This week, Gail responds to two questions based on her previous column about Health Savings Accounts, which were included in the Medicare legislation signed late last year.
Thank you for the informative article on the new Health Savings Accounts.
1) Does it make sense for a business owner to make the full family contribution of $5150 and still pay his medical expenses out-of-pocket? Is this allowed? Since there are income restrictions for Roth IRAs, it seems that the HSA could serve as a pretty fair retirement vehicle even with the 10 percent penalty.
2) What happens to the account balance that is unused when the contributor dies?
Thanks for the compliment! Health Savings Accounts are brand-new high-deductible health insurance accounts. Essentially, the insurance doesn't kick in until you've paid $1,000 worth of medical expenses out of your own pocket if you're single, or a total of $2,000 if you have family coverage. But you get to set aside the money to cover these out-of-pocket expenses via tax-deductible contributions. If you have individual coverage you can set aside as much as $2,600; the maximum contribution for a family is $5,150. These amounts will be adjusted every year for inflation.
Now here's where some folks get pretty jazzed about an HSA: If you don't spend all of the money you've set aside in your account, it remains there, growing on a tax-sheltered basis. In other words, as you clearly understand, Peter, these accounts can be a substitute retirement savings vehicle, similar to a nondeductible IRA.
Martha Priddy-Patterson, a director with Deloitte & Touche, says you're "absolutely right" to consider not dipping into your HSA to cover medical bills if you don't have to. "You're under no obligation to pay your medical bill out if the HSA account. If you can afford not to, it's smart." If nothing else, leaving the money in the account allows you to build up a kitty in the event you do have a major medical expense, whether planned (braces for your two kids) or unplanned (you're in a car accident).
Keep in mind that withdrawals before age 59 1/2 for expenses that are not health-related will result in a 10-percent penalty, plus ordinary income tax on the gains. However, provided the money is used for medical bills — at any age — your withdrawal is tax-free. And once you're past the 59 1/2 milestone, you can even take withdrawals for non-health expenses without a penalty (you'll still owe income tax on the gains, though). If you're planning to use your HSA for retirement purposes, stay abreast of current IRS regulations — it is not inconceivable that the rules for these accounts could change once they come into widespread use.
In order to qualify for a Health Savings Account, you can't be covered by a low-deductible health insurance policy, say, through your or your spouse's employer. However, this doesn't mean you can't have ANY other health-related insurance. You can have an HSA and also have dental and vision insurance, as well as disease-specific insurance which kicks in if you develop, say, cancer or heart disease.
Moreover, you don't have to be employed to have an HSA. "That's one of the major differences," say Priddy-Patterson, "It's not linked to an employer."
If you die with money left in a Health Savings Account and your spouse inherits it, he/she can simply assume ownership of the account without any tax consequences. Your wife would be entitled to tax-free withdrawals to pay for, say, long-term care, Medicare premiums, or doctor visits, or any other health-related expenses.
If you die and have no spouse to take over your HSA, it will generally go to your estate. A non-spouse beneficiary such as a child cannot assume the account. He or she must cash it out and would pay ordinary income tax on the value.
And just because Congress recognizes this is 21st Century America, they've even included provisions that allow an HSA to be divided in the event of divorce! (Not that I'm assuming you're interested in this aspect of these accounts, Peter!)
Thanks for providing information on HSAs. They sound perfect for me (self-employed, good health, 43 years old). Are you aware of a web site that analyzes, compares or at least lists some of the primary providers of HSAs and premium ranges? I would like to research the HSA option, but of course, my insurance company has a vested interest in the plan(s) it presents to me.
While there is no centralized, "neutral" source of information on Health Savings Accounts, you might want to start by checking out http://www.cdhca.org. It's a Web site operated by a consortium of companies which provide HSAs. Frankly, there's not much to this site except a link to each sponsor's Web site. However, once there, you'll find lots of information about HSAs. It's a good place to start. At least it will give you the ammunition you need to ask intelligent questions so you can select the provider that best meets your needs.
By the way, In case you're wondering, "CDCHA" stands for "Consumer-Driven Health Care Association." Huh? (That was my reaction, too.)
Deloitte & Touche's Priddy-Patterson says CDHCA is comprised of health insurance companies that provide policies where "the individual covered is herself actively engaged in choosing the providers she'll go to." In other words, if you're paying a big chunk of your own medical expenses (because the deductible is so high), you're going to have a personal interest in selecting the doctors you see and the tests you undergo.
And get this: Priddy-Patterson says, "Generally, these plans come with a health coach and website." Essentially the coach is someone who tries to nudge you into being a more responsible health-care consumer. "For instance," she says, "If you have tests done, the coach will call you up and the discuss results and treatment options."
Your coach might say, "Gee, your cholesterol is too high. We could prescribe medication which would cost you about $60/month, or you could consider working exercise into your routine. Why don't you try a walking program for 2 months and then we'll re-test your cholesterol to see if you still need medication?"
The point, says Priddy-Patterson, is to educate people so they're making smarter decisions about their health care. "When they have to see a doctor, you want them to be asking questions such as, 'Is there a less expensive alternative? Do I need all 5 tests? Why don't I start with the one most likely to pinpoint the problem and if that doesn't help, then we can try the other four tests one at a time?' "
Most of us don't ask these kinds of questions in the doctor's office because we assume the doctor knows best and wouldn't recommend a procedure/test if it weren't necessary. And, let's be honest, if your company health insurance is picking up the tab, what's the financial incentive to do so?
But with HSAs, the insured person is paying a good deal of his medical bills himself until the deductible is met. By law, this is $1,000 for individual coverage and $2,000 for a family. So you should be more motivated to seek out the best health care at the most reasonable cost.
Hope this helps,
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