Planning ahead Featured

7:00pm EDT December 26, 2009

Finding the money to pay for medical expenses can be difficult, but investing in a health savings account can help ease the burden.

HSAs are triple tax preferred — money goes into the account tax free, is spent tax free and grows tax free — and funds can be used for any qualified medical expense.

“The great thing is that these accounts are owned and controlled by the account holder,” says Marti Lolli, product manager with Priority Health. “They operate like a personal checking account and include similar features, such as debit cards.”

Smart Business spoke with Lolli about how to take full advantage of an HSA.

How do HSAs work?

You must be covered by a high-deductible health plan (HDHP) in order to be eligible for an HSA. HSAs are available through banks or credit unions and come with typical bank account features.

These accounts are not associated with a particular employer or health plan and are owned and operated by the account holder, so even if you’re drawing unemployment, you can use an HSA to pay for your health insurance premium and other medical expenses. HSA money also rolls over, so it can be used for medical expenses today or in the future. In addition, HSA dollars can be used to pay for your spouse’s and dependents’ expenses, even if they are not covered under your medical insurance.

And because decisions on how to spend the money are made by the account holder, not an insurance company or other third party, you need to keep all receipts in case of an audit by the IRS. You need proof that you are spending HSA money on qualified medical expenses, such as deductibles and copayments, dental and orthodontia services, and vision services, including glasses and corrective surgery.

What are the risks associated with HSAs?

One is not putting enough money into the account. Accounts are capped per year by the government, and because you cannot exceed that maximum contribution, you can’t catch up later if you failed to put in money when you could. The most you can contribute for 2010 is $3,050 for single HDHP coverage and $6,150 for family coverage.

Contribute enough to cover your projected yearly medical expenses. If you don’t spend the money but also don’t put in enough, you won’t have enough when you retire. Most financial advisers say that, because of the triple-preferred tax status, an HSA is the first place money should go after you contribute enough to receive your employer’s full 401(k) match since HSA dollars can pay for Medicare premiums tax free.

Another risk is failing to receive preventive care, even though many HDHPs cover this at 100 percent. All medical expenses are covered under high-deductible plans, but the plan can’t pay for anything until that deductible has been satisfied. You could increase your risk of disease down the road by avoiding screenings now.

What are key things employers need to understand about HSAs?

Employers are nervous that employees will stop receiving care because services are paid for out of pocket with high-deductible plans. But when employees are paying, they’re more likely to get appropriate care. Studies also show that people with chronic conditions who hold HSAs take better care of themselves.

Employers also worry that these plans won’t change the trend of health care spending, but the reverse actually happens, as premiums continue to be about 30 percent for HDHPs. The premium increase is also smaller each year than it typically is with other plans, so many employers contribute part of the savings into employee HSAs.

Many employers hesitate to offer HSAs because they cannot get that money back. If an employer puts money in an employee’s HSA on Jan. 1 and the employee terminates on Jan. 2, the employer cannot recoup the funds.

One solution is to spread contributions over the year, but what if that employee has a big ER visit on Jan. 2? A recent change in the Federal Registry allows employers to prorate contributions over the year but advance money to help employees with a medical emergency. Employers should create a policy that specifies this option is available and outlines how employees can access that contribution sooner and then apply it uniformly across all employees.

Employers can allow employees to put pre-tax contributions into the HSA bank account through a payroll deduction process. The employer must sponsor a Section 125 plan (also known as a Cafeteria Plan) and reference the option for employees to contribute money tax free. Employees then simply make a contribution election, which can be changed at any time.

What do employees need to understand about HSAs?

Employees need to compare health insurance plan designs if they have more than one option. For example, if an HDHP is offered as a benefit design along with another design, calculate which option is best for your family. Determine your premium costs under all options, then look at your expected health care needs and factor in the out-of-pocket costs associated to those services (deductibles and copayments), and how much your employer is contributing. And if the HDHP with an HSA makes the most sense for you, discipline yourself to contribute to the HSA every pay period.

While you have to be careful how you use your account because of audits, at the end of the day, it’s your money, and you can spend it how you want for medical expenses.

Marti Lolli is a product manager with Priority Health. Reach her at (616) 464-8233 or marti.lolli@priorityhealth.com.