These days, medical conditions that previously killed and crippled are being treated and those people that are afflicted cured. Americans – and people from other lands who come to our country in search of medical care – pay the increasing costs associated with the improved quality of care.
Physicians, patients, insurance companies, and even the government have sought ways to reduce cost but maintain quality.
Health insurance transfers the risk of unaffordable medical expenses to insurance companies that pool the risks of a large group of people, but insurance, too, is becoming more expensive.
Health Maintenance Organizations (HMOs) reduce costs with preventive care and guidelines for care, but HMOs offer limited choice. What else is out there? Plenty, but the challenge is understanding the choices.
Here is a health care option that’s drawing a lot of attention from consumers. Health Savings Account (HSA) is a new name for an old way to pay for medical care. HSAs are tax-advantaged accounts in which you can save money to pay for your own medical expenses. They must be set up in conjunction with high-deductible (i.e. lower-cost) health insurance. For 2010, the annual deductible can be no less than $1,200 for self-only coverage and $2,400 for family coverage. Additionally, the annual out-of-pocket expenses for HSAs cannot exceed $5,950 for self-only coverage or $11,900 for family coverage.
A single person can contribute and deduct up to $3,050 and a family $6,150. Your money grows tax-deferred and you can withdraw tax-free money to pay for allowable medical expenses.
Allowable medical expenses are broadly defined, including costs that traditional insurance may not cover. If you withdraw money for other purposes, you will pay tax and a penalty on the withdrawal. Nevertheless, the decision is yours as to what you use your HSA to pay for.
If HSAs sound familiar, you may have heard of MSAs (Medical Savings Accounts). Before HSAs replaced them, MSAs did virtually the same thing as HSAs. The difference is HSAs are available to individuals and most employers, while MSAs were available only to self-employed individuals and small employers. Furthermore, HSAs have lower minimum deductibles and may be funded by the employer and employee, not one or the other.
An employer may prefer to use a little different option – Health Reimbursement Arrangements (HRAs). An employer would be the sole contributor to anHRAs. Accordingly, they can decide the contribution levels to afford various groups of employees. Furthermore, HRAs allow employers to control costs by determining what expenses they will reimburse. HRAs may allow the employee to “bank” unused money and carry over balances to the next year or HRAs may require employees to use the money by the end of the plan year or forfeit their contributions.
If you’re an employee, Flexible Savings Accounts, or FSAs, allow you to fund your own medical expenses. FSAs have high deductible contribution limits (up to 25 percent of salary, depending on the plan). FSAs may be available for day care as well as health care. The drawback is FSAs are “use it or lose it” plans.
These consumer-driven health plans may be efficient health care alternatives for people for a couple reasons. First is the favorable tax treatment. If you make $30,000 per year and have $2,500 of medical expenses, only $250 of that cost is deductible. The first $2,250 (7.5 percent of your income) is not. On the other hand, you can make a $2,700 deductible contribution to an HSA and withdraw that $2,700 tax-free to pay for the doctors’ bills. If you don’t have medical expenses, that $2,700 stays in your account.
Even if people don’t itemize deductions, they can use pre-tax contributions to consumer-driven health plans to pay for expenses that they ordinarily don’t deduct. In fact, they’ll see more of a benefit. If they don’t itemize, they wouldn’t ordinarily have deducted even the $250 in the previous example. That $2,700 deduction will mean even more to them!
The second reason for a consumer-driven health plan is individual autonomy. You get to decide what medical care you want to have and how you’ll pay for it. If you have more serious, ongoing medical issues, you may prefer traditional insurance solutions and the transfer of extraordinarily high costs to another party. But, if your medical expenses are more reasonable and remain about the same from year to year, you may want to consider a consumer-driven health plan.
Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.
For additional information or questions, contact Gregory B. Walker, financial advisor, Raymond James and Associates Inc. at Gregory.Walker@RaymondJames.com or call (260) 487-4154 or toll free: 1-800-487-6639.
