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Expenses. Health insurance costs are going up. The cost of health care and prescriptions are again on the
rise. Employers, individuals and self-employed persons are experiencing the reality of rising health care
costs every day. Employers are reducing benefits and insisting on employee participation to meet the rising
costs of providing health insurance coverage. Self-employed individuals and those individuals not covered by
a group plan are facing the same dilemma. Health insurance is not an area of my expertise, but Jay Hooper
of Great Northern Benefits brought Health Savings Accounts to my attention.
Health Savings Account (HSAs). Many of you in the income tax field are doubtless already aware of the
income tax benefits of HSA’s. An HSA is a tax privileged savings account established in conjunction with high
deductible health insurance. The HSA is held in a bank, working in conjunction with the health insurance
company. The account can be used to pay the deductible for medical and prescription expenses simply by
writing a check.
Pre-tax Contributions. The insured gets an income tax deduction for contributions to HSA, limited annually by
the deductible selected. This is a reduction in adjusted gross income, not part of itemized deductions! There
are typically minimums and maximums for deductible amounts. One sample company brochure I read
showed minimums of $1,000 for singles and $2,000 for families with maximums of $2,600 to $5,150
respectively. Medical expenses are paid by simply writing a check on the HSA.
Other Tax Benefits. Withdrawals for medical expenses are tax free and not deductible again. Income earned
on the account is tax-deferred (like an IRA) and not ever taxed, if used for medical expenses. If you terminate
the plan, you get the money back less a ten percent penalty and pay income tax on the amounts withdrawn.
However, these days with high medical and prescription costs, it is not hard to spend the money in these
accounts for medical expenses. Your HSA works like an IRA, in many other respects. If you don’t spend all
the HSA in one year, you just roll it forward and contribute for the next year. The HSA terminates at age 65, and
you can withdraw the balance of the account tax free.
High Deductible Health Insurance. As mentioned above, an HSA is linked to a high deductible health
insurance plan. You can imagine the savings and administrative costs for the health insurer when small
routine items are removed from plan administration. From looking at a sample brochure, it appears that the
monthly premiums for high deductible medical insurance are considerably below regular rates. When
combined with a tax deductible contribution to an HSA, these plans can afford substantial savings for many
people, particularly self-employed individuals such as professionals. For employed persons, the high
deductible plan has to be offered by the employer. Companies can often move to this type of plan and use
savings to help employees fund the first year HSA.
If you advise individuals and families in this category, who are faced with steeply rising health insurance
premiums, I would suggest that you recommend that they investigate HSA’s as a way to keep these costs
under control and obtain income tax benefits as well. If you would like more information, please contact
James Modrall at (231) 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| January 2005 HEALTH SAVINGS ACCOUNTS by James R. Modrall III, J.D., C.P.A. |