Benefits Age Presents HSA Q & A Courtesy of HSAInsider.com

Questions? Call Benefits Age at (847) 397-5300
We’re the Employee Benefit Specialists

1. What is a Health Savings Account?
2. Where does the money deposited in the account come from?
3. Why would some one who is less healthy want a Health Savings Account?
4. Does the maximum out of pocket include the deductible?
5. Can a copay prescription card be offered under a qualified high deductible plan?
6. Eligibility?
7. What Is a “High Deductible Health Plan” (HDHP)?

1. Q: What is a Health Savings Account?

Insider: Health Savings Accounts are a new option for health insurance and they have two parts. The first part is a health insurance policy that covers large hospital bills. The second part of the Health Savings Account is an investment account or retirement account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes.

2. Q: Where does the money deposited in the account come from?

Insider: The money comes from refinancing your current health insurance. The average cost of health insurance was $9,068.00 for a family in 2003 in the U.S., according to the Kaiser Foundation. That is how much money on average, per family, was spent last year on family health care insurance coverage (HMOs, PPOs, fee for service plans) in the United States.

Remember HSAs are two parts: an insurance policy and a tax-free account. So, if you take $3,000.00 of that $9,068.00 (leaving $6,068.00 unspent) and you or your employer purchase a health insurance policy that covers your medical expenses above $5,150.00, the high deductible health insurance plan is in place. (Ed. Note: For 2005, maximum annual contributions have been raised to $2,650 for individual coverage and $5,250 for family coverage.)

Now, according to the law, you are allowed to deposit – tax free – up to $5,150.00 to pay for the routine medical care. Withdrawals for medical care are tax-free. Your insurance company may administer the account or you can open the account with an HSA administrator like FirstMSA (www.firstmsa.com) or MSABank (www.msabank.com) or Prime Healthcare (www.webhealthsavingsaccount.com) or a local bank that offers Health Savings Accounts.

To review, out of the $9,068.00, you spent $3,000.00 on a health insurance policy with a $5,150.00 deductible. The insurance covers your family’s health care costs that exceed the $5,150.00 deductible.

Out of the $6,068.00 remaining, you and your employer deposit $5,150.00 into your health savings account. It is now your money. If you leave your employer, it is still your money. It follows you. What you do not spend out of the account rolls over, so if you and your family only have health costs of $2,000.00 this year, you and your family would have $3,150.00 remaining in your Health Savings Account. So, next year, you will start your Health Savings Account with $3,150.00, plus the interest you earned, and you and your employer will add another $5,150.00 to your account, giving you ($5,150.00 + $3,150.00 = $8,300.00) to spend next year.So, you and your employer just saved $918.00 in health care costs in the example above.

3. Q: Why would some one who is less healthy want a Health Savings Account?

Insider: There are two key reasons the less healthy should choose a Health Savings Account.

The first reason is to have control over their own health care decisions and treatments, including their prescription drugs.

With an HMO, the sick must face the rationing regime in place by HMOs to contain costs, which includes a frustrating waiting list to see a specialist and treatment and prescription drug formularies that may not have the most up-to-date treatments or brand name drugs that would make them feel the best.

The second reason is a financial incentive.

Assuming the less healthy would rather not be in an HMO or other managed care plan, then they would likely choose a fee-for-service plan. The standard fee-for-service plan has a $500 deductible, with a 20% co-pay of the next $5,000. This means the person would pay $500 for the deductible, and $1,000 for 20% of $5,000, before being covered 100%.

That is $1,500 in after-tax income to be insured 100% for someone who is less healthy in a traditional, low deductible, fee-for-service health insurance plan.

With a Health Savings Account, the same individual would pay a much smaller premium, and in most cases, the savings fund a majority of the deductible in their Health Savings Account.

With a $1,700 deductible, and, say $1,500 deposited tax-free in the Health Savings Account, the less healthy individual with an HSA would have to come up with $200 in after tax money to be covered 100%. ($1,700 deductible minus $1,500 from the Health Savings Account equals $200 to meet the deductible).

So the choice for a less healthy individual in a fee for service plan is: (1) pay $1,500 in after-tax funds to pay to be covered 100% by their insurance, or (2) with an HSA, pay $200 in after tax money to be covered 100%.

The less healthy, therefore, have a financial incentive to choose a Health Savings Account.

4. Q: Does the maximum out of pocket include the deductible?

Insider: Yes.

5. Q: Can a copay prescription card be offered under a qualified high deductible plan?

Insider:The U.S. Department of the Treasury has recently stated that those with a health insurance plan that is in all other respects HSA compatible, except that it provides prescription drug coverage below the deductible, can have an HSA until 1/1/2006. This is how the U.S. Department of Treasury’s media release described this recent Treasury ruling:
http://www.hsainsider.com/treasury/treasury_7.pdf

INTERACTION OF HDHP BENEFITS WITH PRESCRIPTION BENEFITS AND TRANSITIONAL RELIEF Prior guidance noted that an eligible individual must be covered by an HDHP and generally no other health plan that is not an HDHP. Guidance issued today clarifies that individuals covered by a health plan that provides prescription drug benefits before the minimum annual deductible of an HDHP has been satisfied may not make contributions to an HSA. However, companion guidance also issued provides transition relief to those individuals covered by both an HDHP and by a separate health plan or rider that provides prescription drug benefits before the deductible of the HDHP is satisfied. Under the relief, such individuals continue to be eligible to contribute to HSAs before 2006.

If you want to read the full text of the Ruling, go to: http://www.hsainsider.com/treasury/treasury_3.pdf

6. Q: Eligibility?

Insider: Here is the U.S. Department of Treasury’s answer, which can be found at: http://www.treas.gov/offices/public-affairs/hsa/faq2.html#hsa3

Who is eligible for a Health Savings Account?

To be eligible for a Health Savings Account, an individual must be covered by a High Deductible Health Plan (HDHP), must not be covered by other health insurance (does not apply to specific injury insurance and accident, disability, dental care, vision care, long-term care), is not eligible for Medicare, and can’t be claimed as a dependent on someone else’s tax return.

7. Q: What Is a “High Deductible Health Plan” (HDHP)?

Insider: A HDHP is a health insurance plan with minimum deductible of $1,000 (self-only coverage) or $2,000 (family coverage). The annual out-of-pocket (including deductibles and co-pays) cannot exceed $5,000 (self-only coverage) or $10,000 (family coverage). HDHPs can have first dollar coverage (no deductible) for preventive care and higher out-of-pocket (copays & coinsurance) for non-network services.