Make money from your health care plan
By Peter J. D’Arruda
Most people are familiar with the old Medical Savings Account (MSA) plans. These were the supplemental health care plans where you could contribute money to pay for typically non-covered medical expenses. The only problem was that in order to have an MSA, you had to first have health insurance with an incredibly high deductible, and any MSA money you did not use by the end of the tax year was lost forever. Because of these restrictions, many consumers disliked the plan and actually became fearful of contributing to one.
But with the Medicare Prescription Drug Improvement and Modernization Act of 2005, Health Savings Account (HSA) plans were firmly planted into the tax code. While some aspects of the HSA plan mirror the MSA plan, there are many differences – all of which are in your favor. In a sense, HSA plans are the next generation of MSA plans.
Before you make another high health insurance premium payment, know the
facts about HSAs and how one can actually make money for you.
Benefits of an HSA
While an HSA has many benefits, you do need to meet one important criterion before you can open one: Your existing health care insurance must be a High Deductible Health Plan (HDHP). But, just because your family has a $10,000 yearly deductible doesn’t mean you have an HDHP. The required HDHP policy enjoys special features not found in most policies issued prior to the advent of the HSA (except for the MSA-qualified policies). So before you start an HSA, you must first check with your insurance carrier to be sure you have an HSA-qualified policy.
Assuming you have the correct type of health insurance in place, you can now enjoy the many benefits of an HSA, such as:
Lower monthly health insurance premiums: Because you have a higher deductible on your health insurance policy, you pay a lower monthly premium. So let’s say a health insurance policy with a $1,000 deductible costs you $500 per month. By opting for a plan with a $5,000 deductible, for example, your monthly premium is only $300. You can now take that $200 savings and deposit it into your HSA. So in a sense, you’re now paying part of your health insurance premium to yourself.
Immediate tax savings: Just like an IRA or 401(k), every dollar you deposit into your HSA is done with a pre-tax dollar which lowers your yearly taxable income. If you’re single, you can deposit up to $2,700 into your HSA per year, and if you’re married, you can contribute up to $5,450 per year. The only restriction is if your health care insurance deductible is lower than the allowed contribution. In that case, you can only contribute up to the amount of your deductible. People age 55 and older are allowed a special "catch-up" feature, which enables them to put an extra $700 a year into their accounts. Additionally, when you take the money out to pay for covered medical expenses, the money is still not taxed. Even better, "covered medical expenses" are things not usually covered by your health care policy, such as dental, vision, acupuncture, vitamins, long-term care insurance, cobra premiums, or health care premiums while unemployed.
Long-term growth potential: With an HSA, you can actually make money on your health care plan. First, realize that once you put the money into the account, you can’t lose it, unlike the old MSA plans where you had to obey the "use it or lose it" rule. Think of an HSA as an IRA for your health savings. If you stop putting money in or don’t use the money you contributed, it stays in your account and builds interest indefinitely. You can even invest the money into the stock market or annuities.
Greater flexibility when Medicare kicks in: If you’re nearing retirement, an HSA is still a good choice. Since you don’t lose the funds if you don’t use them, you have the potential to save quite a bit of money over the years. When you turn 65 and go on Medicare, you can withdraw any unused HSA contributions and use the money for other things, such as a vacation or college money for the grandkids. The only restriction is that since you’re withdrawing the money for non-medical expenses, you have to report that money as income on your taxes.
An HSA puts you in control: With an HSA plan, you can choose to visit any doctor you like. You’re not restricted by networks or referrals. Additionally, you aren’t obligated to always put a certain amount of money into the plan each month. If you’ve contributed enough to meet your deductible, or if you simply don’t want to contribute for a few months for other reasons, then you can stop at any time and resume contributions at a later date. Now you really have control over your health care decisions.
Peace of mind: Most HSAs are FDIC insured. The only way you could lose your HSA money is if you decided to invest it in the stock market, and the stock market took a downturn. But just like any investment, never put too much of your money into something risky. The safest alternative is to keep the funds in an HSA fixed (no risk) savings account, giving you immediate access to the money in an interest-building account.
Less restrictive: In the past, only companies with 50 or more employees could offer an MSA plan. HSAs are not that restrictive and are available to virtually anyone with a HSA-qualified policy. HSAs are also completely portable, so if you leave your job and move to a company that does not offer an HSA, you can still draw from your previous HSA to pay medical expenses, until you deplete the account; you just can’t contribute to the account anymore.
Is an HSA plan in your future?
Those who start an HSA and who use the account to the fullest extent possible typically have only one complaint: They wish they could put more money into the account each year. They enjoy the tax benefits and health insurance premium savings an HSA affords, and they appreciate the account’s flexibility and long-term growth options-two things MSAs didn’t offer.
So if you’ve avoided starting an HSA because you think it’s too much like the old MSA plans (restrictive and not consumer focused), look again. When used correctly, an HSA could be the solution you’ve been looking for to combat rising health insurance costs.
Peter D’Arruda, author of Financial Safari, holds certifications as a Senior Advisor, Estate Advisor, Charitable Advisor, Annuity Consultant, and Liability Advisor as well as an Identity Theft Risk Management Specialist. For more information, please contact him at 919-657-4201 or at pete@financialsafari.com.
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