Premium savings. High-deductible health insurance policies typically cost between 20% and 50% less than traditional plans. At Fortis Health Insurance Company, which offers both traditional and high-deductible policies, a family of four consisting of two 37-year-old adults and two children would pay a $600 monthly premium for a traditional insurance policy with a $500 annual co-payment. A policy with a $5,000 annual deductible would cost $250 a month.
The previous example illustrates a best-case example of a healthy couple purchasing a nongroup policy with a very high deductible. Group policies, as well as those with lower deductibles, typically provide less dramatic savings over traditional health plans. "Plans with deductibles of only $1,000 or $2,000 will probably offer premium savings over traditional policies in the 20 % range," says Evans.
How comfortable you feel paying for medical costs yourself. Most Americans who have health insurance are used to going to the doctor and paying a co-payment of $10 or $15 for a typical office visit. Without insurance, even routine health care costs can add up to hundreds or even thousands of dollars fairly quickly. Regardless of the tax advantages HSAs offer, users have to be comfortable with the practical reality of digging into their own pockets to pay for medical expenses.
A Bright Future?
Don't expect to see large employers offering health savings account this year. Many already had their benefit plans mapped out for 2004 by the time the legislation passed late last year, and aren't likely to alter their insurance options before 2005. "The real question is how many employers will move away from traditional plans to high-deductible plans," says Andy Anderson, an attorney with Hewitt Associates, a benefits consulting firm. "Enrollment in existing high-deductible insurance plans has been low, and limited mainly to young, healthy employees with no children. But more people could be drawn to HSAs because of their tax benefits."
The longer-term future of health savings accounts, and their appeal as an investment for those with the resources to maximize their tax benefits, depends in part on whether banks, brokerage firms or mutual fund companies jump in to offer competitive products with a broad choice of investment options. Right now, three carriers dominate the market: Fortis Health (800-800-1212; fortishealth.com), Aetna (860-273-0123; aetna.com) and Golden Rule Insurance (800-444-8990; goldenrule.com).
Fortis, which offers medical savings accounts with more than 8,000 mutual fund investment options, plans to extend those options to health savings accounts as well. Its MSAver plan provides evidence that at least some users have embraced the concept of a health insurance arrangement that walks, talks and smells like a tax-favored savings plan. The MSAver account connected to the plan offers Internet trading, stock quotes, access to phone representatives and other features associated with mainstream brokerage accounts. Participants can pay for out of pocket medical expenses with a healthcare-only debit card or dedicated checking account. No claim forms are necessary.
Health Savings Account Highlights
Beginning this year, individuals can make annual tax-deductible contributions of as much as $2,600 ($5,150 for families) to a health savings account, regardless of whether they itemize on their federal tax returns. Employer contributions are made on a pre-tax basis and are not taxable to the employee. This means employers can make deposits to HSAs on behalf of employees and receive the full employer health insurance deduction for such deposits.
o In addition to the maximum contribution amount, individuals between age 55 and 65 may make additional "catch up" contributions of up to $500 beginning this year, increasing to $1,000 annually in 2009 and thereafter. A married couple can make two catch-up contributions as long as both spouses are at least age 55. The maximum amounts are indexed annually for inflation.
Distributions made for nonmedical purposes are subject to income tax and a 10% penalty. The penalty is waived for distributions made by individuals age 65 and older, or in the case of death or disability. Medical expenses that qualify for tax-free withdrawal treatment include amounts paid for the diagnosis and treatment of disease, prescription drugs, long-term care insurance and long-term care services, continuation coverage required by Federal law under COBRA and health insurance for the unemployed.
If an account beneficiary's surviving spouse is the named beneficiary on the account, the spouse becomes the new account owner. Although the account passes to the spouse tax free, it continues to be subject to regular health savings account distribution rules. If the health savings account passes to a person other than the account beneficiary's surviving spouse, it is no longer a health savings account and the heir is required to include in gross income the fair market value of the assets as of the date of death.