NEW YORK - New rules governing Health Savings Accounts are making them more attractive to consumers, who can use HSAs to help reduce health insurance costs now - and, potentially, in retirement. Health Savings Accounts are like Individual Retirement Accounts for health care. They were created by Congress in 2003 so that workers could cover some of their medical costs with pretax money if they have high-deductible health insurance plans.
The idea is that workers and their employers can fund the tax-free accounts, with withdrawals used for copays at doctors' offices, prescription and nonprescription medicines, and hospital services not covered by insurance. Because unused balances in the HSAs can be rolled over from year to year, some financial advisers are suggesting that the accounts can be a way for families to accumulate money to be used to cover health care costs in retirement, including Medicare deductibles and long-term care insurance.
JoAnn Mills Laing, author of "The Consumer's Guide to HSAs," said that there were 3.6 million HSA accounts at the end of 2006 with $5.1 billion in deposits, up from 1.1 million accounts with $1.2 billion in deposits at the end of 2005. She predicts further growth, in part because more companies are offering high-deductible insurance plans to their workers. That's because these plans are less costly for employers and employees than traditional health policies but still give workers coverage for medical catastrophes.
"Employees who hadn't been able to get insurance coverage are enthusiastic if they can high-deductible policies because it gives them peace of mind," said Laing, who is chief executive of Information Strategies Inc., a human resources consulting firm in Ridgefield, N.J. She pointed out that in addition to payments related to Medicare and long-term care insurance, seniors can use HSA dollars for chiropractic sessions, nursing services, dental care and glasses. To qualify, a health insurance plan must have a minimum deductible of $1,100 for an individual and $2,200 for a family. The maximum out-of-pocket expenses are set at $5,500 for an individual and $11,000 for a family.
Under the old rules, consumers could only set aside in their HSAs the equivalent of their insurance deductibles. The new rules have raised those limits so that an individual can put $2,850 into an HSA this year, while a family can put in $5,650. People 55 and older can add $800 as a "catch-up" contribution. Also new this year, according to the Internal Revenue Service, is that employees can ask their employers to make a one-time transfer of the balance in Flexible Spending Accounts or Health Reimbursement Arrangements into their HSAs. (FSAs and HRAs are specialized, employer-sponsored health plans.) And some consumers can exclude from their gross income an HSA funding from an IRA.
The rules are outlined in IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans." Qualifying medical expenses can be found in Publication 502, "Medical and Dental Expenses." Hugh Bromma, chief executive of Entrust Group, a retirement plan administrator in Reno, Nev., said high-deductible policies and HSAs "should be especially attractive to younger people who are healthy and don't expect a lot of claims." He doesn't see the HSA as a substitute for retirement savings plans, such as IRAs or company-sponsored 401(k) accounts, since the retirement plans generally allow people to save more. This year, for example, a worker can set aside up to $15,500 in pretax income in a 401(k) account. The funds grow tax-deferred, and are taxable when withdrawn in retirement.
HSAs also are funded with pretax dollars and grow tax free. But withdrawals are not taxed when used for qualified health care spending. "This means the money accumulates tax free and, if you don't use it, it's terrific savings," Bromma said. "So if you can, why not have both a retirement account and an HSA?" Bromma's firm specializes in self-directed retirement accounts, which make it easier for individuals to invest their savings in nontraditional ways, such as in real estate holdings or limited partnerships. He's seeing some of this investing in HSAs, too.
Laing said that about 90 percent of people covered by high-deductible health plans choose to set up HSAs. She added savers last year pulled out just 30 cents for every $1 they deposited - resulting in a balance of 70 cents for future use. "It grows tax free, so there's no reason not to put money into an HSA," she said. "It will be another way to supplement your retirement income."
