Pumped-Up Savings or Just a Raw Deal?
By: Source: AARP Bulletin Today Date Posted: 2004-08-13 13:15:00-04:00
Wayne Modugno of Lake Arrowhead, Calif., is a self-employed construction manager with seven children and all the health insurance headaches and expenses that go with that territory.
So when new tax-deductible health savings accounts—HSAs—became available earlier this year, Modugno, 49, jumped at the chance to open one. "It creates a financial windfall for me," he says.
The plans, authorized in last year’s Medicare prescription drug legislation, allow people under age 65, like Modugno, to put up to $5,150 into their health savings accounts tax free every year—and to take it out tax free if it’s used for medical expenses. Modugno can use his HSA money to pay his health insurance plan’s premiums and other out-of-pocket charges or for items that aren’t covered, like aspirin or braces for all those kids. He also can let the account build until he retires and use it like an IRA.
But HSAs are not for everyone. They are open only to qualified applicants who have health insurance with a high deductible—at least $1,000 a year for an individual and $2,000 for families.
Ron Pollack, executive director of Families USA, a Washington advocacy group, fears HSAs will appeal to younger, healthier and wealthier workers and leave older, sicker people in the lurch. "These health savings accounts are going to cause tremendous mischief for people who remain in traditional insurance pools," he says.
People who can’t afford high deductibles could be relegated to low-deductible plans that will become more and more expensive, Pollack says. He adds that the HSA’s tax benefit is of dubious value even for those in lower brackets because it will be trumped by higher out-of-pocket costs.
Some critics worry that HSAs will perpetuate the trend of shifting health care costs from employers to employees. "That’s one of our largest concerns," says Edwin Park, a health policy analyst with the Center on Budget and Policy Priorities, a Washington think tank. "If employers switch from comprehensive coverage to high-deductible coverage, that is a savings for the employer. Will they put money into accounts for the employees? In a large number of cases they will not."
The employee merely bears more of the cost, Park says. "That’s what’s been going on for the last several years."
Even so, Linda Havlin of Mercer Human Resource Consulting, an international business-advisory firm, says, "We’re looking at a major market change unlike anything we’ve seen before." A survey Mercer released in April found that three of four large employers are likely to offer the plans to employees.
The idea behind the accounts is to encourage people to be more cost-conscious about their health care and reward those who opt for high-deductible insurance. One reward is a lower premium. A zero-deductible plan, for example, can cost a couple in their mid-50s $917 a month; a similar plan with a $5,000 deductible can cost $188, according to ehealthinsurance.com.
The U.S. Treasury Department released rules this spring allowing yearly tax-free contributions to HSAs. The current limits are up to $2,600 for singles, $5,150 for families and an extra $500 for individuals age 55 and older. Although Medicare beneficiaries are not eligible for HSAs, younger spouses can enroll in a family HSA and pay out-of-pocket expenses for them.
Proponents say HSAs will boost the number of insured people by making health coverage more affordable. The average age of purchasers is around 48, and more than one in three new buyers did not have insurance before, says Dan Perrin, executive director of HSA Insider, an HSA advocacy group in Washington. Chicago attorney Teresa Hoffman Liston, for example, is a breast cancer survivor who says she can’t buy insurance unless it has a high deductible. Her HSA helps her cover the deductible.
The most enthusiastic fans are people like financial planner David Hultstrom of Richmond, Va., who sees the new accounts as a great way to beef up retirement savings. "They’re like a flex spending account on steroids," he says. People can save for years in an HSA, while money in flexible spending accounts must be used by year’s end.
HSA money that’s used for nonmedical retirement expenses will be subject to income taxes, much like a 401(k) plan or traditional IRA. As account holders reach 65, they can use their HSAs to pay Medicare premiums and their share of employers’ retiree health insurance (but not for medigap insurance that supplements Medicare).
Employers, health insurers and banks can offer HSAs. Applicants will have plenty of options, since new plans are coming to market daily. Some are run like bank accounts, with safe but low rates of return. Others allow account holders to invest their HSAs in mutual funds.
But there’s no need to rush. If you decide an HSA is right for you, you have until April 15, 2005, to open and feed your account for the 2004 tax year.
Linda Stern writes on personal finance for Newsweek.
preview