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The new health savings accounts.

I AM LOOKING FOR A JOB just to get company paid health insurance. Some of my clients are thinking about selling their companies since the cost of health insurance as an employee benefit has smothered their bottom lines. Face it. You are going to pay more to insure your health. If you can afford it, that means more money out of your pocket. If you can't, that means you go without coverage.

Let's add some more to the equation. Remember the Baby Boom generation? There are millions of individuals entering into an age where health coverage is on top of their list of demands. How about the constant introduction of new drugs to extend life and the quality of life? More people demanding more drugs. My recollection of supply and demand says that is going to create higher prices. If the price of health care is going up, so too is the cost of health insurance. What to do?

Like too many other problems, we look to government for assistance. This time, though, Congress got it right--finally! It actually used the tax code to reduce the cost of health insurance for just about everyone. Tax deductible going in, and no taxes when you take it out! it does not get much better than that. I am referring, of course, to the new Health Savings Accounts (HSAs) that were created last year as part of the Medicare Act.

The concept is easy. Congress wants to put you in charge of your own health costs. So, if you buy their special ticket, you will be able to set up a magical account. You will put money into that account and be able to deduct it. There is no tax while the money is held by the account. And, if you take the dollars out for the right reasons, there is no tax when you empty the account.

Technically, it is a bit more complicated. Let's start with the special ticket. In order to qualify to open a Health Savings Account, you have to be covered by a high deductible health plan. It must be your only health plan. (There are some exceptions--for instance, workers' compensation, coverage under an auto policy, etc.) The annual deductible cannot be less than $1,000 for individual coverage or $2,000 for family. Remember, the bigger the deductible, the smaller the premium you have to pay. In addition, the sum of the annual deductible and other out of pocket expenses required to be paid under the plan cannot exceed $5,000 for individual or $10,000 for family coverage.

If you have this special ticket, what does it let you do? For starters, you can set up a Health Savings Account. Where do you get the money? How about from the premiums you saved by switching to a high deductible health plan?

Technically, the HSA is a trust. You can contribute into that trust, and take a tax deduction for, the lesser of the annual deductible for your high deductible health insurance, or $2,600 ($5,150 with family coverage.) Up to the limits, the higher the deductible, the lower your premiums, and the more you can put into the pot.

If you are 55 or older, you can make additional deductible contributions. For 2004, it is an extra $500. It increases $100 each year until 2009, when the bonus reaches $1,000.

You can dip into this pot at any time. Any dollars used for medical expenses come out tax free. You can use the HSA for routine doctor visits, lab tests, eyeglasses, dental care, or even cosmetic surgery. However, you may not use your HSA to buy health insurance, although payments for long-term care insurance count. You also may use the money for temporary health insurance while you are out of work and collecting unemployment, or for COBRA continuation insurance. If you withdraw for nonmedical purposes, you pay tax, plus a 10% penalty, on the nonqualified amount.

Similar set-ups, the Archer Medical Savings Accounts, for instance, have been around for a while. The Archer MSAs, however, were limited to small businesses and the self-employed. They also were temporary and scheduled to terminate after a trial period. That really did not encourage insurance companies to develop the appropriate policies on a mass basis.

Health Savings Accounts are designed to be permanent and can be used by anybody! They can be offered to employees as part of a cafeteria plan. Contributions can be made by employers and employees. The individual who puts in the dollars gets the deduction.

Here is how the numbers might work, according to Scott Krienke, a vice president with Fortis Insurance. A couple in their mid 30s with two children in a large city in Ohio could buy a health policy with a $5,000 deductible for $250 a month, or $3,000 a year. A plan with a $500 deductible would cost $600 a month, or $7,200 a year. With the $3,000 plan, they save $4,200 in premuims. That $4,200 can be used to fund an HSA, and would be fully deductible.

Now, you are in charge. First, you have the tax savings. In the 35% bracket, that is an additional $1,470 in your pocket. More importantly, you are in control of your own medical expenditures. For a $10 co-payment, it was easy to visit the doctor. Now it is your money that is being spent. That should help put a break on runaway health care costs.

If you are young, healthy, or wealthy, this is a deal you do not want to pass up. I know of no other vehicle where you get a deduction with a deposit, and no tax with a withdrawal. That's my kind of tax shelter!

Jeff A. Schnepper, Associate Economics Editor of USA Today, is an attorney and estate planner in Cherry Hill, N.J., and author of How to Pay Zero Taxes.
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Title Annotation:Economic Observer
Author:Schnepper, Jeff A.
Publication:USA Today (Magazine)
Geographic Code:1USA
Date:Jul 1, 2004
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