What the heck are HSAs?

After I posted my tale of the health care cynic, commenter John Parker suggested that Matt might be able to further benefit from having a Health Savings Account (HSA). He mentioned that since Matt is a sole proprietor and has a "high-deductible plan" he could get additional tax saving by putting money aside pre-tax for his health costs.

I was familiar with the concept because several of the companies I worked for had that kind of option...which I never took advantage of.

But since I, too, am a sole proprietor with what I consider to be a high-deductible plan, my interest was definitely piqued.

So, I turned to my trusty sponsor and asked: "hey is this true, and what does it actually mean?"

Read on for the answer...which made me realize how non-savvy I am as a consumer...

So the short answer is, "yeah, it's true."

Not that the short answer is ever enough, so here was the full answer:

Matt is currently not on a HSA plan, but he would reap greater tax benefits if he was. Each plan must be specifially qualifed by the health insurance company to be considered HSA-eligible.

Basically an HSA program has two parts:
-a high deductible health plan
(at least 1,000 for individuals and $2,000 for families)

-an IRA style savings account.
You get to deposit tax free money into your savings account up to your deductible every year. You can use the money in the account for medical expenses until you reach your deductible and the list of qualified medical expenses is really broad...eyeglasses, Rx, dental etc. The unused funds roll over every year until you reach retirement at which point you have a nice nest egg for post retirement medical expenses.

I was also provided with this link to an article on HSAs.

I still had one question after reading it which was: how do withdrawals work? I mean, the article says you can use the money to buy over the counter medications (I take Claritin every day...and most carriers won't cover any other allergy drug now that Claritin is available OTC.) How do they know?

So, my intrepid contact filled me in: most HSAs give you a debit card or even special checks, and you can use those to pay for your items. At any rate, at the end of the year when you do your taxes, your withdrawals from your HSA better equal your medical expenses. Of course, as always, there is a disclaimer which is talk to your own accountant and health care provider to make sure you fully understand their HSA offering and that you follow the regulations properly.

She even provided me with an online calculator to see if HSAs would help me. Which they would. Which is nice.

Only the punchline is that Kaiser doesn't support them yet.

(Apparently these only become available in January 2004. Some carriers, like Matt's Golden Rule" were quick on the trigger. Some carriers, like Kaiser...not so much.)

OK, so there's everything you never knew you wanted to know about HSAs

Comments

[Bob]

Golden Rule (and Fortis, now Assurant) were the first to get on the HSA (formerly MSA) in a big way. Other carriers have followed suit, especially with the HSA. It remains to be seen how many will stay in the market.

Many jumped in when MSA's became available, but few were sold. Could be wrong but believe the number was less than 1,000,000 accounts after 6 years or so in the market. Considering how many were eligible for MSA's, the penetration was very low.

HSA's expanded the number of eligible participants but almost a year and a half later, very few people have actually established an HSA.

As for KP being a late entrant, yes they are (as are most other HMO's). But I am glad to say that KP now offers an HSA in several areas.

[Elisa Camahort]

This kind of loops back to your other points that people are uninsured because they WANT to be. I would submit that many are uninsured, or in this case don't get HSAs because they haven't a clue what's available to them.

[John C Parker]

Bob in his post indicated:

"HSA's expanded the number of eligible participants but almost a year and a half later, very few people have actually established an HSA."

The results of a study, released in the last few days, found that in the first 14 months the high deductible part of the HSA has been available (1/04) 1,030,000 have been sold.

Of those sold to individuals - 37% indicated they did not have prior medical insurance. Of those sold to employers (group plans) 27% said they did not have coverage. This connects to Elisa's comment.

About 50% of the buyers were over age 40.

Couple other points:

One - a person does not have to set up their HSA account with the same company they bought their high deductible insurance coverage from.

Two - there are many options for qualified HSA savings accounts and more banks, insurance companies, and others will be getting into the business. Couple sites to look at options in your area - www.HSAFinder.com www.HSAInsider.com

Three - Like bank run IRA accounts HSAs have a one time set up fee. A few HSA Trustees (IRS name) do not have a monthly fee. More common - $2 to $5 a month. Care must be taken - e.g. are there also transaction fees.

Want to also comment on part of an earlier post:

"You get to deposit tax free money into your savings account up to your deductible every year."

The IRS regs tell us for 2005 the maximum contribution is up to the individuals qualified high deductible health plan but not more than:

For single coverage - $2,650

For family coverage - $5,250

These amounts are indexed for inflation - single went up $50 for 2005 - and contributions are also pro rated if for example someone sets up a high deductible and a HSA Trustee account June 1st they could put in 7/12 of their allowable for 2005.

[Bob]

John, I have not seen that study and was just shooting from the hip. Does the report indicate how many of those are MSA conversions?

Also, many of the blurbs I have seen recently indicate the bulk are sold in the employer market, not to individuals. Does this track with what you have seen?

[Bob]

Administrators of health savings accounts (HSAs) have amassed $460 million in deposits, according to data gathered by Inside Consumer-Directed Care (ICDC) through interviews with 21 financial firms including JPMorgan Chase, Mellon Financial Corp., Exante Bank and Wells Fargo.

Collectively, the firms have opened more than 425,000 HSAs since Jan. 1, 2004, and are opening an average of 50,000 new ones each month, reports ICDC, an independent newsletter from Atlantic Information Services, Inc., a health care business news publisher based in Washington, D.C. Two of the largest HSA administrators -- Sheboygan, Wis.-based HSA Bank (acquired this year by Webster Financial Corp.) and Salt Lake City-based Exante Bank (a division of UnitedHealth Group) -- say they are opening more than 8,000 new accounts each month, and expect that number to increase dramatically on Jan. 1, 2006, when many employers begin their plan years. Average monthly contributions to the accounts typically are between $100 and $150 and can include individual and employer dollars, ICDC finds. The article and table can be found at http://www.AISHealth.com/ConsumerDirected/CDarticles/ICDCrelease.html.

HSA Bank, which began administering Archer medical savings accounts (MSAs) in 1997, is the nation's largest administrator with 110,000 HSAs and $200 million in deposits. Several HSA administrators had previously administered MSAs, many of which have been converted into HSAs. MSAs -- which at their peak covered just 250,000 people -- are far more restrictive and available to fewer people than are HSAs.

"We expect to see tremendous growth in HSAs in 2006 as local banks begin to look at the accounts as a way to boost overall deposits and attract new customers," says ICDC Editor Steve Davis, who has been tracking trends in account-based health plans since 2002. "The Treasury Department has told us that one of its top goals for 2005 is to encourage banks and credit unions to make HSAs available."

A provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President Bush in December 2003, gave birth to HSAs. The first accounts were opened on Jan. 1, 2004. HSAs are similar to 401(k) retirement plans in their portability, and can be opened by virtually anyone who has a high-deductible health plan (at least $1,000 annually for single coverage and $2,000 for couples and families).

[Bob]

http://www.ncpa.org/prs/tst/20040519djg.htm

"As of January 1, 2004, 250 million nonelderly Americans now have access in principle to Health Savings Accounts (HSAs), provided they are combined with catastrophic insurance"