"A Nine-Step Workbook to Helping Your Health Insurance Serve You Affordably and Holistically”
Excerpt from "Health Insurance Off the Grid A Nine-Step Workbook to Helping Your Health Insurance Serve You Affordably and Holistically"
written by Daryl Kulak
published as an e-Book and Paperback January 30, 2004
Click here to purchase Health Off the Grid e-Book or Paperback
Step 2 Health Savings Account (HSA/MSA) Cover Small
Expenses and Save on Taxes
The Health Savings Account (HSA) was created as part of the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, but its predecessor, the Medical
Savings Account (MSA) existed in a slightly different form several years before that.
Since the MSA was considered an experiment by the federal legislators, some individuals shied away from it until it was made permanent in late 2003. There is no longer a reason to ignore the benefits of the HSA.
An HSA is a type of Individual Retirement Account (IRA) that may also be used for
medical expenses.
An IRA is an account where an individual may deposit a few thousand dollars each year,
deduct that amount off their current year tax return, and then watch the money grow
without taxes being applied each year thereafter. After the money is withdrawn at the
time of retirement, tax is applied. If a person has retired, their income level would be
lower and therefore the tax rate would be less than if they had been taxed all those years
earlier.
An HSA may be used exactly the same way, but that is not its purpose.
An HSA is an account where the individual may deposit money and deduct that deposit
from their tax return (or deduct it from their paycheck before taxes are applied same
thing). However, the individual may withdraw money from the HSA at any time, as long
as the withdrawal is to pay for a medical expense. The IRS decides what a valid medical
expense is.
Here is a partial list:· co-payments for doctor visits
· insurance premiums
· legal abortions
· acupuncture
· Alcoholic Anonymous expenses (transportation, etc.)
· chiropractor
· Christian Science practitioner
· dental treatment
· glasses and contacts
· lab fees
· pharmaceuticals
· weight loss programs
· wheelchairs
For a complete list, you may visit the IRS Website and search for Publication 502, which
lists all the medical expenses that the IRS views as "valid" for tax deduction.
http://www.irs.gov/pub/irs-pdf/p502.pdf
Almost all these services must be done at the direction of a Medical Doctor (MD or DO)
in order to be considered valid withdrawals from a Health Savings Account.
Essentially, an HSA allows you to "be your own insurance company" for small expenses
that fall under your deductible. And being your own insurance company means avoiding
the overhead of forms processing through a real insurance company, which means saving
you a lot of money.
You cannot be your own insurance company for large amounts. An extended hospital
stay could cost $50,000, which very few of us could afford out-of-pocket. That is why we
have the safety net of the high-deductible insurance policy. But for smaller amounts, we
can do it ourselves safely.
You must decide how to invest your HSA. It must be specially designated as an HSA, but you may put it into a bank savings account, a money market account or a mutual fund. I suggest either a money market account or a "very safe" mutual fund, one that specializes in government bonds, for instance. You do not want an account that gyrates up and down with the stock market, because your money might not be there when you need it most. But you also do not want the ultra-low interest generated by a regular bank savings account, so choose something in between.
Use, Snooze, but You Won't Lose It
HSAs can be rolled over from year to year. There is no "use it or lose it" with HSAs.
Whatever you don't use in the first year is rolled over completely (with interest!) into the
second year, so if your health is good, you are rewarded with increased savings each
year!
If when you retire, you have built up extra money each year in your HSA, well, you now
have another IRA that you hadn't counted on! Upon retirement age, you may begin
drawing the money out just like any other Traditional IRA. Taxes will be charged upon
withdrawal in retirement, but since you are retired, your income level is probably much
lower than when you were working, so the tax rate will be much lower.
An HSA is only available to an "eligible individual." An eligible individual is one who:· is covered under a high-deductible health insurance policy
· is not entitled to benefits under Medicare (generally, has not yet reached age 65)
· is not covered by some other health insurance policy that is low-deductible
· may not be claimed as a dependent on another person's tax returnThe lowest "high deductible" you could have and still get an HSA is $1,000 for an
individual and $2,000 for a family. But my advice is to stick with the $2,500 deductible,
because that is when the numbers are all working for you, not against you. I feel $1,000
is still too low.|
Where to Get It?
