A Word from the Life/Health Director

What is a Health Savings Account (HSA)? (part two)

In a previous "Word from the Life and Health Director", I discussed the basic concepts of Health Savings Accounts (HSA's) and High Deductible Health Plans (HDHP's). I described their government mandated coverage requirements and contribution limits. I also talked about their tax savings, potential health insurance premium reductions and other possible cost savings for appraisers and other self-employed professionals. Let’s see how this works.

In our example, "Howard" is a 45 year old appraiser with a wife and two children. His taxable income for 2010 is $75,000, resulting in a federal tax obligation of $11,113. He covers himself and his family with a traditional medical insurance policy with a $500 individual deductible, $1,000 family deductible and $2,000 annual out-of-pocket maximum. The plan premium is $900 per month or $10,800 annually. After researching HSA/HDHP's and getting premium quotes, Howard decides to switch to a HDHP with a $2,500 individual deductible, $5,000 family deductible and $10,000 annual out-of-pocket maximum. He does so in part because his family is in good health and in the past few years has required only routine physical exams and other preventive care. This coverage costs $400 per month or $4,800 per year, resulting in a savings of $500 per month or $6,000 annually. Howard sets up a HSA and contributes $6,150 to it. (This is the maximum allowable contribution for a family in 2010, although there is an additional $1,000 "catch up" contribution for those over age 55.) This reduces his taxable income from $75,000 to $68,850 and his federal tax liability from $11,113 to $9,575, a savings of $1,538. The combined premium and tax savings of $7,538 exceeds Howard's contribution of $6,150 by nearly $1,400.

Below is a table summarizing the points noted above.

	Traditional Policy	HSA/HDHP
Taxable Income	$75,000	$68,850
Tax Obligation	$11,113	$9,575
Individual/Family Deductible	$500/$1,000	$2,500/$5,000
Annual Out of Pocket Maximum	$2,000	$10,000
Monthly/Annual Premium	$900/$10,800	$400/$4,800

Moreover, the HSA account continues to increase tax free as long it is used for medical expenses. To illustrate the power of this tax free compounding, assume that Howard earns 3% annually on this account over the next five years. We will also assume that he continues to make $6,150 contributions each year and uses $1,650 for yearly physicals and other routine care for himself and his family. His HSA account balance would increase as shown in the table below:

Year One	Year Two	Year Three	Year Four	Year Five
$4,635	$9,409	$14,326	$19,390	$24,606

Using a less optimistic set of assumptions, the table below has Howard contributing $6,150 and earning 3%, but using over half ($3,150) of his annual contribution for medical expenses:

Year One	Year Two	Year Three	Year Four	Year Five
$3,090	$6,275	$9,550	$12,926	$16,403

As seen from these illustrations, the Health Savings Account grows within a few years to a size that is sufficient to cover the deductibles and other out-of-pocket expenses associated with a High Deductible Health Plan. It should be noted, however, that "Howard" and his family did not experience any large, unexpected medical expenses during the first few years after switching to their HSA/HDHP. While it is, of course, impossible to predict when a serious illness or accident will strike, people with chronic or especially costly medical conditions or those at risk of developing them may be better off with traditional medical plans offering lower deductibles and out-of-pocket maximums. For many other professionals who must provide their own coverage, HSA's represent a very viable option.

There are two important changes to the rules governing these plans that are effective in 2011. First, only prescribed drugs will be considered reimbursable beginning in 2011. Therefore, aspirin and other over the counter medications will no longer be considered qualified expenses for Health Savings Accounts. Another change to be aware of is the penalty for non-qualified distributions from HSA's. In 2010 and previous years, the penalty tax on non-qualified distributions was 10%. However, with the new Health Care Reform, this penalty will go from 10% to 20%.

Even with these changes, Health Savings Accounts provide a great way for individuals and families to pay medical expenses that are not otherwise covered. These expenses could include costs for preventive and wellness related programs that could potentially save you from future illnesses and other health related issues. To use just one example, very recent research has shown that CAT scans can significantly reduce lung cancer death rates among older current and former smokers. Yet many traditional health plans do not cover such scans. Payment for a CAT scan from a HSA would be a qualified expense and thus illustrates how such a plan might work to an insured’s benefit. LIA's health insurance administrator, JLBG Health, is a specialist in Health Savings Accounts and High Deductible Health Plans. They offer a variety of qualifying HDHP’s that can be paired with their no cost HSA's or used with another Health Savings Account chosen by the appraiser.

For more information, go to www.LIAHealthPlans.com or call 888-623-5798.

Alternatively, you can email me at paul@liability.com