What Are HSA's and HDHP's And How Can They Save You Money And Boost Your Retirement?
The acronym HSA is being tossed around quite a bit nowadays especially since the tax advantages of owning an HSA and a corresponding qualified HDHP (Deductible Health Plan) have been significantly increased under the former Bush administration. Effective December 20, 2006 President George W. Bush signed the Health Opportunity Patient Empowerment Act of 2006, enhancing Americans' access to tax-advantaged health care savings. The law, part of the Tax Relief and Health Care Act of 2006, provides new opportunities for health savings account (HSA) participants' to build their funds. To read about the new adjustments for the 2009, click here. For more information on the IRS H.S.A. COLA Adjustments click here.
HSA stands for Health Savings Account, more commonly referred to as a "Medical IRA". HSA qualified HDHP's are one of several relatively new Health Insurance concepts that fall under the heading of "Consumer Driven Health Insurance". Health Savings Accounts are a unique way to attractively manage your health insurance costs. They were originally named MSA's or Medical Savings Accounts designed by Senator Bill Archer (R) of Texas. Bill's project was to find a way to reduce the cost of health insurance for the self employed without sacrificing quality coverage for a major medical illness.
Bill's brilliant idea was to eliminate the parts of a Traditional Health Insurance Plan that cost the consumer the most money. These expensive benefits include outpatient doctor "co pays" and outpatient prescription "co pays". Bill approached Congress with a proposal that stated in essence that if you remove those two features and keep the major medical coverage in place you could conceivably cut the cost of your health insurance premium considerably. He was absolutely right!
To illustrate how Bill's idea works in the real world. We will use a real world example. Tony & his wife are currently paying $1,134 a month for Cobra continuation coverage from a previous group plan. In comparison, the monthly premium for an HSA qualified HDHP (High Deductible Health Plan) which covers each insured family member up to $5 million dollars is less than half of the premium that they are paying now ($481.64 monthly to be exact). This is a yearly savings of $7,828.32 or a monthly savings of $652.36. This is a significant difference.
However the insured has to give up all of their outpatient co pays. Is this worth it? This was the question posed to Senator Bill Archer (R) when he approached Congress back in the late 1990's. His answer to Congress was simply "make it worth it".
In other words, he asked Congress to make it worth it to the insured. Their response was two fold. And it is these two primary reasons that make HSA's a "no-brainer" for every self employed prospective insured and for their corresponding employees. The first thing Congress did was to state that if a policy holder buys a major medical health insurance policy (HDHP) with a yearly family deductible between $2,200 per family (not per person) or as high as $5,800 per family we will call that an HSA qualified health insurance plan (HDHP).
They further said that in order to make giving up outpatient co pays more attractive to the insured we will allow anyone who has an HSA qualified health insurance plan (HDHP) the option to open a tax favored HSA (Health Savings Account) with their local bank or financial brokerage house. Since the insured is saving a considerable amount of money each month by giving up their out patient co pays, we will allow them to take that extra premium that they would have normally given the insurance company for the "privilege" of a co pay and put it into a 100% tax deductible account that will grow tax deferred at an interest rate adjusted by the Fed.
In addition to depositing the amount you save in insurance premiums, you may also deposit in your HSA an amount equal to what the IRS allows for that given year. For the year 2009 the maximum contribution a family can make to their HSA account is $5,950. In addition, any family member who is 55 years of age or older can deposit an additional $1,000 annually (more on the age 55 allowance below). This means that the total amount that Tony and his wife (in our example above) can deposit per calendar year is $7,950 and they can take a 100% tax deduction for that contribution similar to an IRA.
Furthermore, if they do incur medical expenses that arise throughout the course of the year that are subject to the deductible (i.e. prescriptions, doctor's office visit charges, etc.) the IRS will allow them to pull out that money that they put into their optional tax deductible, tax deferred HSA savings account to pay for those expenses. When they use their HSA money to pay for those expenses the IRS will allow them to write those expenses off at a 100% tax deduction. The list that the IRS allows them to spend their HSA money on is very liberal and includes things like dental, orthodontics, eyeglasses, radiokeratonomy (Lasik corrective eye surgery), alternative medicines etc. Click here to see the list of allowable expenses and disallowed expenses on the HSA section of the IRS web site.
