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The inside scoop on Health Savings Accounts

by Tony Novak, CPA, MBA, MT
, revised 11/29/2011

After years of effort, the Republican party finally passed legislation effective January 1, 2004 authorizing Health Savings Accounts. The accounts work just like IRAs, except that the money is used for health care instead of retirement. One Congressman says these plans "will spark a revolution in health care." Supporters say HSAs have the potential to cut costs and boost the quality of health care we receive. But critics call the HSA plans just another tax shelter for the rich. The opinion each American may adopt about HSAs is likely to be influenced by their current health care expenses, access to knowledgeable financial advisers and the options available in each local health insurance market.

HSAs allow individuals or businesses to purchase certain authorized catastrophic health plans at a lower cost than traditional health plans and then place the money saved in a tax deductible savings account that can build up or be used at the discretion of the account owner. HSAs have liberal provisions for using extra funds for other purposes but are basically designed to allow each person to build a pool of cash that can be kept into retirement years. Accounts are self-directed just like IRAs but unlike IRAs, withdrawals are designed to be tax-free.

It is immediately clear that HSAs can reduce health care costs by about $2500 per year and generate a tax savings of about $1000 per year for an average taxpayer' s household that makes a switch from a traditional health plan. These estimates are based on average family plans; savings would be less for single taxpayers. But there are plenty of obstacles to overcome in order to enjoy these savings.

First of all, the distribution system makes HSA plans far more accessible to the rich than to middle income Americans. HSAs do not utilize commission-based financial products that are commonly used with the middle-income market. HSA accounts tend to use no-load, low commission or low fee financial products. The result is little interest from the majority of financial firms that make a living from transaction-based income. So far, most HSAs are handled by accountants and attorneys who work on a fee or retainer basis and are not accessible to most middle-income people. Some online HSA service providers are likely to help close the accessibility gap by offering this service at a lower fee, but it is not a "do-it-yourself" type of financial service. A third party trustee is required by law and a professional financial adviser who specializes in this area of benefits is probably the most efficient way to negotiate the details of enrolling in a HSA program. It is unclear whether the bulk of Americans who could potentially benefit from an HSA will invest the money required to qualify and enroll in an HSA plan.

Second, Americans are bugged that so few health insurance plans actually qualify for HSA benefits. This may be largely the fault of the health insurance companies that are not really excited about the concept of a self-insurance program. Many of the people who initially expressed interest in opening a HSA account this month expressed disbelief that the were excluded from the new program because their insurance company did not plan to apply for qualification under Treasury' s procedures. HSAs will not be viable options in Hawaii, New Jersey, Massachusetts, Maine, New York, North Carolina, Washington and Vermont due to quirks in the state insurance laws.

Third, the program is a great cost saver for young healthy people with few health care expenses, but does not really help people who struggle the most with medical costs – the older and less healthy members of our population. In effect, this type of health plan skims off the healthiest people and leaves the unhealthiest in traditional health plans. This process tends to cause the rate of high risk or “open enrollment” health plans to increase more rapidly.

Fourth, the HSA program does nothing to address the problem of health care inflation. No matter how much the immediate savings, we are still going to be in financial trouble if costs continue to increase at double-digit rates for the next decade.

A more attractive health plan option for employers seeking to cut medical costs paid for employees is a Health Reimbursement Arrangements (HRA) that does not have any of the restrictions of the HSA program. Individuals and self-employed business owners looking for cost-saving alternatives may find that limited length health insurance policies offer significant cost savings in trade for the inconvenience of having to re-enroll in a new health plan after one to three years. More information on HRAs can be found at www.FreedomBenefits.org. Low cost individual health insurance plans are listed at Freedombenefits.net.

More information about Health Savings Accounts, including links to other articles and an extensive list of Frequently Asked Questions, see www.healthsavingsaccount.hsa.com.

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