Planning Your Own Health Care Reform
If you are like me, the constant barrage of news coverage on Health Care Reform is about to make you sick. But while our legislators are debating various solutions, a great one for many of you is already in effect: the Health Savings Account (HSA). Many are reviewing their health insurance options during open enrollment and seeing where the HSA can fit in.
A Health Savings Account (HSA) is a tax-advantaged medical account available to taxpayers who are enrolled in a High Deductible Health Plan (HDHP). Here are five great advantages of the HSA:
1) Save on Insurance Premiums.
Some people are uninsured simply because of the high cost of premiums. The HSA can help. I asked a local health insurance specialist to prepare some generic premium quotes for a family of four. From the following breakdown, it is clear that the HDHP will save over 50% on premiums. Here are the results:
- a) Plan A: $595.80 per month for a traditional $25 co-pay health insurance (which requires $1,000 deductible per person and covers 80% of expenses up to $5,000).
- b) Plan B: $283.45 per month for a HDHP which requires $4,000 deductible per year but pays 100% of costs once the deductible is reached.
2) Tax advantages of HSA.
Funds contributed to an Health Savings Account are not subject to federal income tax at the time of deposit. Therefore, the family in the above example could pay themselves the savings in premium ($312.35 a month) into an HSA and reduce their taxable income by $3,748. At a tax rate of 15%, they have saved themselves $562 in taxes. And as long as the HSA is used for approved medical expenses, those tax savings do not to be repaid…ever.
3) Retirement tax advantages.
If the money in this account is used for non-medical expenses, it is subject to repayment of income taxes and a 10% penalty. However, the penalty disappears at age 65, meaning all of the accumulated savings and growth are now available for any use. The HSA therefore functions at age 65 just like a traditional IRA, becoming a potential retirement investment tool. And, of course, all withdrawals for approved medical purposes are still tax free.
4) One time rollover from an IRA or 401k.
The biggest obstacle of getting started with your HSA is coming up with the money to fund your entire deductible that first year. This is a great way to do it: you are allowed a one time only rollover from an IRA or a 401k into your HSA.
5) Better health.
Why would the HSA give you better health? Because health care expenses (up to the deductible) come out of your own pocket, you will start monitoring them more vigilantly. For most of us, this translates into proactively taking more responsibility for your own health.
Is an HDHP for you?
Here is how to find out: Get quotes for your family similar to the example I used above. Compare the savings (annual premium savings plus annual income tax savings) with your normal annual medical expenses (up to the deductible of your HDHP quote). If those annual savings are greater than your annual expenses, you should go for the HDHP. Once your HSA is funded to at least the level of your deductible, you will be saving money on health care every year into the future.
That, for you, is true health care reform.
photo credit: Robert S. Donovan
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