Health Savings Accounts Grow In Popularity
(Dow Jones) As high-deductible health insurance plans become offered by more and more companies, the tax-free Health Savings Accounts associated with them are gaining popularity.
Financial advisor Carolyn McClanahan in Jacksonville, Fla., encourages all her clients who are eligible to consider using the accounts. "If they have it as an option, I recommend it," she said.
McClanahan is also a physician, and many of her clients are young surgeons with big incomes and tax bills but relatively little in savings so far. She regularly recommends use of the high-deductible plans and HSAs to medical practices and other professional groups because of the tax benefits.
Michael Thompson, a principal and the NY-metro healthcare practice leader in PwC Human Resource Services, said he sees small firms of professionals using the plans, not just big companies trying to save on health-care plan costs. "High deductible plans have been around for a while, but they're becoming the primary plan for many, many more employers," he said. "It's one of the most tax-favored vehicles that exist today."
Companies like the lower premiums for the plans, which to be qualified as high-deductible in 2011 must have a minimum annual deductible of $1,200 for an individual and $2,400 for a family, as well as a maximum out-of-pocket limit for in-network expenses of $5,950 for an individual and $11,900 for a family. Companies with such plans are allowed to offer HSAs, so employees can make pre-tax contributions. No tax is paid if the savings are used for medical expenses.
Unlike the more prevalent flexible spending accounts associated with other health care plans, the money in HSAs does not have to be spent in the calendar year. Instead, it can build and be invested much like money in an Individual Retirement Account. Should it be used in retirement for non-medical expenses, it is taxed as ordinary income for those 65 and older.
Fidelity Investments estimated that a couple retiring in 2010 at age 65 could expect to pay $250,000 for Medicare premiums and out-of-pocket health care expenses. "The HSA should be the first place someone invests after they've contributed to the company 401(k) match," said Will Applegate, vice president of product management at Fidelity Investments.
He said about 30% of the people using the Fidelity HSAs are saving the entire contribution and instead using after-tax dollars to pay deductible health costs. About 80% to 90% are saving at least some of their contributions for the following year. Growth on the savings is also tax-free.
Applegate recommends that investors keep at least some of the assets in cash, if they expect to use it that year, but should otherwise invest the assets "consistent with other retirement funds."
Advisors can help investors make the decisions about HSAs, which unlike a flexible spending account, could be used decades from now for medical expenses and don't need to be kept in the employer plan, said Paul Fronstin, director of health research at the nonprofit Employee Benefit Research Institute.