Health Savings Accounts 101
A 65 year old who is ready to retire is expected to need at least $200,000 to cover just medical expenses. This is after adding up Medicare deductibles, premiums, co-payments, and other out-of-pocket cost, according to a study by Fidelity Investments. This number will continue to rise. When President Bush signed health savings accounts (HSAs) into law in 2003, as part of the Medicare Modernization Act, consumers could start saving tax free money to use for these future medical expenses. A person must be enrolled in a high deductible health plan (HDHP) independently or through an employer to open an HSA. These health plans require the individual to pay out of pocket for the first $1,100 for self-only coverage and $2,200 for family medical expenses. The maximum annual out-of-pocket amounts for HDHP self-coverage increase to $5,600 and the maximum annual out-of-pocket amount for HDHP family coverage $11,200.
In 2008, HDHP deductibles start at $1,100 for self-only coverage and $2,200 for family. Therefore, policyholders will pay that amount out of pocket to lower their monthly premiums. The deductibles can be higher depending on how the policyholder wants the monthly premium to be and how much they can afford to pay out of pocket.
Once the individual or family is enrolled in an HDHP, they can begin to put money into their HSA. The money that is being saved can be taken out of the account to pay for medical expenses that their HDHP does not cover, such as deductibles, co-payments, dental care, vision care, over the counter drugs, and prescriptions. After 65, a person can no longer put money into an HSA, but only withdraw from it.
The HSA contribution cannot exceed the deductible. An individual can deposit as much as $2,900 in 2008 and $5,800 for a family, as long as their deductible is that large. After 55, they can put additional $900 into the account.
When a person puts pre-tax dollars into an HSA, they are reducing their income taxes. Withdrawals for medical expenses are also tax-free. People can put money away to save in these accounts until they retire or withdraw money over time as needed. A person will be taxed and get a 10% penalty if they use the money from an HSA for anything other than medical expenses. After age 65, they can use that money for whatever they want. They will only be taxed for non-medical expenses and will not have the 10% penalty.
About 3 million Americans have opted for HDHPs and opened HSAs, according to findings by America’s Health Insurance Plans. By 2010, 15 million to 25 million Americans are expected to have HSAs holding $75 billion in assets, according to a study by DiamondCluster International. Some experts have suggested that insurance companies may want to open their own banks or establish partnerships with banks to link HDHPs with HSAs. Some have already done so.
For the most part, insurance companies and banks have only formed loose relationships. The demand for customer friendly HDHPs and HSAs could increase as HSAs mature in the next few years. If insurers do not make the customer’s enrollment experience as effortless as possible, HSAs will become less appealing. By working together, insurance companies and banks will be able to offer hassle free access to HSAs and their insurance policies. These partnerships could include the innovative use of debit cards to withdraw money from an HSA to pay medical expenses.
According to the experts, insurers and banks will have to address the issue of giving customers information about cost and procedures. Another concern is allowing customers to understand where they stand in regards to deductibles, how much money they have in their HSAs, how much money they can put into their HSAs, and whether they have exceeded any limitations. Hewitt Associates revealed that some of its employees who enrolled in a HDHP did not fill out the correct forms in order to open up an HSA because there was no seamless integration between the HDHP and HSA.
HSAs should encourage Americans to spend their healthcare dollars more carefully by tracking their medical expenses. By having to pay out-of-pocket with a HDHP, people will be more aware of how they are spending their money. Americans will need the necessary information to determine how to spend wisely on medical cost.
On the other end of the spectrum, because the deductible is higher, people enrolled in HAS type plans are more likely to spend a large amount of their income on out of pocket healthcare expenses than are people in comprehensive plans. According to a study by the Employee Benefit Research Institute, there is a particular concern that focusing on healthcare cost at the front end ($1,100 for an individual or $2,200 for a family) may encourage employees to avoid preventative care. Although plans can exempt preventive services from the deductible, high deductibles may also discourage people from managing chronic conditions properly. They may forego medications or healthcare services that help monitor those conditions, which would exacerbate the cost problem. Dr. Henry Simmons, president of the National Coalition on Health Care, noted that it is very difficult for the average American consumer to understand the healthcare pricing system. It is even difficult for experts in the insurance field to understand. Still, the fact is that HSAs are here and are expected to grow tremendously over the next five years. Significant changes will be taking place between insurance companies and banks. The amount of money that is expected to be deposited into HSAs over the next five years will fuel insurers’ desires to open their banks. Consumers will also become more aware of how they spend their money since more of it will be coming out their own pockets. As a result, educating consumers on how to spend their money will also become an important role in HSAs and HDHPs.
|Matt Lockard California License #0B51503|
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