When it comes to health insurance, options are essential. In today's health insurance environment, clients are always searching for ways to maintain good coverage while saving what they can in terms of payments and premiums. A health savings account (HSA) coupled with a high-deductible health insurance plan (HDHP) is one solution that may help your clients save money off high health insurance costs.
An HSA combined with an HDHP provides affordable medical coverage combined with a tax-free way to save money. It can be written for both individuals and groups.
If it is explained to them correctly, employers will be more likely to offer an HSA as part of a dual or triple option selection for their employees as it is a lower-cost option.
The first thing you'll want to explain to clients is that they need two components to have an HSA: a high-deductible health plan and the bank account or investment portion of the plan. Then, tell them what "high-deductible insurance" means according to the IRS regulations and go over the contributions that can be set aside.
Clients may be reluctant at first to consider the idea until you can show them on paper the actual dollar savings available both in health insurance premiums and tax savings.
While few employers are willing to fund the accounts for their employees, many want to take advantage of the cost savings on premiums, as well as having the opportunity to personally fund their own accounts.
HSA overview
A health savings account is a special account owned by an individual and used to pay for current and future medical expenses. These accounts are used in conjunction with a high-deductible medical plan. Money is deposited into this account with pre-tax dollars, and in return, the bank will send a checkbook and or a debit card for the client's use. They can use the money in the account only to pay for qualified medical expenses as defined by the IRS.
With group insurance, either the employer or the employee can make the maximum annual contributions into the plan. Unlike flexible spending or health reimbursement accounts, any money that is not used will roll over year to year. There are no "use it or lose it" rules. Additionally, all monies that are deposited into these accounts are fully vested.
Individual accounts are owned by the individual and not the employer. The individual decides how much they should contribute (if their employer is not making the full contribution), how much to use for medical expenses, and which medical expenses to pay for using money from the account. The employee also makes the decision as to which company will hold the account and what types of investments should be made to help grow the account. Employers are not allowed to restrict distributions from an HSA account, regardless of whether they fund these accounts.
Eligibility
Any individual who is covered by an HDHP is eligible, so long as they are not covered by other health insurance (excluding specific disease or illness insurance and accident, disability, dental, vision, long term care, and prescription-only coverage). In addition, in order to be eligible, the individual cannot be enrolled in Medicare or claimed as a dependent for income tax purposes.
As for the high-deductible health insurance plan, it must have a minimum deductible of $1,100 for self coverage only, or $2,200 for family coverage. The annual out-of-pocket maximums (excluding deductibles and copays) are $5,600 for self coverage only or $11,200 for family coverage. These are the maximums for year 2008 and are indexed annually for inflation.
The 2008 maximum amount that can be contributed (and deducted) to an HSA from all sources is $2,900 for self coverage and $5,800 for family coverage. Again, these are figures for 2008 and are indexed annually for inflation. Contributions can be made by an individual, an employer or both.
There are other considerations, as well. Excess contributions must be withdrawn or be subject to an excise tax, and the self-employed, partners, or S-corporation shareholders are generally not considered employees and cannot receive employer contributions.
The distribution benefits
With an HSA, the distribution is tax-free if taken for qualified medical expenses. These must be incurred on or after the time that the HSA was established, but they do include over-the-counter drugs. The tax-free distributions can be taken for the qualified medical expenses of the person covered by the high deductible plan, or their spouse and/or any dependent, even if they are not covered by the HDHP.
Now, if the distribution is not used for qualified medical expenses the amount is included as income (with a 10 percent additional tax) except when taken after the individual dies or suffers disability and is age 65. The good news is that distributions can be used to reimburse prior years' expenses as long as they were incurred on or after the date that the HSA was established. Also, for individuals age 55 and older, additional catch-up contributions to HSAs are allowed. While there is no time limit on when distributions must occur, individuals must keep records.
More now than ever, individuals and employers are looking for creative ways to maintain affordable health care coverage without jeopardizing the quality of care.
Health savings accounts in conjunction with a HDHP will offer them a lower cost health insurance plan with the ability to set aside money to cover the first dollar costs.
These plans are not a fit for everyone, but they should certainly be one of the many options presented to clients and prospects.
Margo L. Coplan is manager of individual and group insurance products for Riemer Insurance Group Inc. in Hallandale, FL. She can be reached at 305-945-5529 or mcoplan@riemerinsurance.com.
