At first glance, new laws that create tax incentives generally appear unquestionably beneficial to their recipients. After all, since the incentives are optional, at worst you can simply choose to keep doing things the way you've always done them. And if you use the incentives, you might end up better than before.
But sometimes, these laws aren't just about giving incentives to businesses or individuals -- they're also about persuading people to take a certain course of action. In these cases, you may find that sticking with your old routine is no longer practical, if that option's even available to you in the first place. As a result, despite the incentives offered by the new law, you may feel like you're worse off than you were before.
As an example, witness the health savings account, or HSA. HSAs were created in 2004 to address the increasing costs of medical care and health insurance. They have been invaluable to self-employed individuals and small businesses that might otherwise have no access to health insurance. However, HSAs may also lead to benefit cuts for employees who have received more comprehensive medical coverage until now.
A great deal -- on the surface
In creating HSAs, Congress gave individuals an incentive to self-insure part of their medical-care needs. To use an HSA, you must have a qualifying health insurance policy, referred to as a high-deductible health plan or HDHP. As the name suggests, an HDHP must provide for a relatively high amount that you must pay before the coverage begins. In 2006, you must generally pay the first $1,050 for an individual plan, or $2,100 for a family plan. Total out-of-pocket costs must not exceed $5,250 for individuals or $10,500 for families. HDHPs may cover certain preventive care without imposing the deductible, so under some circumstances, your policy may pay benefits without your having paid the deductible.
Because HDHPs require you to pay more of your own health-care costs than more traditional, lower-deductible insurance policies, the premiums for HDHPs are generally much lower. The savings in premiums can then be used to help fund the HSA, a savings or investment account that you can obtain from a number of banks and other financial institutions, including First American Bank, the HSA Bank subsidiary of Webster Financial (NYSE:WBS), and Wells Fargo (NYSE:WFC). Contributions to the HSA are tax-deductible, and any income the HSA earns is tax-free. You can contribute up to the amount of your deductible, or $2,700 for individuals or $5,450 for families, whichever is less. As long as you only withdraw money for medical-care costs, you do not pay tax on withdrawals. Unlike traditional flexible spending accounts offered by many employers, if you do not use up all of your contributions to the HSA in a given year, you do not forfeit the money; instead, you can keep the money for medical costs in future years.
The combination of tax-deductible savings, tax-free income and withdrawals, and lower insurance premiums make the HSA provisions extremely attractive. For many people, especially individuals who are healthy and incur relatively few medical costs, HSAs can help build up a reserve of funds for future medical emergencies and unexpected health-care costs.
The other side of the coin
However, HSAs aren't right for everyone. If you have above-average health-care costs, you may get better benefits from a traditional health insurance policy than from the combination of a high-deductible policy and an HSA. In theory, the HSA's tax savings and the lower cost of the HDHP would allow even people with high medical costs to at least break even using HSAs. But in practice, the HSA is sometimes more expensive.
As a result, some people would likely prefer to remain with traditional insurance plans. The law that created HSAs made them completely voluntary, but nonetheless, two factors will make it increasingly difficult for individuals to use traditional insurance plans.
First, as health-care costs have risen, so have the costs of employee health benefits for large employers. To cut costs, some employers have begun serving as an insurance company for part or all of their employees' collective medical expenses. By incorporating these benefits into their internal structures, employers have a better understanding of these costs and can urge employees to change unhealthy behavior, which may help reduce health-care costs. In addition to self-insuring, however, employers may also seek to cut costs by replacing traditional health coverage with HSAs. While this will save employers and many employees money, workers with higher medical costs may suffer decreased benefits as a result.
Second, because HSAs encourage healthier individuals to use high-deductible health plans, they draw those healthy people away from the pool of traditional health-insurance consumers. Since the remaining policyholders will generally have higher medical-care costs, insurance companies will raise premiums to compensate for the increased risk. The resulting higher insurance costs may leave individuals with no choice but to use an HSA, even if they have to pay more than they did before.
The HSA is a good reminder that there are often unintended consequences to even the most beneficial legislation. By looking not only at the surface of a new law but also at its long-term effects, you can make a complete assessment of its net effect on you and your family.
For more Foolish Reading:
- Is an HSA Right for You?
- The Price of Cheap Insurance
- Flying Without a Net
- HSA Accounts Ease Medical Costs
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Fool contributor Dan Caplinger hopes that his apple a day will keep the doctor away. He doesn't own any of the companies mentioned in this article. The Fool's disclosure policy keeps you healthy, wealthy, and wise.
