The alphabet soup of health insurance and savings options has swelled by one, leaving many wondering how to spell relief.
Approved in 2003 and launched this year, health savings accounts (HSAs) have joined the lineup of new ways to set aside money for medical costs such as health reimbursement accounts (HRA), flexible spending accounts (FSA) and medical savings accounts (MSA).
While the health care and financial industries are still waiting for final rules from the Treasury Department, there is plenty of interest in HSAs.
"What you've got, obviously, is a crisis in health costs, and this is an attempt to change that dynamic completely," said Dan Perrin, executive director of HSA Insider, a newsletter for the HSA Coalition in Washington. "Health savings accounts will provide a way for people to save for medical costs and retirement."
If you are healthy and don't have a lot of medical costs or you are self-employed or uninsured, you are likely to benefit the most from these plans. Early retirees and conscientious savers can also use HSAs as another place to stash money. You can't open an HSA once you qualify for Medicare. And you can't have one if you are already covered by another existing health insurance plan.
Before making the leap, here are four things you should know about HSAs:
1. It's part savings, part insurance.
There are two parts to an HSA - a savings account and health insurance whose annual deductible must be at least $1,000 for an individual and $2,000 for a family. The idea is that the money you save on your premium, plus any other funds you want to kick in, gets routed to the savings account, said Ryan Levin, a vice president at Destiny Health in Chicago.
The most you can put away in 2004 is the lesser of your deductible or $2,650 for an individual or $5,150 for families.
That money in the savings account is used to pay for qualified medical costs such as doctor visits, dental care and hospital stays. You can't use the money to pay your insurance premium, unless you are unemployed, and cosmetic surgery isn't covered.
Proponents said what makes an HSA better than a flexible spending account is that the money carries over from year to year and the account stays with you even if you switch jobs. And there's flexibility with how your savings can be invested - the HSA can be any type of investment allowed under IRA rules.
2. Tax benefits.
Money that goes into the HSA is not taxed if you use it for qualified medical expenses. Any interest you earn also is not taxed. Once you hit 65, you can use the money for whatever you want, but you'll be taxed at your individual rate.
If you pull the money out for non-medical expenses before you turn 65, you'll pay taxes and a 10 percent penalty on the amount.
3. Everybody is getting into the pool.
Health insurers and financial institutions are scrambling to create some type of health savings account product. Health care companies are starting banks while banks are offering medical insurance products.
"For a bank, this is found money," explained Perrin. "This is money that used to go to insurance companies and now it goes to them."
That means you could face a number of plan choices as more companies roll out their HSA products. You need to read the details of each carefully to decide which company you want to sign up with.
4. It's not for everyone.
"There certainly are some downsides," said Dan Plante, senior manager for PricewaterhouseCoopers in Chicago. "You do need a high-deductible health plan and, for individuals who have low income, can they pay the premium?"
Then there is the prescription drug issue. Starting Jan. 1, 2006, you can't use a drug co-pay, which means you'll have to foot that bill until you hit your deductible limit. Not such a good deal if you are on maintenance drugs that cost at least $100 a month. At that rate, it will take 10 months to meet your out-of-pocket expense, assuming you don't have any other medical costs.
But for most people, particularly self-employed individuals or those who don't have health insurance, experts said HSAs are a good idea.
"For anybody that qualifies, I think this is a fantastic idea," said Kristina Sommerkamp, a certified financial planner in Boca Raton, Fla. "Of course, you also have to fund it."
Lorene Yue is a Your Money staff writer.