Health Savings Accounts: Just What the Doctor Ordered? 

Just when the cost of health insurance for self-employed professionals and small business owners was reaching the critical care stage, a new "consumer driven" health solution has hit the marketplace promising to reduce health insurance premiums and add tax incentives for health consumers.  It's called a Health Savings Account (or HSA), and is part of the recent Medicare Prescription Drug and Modernization Act of 2003 passed last December.  Actually, HSA's have little to do with Medicare or prescription drugs, but as it happens was a part of the same legislation.

So, just what is an HSA and how do you start one?  In the most basic terms an HSA is nothing more than an account funded with pre-tax money to be withdrawn as needed for lower cost medical services before the deductible has been met in a health plan.  Contributing to a tax-advantaged account is a concept already familiar to anyone who participates in a 401k or IRA.  The major difference is the HSA is much more of a transactional account used for medical service payments during your working years, rather than a nest egg accumulating for retirement.  With an HSA the co-payment and pre-deductible portion of your health care expenses can now be paid with tax-deductible money from your Health Savings Account (some of which may by funded by the employer making a contribution).

What induced lawmakers to create the HSA?  It's inline with a new movement towards "consumer driven" health care, a concept generally characterized by more consumer choice.  The proposed effect of the HSA is that overall plan premiums will be reduced while keeping intact major medical coverage, and basic or preventive health care will be paid with pre-tax dollars. Is it a good idea? The movement is not without detractors, but while individual or particular group cases may differ, proponents believe that HSA's will have an overall positive effect in reducing costs and keeping more workers insured.  If you agree you'll need to meet the eligibility requirements for an HSA.

Eligibility
Generally you will be eligible for an HSA if you are covered by a "high deductible health plan," and you cannot be claimed as a dependent. A high deductible health plan is one with an annual deductible of between $1,000 and $5,000 for an individual, and between $2,000 and $10,000 for family coverage.  An HSA can be set up independently of the employer, although employees may want to see if their employer-sponsored health plan meets the above eligibility requirements, or perhaps will be amended to a new HSA eligible plan.  Self-employed professionals only need to be concerned with meeting the requirements.

Contributions
Assuming you meet the eligibility requirements and are covered by an HSA approved health plan you're ready to enroll and begin contributing.  In 2004 an individual can contribute up to $2600 to an HSA pre-tax, while a covered family may contribute up to $5150 (these amounts are indexed for inflation).  You don't have to fully fund your account and unlike earlier MSA or FSA accounts you don't have to use the entire balance by year-end because it carries forward (earning interest) year after year.  After your account is funded you simply pay the medical fee or co pay amount directly to the physician's office at the time treatment is received (depending on your provider you can write a check or use a debit card issued for your HSA).  It is also important for both employer and employees to understand that the sole responsibility for verifying that HSA funds are used for medical services (adjudication) lies with the account owner, not the employer.

HSA Providers
An HSA is a trust that usually must be obtained from a bank or insurance company and, although they may not be easy to find this early on, there are reputable providers that will help you take advantage of the new laws today.  If you think the HSA may be a good prescription for you, you can learn more by contacting a local health care provider, or visiting www.mybizbenefits.com where you'll find a gateway search to HSA qualified health plan providers including a no-fee HSA, and more rules and regulation details.

Jay Barker is the Editor of MyBizBenefits.com, a free independent benefit plan information source for small business owners and self-employed professionals.  Email Mr. Barker at jaybarker@mybizbenefits.com