Tax Qualified Health Insurance Can Save You Money & Boost Your Retirement
One of the most popular (and lowest priced) types of Tax Qualified health insurance plans is the HSA qualified HDHP. HSA stands for “Health Savings Account”, more commonly referred to as a “Medical IRA”. HDHP stands for High Deductible Health Plan. HSA qualified HDHP’s are a unique way to attractively manage your health insurance costs. For a brief introduction to Consumer Driven Tax Qualified health insurance please watch the following short but informative videos:
Contrary to popular belief, you can still purchase an HSA qualified HDHP in 2014 and beyond. The “Bronze” plan under the PPACA (Obamacare) is an HSA qualified HDHP. In fact, there are many more benefits included with HSA qualified HDHPs than there were before Obamacare. This is so because all health insurance plans sold after January 1, 2014 must now include 63 preventive care test and exams with no deductible or co pay required. To view all of those test and exams click the banner below:
HSAs were originally named MSAs or Medical Savings Accounts. MSA Plans were first taken to the marketplace in 1995 by Golden Rule Insurance Company prior to any federal or state statutory (tax shelter) protections. The original idea was to find a way to more fully engage the policy owner’s “skin in the game” beyond co-payments. The premise was simple. Raise the deductible, lower the premiums, take the savings from the lower premiums and fund the MSA bank/trust account. The MSA policy owner would have to meet their deductible without co-pays before the insurance portion of the plan would kick in. Consumers would be more cost conscience on medical expenses below the deductible and would not be so quick to access and then over-utilize the insurance portion of the MSA Plan.
Simple enough, but there was not enough room to sufficiently fund the MSAs with after-tax dollars leaving the policy owner facing too much risk. Without legislative action to tax shelter the MSA funds, MSA Plans could not be mass marketed. Enter Representative Bill Archer (R) of Texas. Representative Archer took up the cause and championed the MSA provisions that finally became law as a part of the 1996 HIPAA legislation. MSAs where then known as Archer MSAs.
In 2003, Chairman of the Committee on Ways and Means, Representative Bill Thomas, introduced HSAs that would replace Archer MSAs. The HSA legislation, as it was written, contained a variety of elements that would significantly affect the salability of HSA Plans in the marketplace. The most serious of these discriminated against the family of any spouse who was covered under an HSA Plan and then earned a health insurance benefit from other employment. Provided a health insurance benefit was earned by a spouse, and the spouse accepted the insurance coverage, the legislation stated the any funds accumulated in the HSA could not be used to cover qualified medical expenses of the spouse. The family had to make a decision. Either accept the earned insurance benefit and forfeit the use of any funds in the HSA or forfeit the earned insurance benefit.
Terry Holman, a licensed insurance broker at the time and former lead consultant to Golden Rule Insurance Company on Medical Savings Accounts, knew the content of the legislation and that HSA Plans could not be mass marketed without removing or altering the text of the legislation. Terry appealed directly to the tax writer for the Committee on Ways and Means. The tax writer immediately understood the issue and made the structural changes necessary to allow HSA Plans to be mass marketed.
To illustrate how Terry’s idea works in the real world. We will use a real world example. Tony & his wife are currently paying $1,134 a month for Cobra continuation coverage from a previous group plan. In comparison, the monthly premium for an HSA qualified HDHP (High Deductible Health Plan) which covers each insured family member up to and unlimited lifetime coverage amount is less than half of the premium that they are paying now ($550.64 monthly to be exact). This is a yearly savings of $7,000.32 or a monthly savings of $583.36. This is a significant difference. However the insured has to give up all of their outpatient co pays. Is this worth it? This was the question posed to Terry when he approached Congress back in the late 1990’s. His answer to Congress was simply “make it worth it”.
In other words, he asked Congress to make it worth it to the insured. Allowing the policy holder to save that extra money each year on a tax deferred basis makes it worth it. For the year 2017 the maximum contribution a couple or a family can make to their HSA (Health Saving Account) is $6,750. In addition, any family member who is 55 years of age or older can deposit an additional $1,000 annually (more on the age 55 allowance below). This means that the total amount that Tony and his wife can deposit per calendar year is $8,550 since he and his wife are both over the age of 55. The best part is they can take a 100% tax deduction for that contribution similar to an IRA.
Furthermore, if you do incur medical expenses that arise throughout the course of the year that are subject to the deductible (i.e. prescriptions, doctor’s office visit charges, etc.) the IRS will allow you to pull out that money that you put into your tax deductible, tax deferred Health Savings Account to pay for those expenses. When you use their HSA money to pay for those expenses the IRS will allow you to write those expenses off at a 100% tax deduction. The list that the IRS allows you to spend your HSA money on is very liberal and includes things like dental, orthodontics, eyeglasses, Radial keratotomy (Lasik corrective eye surgery), alternative medicines etc. Click here to see the entire list of allowable expenses.
