MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: Thanks to the Medicare reform act passed last summer by Congress a potentially lucrative IRA-like tax advantaged health insurance program becomes available this Thursday for most individuals. They’re called Health Savings Accounts or HSA’s. Like Individual Retirement Accounts investors soon can use HSA’s to build tax-sheltered nest eggs to cover unreimbursed medical costs. The new investment vehicle permits a taxpayer, starting in 2004, to shelter up to $5,150 annually. Under federal law, money put into a HSA is tax-deductible, is invested on a tax-deferred basis and is totally tax-free upon withdrawal if used to pay medical expenses. And this is what makes them unique. While other tax-advantaged savings plans such as Roth IRAs and 401(k) plans offer either a federal tax deduction for deposits or tax-free withdrawals, neither of these programs offers both advantages. But there is a catch. The new accounts are linked to the amount of out-of-pocket expenses you might incur under your existing health insurance which must be at least $1,000 for an individual and $2,000 for a family. If a family has coverage from more than one employer, then the plan with the lower deductible controls whether they are eligible for the HSA. The required deductibles are indexed to inflation. The accounts are designed in part to help consumers pay for health expenses until insurance benefits kick in. When Congress enacted the legislation they assumed it would help both employers and employees. It just might. It is commonly believed that an HSA will reduce a participant's overall health care costs without adversely affecting the participant's health. HSA’s create a tax incentive to save for future healthcare expenses and decrease dependency on health insurance. The intent is to shift some small health care spending decisions to the cost-conscious individual consumer level. Independent studies have consistently shown that people covered with high deductible health insurance plans spend less on their health care with no measurable adverse effect on their long term health. There is no cost for opening or administering the HSA account when you enroll with the qualifying health insurance. Enrolling in an HSA account separately from the HSA-qualified health insurance requires payment of a small annual administrative fee depending on the bank or investment firm that you choose to have the plan with, typically under $25 per year. HSAs are “above the line” deductions; which means the deduction is always available and is not dependant on earnings, tax-fling status, employment status or whether you itemize your tax deductions. Interest earnings inside the HSA account are not taxed. Non-qualified withdrawals are subject to a tax penalty. The account balance may be transferred tax-free to a spouse at death. The deposit is deducted in the year it is made and withdrawals may be taken any time tax-free to pay for out-of-pocket medical expenses. Unused deposits may be rolled-over to an IRA to supplement retirement income. After age 65 account balances can be withdrawn for any reason without penalty. How popular will these programs become? Congressional analysts calculate that 40 million savings accounts would be established by 2013, at a cost to the Treasury of $174 billion. Either employees or employers or a combination of both can make contributions to an HSA. Employers who offer a high-deductible health plan with HSAs must make comparable contributions for all employees with comparable coverage during the same period. The employer contributions are tax-deducted by the employer and are not included as income for the employee. If you leave your company, you can keep and continue your current HSA or transfer it to your new employer’s plan if they maintain one.▲

Medical IRA’s...

Volume 14, Issue 38

December 29, 2003

Health Savings Accounts