NEW YORK – Health savings accounts, often thought to be for the young and healthy, can also be a tax-efficient way to save for the worrisome cost of retiree health care.
While not yet available to most Americans, health savings accounts, or HSAs, enable consumers to invest pretax dollars in high-earning years and withdraw that money in retirement for out-of-pocket medical costs.
Those costs can be steep for the growing number of retirees without corporate-sponsored retirement health insurance: Fidelity Investments estimates that a 65-year-old couple retiring in 2006 without employer-provided health benefits would need an average of $200,000 for out-of-pocket health care expenses because Medicare does not cover all costs.
HSAs first became available in 2004. Only those with high-deductible health plans – those with a minimum deductible of $1,050 for a single person and $2,100 for a family – are eligible.
Eligible consumers can each year deposit amounts equal to their deductible into the HSA, which typically include fairly liquid as well as longer-term investments. According to the Inside Consumer-Directed Care newsletter, there are now more than 1.17 million health savings accounts with $1.5 billion in assets.
“This is the triple crown of tax treatment,” says Jeff Munn, a benefits consultant at Hewitt Associates. “It’s the only place in the tax code where you truly have money that is never taxed.”
That’s because the deposit is funded with pretax dollars and can be withdrawn tax-free for out-of-pocket medical expenses. The maximum amount someone could set aside this year is $5,450 for a family and $2,700 for an individual. A person 55 or older could contribute an additional $700.
The money in an HSA also could be used at any time to fund out-of-pocket expenses, but unlike the more widely used and better known flexible-spending accounts, HSAs can be left in the accounts to grow. One hurdle for saving in an HSA is that the money may need to be withdrawn to meet the deductible.
The HSA benefit is even better if your employer contributes to it. In 2005, workers with HSA-eligible policies received an average employer contribution of $1,139 for family coverage and $689 for individual coverage, according to the Kaiser Family Foundation. About one-third of companies didn’t contribute anything.
“I took the HSA to maximize tax benefits over the long term,” said Brad Kimler, a senior vice president of the health and welfare consulting group at Fidelity Investments, which began in December 2005 to offer HSAs.
Kimler said that under certain circumstances a 45-year-old with a family could accumulate about $170,000 by age 65. The calculations assume the health plan’s deductible is $3,000 and is increased by $500 every five years, and the employee contributes an additional $1,000 per year catch-up amount (an increase over current limits) between ages 55 and 64.
Legislation now before Congress could result in larger HSA balances. A House tax panel in September approved legislation that would, among other things, increase the current limit on HSA contributions, which currently is capped at the holder’s insurance deductible, to $2,700 for an individual and $5,450 for families in 2006.
Even without the legislation, the use of high deductible health care plans and the availability of HSAs are expected to grow because businesses are desperately seeking ways to reduce the cost of health insurance. Health-insurance plans with high deductibles are one technique being used to shift costs to employees and to encourage more disciplined health spending.
Participation in high-deductible plans tripled from March 2005 to January 2006, to nearly 3.2 million individuals, according to the America’s Health Insurance Plans, AHIP. The number of businesses offering them is expected to double annually. The growth, according to the report, is expected to be particularly strong among larger companies.
“We see them growing steadily but not drastically,” said Helen Darling, president of the National Business Group on Health in Washington.
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