What are H.S.A's and H.D.H.P.'s and how can they save you money and boost your retirement?

The acronym "H.S.A" is being tossed around quite a bit nowadays especially since the tax advantages of owning an H.S.A. and a corresponding qualified H.D.H.P (High Deductible Health Plan) have been significantly increased under the 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 in H.S.A. law for the year 2007 please Click here: http://www.treas.gov/press/releases/hp209.htm  

H.S.A. stands for Health Savings Account. Health Savings Accounts are a unique way to attractively manage your health insurance costs. They were originally named M.S.A'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 H.S.A. qualified H.D.H.P. (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 when he approached Congress back in the 1990's. His answer to Congress was quite 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 H.S.A.'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 (H.D.H.P.) with a yearly family deductible between $2,200 per family (not per person) or as high as $5,650 per family we will call that an H.S.A. qualified health insurance plan (H.D.H.P.) 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 H.S.A. qualified health insurance plan (H.D.H.P.) the option to open a tax favored H.S.A. (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 H.S.A. an amount equal to the size of your chosen plan deductible. So if a family chooses an H.D.H.P. with a $5,650 yearly family deductible then that family can deposit an amount equal to that number each year and an additional $800 a year (in 2007) for each insured who is over the age of 55 (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 $6,450 and they can take a 100% tax deduction for that contribution similar to an I.R.A.  

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 I.R.S. will allow them to pull out that money that they put into their optional tax deductible, tax deferred H.S.A. savings account to pay for those expenses. When they use their H.S.A. money to pay for those expenses the I.R.S. will allow them to write those expenses off at a 100% tax deduction. The list that the I.R.S. allows them to spend their H.S.A. money on is very liberal and includes things like dental, orthodontics, eyeglasses, radiokeratonomy (Lasik corrective eye surgery), alternative medicines etc. Click the hyperlink to see the list of allowable expenses and disallowed expenses on the H.S.A. section of the I.R.S. web site here: http://www.irs.gov/publications/p502/index.html   

Arguably the most attractive tax advantage to owning an H.S.A. is the fact that the money left over in the H.S.A. 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!   To learn more about H.S.A.'s and the recent federal legislation that has made them even more attractive to people over the age of 55 click here: http://www.treas.gov/offices/public-affairs/hsa/about.shtml to read all about them on the Federal Governments H.S.A. educational web site.

If you are an employer and are considering H.S.A. 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 percent in some cases relative to other forms of insurance. For more details about the advantages to the employer please click here: Click here: U.S. Treasury - HSA Frequently Asked Questions  

Please "Contact Us" with questions about H.S.A.'s. If you have a C.P.A. or tax advisor please feel free to ask he or she about the advantages of owning an H.S.A. as well. You can run your own quotes and learn even more about H.S.A. qualified H.D.H.P.'s via our web site here: Click here: Small Business Insurance Services-What are H.S.A.'s and H.D.H.P.'s and how can they save you money