|
Health Savings
Accounts pair high-deductible insurance with tax-free savings that
participants can use to stay healthy or to retire someday. The plans fit
self-employed people well. Do they fit you?
Self-employed clients deluged insurance agent Gail
McElroy with calls after Congress created the Health Savings Accounts in
December 2003. From everything the clients had heard, the new account would
be better than sliced bread:
- Consumers can make pre-tax contributions to cover health-care costs.
- The contributions can be invested, and the earnings will be tax
deferred, much like an Individual Retirement Account.
- The money in the account can be rolled over from year to year,
potentially building up to hundreds of thousands of dollars.
- Withdrawals for medical expenses are tax-free. Withdrawals in
retirement for any purpose are penalty-free.
- The accounts come with “catch up” provisions, allowing people older
than 55 to contribute even more.
- The accounts are no longer limited to the smallest businesses. Just
about anyone, including employees at large companies, potentially could be
eligible.
- The accounts are portable and can be transferred from job to job.
At first, McElroy had trouble finding any information about the new
accounts. Although authorized starting Jan. 1, 2004, providers and details
were scarce.
The more information she did find, though, the fewer clients were
interested.
HSAs are complex and come with a big drawback: They can’t be used unless the
client has a high-deductible health insurance plan, and many people don’t
want to pay $1,000 to $5,000 out of pocket, even with tax-advantaged money.
“Most people don’t like that high deductible,” said McElroy, who works for
an agency in Westlake Village, Calif. “It’s very confusing, and people did
not understand how these worked.”
A new wave in health-care coverage
Some proponents still believe HSAs will revolutionize health care and even
play a role in bringing medical inflation under control. They predict
large-company employers will start rolling out the plans in droves next
year, supplementing a growing number of self-employed and small-business
owners who have set up the accounts.
Some large companies will offer this option for their employees next year,
and even more are expected to introduce HSAs in 2006, said Joe Martingale,
national leader for health-care strategy at Watson Wyatt, a benefit research
firm.
“A lot of employers are thinking of this as the only (health insurance)
program they’ll offer in the future,” Martingale said.
Others see HSAs as a niche product for “the healthy and the wealthy” -- and
the savvy. HSAs take some explaining and require some financial
sophistication on the part of the consumer. They’re not for everyone. But,
if done right, they can help you build up a pile of tax-advantaged cash --
and may help you survive a looming crisis in the retiree medical system.
One couple’s experience
Architect Robert Payne of Richmond, Va., signed up for a Medical Savings
Account -- the predecessor to the HSA -- as soon as Congress made them
available in 1997. He bought a high-deductible insurance policy that
required him to pay the first $3,500 of medical expenses for himself and his
wife each year, and put that much tax-deductible money into an investment
account offered by Health Savings Administrators, also of Richmond.
Payne figured he and his wife were in good health and unlikely to need much
medical care. The high-deductible policy helped him lower his insurance
premiums while preserving their coverage in case he or his wife suffered a
catastrophic illness or injury.
“It’s a safety net for the ‘big one,’” Payne said. “That’s what I wanted
protection for.”
Congress’ creation of the HSA to replace the MSA, in Payne’s opinion, just
made a good situation better:
- Contributors can now put aside up to $5,150 a year, an amount that
will rise with inflation.
- In addition to avoiding income taxes, the contributions are now free
of Social Security and Medicare taxes as well.
- People like Payne who are over 55 (he is 61) can contribute an extra
$500 a year, an amount that is scheduled to rise to $1,000 by 2009.
Congress also vastly expanded who can qualify. While MSAs were limited to
the self-employed and small businesses with less than 50 employees, anybody
who buys a compatible high-deductible policy can now open an HSA.
Even after surgery, a $30,000 balance
Most years, the Paynes haven’t had to take much out of their account, which
is invested in low-cost Fidelity mutual funds. Even after back surgery last
year, Payne still has a $30,000 balance.
“When you’re self-employed, it really couldn’t be any better,” Payne said.
“You can put away money, and it keeps compounding.”
In fact, many account holders are so attracted by the idea of how much their
tax-advantaged money can grow that they actually pay for medical expenses
with other, after-tax dollars rather than tap their accounts.
“Sixty-eight percent of our account holders never touch the money,” said
John Vellines, president of Health Savings Administrators. “The type of
people attracted to this are looking to the future, knowing they can use it
for retirement and have full flexibility in how they use the money.”
Theoretically, a couple that contributed the current maximum each year and
never tapped the cash could have a nest egg of nearly $600,000 in 30 years,
assuming their investments grew at an average 8% annual rate.
The nest egg may well be needed
That seems like a lot, but the Employee Benefit Research Institute warns
that such a cash pile might be essential by the time many of today’s workers
reach retirement age. The nonpartisan institute has estimated that people
will need to have anywhere from $40,000 to $1.5 million saved to pay for
out-of-pocket medical costs in retirement, not including the costs of
long-term care, such as nursing homes.
Health and longevity will play a role in how much money you need, EBRI said,
but so will Medicare and employer coverage:
Someone with employer-provided coverage who dies at age 80 would come in at
the low end of the estimate, while those who lack such coverage and live to
100 would come in at the high end.
