HSAs Offer a Good Way to Pay for Care

by Jeanie Wyatt
San Antonio Express-News
10/07/2007

We are told to get regular checkups on just about everything — our health, our finances, our car, you name it. Sometimes I like to check up on a subject I have written about previously to see what might have changed. I did this recently with Health Savings Accounts, or HSAs. I won't repeat what I covered in the two More Than Money articles in April 2004, but I have learned some interesting things.

The growth in the use of HSAs has been dramatic. These accounts first came into use in January 2004 as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 signed into law by President Bush.

According to the fact sheet from the U.S. Department of the Treasury, America's Health Insurance Providers (AHIP) reported that there were 438,000 individuals covered in November 2004 by HSA-type insurance. Additionally, IRS data for the 2004 tax year indicated that 113,000 tax returns reported income tax deductions for HSAs. By December 2005, the number of individuals covered under these plans had mushroomed to 3.2 million. The breakdown was fascinating:

Thirty-one percent (31%) were previously uninsured individuals buying health insurance on their own;

• 33 percent were employed by small businesses that previously had not offered any health-care coverage to their employees.
• Nearly 50 percent of these HSA accounts were for people age 40 or older.
• Finally, 42 percent of these accounts were for individuals and families with incomes below $50,000 who are buying HSA-type insurance policies — those with high deductibles — on their own.
  

There is more than $1 billion invested in HSAs, accumulated in just three short years! These funds forever escape income taxes so long as they are used to pay for qualified health-care expenses. You get to choose how and when the money is spent, and you don't lose it at the end of the year, like in the more common Flexible Spending Accounts (FSA) offered by many employers.

By 2010, the Treasury Department is predicting that there will be 14 million HSA policies covering 25 million to 30 million people, with greater growth even more likely as time goes on. With all the talk of health-care reform in the news, this is an existing option that you need to know more about.

An important update in the law in 2007 now allows individuals to make a one-time tax-free transfer from their IRA to an HSA. The amount is subject to the applicable contributions limit for the year in which the transfer is made. For 2007, the maximum amount that can be contributed to (and deducted from) an HSA from all sources is $2,850 for an individual and $5,650 for a family. For someone considering opening an HSA but concerned about building up enough cash to cover that first year, this is a great development.

Whereas withdrawals from an IRA are taxed when you take them out, withdrawals from HSAs never are taxed so long as they are spent on qualified health-care expenses. I recommend that everyone with a regular IRA should consider this transfer to an HSA.

The data show that a lot of people have figured out that Health Savings Accounts are a good way to pay for their health care. There is an excellent Q&A, "All About HSAs," on the Treasury Department Web site (www.treas.gov/offices/public-affairs/hsa).

Since these types of accounts must be partnered with a qualified High Deductible Health Plan (QHDHP), your health insurance provider is also a good resource to ask if a Health Savings Account makes sense for you. Of course, we always recommend you also consult with your tax adviser.

Jeanie Wyatt is a CFA and CEO of South Texas Money Management.