A Health Savings Account can be an important part of your tax and money-management strategy. Not only can you reduce your health insurance premiums, but when you fund your account you get a nice tax break. If you stay healthy, that money grows tax-deferred like an IRA, and can amount to a lot of money in retirement.
Every year around this time you should assess your finances and see what you need to do to optimize your situation. Making the most of your Health Savings Account (HSA) is one area that can really make a difference. Here are the key things you need to know to get the greatest tax reduction and the most growth out of your HSA.
Maximizing Your Contribution May Reduce Your Taxes By $1836 or More
If you own an HSA-qualified health insurance plan that has an effective date no later than December 31, 2007, you qualify to make a tax deductible contribution to your Health Savings Account. This will immediately reduce your tax bill come April 15.
The contribution limit is not pro-rated based on the number of months in 2007 in which you had coverage, as it was in the past. However, you do need to remain an HSA-eligible individual throughout 2008, or the extra amount contributed will be counted as income and subject to an additional 10 percent tax.
The maximum HSA contribution in 2007 is $5650 for families, and $2850 for individuals. If you are 55 or older, you may also contribute an additional $800.
Your HSA contribution is deductible on your federal income taxes, and every state (except AL, CA, NJ, and WI) also gives a deduction on state income taxes. So by maximizing their HSA contribution a family in a 28 percent tax bracket, paying 4.5 percent state income taxes, will reduce their April 15 tax burden by $1836.25.
Though your HSA-qualified health insurance must be in place before the end of the year, you do have until April 15 to make your 2007 contribution. Though you cannot put any more 2007 money in if you miss this deadline, you can reimburse yourself in later years for qualified expenses incurred in 2007, even if you do not currently have the money in your account.
Strategic Withdrawals
You can withdraw money from your HSA at any time to pay qualified medical expenses. Keep in mind that this includes over-the-counter medications such as aspirin or cough syrup, dental and vision expenses, and even alternative care such as acupuncture or homeopathy.
One strategy that many of our members take is to save their medical receipts, but to delay reimbursement from the HSA so that the funds have the opportunity to grow tax-deferred. There is no time limit in which you must withdraw the money. Since most people will face larger medical bills during their retirement, it is quite likely that the withdrawals would never be subject to taxes.
If you are not fully funding your Roth, another strategy would be to reimburse yourself for medical expenses from your HSA, and to deposit it in your Roth. Your HSA reimbursement is tax-free, and placing it in your Roth would also give you tax-free growth while enabling you to withdraw the money in retirement tax-free for any reason, including non-medical expenses. You would also avoid any extra state taxes in the states that currently tax Health Savings Accounts.
Remember to Keep Good Records
You should keep a record of any qualified medical expenses you incur. This will ensure that you have documentation substantiating any tax-free withdrawal you make from your HSA. In order to pay for a medical expense from your HSA, it must be a qualified expense.
You can go low-tech and just put receipts in a file, or get a little more organized and track your records online.
2008 Contribution Limit and Deductible Changes
In 2008 the maximum annual HSA contribution limit will again go up, this time to $2900 for individuals and $5800 for families. Those over age 55 will be allowed to contribute an additional $900 to their accounts.
The maximum deductibles will be going up next year to $5600 for individuals, and $11,200 for families. If you've now got some money socked away in your HSA, it might make sense to move to a higher deductible to further reduce your premiums.
Health Reimbursement Arrangements
If you are currently set up as an S-corp, you should strongly consider setting up a Health Reimbursement Arrangement (HRA). An HRA enables your S-corp to reimburse you as a tax-free fringe benefit for the cost of your individual health insurance. This is the only way an S-corp can legally pay for individual health insurance, and is saving our average S-corp member over $3000. The HRA must be established by December 31st in order to take advantage of it in 2007.
It may also be beneficial to set up an HRA if you have a spouse who works in your business. Also, many small businesses use an HRA to reimburse their employees for individual health insurance premiums (which is much less expensive than getting group coverage). More information and a simple online application is available on our Health Reimbursement Arrangement page.
