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Personal Finance - Health Savings Account: How to make the plan work for you

12-Oct-2012

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If your company tells you it�s replacing your health insurance with a high deductible plan paired with a health savings account - or adding that option to your benefits menu - you might want to make your first stop the information technology department rather than human resources."The guys in finance and the guys in IT - those are the two departments that sign up for higher deductibles," says Helen Darling, president and chief executive of the National Business Group on Health, a non-profit coalition of 325 large employers.

That�s because it all comes down to cold, hard math, and the spreadsheet jockeys have probably run the numbers on those plans. While many people shudder at the thought of anything that is "high deductible," these plans can work out in your favor. "Once people see the math, many are won over right away," says Maureen Fay, a vice president at Aon Hewitt, a benefits consulting firm.

Workers may not have much of a choice, the National Business Group on Health says, since 19 percent of employers will be offering high deductible plans as the only option in 2013, as opposed to 17 percent in 2012 and just 7 percent in 2009. Some 54 percent of workplaces will offer the high deductible plans as a choice in 2013.

Here�s how to make the plan work for you:

1) Get over the initial sticker shock. High deductible plans are similar to traditional plans in that after you meet the deductible, care is covered at around 80 or 90 percent if you stay in the preferred provider network. But initial out-of-pocket costs are higher; there�s a minimum deductible of at least $2,400 for a family, versus an average of around $1,200 at large employers for other plans, according to Mercer, a human resources consulting firm.

While most insurance plans can be paired with pre-tax flexible spending accounts, high deductible plans are instead often matched up with either an employer-funded health reimbursement arrangement (HRA) or an employee-controlled, pre-tax health savings account (HSA), depending on which your employer chooses to offer. HSAs are gaining ground the fastest, according to Aon Hewitt, mostly because they provide an attractive savings vehicle. The money in HSAs belongs to the account holder forever. An account holder can save it from year to year, and the funds in the accounts are never taxed if used for qualified healthcare expenses.

2) Work the freebies. Well visits for the kids, annual physicals, yearly mammograms - preventive care is free now, and not counted toward the deductible. Paul Fronstin, director of the Health Research & Education Program at the Employee Benefit Research Institute, says the most important way to work your HSA is to know the details of your plan and what incentives your employer offers. Some will put cash into your HSA for completing things like health surveys, and some will just give a cash contribution with no strings attached. Some companies also allow you to contribute to a Flexible Spending Account for certain limited, qualified expenses (such as vision or dental expenses) at the same time as an HSA or an HRA, increasing the tax benefits.

3) Know what care costs. If you�re used to a $20 co-pay, researching costs may sound ominous. But it�s worth it to find out which mammogram location costs less, or which drugs are cheaper, says Aon Hewitt�s Fay. Most health insurance providers have smartphone apps that allow you to check doctors and drug costs, and programs like Quicken can help you keep track of the money going in and out.

Keeping receipts and good records could help you down the road, since you can reimburse yourself later from your HSA for past bills that you don�t claim against the savings right away. There is a potential downside here, though. The theory behind high deductible plans is that when people know the cost of care and the dollars are coming out of their own pockets, they spend more wisely. But it might also keep people away from needed care that they can�t afford. If you are in one of these plans, make sure you have the cash available to cover services until you meet your deductible.

4) Know your own health. Conventional wisdom says that young, healthy people like high deductible plans because they only pay for what they use, and they typically use very little. But Fronstin says the plans actually work very well if you have a chronic condition, especially if you know what you spend in a year. Some families could reach a $3,000 deductible in just a couple of months - have a baby in January and you are set for the year. And there are mandated out of pocket maximums -- $6,050 for an individual, $12,100 for a family -- for your protection.

5) Choose your HSA custodian wisely. Just because your employer chooses one home for your account, doesn�t mean you have to stay there. A variety of financial institutions can house your HSA, as it�s functionally just like retirement savings account. Until you turn 65, you can only use the money for medical expenses or it�s subject to income taxes and a 20 percent penalty. Once you hit 65, there are no withdrawal penalties, but you still need to pay income tax if you use the funds for nonmedical expenses. Every custodian has a different schedule of fees for such things as monthly maintenance and overdrafts. Also, some custodians have more options for investments once you accumulate over $2,000 or so, while others have more flexible options for frequent withdrawals. You can compare account features at sites like HSAfinder.

6) Savers fare better long term. The maximum contribution for HSAs in 2013 will be $3,250 for individuals and $6,450 for families, with a $1,000 makeup contribution for those older than 55. You can keep making these pre-tax contributions as long as you have a qualifying high-deductible plan, and any money you leave in the account is yours to carry forward, all the way through retirement. So you could end up socking away quite a bit of money that could grow tax free.

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