Beginning January 1, 2004 (yes, that means NOW!) you can establish an HSA with a
qualified HSA trustee or custodian, in much the same way that you establish IRAs with
qualified IRA trustees or custodians. No permission or authorization from the Internal
Revenue Service (IRS) is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer. Any bank or financial planner or insurance agent can likely help you set up an HSA. Since they are so new, you may have to make a few calls, but don't despair, you'll find one in your area.I can state for certain that any State Farm insurance agent will offer the services of a
high-deductible health insurance policy and an HSA. State Farm provides my wife and
me with our insurance and HSA, through Ohio agent Larry Buttermore (614-882-
3276). I am also aware that some Raymond James offices offer this combination of
insurance and HSA, including Logan Financial Group in Ohio (614-442-0214). And,
independent insurance agents and financial planners will also be able to help you,
including Mica Schober at the Poetry of Money in Ohio (614-619-0404).
Any insurance company or any bank can be an HSA trustee or custodian. That doesn't
mean they all are, but they can apply for that title. Also, any agent or planner already
approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is
automatically approved to be an HSA trustee or custodian.
The financial planner or insurance agent setting up your HSA may ask you for proof that
you are covered by a health plan that meets all of the requirements of an "high-
deductible" health insurance policy. The easiest way to set up your HSA is to do it with
the same company that sets up your health insurance policy.
HSA Details, Details, Details
What about contributing money into your HSA? For an HSA established by an employee
of a company, the employee, the company or both may contribute to the HSA. For an
HSA established by a self-employed (or even unemployed) individual, the individual
may contribute to the HSA. Family members may also make contributions to an HSA on
behalf of another family member.
The maximum contributions to an HSA for each year must can be 100% of the annual
health insurance deductible ($2,500) but not more than $2,600 for an individual (single
person policy), whichever is less.
For families with a high-deductible policy, the maximum is the lesser of 100% of the
annual deductible under the HDHP but not more than $5,150.
For people between ages 55 and 65, the HSA contribution limit is increased by $500 in
calendar year 2004. Starting in 2005, this catch-up amount will increase in $100
increments annually, until it reaches $1,000 in calendar year 2009.
After an individual has attained age 65 (Medicare eligibility age), contributions,
including catch-up contributions, cannot be made to an individual's HSA.
Your contributions to your HSA are deductible whether or not you itemize on your tax
return. However, you cannot duplicate these same medical expenses in other areas of
your tax return if they were paid from your HSA.
Employer contributions to the employee's HSA are treated as employer-provided
coverage for medical expenses under an accident or health plan and are excluded from
the employee's gross income. The employer contributions are not subject to withholding
from wages for income tax or subject to the Federal Insurance Contributions Act (FICA),
the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Of
course, the employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions.
You can contribute to your HSA however you'd like. My wife and I make our
contributions in a lump sum at the beginning of each year, but you could contribute
monthly, twice-monthly, whatever way you'd like. In fact, like an IRA, you can
contribute to last year's HSA until April 15 of the following year.
If you currently have an MSA, I suggest you "roll it over" into an HSA. HSAs have
higher limits and fewer restrictions than MSAs. However, if you have a Flexible
Spending Account (FSA) with your employer, you cannot roll that into an HSA. The
rollover amount does not contribute to your yearly limit.
No one is going to be looking over your shoulder to make sure the withdrawals you make from your HSA are for valid medical services. However, when it comes to tax time, the IRS will be looking at those withdrawals and any that cannot be accounted for will be investigated, just like any other tax deduction. I have no information nor reason to believe that owning an HSA will draw a "red flag" from the IRS for a tax audit. HSAs will
become so popular that I believe this is a very unlikely scenario, unless you abuse your
HSA, of course.
Try to find a provider who offers a debit card as the way to withdraw money from your
HSA. This will provide an easy method of documentation for every transaction. If you
cannot find one with a debit card, you can make your withdrawals using checks and keep the records yourself.
As an employee of a company, you'll see your employer's contributions into the HSA on
your W-2 at the end of the year.
Also, HSAs are not subject to COBRA continuation coverage requirements. That means
your employer doesn't have to offer the HSA as part of the COBRA package when you
leave the company (or are laid off, etc.)
I hope this chapter hasn't been too technical. I've tried to outline the details of an HSA
in language easy to understand. I'd just like to say that HSAs are a blessing to the self-
employed person, and that anyone who can get one should surely do it.
End of Chapter 2
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