What to Do Now
Here are the steps you should take now:
To maximize the potential growth of your funds, you should try to fund your account as early in the year as possible. Every month of tax-deferred growth does add up over time. You can keep the money in a savings account, or invest it in stocks or mutual funds.
If you have your health insurance in place but do not yet have your HSA set up, you can do so online or possibly your local bank.
If you do not yet have an HSA-qualified health insurance plan, you should apply for coverage as soon as possible. Your plan must be effective before January 1 in order for you to qualify for the 2007 tax deduction. By getting your HSA-qualified health insurance in place by January 1, not only will you be able to maximize your tax benefits, but you also may be able to lock in 2007 rates for the next 12 - 24 months.
If you have a small business with employees, are set up as an S-corp, or have a spouse who works in the business with you, you should set up a Health Reimbursement Arrangement.
Through HSAs and HRAs, individuals who pay for their own health insurance have some powerful tax reduction strategies at their disposal. December 31st is the deadline for obtaining 2007 tax deductions, so you should act quickly if these ideas make sense for your situation.
By Wiley Long - President, HSA for America ( http://www.health--savings--accounts.com ) - The nation's leading independent health insurance firm specializing in HSA Plans that works with a Health Savings Account.
As open-enrollment season for health care benefits is under way at most Colorado companies, a number of employees are adding the term HSAs to their ever-growing jumble of acronyms.
Open enrollment, typically a two-week period in late October or November at most companies, gives workers the chance to re-evaluate their health insurance plans and other benefits.
Some 15 percent of Colorado employers offer, or plan to offer, a health-savings account - or HSA - for next year's health care plans, more than twice as many as last year, said the Mountain States Employers Council. Nationwide, about 20 percent of companies plan to offer HSAs, according to Hewitt Associates.
"This is a way of passing more of the cost to employees, but it also allows the employee to have more control over their destiny," said John Martie, president and general manager of Anthem Blue Cross Blue Shield in Colorado.
HSAs, introduced by federal legislation in 2004, are like a 401(k) for health care. They allow employees to save for medical expenses with pretax dollars, and they're portable. The excess rolls over year after year, and employees take it with them to a new job or if they retire. The kicker is that workers are responsible for 100 percent of their health care costs, including drugs and office visits, until they meet their deductible, which can be as high as $10,500 for a family.
Employers like the plans because they help temper ever-escalating health care expenses. The average company will shell out $9,312 per employee in health care costs in 2008, an increase of 45 percent from 2003, said human resources firm Towers Perrin.
Workers are more wary. Just 3 percent of employees chose such plans last year, Hewitt said, although most companies think that number will grow to 20 percent within five years.
Most employees react with "confusion" when first hearing about the HSA option, and think, "Oh no, I don't have insurance," said Dawn Ned, an account manager at Anthem. "They don't really feel the benefit until they're a couple of years into it" and start to see their HSA egg grow.
A study released by the Bell Policy Center found that health savings accounts benefit high-income workers while offering scant incentive to low-income families, who have little or no tax liability.
"It really depends on the health history of your employees," said Patty Goodwin, director of surveys for Mountain States. "For people who don't use their health care a lot, this is great. It allows them to put money aside for when they do need it."
Employers are trying to make HSAs more attractive by offering employees seed money, typically ranging from covering 33 percent to half the deductible, said Leslie Andrews, president for Humana's Colorado market.
"A lot of employers are recognizing that without the seed, the deductible is too intimidating," she said. Most employers offer a seed for the first two or three years, then restrict it to employees below a certain income level, she said.
Beyond HSAs, employers are taking other measures to curtail costs. Some employers are charging extra to extend coverage to workers' spouses if those spouses are covered by their own employers' plans, or are refusing to extend coverage altogether.
Wellness programs also continue to gain strength, as employers offer everything from discounts on premiums to gift certificates as motivation for employees to exercise more, eat better and quit smoking.
"One of the biggest discussion points we have right now is the challenge most employers have trying to get employees involved in wellness programs," Andrews said.