As longevity increases and help with health-care costs is harder to find,
workers and retirees will face a rising need for cash to pay for treatments.
Consider:
- Medicare currently pays only half of retirees’ medical expenses, and
that proportion may drop as the system runs aground. Medicare is expected
to run out of cash in 2019. That’s more than two decades before Social
Security is expected to suffer the same fate.
- The percentage of retiree medical expenses paid for by companies is
expected to continue falling, as well. Fewer than 40% of large-company
employers currently offer retiree health benefits, and research firm
Watson Wyatt has estimated employers will pay for less than 10% of retiree
medical costs by 2031.
- Even now, one of the big potential expenses of retirement -- nursing
home care -- typically isn’t covered by either Medicare or private
employer plans. The typical three-year stay in such a facility usually
costs upward of $150,000, and the tab can be much higher in urban areas or
if round-the-clock care is provided at home.
If medical inflation continues at its current breakneck rate of 14% a
year, prospects for future retirees are even worse.
The goal: Using health coverage more wisely
It was medical inflation, in fact, that convinced Congress to launch the MSA
pilot project and then replace it with HSAs. The idea was that unless
consumers start paying more of their own health-care expenses, they won’t
make the kind of dollar-wise decisions that will help rein in inflation.
“What we Americans have lost sight of is that the most important function of
insurance is catastrophic protection,” said Wyatt’s Martingale. “We would
all have been better off if, back when health insurance was introduced in
the 1940s and 1950s, we had focused on the real issue of protecting against
catastrophe … rather than creating an entitlement that offered coverage from
the first dollar.”
Treating insurance this way doesn’t necessarily mean higher costs for
consumers. High-deductible policies typically cost much less than
traditional insurance plans -- sometimes so much less that the savings more
than cover the higher deductible.
A healthy Los Angeles couple in their 40s with a child would pay about $475
per month for an HSA-compatible policy from Blue Cross of California, for
example, compared to $1,000 for an all-inclusive HMO plan.
Critics: HSAs will draw off the healthiest
Critics worry, though, that widespread adoption of HSAs could undermine the
health-care system. Healthy individuals could abandon traditional plans,
which could founder under the costs of caring for the sicker remaining
members.
That could lead to much higher premiums for the most vulnerable workers and
retirees, according to the National Association of Retired Federal
Employees. The group criticized the government’s plan to offer HSAs to about
3 million federal workers next year as “risky” and “premature.”
Stopping HSA’s momentum may be tough, however. Congress’ expansion of HSA
eligibility has already had a profound effect on the health-insurance
market.
Finding an insurance policy that would work with an MSA used to be
difficult, Vellines said. Congress limited the number of potential MSA users
to 750,000, and most major insurers considered that market too small to be
worth the bother.
Since the program’s expansion, though, a number of big insurers, including
Aetna and the Blue Cross and Blue Shield plans in some states, have rolled
out HSA-compatible plans.
What the government requires
Not just any policy will work. Deductibles have to be at least $1,000 a year
for singles and $2,000 for family coverage. The policy can’t offer “first
dollar” coverage -- in other words, high-deductible policies that also have
co-pays for all doctor visits won’t work.
The Treasury Department did recently rule that a compatible policy could
offer “first dollar” coverage for wellness visits, which can include
physicals, immunizations and prenatal and well-baby care. Since that’s a
routine feature of many high-deductible policies, HSA proponents welcomed
the ruling. Federal regulators also are temporarily allowing policies that
offer prescription co-pays, but that exception is scheduled to end Dec. 31,
2005.
The interest by large employers also is creating more interest among
brokerage firms in offering the investment accounts.
Fidelity Investments already is working with a few employers who are trying
to roll out HSAs as early as July 1, said Pam Norley, senior vice president
for the mutual fund company’s health and welfare practice. Others are aiming
for a Jan. 1, 2005, introduction, and even more are shooting for 2006.
Getting buy-in from employees is a challenge
Employers are “really excited” about HSAs and their potential to contain
costs, Norley said. Convincing employees of the benefits, though, might not
be easy.
“The majority (of employers) have said they really need another 12 months,”
Norley said, “to tackle the communication challenges these products
present.”
If you’re interested in setting up an HSA, the growing buzz means you’ll
probably have many more options to choose from in two years than you do
today. For now, the dozen or so companies offering HSAs tend to come in two
flavors:
- Those that package the insurance policy with the account.
- Those that let you “bring your own” by buying a policy from the
insurer of your choice.
The National Small Business Association, for example, has an alliance
with Assurant Health to offer HSAs. By contrast, people who use account
administrators like Health Savings Administrators or First MSA Inc. of
Reading, Pa., buy their coverage independently from an insurer like Blue
Cross.
Premiums and account fees can vary, so make sure to shop around. Also, make
sure that you can take your account with you easily in case you find a
better option next year.
Liz Pulliam Weston's column appears every Monday and Thursday,
exclusively on MSN Money. She also answers reader questions in the
Your Money message board.
|
