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Health Savings Accounts October 2004

Bearing in mind ever rising costs in health insurance, I thought it would be useful to bring Clinical Update readers up to date with the new Health Savings Plans. These plans may save you money if you are in private practice or if your employer does not pay for your health insurance. Health Savings Accounts along with accompanying high deductible health insurance (HSA plans) have replaced the old Medical Savings Accounts (MSA plans) in federal legislation that was signed in December 2003. They represent a considerable improvement over the old MSA plans.

Here is how HSA Plans work:

First, you purchase a high deductible health insurance plan that is specifically designed to qualify for the Health Savings Plan. You are then qualified to open a Health Savings Account -- which is a tax-sheltered savings account similar to an IRA. However, unlike an IRA (which is for retirement savings), the purpose of a Health Savings Account is to save for healthcare expenses. Deposits are tax-deferred and can be withdrawn tax-free and penalty free to pay for qualified healthcare expenses. HSA funds can be readily withdrawn by check or debit card to pay routine medical bills and expenses such as OTC and prescription medicines with pre-tax dollars. If you have high medical costs in a given year, your health insurance kicks in once your deductible is met. Premiums on high deductible health insurance are generally considerably less expensive than premiums on health insurance with low deductibles.

One group of consumers who may find these plans favorable are folks who rely heavily on alternative healthcare providers for their day-to-day health needs. There are many people who basically maintain their health insurance to cover themselves in the event of a medical catastrophe, but meet many of their day to day healthcare needs through alternative approaches such as acupuncture. Such consumers can now pay for their alternative care with pre-tax dollars from their HSA .

HSA funds can be used to pay for expenses associated with the diagnosis, cure, treatment or prevention of illness or injury. This includes doctor's office visits, medications (both OTC and prescription), dental expenses (including orthodontia), and vision expenses. Cosmetic surgery usually does not qualify, but laser eye surgery does qualify. Another interesting feature is that you can use HSA funds to pay long-term care insurance premiums.

If you have money left in your Health Savings Account at the end of the year, those funds stay in the account and continue to earn interest on a tax-favored basis. These funds can be used to pay for future medical expenses, or can be saved for retirement. If there are funds in the account when you reach age 65, those funds can be used for retirement expenses penalty free in much the same way IRA funds are used in retirement.

How much can be contributed to an HSA?

The maximum annual allowable HSA contribution is 100% of the annual deductible up to $2,600 for a plan with one person and $5,150 for family coverage. Limitations on contributions are based on how many months the coverage for a qualified health plan is active. For every month that a qualified health plan is active, 1/12 of the maximum annual allowable contribution can be deposited into an HSA.

Improvements from the old MSA plans include the following:

* The new HSA plans are open to anyone who has a qualifying high deductible health insurance policy (the old MSA plans were available only to the self employed and small businesses).

* Lower deductibles on qualifying health insurance are available than in the old MSA plans.

* HSA plans are not limited to the self-employed and small businesses, as the MSA plans were. Now, practically anyone with a qualifying high deductible health insurance policy can open an HSA.

It is possible that an HSA plan along with a high deductible health insurance policy could save you money both on taxes and on your healthcare expenses. With today's high health care costs, an HSA plan is an option you may want to explore.

Remember, the best time to start with your financial planning is ten years ago. The next best time is now. Good luck, and feel free to contact me with feedback and questions.

Peter Cole is an LCSW, Chartered Financial Consultant and director of Insight Financial Group1. He specializes in financial planning2 for psychotherapists throughout California. His book, Mastering The Financial Dimension of Your Practice: The Definitive Guide to Private Practice Development and Financial Planning is newly published by Brunner-Routledge and is available through Peter can be reached at (916) 444-1122;

1 Securities through Securities America Inc, a registered broker/dealer, member FINRA/SIPC, Peter Cole, Registered Representative.
2 Advisory Services Through Securities America Advisors Inc, an SEC Registered Investment Advisory Firm, Peter Cole, Investment Advisor Representative. CA insurance lic. 0D04931. Insight Financial Group and Securities America are unaffiliated.