� U.S. Treasury Web site with links to how to transition to HSA, frequently asked questions and basics of the plan: treas.gov/offices/ public-affairs/hsa/
davisj@RockyMountainNews.com or 303-892-2514
HSAs work because you get a tax deduction for the money you contribute to the health savings account. However, as long you spend the money in the account for eligible healthcare expenses-pretty much anything reasonable-you aren't taxed when you withdraw the money. Note that HSAs deductions are not limited by taxpayer incomes.
In effect, the HSA makes all or most of your uncovered healthcare expenses fully deductible. This is a big deal because for most people, healthcare expenses are not deductible. Just to put the value of an HSA into perspective, a family can save from $500 to as much as $1750 annually in income taxes by using one of these accounts. The final savings, predictably, depend on family income and the state where the family lives. One other thing.
Don't confuse HSAs with the old style Flexible Spending Accounts, or FSAs. With FSAs, you lost the money you didn't spend by the end of the year. With HSAs, you don't lose the money. The unused balance just carries forward to the next year.
"HSA plans have been a valuable new coverage option -- especially for those who had been uninsured previously -- and are providing consumers with access to important preventive health care services," said Karen Ignagni, President and CEO of AHIP.
AHIP surveyed its members to examine the preventive benefits provided by high-deductible health plan (HDHP) policies that are compatible with a health savings account (HSA). The survey found that most HSA/HDHP policies cover recommended preventive benefits on a "first dollar" basis -- that is, without regard to whether the deductible is met.
Among HSA/HDHP policies offering first-dollar coverage for preventive care, 100 percent cover adult and child immunizations; well-baby and well-child care; mammography; Pap tests; and annual physical exams and screenings. Nearly 90 percent provide first-dollar coverage for prostate cancer screenings and 83 percent offer this coverage for colonoscopies.
Virtually all HSA/HDHP policies purchased in the large-group market (99 percent) and small-group market (96 percent) provide first-dollar coverage for preventive care.
Additionally, 59 percent of policies purchased in the individual market cover preventive care on a first-dollar basis. First-dollar coverage for preventive benefits is less frequent in the individual market because premiums for individual coverage are not tax deductible, as they are with employment-based coverage. This gives consumers an incentive to purchase preventive benefits through a tax-free HSA rather than through higher premiums. AHIP supports full tax deductibility for all health insurance premiums to create a level playing field for consumers purchasing health care coverage on their own without an employer sponsor.
Click here to view the entire survey: http://www.ahipresearch.org/pdfs/HSA_Preventive_Survey_Final.pdf.
Most high-deductible health plans linked to health savings accounts provide first-dollar coverage for many preventative services, including immunizations, mammography and physical exams, research from America’s Health Insurance Plans shows.
Among the individual and group markets, 84% of HSA/HDHP policies provide coverage for services falling within Internal Revenue Service HSA guidelines for preventative care, without requiring individuals to first meet their deductible.
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“These results demonstrate these new products are doing what consumers expect them to do in terms of covering their preventative benefits,” Karen Ignagni, president and CEO of the Washington-based association, said in a statement. The HSA products “are providing not only a safety net on the back end for catastrophic expenses, but they can help on the front end as well.”
The survey results found 100% of the HSA/HDHP policies offering first-dollar coverage for such preventative care services as adult and child immunizations; well-baby and well-child care; mammography; pap tests; and annual physical exams and screenings. Screenings covered by such policies include adult blood pressure and cholesterol tests; children’s vision tests; bone mineral density testing for women; and prostate cancer screening for men aged 50 or older.
Fifty-two percent of the 1.7 million enrollments evaluated for the study do not place any annual dollar limits on coverage of those services, while 24% have annual dollar limits of $500.
Survey responses included information from 36 companies with average HSA/HDHP enrollments of 48,300. The three largest companies responding to the survey had between 200,000 and 300,000 HSA/HDHP enrollees.
The responses also included information from 25 companies with policies covering 607,735 lives to evaluate preventative care in HSA/HDHP policies in the individual market. Small group data came from responses from 35 companies covering 351,235 lives.
Copies of the survey are available at www.ahipresearch.org/pdfs/HSA_Preventive_Survey_Final.pdf.
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