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This
article is intended for smaller self-storage operators as well as
managers who purchase their own health insurance or who, for economic
reasons, have insurance with high deductibles. For the rest of you,
tune in to this column in February for something more relevant for
those who have low-deductible health insurance provided as an employee
benefit.
The Health Savings
Account (HSA) was created by the U.S. Congress in December 2003
and is essentially a custodial account into which you or your employer
can deposit money to pay for certain health-related expenses. It
is similar in some ways to an IRA in which you deposit funds that
you invest or have invested on your behalf.
The HSA can be
set up at a bank or other financial institution or a health-insurance
company for the specific limited purpose of paying for costs of
healthcare. When used properly, it can save you hundreds of dollars
in taxes, as it allows you to pay many medical fees and insurance
deductibles with pre-tax dollars. Congress believes if people spend
their own money on medical expenses, they will be more conscious
of costs and spend less. The tax benefit is the added motivation.
How
It Works and Who Is Eligible
First, let me
explain how an HSA works. Assuming you qualify, you make deposits
to the account, either in a lump sum or installments. The deposits
must be cash, as opposed to other assets like stock. Your employer
can also make contributions to your HSA as an employee benefit.
In this case, payments are tax-deductible for your employer and
are not taxable to you. Therefore, this might be an excellent benefit
to request of an employer if he does not or cannot provide health
insurance. It’s also a great way to supplement high-deductible
insurance.
Who is eligible
for an HSA? First, you must be an individual or family covered by
a “high-deductible” health-insurance plan. Second, you
may not be covered by any other health plan that is not a high-deductible
policy (there are minor exceptions). Third, you cannot be eligible
for Medicaid. Fourth, you cannot be claimed as a dependent on anyone
else’s tax return.
A “high
deductible” is characterized as one of at least $1,000 per
person or $2,000 per family. This amount may include co-pays but
not the premium itself. A high-deductible policy can sometimes cost
as little as half of its low-deductible counterpart. An HSA may
encourage you to save money on your premiums by opting for a higher
deductible and saving the “difference” in the account.
The premium for
your health insurance cannot be paid out of the HSA, but costs associated
with diagnosis, treatment, and prevention of illness or injury can.
Eligible expenses include doctor visits, prescription drugs, over-the-counter
drugs, vision care, dental care, orthodontia, laser eye surgery,
long-term-care insurance premiums, long-term care and even COBRA
insurance premiums. One word of caution: Prescription-drug benefits
that cover a portion of drug costs before you meet your deductible
may affect your eligibility for the plan.
Benefits
and Limitations
While insurance
premiums must be paid independently, virtually everything else you
need for healthcare purposes, including deductibles and the expenses
previously mentioned, can be paid for out of the HSA. Contributions
can be made with “pre-tax dollars,” which are not included
in the calculation of gross income subject to taxation at the end
of the year. Another benefit is interest on deposited funds is not
taxable, nor is the money you pay out of the account for eligible
expenses. As an added bonus, any dollars left at the end of each
tax year can be used to increase the account reserve for the future.
However, there
are limitations. In 2004, the maximum you could deposit into an
HSA was equal to your individual or family deductible (which, by
definition, must be at least $1,000 and $2,000 respectively) but
could not exceed $2,600 per individual and $5,150 per family. This
amount is scheduled to adjust every year.
For example,
if you are single and have a $1,000 deductible, you or your employer
can contribute up to $1,000 to the account to cover medical expenses
not covered by your health insurance. If you do not incur enough
expenses to use up your savings, you can roll over the balance to
use in following years or use the money for other uncovered medical
items, such as medications or the laser eye surgery you always wanted.
If you actually spend that $1,000, what you have saved yourself
is the amount of tax you would have paid on that money if it had
been included in your gross income, plus any applicable interest.
On the other hand, there are penalties for withdrawing the money
for nonhealth-related items, including imposition of the previously
avoided tax and a 10 percent additional fee.
When you view
an HSA this way, a little shrewd planning can save you money in
taxes. It can also become a tidy little reserve mechanism for other
medical-related expenses or an elective procedure. Any way you slice
it, you save money at essentially no cost.
This article
is a simple explanation of a complicated subject. As with any Congressional
creation regulated by the IRS, there are rules and tests that should
be reviewed before opening an HSA. Please consult with an attorney,
tax advisor or financial advisor before acting. However, those of
you who set up an HSA may find your wallet feels a little thicker
come tax time next year.
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