Column 71

First, I will answer our readers' question about last week's column.  While my intent is to avoid political comment, my goal was to explain how the provisions of Proposition 45 are not in the best interest of consumers. I did not address every part of the proposed legislation.  The two main points were, in my opinion, enough reason, to vote against it.  However, when asked directly by readers, I think it is only fair to be forthright. So, to answer the question directly:  It is my position to vote "no" on Proposition 45. Please refer to that column for more detail. 

 

As open enrollment period for both employer sponsored insurance and individual plans is approaching, it is important that consumers understand how a Health Savings Account (HSA) works and why it might be a good choice.

 

The IRS has released its HSA contribution limits for 2015. For individuals, the 2015 limit will be $3,350 and $6650 for families.  There is a catch up provision for those age 55 and over that allows an additional $1,000 per year. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,450. Each spouse must make the additional contribution to his or her own HSA.  

An HSA is most simply described as a tax favored account that allows one to fund eligible medical expenses. This account can be held at any financial institution that offers such an account.  There are several local banks that offer them.  (Unfortunately with the merger of North Valley and Tri-Counties Banks, we have lost one local option.  Tri-Counties does not offer HSA's, but apparently will maintain those for NVB customers for now. )

To open an HSA you must have an "HSA qualified high deductible health plan".  Rather than explain the nuance of the rules, simply ask your broker, employer or insurer if the plan is HSA qualified.

Funds that are contributed are deductible for federal income tax purposes, but not for state income tax.  It is an "above the line" deduction.  This means you do not need to itemize deductions on your return to take advantage of the deduction.

Money in the account can be used to pay any health expense that is considered deductible by the IRS.  This includes direct medical expenses and copays for drugs or provider services, supplies, dental expenses including orthodontia, eyeglasses and even Lasix surgery. 

The account can be used to pay Medicare Part B premiums when you are old enough to qualify for Medicare.  Long term care insurance premiums may also be paid from the HSA.  Other health insurance premiums may only be paid from the HSA during periods of unemployment.

Over the counter medications are only eligible if you have a written physician's prescriptions

An HSA is a bit like a health IRA.  It's an account that allows you to pre-fund for expenses that you are likely to have in the future and give you a tax benefit too.   

People often confuse HSA with the FSA (Flexible Spending Account) that is offered through employer sponsored benefit plans.  While the same medical expenses are eligible to be paid from the account, there is a very big difference.  The HSA has no "use it or lose it" provision like the FSA.  The money is yours.

The funds can continue to accumulate for as long as you like.  Should you not use the funds to pay medical expenses, you may withdraw money at age 65 and not pay a penalty.  Note that any funds used to pay ineligible expenses are subject to a 20% penalty from the IRS.  So just because you can buy beer at the drug store, it does not qualify as an eligible expense!

Be sure to keep your receipts in the event of an audit as you may be asked to justify the withdrawals.

If you have funds in the account and no longer have an HSA qualified insurance policy, you may still use the funds to pay qualified medical expenses for you or your dependents.

As you review insurance options, look at the maximum out of pocket exposure of the plan.  Often the premium is quite a bit lower for the high deductible plan.  If you choose the higher deductible and put the difference into your HSA, you could be better off. If you have a good year and don't use your plan much, the extra dollars are in your pocket not the insurance company's!