Use of Health Savings Accounts up 35 Percent; Critics See Them as Tax Shelter

The number of Americans with insurance plans tied to health savings accounts has passed the 6 million mark, according to America's Health Insurance Plans. HSAs are tax-favored, individually owned savings accounts that can be used to pay for medical expenses in conjunction with a high-deductible insurance plan. About 6.1 million Americans were covered through HSA plans in January 2008, up 35 percent over the same period a year earlier, according to AHIP, a trade association representing insurers. The plans have been in existence since January 2004.

About 30 percent of individuals covered by HSA plans worked for small businesses, 45 percent worked for large employers, and 25 percent bought insurance in the individual market. The small-group market is the fastest-growing segment for HSAs. The AHIP survey found that HSAs are helping more Americans afford health insurance. HSA plans accounted for 31 percent of new coverage in the small-group market over the past year, and 27 percent of new coverage in the individual market.

The average deductible for the best-selling HSA plans in the small-group market was $2,244 for single coverage and $4,356 for family coverage, according to AHIP.

Average annual out-of-pocket limits were $3,462 for single coverage and $6,690 for family coverage.

Premiums averaged $3,189 for single coverage and $8,125 for family coverage.

"The increasing popularity of HSAs is a result of managed care's failure," said John Goodman, president of the National Center for Policy Analysis, a Dallas-based public policy research organization. "The best way to control health care costs is to put patients in control of more of their health care dollars."

Critics of HSAs, however, pointed to another study. The Government Accountability Office found that taxpayers with HSAs in 2005 were, on average, more than twice as wealthy as other taxpayers. Contributions to HSAs were more than twice as high as withdrawals. "HSAs clearly are attractive to higher-income people who are looking for tax shelters," said Rep. Henry Waxman (D-Calif.). "But they aren't the answer for providing adequate health insurance coverage for the average American. This report provides further evidence that we need to re-examine whether this is the right way to use the government's resources to address our health care needs."

The House recently passed legislation that would require HSA trustees to substantiate that withdrawals from the accounts were used for allowable medical expenses. Republicans who opposed this provision said it was designed to undermine HSAs by adding unnecessary administrative burdens. "Democrats should stop trying to dismantle this coverage option," said Rep. Charles Boustany (R-La.). "These accounts help cover the uninsured and lower health costs with preventive care, lower-cost medicines and fewer visits to emergency rooms."

The HSA studies are available at www.ahipresearch.org and www.gao.gov.

Health Savings Accounts can do double duty as backup for insurance, retirement booster

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."

IRS Announces 2007 HSA Limits

CHH Online

The IRS issued guidance on the maximum contribution levels for health savings accounts (HSAs) and out-of-pocket spending limits for high deductible health plans (HDHPs) that must be used in conjunction with HSAs. These amounts have been indexed for cost-of-living adjustments for 2007.

Annual contribution levels

* For 2007, the maximum annual HSA contribution for an eligible individual with self-only coverage is $2850. (Note: for any individual, the maximum contribution is the lesser of the indexed amount or the deductible of the HDHP.)
* For family coverage the maximum annual HSA contribution is $5,650.
* Catch up contributions for individuals who are 55 or older is increased by statute from $700 to $800 for 2007.
* Both the HSA contribution and catch up contribution apply pro rata based on the number of the months of the year a taxpayer is an eligible individual, and, with respect to the catch up contribution, the number of months of the year that the taxpayer is age 55 and over.

Out-of-pocket spending

* The maximum annual out-of-pocket amount for HDHP self-coverage increases to $5,500 and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $11,000.

Minimum deductible amounts

* For 2007, the minimum deductible for an HDHP increases to $1,100 for self-only coverage and $2,200 for family coverage. (IRS Rev. Proc. 2006-53, IRB 2006-48, Nov. 27, 2006.)

http://hr.cch.com/news/payroll/112106a.asp