As I’ve asserted in this space before, news on the healthcare front has often seemed unrelentingly bad. And it’s been that way a long time. First came the demise of the house call, then the soaring cost of care delivered anywhere but where folks would like it, in the home. Ensuing decades brought more bad news.
There was the insistence by the pharmaceutical industry that everyone stock mini apothecaries in their medicine cabinets. There was the emergence of drug-resistant superbugs hanging out in hospital corridors. There were stories of surgeons amputating the wrong legs, or of taking legs off folks just visiting a sick relative. And there was news of surgical teams leaving stuff like sponges, scalpels, and anvils inside patients they’d just sewn up after major operations.
Just about the time Americans were ready to toss up their hands and scream at the mere thought of ever getting sick, a development nicely bucking the bad news trend arrived on the scene. That was the 2004 creation of the health savings account, a tax-advantaged savings account available to U.S. taxpayers who have high-deductible health insurance plans.
In a land where nothing fails to elude the captive claws of the taxman, health savings accounts, or HSAs, let qualified individuals save for healthcare expenses and do it entirely fax free.
Essentially, this is how it works. You agree to open a high-deductible health plan, which leaves you with greater out-of-pocket expenses should you need care. But offsetting that greater out-of-pocket cost are lower premiums.
Money saved by paying lower premiums lets the account holder, his employer, or both contribute to his or her health savings account. Contributions up to the limits established by law are tax deductible on federal income tax returns. The contributions are made year after year, accumulate interest or investment income, and with no mandate to use the money in an HSA in the year contributed, the funds grow over the years into tidy nesteggs.
In 2013, the maximum contribution individuals can make to their HSAs is $3, 250. For families, the limit this coming year will be $6, 450. For those 55 and older, an additional yearly $1, 000 “catch-up contribution” can be made as well.
When the individual is old enough for Medicare, he or she ceases contributing to the health savings account. Withdrawals for qualifying healthcare expenses are not taxed, meaning the account holder pays for care with money that is never taxed.
A retirement savings vehicle
But there’s a whole ‘nuther benefit to the health savings account. It can be used as another kind of retirement savings vehicle. If allowed to grow, it can be used for non-healthcare related expenses, though earnings are taxed, just as the earnings on an IRA withdrawal after the age of 65 would be taxed.
“At the time of utilization, employees can elect to use the money in their health savings accounts for qualified expenses, ” says Allen Wishner, CEO of Rosemont, Ill.-based Flexible Benefit Service Corporation. “Or they can elect to pay out-of-pocket medical expenses [with other savings] and not use the health savings account, allowing that account to grow. This is being recommended more and more especially with older working Americans. You ensure risk you can’t afford, and better manage risk you can afford.”
When they are enrolled in health savings accounts, plan participants grow comfortable with the notion they have first-class insurance benefits, he adds. “In the event of a hospitalization or major illness, his or her exposure to out-of-pocket expenses may mirror colleagues with low-deductible plans.”
Wishner believes health savings accounts are examples of consumer-driven healthcare initiatives that over the past 15 or 20 years have been the only solutions that have been effective, he says, in “bending the cost curve down.”
He adds: “Excessively generous benefits lead to extraordinary utilization. And that’s the story of the exchanges [under the Affordable Care Act]. No one knows what’s coming our way.”
Natasha Rankin, executive director of the Washington, D.C.-based Employers Council on Flexible Compensation, a non-profit organization dedicated of maintaining and expanding private employee benefit programs on a tax-advantaged basis, argues along the same lines. “The key component of an HSA is that it is really essential to the idea of consumer-directed healthcare, ” she asserts. “It reconnects individuals to the cost of healthcare, and encourages them to shop around for healthcare services. The other thing is it encourages employees to seek transparency from their healthcare providers.”
The HSA is an instrument tailor made to help alleviate worries of folks who have been conscientious about saving, but still fret about the x factor of future healthcare costs. And being wealthy doesn’t keep people from fretting.
A recent Merrill Lynch Affluent Insights Survey found that 73 percent of affluent folks here in Chicago are highly concerned about rising healthcare costs, and 30 percent of affluent Windy City denizens believe the rising cost of healthcare is the greatest threat to the life they want to live in retirement.
To these folks and many others, I say check to see if a health savings account might be right for you. Never have fiscal and physical health found a more cozy meeting place.
4 Responses to “Where Physical and Fiscal Health Converge”
My understanding is an HSA qualified insurance plan is not dependent on being an employer sponsored plan. Is that right?
I had an HSA with a previous health insurer. But when I went to look at other coverage, I learned that many plans have “evolved” to now have a high deductible ($5k for an individual, $10k+ for a family) but NOT qualify for an HSA. The premiums are significantly lower if you do not have the HSA option. What do you make of this? I’m surmising companies have struck some kind of tax deal, because with no tax-advantaged HSA contributions, most folks won’t hit the tax-deductible level of medical costs either, and thus have no tax benefits/discount. I went with the non-HSA plan, because I had enough in my former HSA account to cover the deductible if needed, and the premiums were under $200 vs. $450 per month.
Should also probably mention that in the HSA, I have some limited investment options – so there is some earnings potential.
After contributing to a 401k up to the employer match, and also maxing out contributions to a Roth IRA, as well as funding the HSA up to the annual out of pocket maximum – what would you recommend next? Contribute to fully max out the annual HSA contributions as a retirement vehicle or go back to contribute to the 401k above the employer match?