I recently attended a class on Health Savings Accounts and was reminded why I like them so much. They are one of the few tools the IRS provides that are actually useful for everyone to use. The following are some reminders about why they are so useful.
• You need a high deductible health plan (HDHP) or an HSA plan from your insurance company. An HDHP does not have co-pays. In general it means that you pay out of pocket for your doctor visits and prescriptions until you meet the deductible amount.
• You need to open up an HSA account at a local bank that acts as the HSA trustee so opening a savings account will not do. The HSA plan from the insurance company will come with an account but an HDHP will not.
• An individual plan can contribute $3,100 and a family plan can contribute $6,250 for 2012.
• An HSA reminds you that you are in charge of your medical expenses. So when you visit the doctor you just don’t nod your head and agree to his tests. You will find yourself asking how much the test costs. You will find there is a “cash” price and the price that is given to your insurance company. Many times the “cash” price is less and you’ll find yourself not submitting the cost to the insurance company. Of course when you do this it doesn’t count towards your deductible, but let’s be honest how many of us actually reach those deductibles? It will also cut down on how many times you pay a $20 co pay for a prescription when it actually only costs $5.
• Depending on if you fully fund the HSA and how often you actually use funds out of the HSA, in a couple of years you will find that you have enough funds in the account to meet your deductible, and will wonder if you can invest the funds in something besides the bank where you earn next to nothing. And the answer is yes, you can invest HSA funds just like you can an IRA.
• Save ALL your medical receipts. Funds in an HSA can be reimbursed any year after the HSA is established. So let’s say you establish one in 2012. You have medical expenses but you don’t reimburse yourself in 2012 nor do you take the expenses on your Schedule A. Let’s also say that in 2020 you are eligible for Medicare and you have retired and are living on your retirement funds. You could get those old saved receipts out and reimburse yourself for them and have some tax free income! Of course this will take some record keeping if sometimes you reimburse yourself and sometimes you don’t. But for tax free income I bet you can come up with a system or ask your accountant for some help.
• If your spouse is covered by a plan at work that is not an HSA you can pay for their medical expenses out of your HSA.
• You can fund the HSA at the beginning of the year or the end of the year. I had one client who opened an HSA in 2010 and in January discovered she had cancer. She fully funded it for 2010 by the April deadline and also fully funded it for 2011 so that she had the tax deduction for funding her HSA in both years and she was able to meet her deductible as she and the doctors fought the cancer!
• Businesses can offer to help fund the employees HSA accounts with the money they are saving by the employee’s using an HDHP. If you’re a really generous business, you could fully fund the HSA account for your employees. You can even fully fund the HSA for yourself as an owner but you will need to remember to add it to your W2.
• Employees can fully fund the HSA through a flexible spending arrangement. If the employee does it this way the funds are pre tax through payroll. If the employee fully funds it outside of payroll then they get a tax deduction that IS NOT subject to the limits on the Schedule A where medical expenses are reported.
I am a firm believer that HSA’s will put medical expenses in the hands of the consumers and will drive the medical industry’s costs down as doctor’s fight to compete at the cash level, just like any other business. It works far better in my mind than the ObamaCare that is being implemented over the next couple of years.