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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

January 8, 2004

"Health Savings Accounts"

While all the attention recently went to the drug benefits that Medicare recipients would be getting under the recently enacted Medicare reform bill, another important new kind of medical savings account was created as part of the bill which could have even greater impact for people before they retire. It is called the Health Savings Account (HSA), and it went into effect on Jan. 1.

Here is how HSAs work:

  • In order to open an HSA, you have to have a high-deductible health insurance plan with a deductible of at least $1,000 for a single and $2,000 for a family. The plan also must have a high cap on out-of-pocket medical expenses of, at most, $5,000 per individual and $10,000 for families.
  • You can contribute up to age 65 on a pretax basis, thereby escaping federal and state income and Social Security taxes. Any money that you invest in the HSA grows tax-free and can be withdrawn tax-free as long as it is used for allowed medical expenses. If you dip into the account and use the money for nonmedical expenses, you have to pay a 10% penalty and income taxes on the withdrawal.
  • You can contribute up to $2,600 a year for a single and up to $5,150 for a family into your HSA. If you are between age 55 and 65, you can add an additional $500 to your account each year as a "catch-up" contribution. Once you reach 65 and are eligible for Medicare, you can't contribute to the HSA anymore.
  • You can invest the HSA money in stocks, bonds, mutual funds and bank savings accounts, like CDs, to help fund your future health expenses.
  • If you don't use the money in your HSA in one year, it can be carried over into future years, unlike Flexible Spending Accounts now offered by many companies in which you use the money or lose it each year.
Insurance companies are already gearing up to offer HSAs, with United Health Group's Golden Rule Insurance, Aetna and Fortis in the lead. If you open an HSA, you are agreeing not to accept fully comprehensive health insurance because you have signed up for the high-deductible insurance coverage. However, you can use money from the Health Savings Account to pay down your deductibles and other non-covered expenses.

These new accounts will probably be most popular with younger, healthier people who are unlikely to have huge health bills and can use the accounts as a way to accumulate a lot of money toward health expenses in later life that might not be covered by health insurance. The accounts are also attractive for higher-income people, because the higher your tax bracket, the more benefit you get from the tax breaks. I expect a lot of small businesses to offer these accounts to their workers instead of more expensive and comprehensive health insurance.

Whether Health Savings Accounts are right for you depends on your financial and insurance situation. But it is certainly better to have the option of opening such an account than it was before they were created.

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