Little-known HSAs are a good plan for some

Your Money

July 09, 2006|By HUMBERTO CRUZ | HUMBERTO CRUZ,TRIBUNE MEDIA SERVICES

They won't magically solve the problem of rising health care costs, and they won't work for everyone. But more Americans should become familiar with health savings accounts, or HSAs.

Few are. A survey by the Kaiser Family Foundation in February found that 45 percent of Americans said they had not heard about HSAs, which have been available since 2004. Another 24 percent said they had heard about HSAs but did not know what they were.

HSAs are tax-advantaged accounts that allow people not eligible for Medicare to set aside money for health care costs. To be eligible to open an account under government rules, your only health insurance must be a high-deductible policy.

For this year, the deductible must be at least $1,050 for single coverage and $2,100 for families. Nearly 3.2 million Americans were covered by HSA-eligible policies as of January, according to the industry group America's Health Insurance Plans.

The idea behind HSAs is that, by accepting a higher deductible, you can lower your premium. Then you set aside money in the health savings account. The funds are portable if you change jobs and can be rolled from one year into the next.

Proponents say they encourage consumers to shop for medical care and drive down costs. Opponents say they only benefit the young, well-off and healthy, and may discourage people on tight budgets from seeking care.

Whatever your point of view, consider the problem: According to an estimate by Fidelity Investments, a 65-year-old couple retiring this year without employer-sponsored retiree health insurance needs $200,000 to cover medical costs in retirement.

This estimate, up an average of 5.8 percent a year since 2002, includes the cost of Medicare Part B and Part D premiums, co-payments, deductibles and excluded benefits, and out-of-pocket costs for prescription drugs. It does not even include the cost of over-the-counter medications, most dental services and, if needed, long-term care.

With insurance premiums rising more than three times faster than salaries, Americans "should be calculating and factoring lifelong health care expenses into their overall financial planning," said Brad Kimler, a Fidelity executive.

One tool is the health savings account (for a list of insurance companies offering eligible policies and of financial institutions offering HSAs, check out Web sites such as www.health decisions.org/HSA, www.hsa finder.com and www.hsainsider .com).

For this year, account holders can contribute the lesser of their policy deductible or $2,700 for individual coverage or $5,450 for family coverage. People age 55 and older can make an additional $700 catch-up contribution.

"A HSA may not make sense for everyone, but the emerging trend is clearly toward coverage of catastrophic or major expenses rather than all expenses, and putting medical dollars in the hands of consumers to use how they see fit," said Mari Adam, a certified financial planner in Boca Raton, Fla., who has a health savings account.

Adam, 48, figures she's saving $200 a month or more in premiums, and, based on her $1,800 deductible, can contribute $450 each quarter to her account.

"In essence, you are buying real health insurance rather than prepaying [through a higher premium] for medical services you might or might not need," said Vita Nelson, editor of the newsletter The Moneypaper.

"But the out-of-pocket expenses can be a rude shock if you're used to traditional health coverage" with a low deductible, Nelson said. That's a key point: While it is not mandatory, you'll want to fund the health savings account to the max so you can handle expenses as they come.

The money you deposit in the account is tax deductible, grows tax-deferred and can be withdrawn tax-free at any time for qualified health care expenses, including those not covered by the insurance policy, such as eye examinations or long-term care.

Humberto Cruz writes for Tribune Media Services.

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