Of Sickness and of Wealth

Health Savings Accounts Make Sense if You're Physically and Fiscally Fit

When Shannan Phillips's employer went out of business last year, she quickly found a new part-time job. But her new employer did not provide health insurance to part-time workers.

Phillips, dismayed at the cost of many health-insurance plans, turned to a relatively new approach to health care. She bought insurance with a high deductible but low monthly premiums, then put her upfront savings, tax-free, into a health savings account.

Her decision put her among the growing ranks of consumers and employers seeking alternatives to traditional insurance as health-care costs rise. While the number of employers offering health savings accounts is small and that of employees electing them smaller still, they have increased steadily in the past three years. And some recent changes to HSAs for 2007 make them more attractive, especially for enrollees getting started late in the year.

The plans may not work for all consumers, particularly people in poor health. But for Phillips, an HSA made sense.

"I'm fortunately very healthy," she said. She couldn't bear the idea of pouring money into insurance for medical treatment she didn't use. She thinks an HSA gives her more control over her funds, and so far, she's been much more satisfied than with a traditional self-insured plan that "offered less benefits with a higher premium."

Health savings accounts hit the market in 2004, after being created by Congress as a way to cope with double-digit increases in health-care costs. Lawmakers thought that shifting some of the burden for managing health-care dollars to individuals from employers and insurers would encourage consumers to be more frugal about medical expenditures.

To be eligible for a health savings account, consumers must first enroll in a high-deductible health-insurance plan. According to federal rules governing HSAs, the minimum deductible for a qualifying health plan this year is $1,100 for a single person or $2,200 for a family. Deductibles for traditional plans are typically much lower, including no deductible for in-network care.

Consumers can then open a health savings account and contribute up to a certain amount tax-free each year to pay for medical expenses. (For 2007, the contribution limits are $2,850 for an individual and $5,650 for a family.)

HSA funds accumulate indefinitely -- anything left in the account at year's end rolls over to the next year. That is different from a flexible spending account, another tax-advantaged way to pay for medical care that has a "use it or lose it" provision. As long as the HSA is used to pay for qualifying medical expenses, the fund remains tax-free. The IRS keeps a list of allowable expenses. They include standard medical fare as well as options that might not be covered by traditional plans, such as Lasik vision-correction surgery, weight-loss programs and fertility treatments.

The funds can be invested at the account holder's discretion. Investment options include stocks, bonds, mutual funds and certificates of deposit. If the consumer doesn't invest the money, it may sit in a low-interest checking or money market account. The accounts are portable, meaning consumers can keep them if they change jobs.

"They're essentially medical IRAs," said John Vellines, president of Health Savings Administrators, a Richmond company that manages health savings accounts for employers.

Using HSA funds for a non-medical purpose incurs taxes on the amount withdrawn as well as a 10 percent penalty (waived if you're over 65). After an account holder's death, a spouse automatically becomes the owner of the account. If there is no spouse, funds are rolled into the account holder's estate and taxed accordingly.