By Victor Freedman
Traditionally, insurance is seen as a kind of gamble: you or your employer bet a yearly premium and deductible to an insurance company that you won’t need more than that amount to cover your annual health care costs. If it turns out you do need more, the insurance company theoretically makes up the difference using premiums from others in the system who pay in more than they need.
But as the cost of health care has skyrocketed, insurance companies have required higher and higher premiums, deductibles and co-pays, or they limit the amount of care the insured receive or the amount their insurance will pay for. As a result, many consumers feel that they’ve lost control over their health care choices.
A Health Savings Account (HSA) is a financial tool that was conceived partly to give back some choice and control to the health care consumer. Created by the Medicare bill signed by President Bush on December 8, 2003, HSAs are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.
An HSA is a tax savings plan that works with a high-deductible health plan (HDHP) to reduce premiums paid for coverage and maximize benefits. Each year, contributions to the HSA may be made up to the amount of the plan deductible, from as little as $1,100, subject to limits set by the IRS. Generally, these plans are available to insured individuals under 65 years-old who are not covered by Medicare or Medicaid, either individually or through their employers. The ideal consumer for an HSA is a young, relatively healthy person who has time to build up savings over many years before the funds are needed to pay for health care. Individuals 55 and older may make “catch-up” contributions.
The money that funds the HSA can be contributed by either employer or employee and subject to the IRS rules. Money deposited into the account through payroll deduction is on a pre-tax basis. Employer contributions are non-taxable to the employee.
The biggest benefit to an HSA is the ability to use the funds for health care expenses that are not normally covered by your regular health insurance plans. The IRS has issued an extensive list of items that are “qualified medical expenses.” This is a unique feature that can be invaluable to a disabled individual. Here is a brief sampling:
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• ambulance service (nonemergency)
• automobile modifications
• braille books
• corrective devices
• long-term care premiums
• lip-reading lessons
• physiotherapist
• rental of medical & healing equipment
• service animal
• closed-captioning for TV
• OTC medications/vitamins
• eyeglasses
• dental care
What won’t HSAs pay for? Generally, medical insurance premiums are not eligible, except in a few instances. You can pay COBRA premiums if you leave your employment or pay long-term care premiums. You may not use HSA funds to pay Medicare premiums. Payments of certain medical expenses, such as cosmetic procedures, are considered not medically necessary and are not allowed.
The HSA can be a win-win situation. Employers save money on premiums. Employees save money by funding with pre-tax dollars. Last but not least, employees own their HSA funds. The money can roll from plan year to plan year. If you choose to pay out of pocket, the funds continue to grow.
It’s important to remember that when dealing with tax-deferred products, you should consult your tax advisor. There are rules that must be followed, and penalties imposed when they are not.
It’s good to to have a product available that incorporates a multitude of the health care items we need that are not necessarily covered by traditional insurance. This type of coverage can be obtained directly from insurance companies and their licensed insurance agents.
Victor Freedman is an insurance and benefits planner who lives in Hartford, Connecticut. If you have questions you’d like Victor to answer about insurance and health financing, you can e-mail him at vfreedman@unitedspinal.org or call 860-246-4519.
