecisions.org.

What are the minimum deductibles for qualified policies?

For 2006, the minimum deductible for high-deductible health policies is $1,050 for individual coverage and $2,100 for family coverage. Policies must also not have an out-of-pocket maximum (including deductibles and co-pays) greater than $5,250 (single) and $10,500 (family).

If I find a policy, should I automatically
buy it?

No. Since this can be a complicated tax issue as well as an insurance issue, it makes sense to discuss this decision with your financial adviser.

How much can I contribute to an HSA?

Your maximum contribution is the lesser of your insurance plan deductible or the maximum allowed by the IRS. For 2006, the maximum annual HSA contribution for an eligible individual is $2,700. For family coverage, the maximum annual HSA contribution for 2006 is $5,450. Similar to IRAs, there is also a catch-up provision for individuals 55 or older — $700 in 2006.

What’s the difference between an HSA and a medical flexible spending account (FSA)?

One important difference is that HSAs allow balances to be rolled over from year-to-year, growing on a tax-free basis as long as they’re used for medical expenses. On the other hand, Medical FSAs require that the money you contribute each year must be spent by year-end or you’ll lose it. But in certain cases, such as when you incur medical expenses early in a year, you can be reimbursed by your FSA without having to fully fund it — so FSAs might be a better option. Don’t be afraid to talk to your human resources professional if you need help.

Can I have both an HSA and a FSA?

It depends. If your FSA provides for limited reimbursement for items not covered by your health insurance plan (such as dental, vision or wellness care), you can use an HSA for items covered by your plan and your FSA for medical expenses that are not.

What happens if I need to use my HSA dollars for any non-medical reason before age 65?

You’ll get hit with a 10% penalty, plus any withdrawals will be taxed at ordinary income tax rates. After age 65, you’re free to use the funds for any purpose without penalty, but non-medical withdrawals are still taxable.

This column is provided by the Financial Planning Association of Mississippi, the membership organization that connects those who need, support and deliver financial planning. FPA members believe that everyone is entitled to objective advice from a competent, ethical financial planner to make smart financial decisions.

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