Originally created 10/03/04

HSAs allow for tax-free account as insurance



Q: My employer is offering a Health Savings Account as a health insurance option next year. What is it and what are its benefits?

A: Health Savings Accounts are a new approach to providing health care that combine a tax-free account that can be used toward medical expenses along with a high-deductible insurance plan with low premiums.

They were introduced last December as part of Medicare reform and have some similarities to flexible spending accounts.

HSAs are part of the movement to encourage individuals to be more discerning with decisions about how they spend health-care dollars as health-care costs explode, said Kathryn Bakich, the vice president and national director of health-care compliance at Segal Co., a benefits consulting firm.

The tax-free account can either be funded by the employer or the worker or some combination of the two.

The employee's contribution to the account is paid with pretax dollars, lowering their taxable income. An individual buying an HSA in the open market can take the contribution as a tax deduction.

This year, the total contribution to an individual's account is limited to $2,600 while the ceiling for a family is $5,150. The Internal Revenue Service hasn't disclosed the rates for 2005.

The tax break is one benefit of such plans but is probably only notable for people making more than $50,000 a year, said Robert Corrigan, the director of product management for First Health Group Corp.

Mr. Corrigan said the bigger advantage for employees is that once the employer places the money in the account it is theirs to keep even if they leave the company. The money also can be accrued year after year and invested just like a 401(k) so it can grow for future needs.

That differs from flexible spending accounts, where any leftover money is lost if not used.

As with HSAs, the money an employee puts into a flexible spending account is paid with pretax dollars.

But there are other differences: HSAs work only with high-deductible plans, while flexible spending accounts work with all kinds of health plans.

Flexible spending accounts also must be established through an employer and cannot be set up independently, as an HSA can.

Individuals can withdraw money from HSAs for non-health spending, although there is a 10 percent penalty. That means an employee can take money out of an account set up by an employer and even buy a television or a new sofa. Ms. Bakich said such a scenario has made employers leery of setting up such HSAs.

"Employers don't want set up plans that could make employees unhappy," Ms. Bakich said.