Published October 2004

Health savings accounts:
a 401(k) for your health

By Evelyn Lane
Guest Columnist

Employers and employees alike now have a new tool to battle high-cost health care: health savings accounts.

Approved by Congress in late 2003 as part of the Medicare Reform Act, the HSA is a cross between a Health Flexible Spending Account, an IRA and a 401(k) and is offered in conjunction with a high-deductible health plan.

Each year, participants can set aside the full amount of their insurance plan’s deductible on a tax-deductible basis, subject to a cap ($2,600 for individuals and $5,150 for families in 2004). Individuals age 55 to 64 can make additional contributions ($500 in 2004). HSA funds can be used tax free to pay for qualified medical expenses, including dental expenses, deductibles and co-pays.

While HSAs are similar to medical savings accounts, MSAs have been restricted to employees of small businesses and the self-employed. HSAs are open to everyone with a high-deductible health insurance plan. The only limitation on the health plan is that the annual deductible must be at least $1,000 for individual coverage and at least $2,000 for family coverage.

Employees can deduct contributions they make on their own tax return, or they can make contributions directly via a pre-tax payroll salary reduction program run through an employer’s cafeteria plan. The employer can also contribute using pre-tax funds. Additionally, unused money in the account can be saved for future medical expenses and grow tax free.

Here are five great reasons for having a health savings account:

• Tax savings: HSA contributions can be deducted from your gross income on your federal tax return, even if you do not itemize deductions. Many states also allow the deduction from state income taxes.
• Tax-deferred earnings: Funds left in your HSA grow tax deferred.
• Reduced insurance premiums: Your insurance premiums may be lowered by 20 to 40 percent when you change from a low-deductible to a high-deductible plan. You can use these savings to fund your HSA.
• Portability: Even if you change jobs, your HSA funds go with you. You own the account.
• Long-term savings: You can choose to let the funds in your account grow tax deferred. After Medicare-eligibility age (65), you may make withdrawals from your HSA for any reason without penalty, although regular income taxes apply if the funds are not used to pay medical expenses.

An HSA offers tax-deferred earnings on money that doesn’t get used, as well as the ability to roll the money over from year to year, unlike the “use it or lose it” limitation of flexible spending accounts.

The HSA can reduce company health-care expenses and offer a better benefits package to employees. At the same time, an HSA provides employees with added flexibility, choice and tax advantages, as well as ensuring stability for future health-care purchases.

Evelyn Lane is a business banking manager with Wells Fargo in Everett. She can be reached at 425-252-1620.

Back to the top/October 2004 Main Menu