Arguably the most attractive tax advantage to owning an HSA is the fact that the money left over in the HSA account that was not used on medical expenses at the end of the year is “rolled over” into the next year and awarded a higher rate of tax deferred interest. The insured also has the option to roll those unused funds into no load mutual funds, thereby building an extra tax deferred retirement account with money they would have normally given to the insurance company each and every year whether or not they had any claims that year.
It should also be noted that not having a “co pay” with your plan does not mean that your outpatient doctor visits and outpatient prescription drugs will not be a covered expense. With most HSA qualified HDHP’s these charges are a fully covered expense just as they would be with a Traditional Health Insurance Plan. The only difference is these charges will be subject to the health plan deductible.
Being “subject to deductible” does not mean that you will pay full price for these charges either. If you stay within your PPO network, your outpatient doctor office visit charges will be discounted by as much as 40%. Your prescriptions will also be discounted significantly as well by staying within the Rx prescription network.
Let’s break that down in plain English. Let’s say your doctor’s office charges you $100 for a “sick visit”. If you use a PPO provider those office charges will be “re-priced” down to roughly $60. Now compare that to a Traditional plan which provides you with a $30 “co pay”. The difference to you is $30 out of pocket for that doctor’s office visit. But is that all you are really saving? Not if you add in the monthly premium savings between the two plans. The typical monthly premium savings between a Traditional plan and an HSA qualified plan for a family is $200 monthly. This equates to an annual savings of $2,400.
Now let’s take that $2,400 annual savings and deposit it into a tax deferred, tax deductible interest bearing account. Let’s go a step further and imagine you find an HSA account that bears you NO interest AT ALL (which is not that hard to imagine in this economy). You’re still saving $2,400 annually and you’re deducting that amount from your adjusted gross income. This means less reportable income which means less taxes.
Now lets imagine you have no major medical claims in year two and you deposit the same amount. Now in year three you have a worse case scenario occur. Now you have $4,800 to help pay your plan deductible. Not to mention any additional funds you deposit into your Health Savings Account during that same time frame.
In summary, the advantages to owning a Health Savings Account are as follows:
1.) Unlike any other IRA, a Medical IRA (HSA) allows you to withdraw funds at any time with no penalty for “qualified medical expenses“. Most importantly, when you withdraw your HSA funds to pay for any of the qualified medical expenses on that list, those expenses themselves become 100% tax deductible.
2.) Here’s the key point though. If you have just ONE year without any significant claims and you even partially fund your Medical IRA, then if the worse case scenario occurs, you will have those funds available and be able to withdraw them with no penalty and use that money to help pay your calendar year health plan deductible. In year 2 (with no major claims) you are that far ahead of the risk management game. In fact, no other kind of Health Insurance actually allows you to lower your risk the longer you own it by hedging money you would have otherwise given an insurance company for a Traditional plan.
I say this because, there is no other kind of IRA that you can withdraw from at any time with no penalties and then use those withdrawals to pay for medical costs and receive a 100% tax deduction for those expenditures. In fact, the longer you own an HSA qualified HDHP, the lower your risk becomes since the more years that pass, the larger your balance in your HSA account becomes. This is so because each year your remaining balance rolls over and continues to earn tax deferred interest.
The longer you look at HSA qualified HDHPs the more sense they make. This is why they have caught on like wildfire and will continue to do so. The only inhibitor to the spread of HSA’s is lack of education (as is the case with any other financial vehicle) The “Whole Foods” supermarket chain chose HSA qualified Health Insurance. It worked so well for them that they were recently featured on the ABC 20/20 episode entitled “Sick In America” with John Stossel:
Now you can help fund your HSA account by purchasing every day items! www.RetailBenefits.com (formerly MyHSARewards)
To learn more about HSAs and the recent federal legislation that has made them even more attractive to people over the age of 55 click here to read all about them on the Federal Government’s HSA educational web site. To learn more about HSAs in a power point presentation format please click here: www.hsacenter.com and click on the informative videos on the right.
If you are an employer and are considering HSA qualified plans for your employees consider this. An individual’s employer can make contributions that are not taxed to either the employer or the employee. The combined income and payroll tax deductibility leads to discounts for health insurance of over 40% in some cases relative to other forms of insurance. For more details for the employer http://www.treas.gov/offices/public-affairs/hsa/faq_employer-participation.shtml
For the best interest rates you will find just about anywhere on a Health Savings Account CLICK HERE
Please “Contact Us” with questions about HSA qualified HDHPs. If you have a C.P.A. or tax advisor please feel free to ask he or she about the advantages of owning an HSA as well.
Since accidental injuries are far more likely to occur than major medical illnesses (most especially when you have active children) many families are choosing to purchase supplemental accident expense plans. These plans pay you a cash benefit of $2,500, $5,000, $7,500 or $10,000 when an accidental injury occurs. This cash can then be used to pay your health insurance plan deductible. Supplemental Accident Expense plans are also a great way to save money because you can choose a higher deductible than you would normally choose knowing that you will not have to pay that deductible if an accidental injury occurs to any member of your family. Click below for more information:
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