Arguably the most attractive tax advantage to owning an HSA is the fact that the money left over in the HSA account that was not used on medical expenses at the end of the year is "rolled over" into the next year and awarded a higher rate of tax deferred interest. The insured also has the option to roll those unused funds into no load mutual funds, thereby building an extra tax deferred retirement account with money they would have normally given to the insurance company each and every year whether or not they had any claims that year!
It should also be noted that with not having a "co pay" with your plan does not mean that your outpatient doctor visits and outpatient prescription drugs will not be a covered expense. With most HSA qualified HDHP's these charges are a fully covered expense just as they would be with a Traditional Health Insurance Plan.
The only difference is that these charges will be subject to the "aggregate" family deductible. Being "subject to deductible" does not mean that you will pay full price for these charges either. If you stay within the vast PHCS PPO network that most reputable carriers offer your outpatient doctor office visit charges will be discounted by as much as 40%.
Your prescriptions will also be discounted significantly as well by staying within the Rx prescription network. Let's break that down in plain english. Let's say your doctor's office charges you $100 for a "sick visit". If you use a PPO provider (typically PHCS or MultiPlan) those office charges will be "re-priced" down to roughly $60.
Now compare that to a Traditional plan which provides you with a $25 "co pay". The difference to you is $35 out of pocket for that doctor's office visit. But is that all you are really saving? Not if you add in the monthly premium savings between the two plans. The typical monthly premium savings between a Traditional plan and an HSA qualified plan for a family is $200 to $300 monthly or more. Let's split the difference at $250 less monthly. This equates to an annual savings of $3,000.
Now let's take that $3,000 annual savings and deposit it into a tax deferred, tax deductible interest bearing account. Let's go a step further and imagine you find an HSA account that bears you NO interest AT ALL (which is not that hard to imagine in this economy). You're still saving $3,000 annually and your deducting that amount from your adjusted gross income. This means less reportable income which means less taxes.
Now lets imagine you have no major medical claims in year two and you deposit the same amount. Now in year three you have a worse case scenario occur. Now you have $9,000 to help pay your "aggregate" family deductible. Moreover, since deductibles with HSA qualified HDHP's include only one "aggregate" deductible for the entire family there will be no other risk to any other family member for the rest of that year.
Unlike Traditional Health Insurance Plans which typically require each of three separate family members to pay their own calendar year deductible if they end up in the hospital (or need an MRI, CT, Nuclear Medicine Scan etc.)The longer you look at HSA qualified HDHP's the more sense they make. This is why they have caught on like wildfire and will continue to do so. The only inhibitor to the spread of HSA's is lack of education (as is the case with any other financial vehicle).
To learn more about HSA's and the recent federal legislation that has made them even more attractive to people over the age of 55 click here to review the Federal Government's HSA educational web site. To learn more about H.S.A.'s in a power point presentation format please click here.
If you are an employer and are considering HSA qualified plans for your employees consider this. An individual's employer can make contributions that are not taxed to either the employer or the employee. The combined income and payroll tax deductibility leads to discounts for health insurance of over 40 % in some cases relative to other forms of insurance. If you are an employer interested in learning more about HSA's, click here.
Beginning in 2007 one company - American Community Mutual introduced a truly unique HSA qualified HDHP. It is called the "Next Generation" HSA qualified HDHP. This HSA qualified HDHP has four unique features that make it superior in design over all other individual HSA qualified HDHP's on the market today.
The first of the four benefits is called the "embedded deductible feature". As aforementioned, the typical HSA qualified HDHP does not start paying anything until the entire family deductible has been satisfied. This means that whether one person gets sick or multiple family members get sick the insurance company will not pay anything until the entire family deductible has been satisfied. If your plan has a $5,450 family deductible this can feel unfair if only one member of your family gets sick.
