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A Healthy Choice:
Health Savings Accounts offer tax advantages,
help control healthcare spending
Families, individuals and employers hard-hit
by rising healthcare costs can start fighting back this year with
Health Savings Accounts (HSAs), a relatively new tool designed to
ease the burden of medical expenses and provide greater spending flexibility.
HSAs were created as part of the Medicare reform legislation signed
into law by President Bush in December 2003. The accounts, which are
designed to be used with high-deductible health plans, are essentially
medical IRAs that allow for the accumulation of tax-free dollars to
cover the costs of future medical expenses.
``HSAs represent a new way for consumers to think about healthcare
costs,’’ says Kathy Burlison, director of tax implementation
for H&R Block. ``Managed prudently, HSAs can help reduce both
premium and out-of-pocket healthcare expenses. They can also create
an incentive for maintaining good health.’’
Growing interest in HSAs
HSAs represent an improvement on Medical
Savings Accounts, or MSAs, which were created in 1996 and limited
to the self-employed or those who work for companies with fewer than
50 employees. In contrast, HSAs are open to anyone who enrolls in
a high-deductible health plan.
Employers and consumers are increasingly turning to high-deductible
health plans as a way to reign in soaring medical expenses. In exchange
for a dramatically lower monthly premium, the plans require an annual
deductible of anywhere from $1,000 to $5,000.
Currently, only 1 percent of employers offer high-deductible plans,
but interest is rapidly growing, according to Mercer Human Resource
Consulting. Nearly 75 percent of employers recently surveyed said
it was either very likely or somewhat likely that they would begin
offering an HSA-high deductible option by 2006, according to Mercer.
HSAs have tax advantages
How do HSA plans work? It’s simple.
Money, including the savings from the lower healthcare premium, is
invested in a tax-free HSA account. Contributions to the account can
come from the employee, the employer, or both. The consumer then uses
money from the HSA to pay (or be reimbursed) for ongoing out-of-pocket
medical expenses, including deductibles and co-pay amounts.
The good news is that both the contributors
save in several ways:
- Contributions to HSAs are tax deductible.
- Interest earned on the savings is tax-deferred
and in many cases is tax-exempt.
- Distributions are tax free, provided the money
is used to pay for qualified medical expenses.
- Insurance premiums are lower.
Generally, contributions made by the employer,
employee or both combined are limited to the amount of the annual
policy deductible. If you have self-only coverage, your annual contribution
can not exceed $2,600 ($3,100 if you’re age 55 or older). For
family coverage, the maximum contribution is $5,150 (or $5,650 if
you’re age 55 or older and $6,150 if both you and your spouse
are age 55 or older).
Greater personal responsibility
Another bonus is that the plans are
portable from employer to employer, and they also roll over year to
year. That means you can continue to accumulate money even if you
don’t spend it all on medical expenses in any given year. And
once you reach age 65, the money can be used to pay for certain insurance
premiums like Medicare Part A & B, Medicare HMO and the employee’s
share of retiree medical insurance premiums.
Should you want to use the money for
non-medical purposes, you are free to do so, provided you’re
willing to pay taxes on the distribution along with a 10 percent penalty.
However, once you reach age 65, you can use the money for any purpose
without paying the 10 percent penalty; the money you take out that
is not used for qualified medical expenses is subject to tax.
For more information about HSAs, contact
your H&R Block tax professional, your employer or visit www.irs.gov. |
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