Like many self-employed people, I'm self-insured. That means I spend my time swapping home surgery tips with other freelancers (pay a dermatologist to remove a skin tag? Never!) and tracking my drug reimportation options. While it's not a situation many folks would envy, the relatively new health savings accounts (HSAs) make going it alone a whole lot easier than it was a few years ago.
It's not just oddballs like me who should consider HSAs. Those of you who've done a good job planning for your retirement may find you want to leave the corporate bosom a few years before qualifying for Medicare coverage, and you'll need a way to fill the insurance gap. Even folks with many working years ahead of them will find employers increasingly offering HSAs as an insurance option or, in some cases, as the only choice for medical coverage. In the right circumstances, these plans can help you save on medical costs and provide a great new investment vehicle for your retirement.
Unfortunately, you have to know how these plans work in order to take advantage of them, and HSAs are still not widely understood, even among many financial planning types. One small piece of evidence: As I type this, I am fighting bitterly with Microsoft Word, which is convinced an HSA must be a misspelling of the word "has."
How they work
The idea behind the HSA is fairly simple: An individual or family buys a high-deductible insurance policy and then opens a savings account, in which is placed the amount of that deductible. The government has made this setup attractive in several ways. First, you can fund the savings account with pre-tax dollars in most cases, as though the account were another IRA. Yet the contribution -- up to $2,700 for an individual or $5,450 for a family in 2006 -- can be made in addition to other tax-advantaged savings you have. Anything you spend from that account will be tax-exempt, as long as it goes to a legitimate health expense. A typical HSA account will come with a debit card and/or checks that can be used for health expenditures, and you can roll any unused portion of the account over to the next year.
What confuses many people about the accounts is that the insurance and the actual savings account may be entirely separate. (OK, by "many people," I really mean "me" -- this is one of several surprises I came across when setting up an HSA plan recently.) When you select insurance, you must select an "HSA-eligible" or "HSA-compatible" policy, which will have a minimum deductible of $1,050 for an individual or $2,100 for a family and runs up from there, with higher deductibles generally meaning lower premiums. I've seen deductibles as high as $10,000 for a family -- which again may be confusing, since the cap on pre-tax money you can put into the savings account is much lower.
The insurer won't necessarily do anything to help you get a savings account set up, or ever check to see if you have one. That's why the government can't report how many people are using HSA as savings vehicles -- they can only report the number of people with HSA-eligible plans. It's up to you, my Foolish friend. Shop around on sites like eHealthInsurance.com and HSAInsider.com to see what kind of plan offers the best deal for you, but understand that the high-deductible insurance must be in effect before you open the savings account. My high-deductible insurance is with Kaiser Permanente, which is not known for its banking arm, so I had to find a separate home for my savings account.
So who can offer an HSA? Actually, any bank or credit union qualified to act as a custodian or trustee for an IRA is automatically qualified to offer an HSA. Insurance companies that can be custodians of IRAs are also qualified HSA custodians. But just because these institutions are qualified to offer HSA doesn't mean they will.
I was hoping I could simply open an HSA under my E*Trade account and manage it myself. No dice. E*Trade doesn't offer an HSA option, even though the rules governing how you invest HSA contributions are the same as those covering IRAs. I can see no reason why the online brokerage couldn't offer this product. (You hear me, E*Trade? Get on this one!) The same goes for several other online brokerages I checked. I presume that these and other financial institutions will eventually step up to the plate as these plans grow in popularity. As it stands, major banks like Wells Fargo and Bank of America
Right for you?
When deciding whether to investigate this insurance option more closely, remember a few points:
- HSAs generally benefit relatively healthy people. The idea is to save money on a high-deductible policy because you won't need to use it. Then the bulk of your HSA contribution will roll over and, if well invested, gain in value. If you expect to need that amount of your deductible for medical care during the year, you're probably better off with a regular policy.
- You can't have other insurance with your HSA. So if your employer provides health insurance or you are covered by Medicare, this option isn't for you. Employers are increasingly likely to offer HSAs as an option, however, so it's worth considering these plans.
- You can roll over unused contributions and build your savings over time. You can only withdraw money for legitimate health expenses without paying a penalty, but after the age of 65, you can withdraw the money for any reason, just like an IRA.
Lastly, don't assume that HSAs are just for young, self-employed individuals or small businesses. If you're at or near retirement, relatively healthy, and still several years out from Medicare coverage, HSAs can be a great tool for reducing medical insurance costs and adding to your savings.
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Karl Thiel does not own stock in any of the companies mentioned in this article.