In stark contrast, the American Community Mutual "Next Generation" HSA qualified HDHP eliminates this problem by offering the "embedded deductible feature." This benefit (for a few dollars more per month) requires the insurance company to start paying after only one family member has satisfied their individual deductible (half of the family deductible). This significantly reduces the out of pocket expense to the family if only one person gets sick. This is a valuable benefit since statistically speaking only one family member (if any) will incur medical claims in any given year. This benefit is not unique to the "Next Generation" HSA qualified HDHP. It can be found on other HSA qualified HDHPs on the market today. However, the next 3 benefits are unique to the "Next Generation" plan.
The second and more
valuable benefit is the $10,000 "stop loss" number that is included
when the 80% coinsurance option is chosen. According to IRS Doc 5305-B
the new (2009) adjusted maximum annual out of pocket expense that a
family will pay that owns an HSA qualified HDHP with the 80%
coinsurance option is $11,600 regardless of the deductible chosen.
Although
this is the maximum allowable out of pocket expense that a family will
experience if they choose the 80% option with any other HSA qualified
HDHP American Community Mutual decided to reduce the maximum out of
pocket a family can experience per year on their "Next Generation" plan
to only $2,000 in addition to the chosen deductible.
This quite simply means that after a family has satisfied their chosen calendar year family deductible the insurance company will pay 80% ($8,000) and the family will pay 20% ($2,000) of the first $10,000 in medical bills that are incurred. Afterwards the insurance company will pay 100%. This first $10,000 is known as the "stop loss number". The Next Generation plan is the only HSA qualified plan on the market today that offers this type of co-insurance arrangement and it is much better than the typical HSA qualified plan that offers an 80% option because it results in significant out of pocket risk reductions to a family.
To illustrate this further, we will use the $5,450 family deductible for example. With the typical HSA qualified plan, if an 80% option is chosen then this would subject the family to an out of pocket expense of $11,600. In stark contrast, the Next Generation plan would subject the family to only $7,450 before American Community Mutual would pay 100% of the family's medical bills for the rest of the calendar year. This is $4,150 less out of pocket than any other HSA qualified HDHP on the market today and the Next Generation plan is priced the same or less than most plans!
The third unique benefit is the unlimited "Accident Medical Expense" benefit. This benefit will waive the entire deductible if an accidental injury occurs and pay for all the charges related to the accident at either 100% or 80% depending on the coinsurance you chose. This benefit will kick in each and every time an injury occurs to any family member. This benefit is only available with the "Next Generation" HSA qualified HDHP.
The fourth unique benefit is the "Benefit Period". All other HSA qualified HDHP's restart the calendar year deductible on January 1st of each calendar year. This design prevents many consumers from purchasing their health insurance late in the calendar year. For example, if an insured has had no claims for the entire year of 2009 and then a sizeable claims occurs in December of 2009. The insured would have to satisfy their 2009 calendar year deductible before benefits would be paid. The danger here would be if the insured had another claim in the month of January 2010. Since it would then be a new calendar year, the insured would have to satisfy the new 2010 calendar year deductible before benefits would be paid.
The "Next Generation" HSA qualified HDHP eliminates this problem by starting your benefit period on your requested effective date. The next benefit period would not begin again until 12 months after that date. So with this design, if you were to purchase your "Next Generation" HSA qualified HDHP on December 1st, 2009, then you would not be required to pay another deductible until 12 months later on December 1st, 2010. This is a very attractive benefit for anyone considering buying an HSA qualified HDHP late in each calendar year. It is a much better "Benefit Period" design than the typical calendar year design. This benefit is only available with the "Next Generation" HSA qualified HDHP.
Please feel free to contact me if you have any questions about HSA qualified HDHP's. If you have a C.P.A. or tax advisor please make sure to ask about the tremedous tax advantages of owning an HSA.
About the author: C. Steven Tucker, is the President of Small Business Insurance Services, Inc. He is a multi-state licensed insurance broker who has been serving the Small Business community and Self-Employed for 15 years. C. Steven has served as a Subject matter expert for the Wall Street Journal and Fortune Small Business Magazine and hosts his own internet radio show, entitled, "Health Insurance 101." He is also touted for being a consumer watchdog against greedy insurance companies, insurance scams and unscrupulous agents on Twitter.
