Health Savings
Accounts
One of the mechanisms offered individuals (and families; as used
in this commentary, the word "individuals" includes the dependents,
if any, of the individuals) and small employers as a means of
reducing costs in conjunction with either group or individual health
insurance, is based on allowing the individual to control the
choices made with respect health care providers and services.
The mechanism for empowering covered individuals is based on the use
of high deductibles and/or larger co pays.
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At first glance, this approach seems threatening. The
covered person, or his family member, assumes the risk of paying
substantial health costs out of his or her own pocket, before being
helped by insurance. In order to make this approach
attractive, a reward beyond that realized by premium savings, needed
to be developed. The reward took the shape of Federally
Qualified Health Savings Accounts (HSA) programs offer the
opportunity to realize immediate short term benefits through smaller
premium costs, reduction of taxable income and the taxes payable on
current income. Long range benefits are developed by the
accumulation of tax deferred capital. The program is available
individuals and to all employers as a benefit program for their
employees..
There are two mandatory parts to a federally qualified Health
Savings Accounts program:
1.
The qualified Health Savings Account
administered by a statutorily approved account administrator. The
account is a form of a trust, and belongs solely to the account
holder.
2.
A “high deductible health insurance
program.” This program is based on a special form of a major medical
indemnity policy. The policy must meet statutory requirements in
order to qualify for use in a Health Savings Accounts program. The
insurance is rated on the base of a single large calendar year
aggregate deductible. If a family program is elected, there is
no per person deductible; the sum of all the medical expenses
incurred in a calendar year by all members of the family combined
must exceed the single deductible amount before the high deductible
insurance will provide any coverage for incurred medical expenses.
Some advantages of a Health Savings Account Program from the
Employer's Perspective include:
·
The premium paid by the employer for
the high deductible health insurance plan is an allowable expense,
whether paid for coverage for the employee or for the employee and
the employee's dependents;
·
Money contributed to the Health
Savings Account by the employer on behalf of the employee (and the
employee's dependents) is not subject to federal withholding
or payroll taxes. The self-employed, partners, and
S-Corporation shareholders are generally not considered employees,
and cannot receive an employer contribution, although they may make
a deductible contribution to the HSA on their own. Members of
LLCs are treated as if they were partners.
·
The premium cost of the High
Deductible Insurance Program is usually significantly less than the
premium cost that would be associated with an ordinary major medical
insurance program.
·
The annual costs of medical benefits
for your employees and their families tends to be more stable from
year to year than the cost of other kinds medical benefit programs.
Some advantages of a Health Savings Account Program from
the Employee's point of view are:
·
Money placed in the Health Savings
Account by the employer is not reportable by the employee as income
for tax purposes. It is also not reportable as part of the
employee's income on the quarterly wage and tax returns filed by the
employer, so that withholding taxes are not applied to the amount
deposited to the savings account on behalf of the employee by the
employer.
·
If the employee makes a contribution
to the HSA, his or her taxable income reduced by the amount of that
contribution, as long as the sum of the contributions made by
the employer and employee in the same tax period does not exceed the
allowable contribution for that tax period (as defined from time to
time by the Internal Revenue Service).
·
Allowable medical expenses are paid
with pre-tax dollars when they are paid from the Health Savings
Accounts. There is no tax applicable to the funds
withdrawn from the savings account to pay allowable medical, dental,
vision, pharmaceutical expenses.
·
Preventive Medical Care may be
covered without a deductible.
·
Money placed in the health savings
account by an employer belongs to the account owner, regardless of
whether or not the account owner remains an employee of the employer
sponsoring the Health Savings Account Benefit Program.
·
The unexpended content of the Health
Savings Account (including the interest earned by the funds in the
account) may be rolled over into each subsequent tax year without
being subject to tax. Additional contributions, up to the current
allowable contribution limit, as well as the earned interest on the
balances held in the savings account, may be added to the
account until the account holder attains age 65. subject only to the
requirement that a High Deductible Health Insurance Plan remains in
effect.
·
The plan is portable.
·
The cost of prescription drugs
and prosthetic devices, including prescription eyeglasses, may be
paid out of the savings account, to the extent that coverage is not
provided for that benefit by the High Deductible Health Insurance
Plan.
·
A "catch up" surcharge contribution
in excess of the amount of the normal maximum contribution is
available for account holders 55 years old and over, up to age 65.
·
Complete freedom of choice of
licensed health care provider or institution.
·
Includes dental, vision and
prescription costs as part of the allowable medical expenses.
·
Determination of the appropriateness
of treatment is left to the provider and the patient
At age 65, the content of the savings account may be used in
several ways that are potentially very helpful to the account owner.
These options include:
·
The balance may be treated as part of
the owner's retirement estate, and rolled out similarly to the roll
out of a IRA or 401k plan.
·
It may be used to pay co pays and
deductibles associated with the Medicare program, and act similarly
to "Medigap" coverage.
·
It may be used to pay the premium for
long term care insurance.
·
It may continue to pay dental,
vision, and pharmaceutical benefits not covered by Medicare.
·
As long as the funds are used for
medical purposes as defined by the IRS, they may continue to be held
in savings account. However, at age 65 and afterwards, no
further additional contributions may be made to the program.
Please note that William H Gill Consulting is neither a financial
planner nor a tax professional. The comments relating to tax
benefits made above are based on a review of relevant publications
by the Internal Revenue Service and others, but are not guaranteed
as to accuracy. When incorporated into an overall financial
plan, you should review the comments and programs described herein
with a competent financial adviser to determine suitability to your
circumstances, and with competent tax counsel to determine impact on
your tax planning or status.
Revised 10/14/2007