Millions Pass Up Health Savings

Despite tax benefits, many employees don't use spending accounts to stash cash for medical costs. Because some consumers just don't know about the relatively new health spending accounts, they are passing up what could be hundreds of millions of dollars in tax benefits at a time when rising health care costs are eating into the budgets of many families, experts say.

Created in 2004 with the Medicare prescription drug law, health savings accounts allow an employee to make tax-free contributions to a fund that can be used to pay out-of-pocket medical expenses. HSAs are typically tied to health insurance plans that offer employees lower monthly premiums in exchange for higher annual deductibles.

Often called consumer-directed plans because they make employees more accountable for their medical expenses, high-deductible health insurance plans give businesses a way to offer health insurance at a lower cost, as well as help in the nationwide effort to control health care costs.

A number of factors are responsible for underfunded HSAs, the experts say. They include thousands of people eligible for these accounts who aren't opening them, and those who have aren't contributing as much as they can, according to Vimo, which looked at data as of January 2006.

Increasing contributions, experts say, may take education akin to that required to make retirement savings accounts mainstream years ago.

Kirco Management did just that with Jeff Hurlbert, a property manager for the Troy-based company. Hurlbert has a health savings account attached to the high-deductible insurance plan he has through Kirco.  "It was another avenue to make some money," said Hurlbert, a healthy 38-year-old who used to pay higher premiums for insurance he hardly used.

Ditto for Mike Nault, a construction estimator for Kirco, who insures his family with a high-deductible plan with an HSA.  They rarely go to the doctor, said Nault, 54, though he was paying more than $2,000 a year in premium costs on a traditional plan. With an HSA, Nault says, he and his wife can use much of that money to pad a nest egg for future medical needs. "In our older age we'll use it up very nicely."

The number of HSAs is growing as companies learn more about them. According to a Watson Wyatt Worldwide Inc. survey released last month, 40 percent of the 573 companies surveyed plan to offer HSAs in 2008.

The federal government is encouraging more investment in health savings accounts. It raised the maximum contribution in 2007 to $2,850 for an individual and $5,650 for a family -- higher than many annual deductibles.

The accounts are triple-tax advantaged in that the money goes in tax-free, can accumulate interest tax-free, and comes out tax-free if used for medical bills. HSA holders can grow their accounts each year and because they own them, can keep their accounts even if they leave an employer.

And HSA account holders often earn better yields on those accounts than they do with regular savings accounts.

Even without employer contributions, HSAs can benefit many people who pay thousands of dollars in premiums for medical coverage they never use, said Steve Smith, executive vice president of Southfield-based Meadowbrook Insurance Agency. "Why would you pay the insurance company all that money and not get any benefit in return?" he said.

1. High Deductible Health Plan (HDHP) - Also called Consumer-Driven Health Plan (CDHP)

These are health plans with higher deductibles and lower premiums than traditional plans. For example, the minimum annual deductible allowed is $1,000 for a single person and $2,200 for a family.

These plans often include health spending accounts.

2. Health Spending Account (HSA)

Health spending accounts were created in 2004 under Medicare prescription drug act. With these accounts, an employee or employer can make tax-free contributions in a fund that is used to pay out-of-pocket medical expenses.

Money in the accounts can be rolled over from year to year, and employees keep the account even if they change employers or change insurance plans.

Much like money in an IRA, an HSA can grow tax-free through investment earnings. To open a health savings account, you must be enrolled in a High-Deductible Health Plan either through an employer or through an individual policy.

For 2007, the maximum annual HSA contribution for a single person is $2,850; for a family, $5,650.

3. Health Reimbursement Arrangement, also known as Health Reimbursement Account

This employer-funded account reimburses an employee, with tax-free dollars, for medical expenses.

The money can be rolled over from year to year. But the money in these accounts belongs to the employer, and cannot be transferred if an employee changes jobs.

This type of account does not have to be paired with a High Deductible Health Plan, although it often is.

4. Flexible Spending Account (FSA)

This account is usually funded through automatic deductions from an employee's paycheck.

No taxes are deducted from the employee's contributions.

The account can be used to pay for certain expenses, usually medical but often for dependent care. FSAs are often used to pay for medical expenses not paid for by insurance, such as deductibles and co-payments, as well as coverage not included in the employee's health plan, such as dental, vision and over-the-counter drugs.

FSA funds must be used within the calendar year; otherwise, they are forfeited.

Adapted from article by Sofia Kosmetatos / The Detroit News

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