President George W. Bush signed the Health Opportunity Patient Empowerment Act of 2006 on Dec. 20, 2006, bringing new enhancements to Health Savings Accounts, which are qualified, high-deductible health insurance plans combined with tax-advantaged savings accounts.
In the past three years since HSAs have become available, their popularity has grown. Besides offering tax advantages, the accounts may reduce health insurance premiums and provide consumers more control over health care expenses. The provisions of the new law, which became effective Jan. 1, 2007, make HSAs even more appealing.
One advantage of an HSA is that it allows an individual or a family to set aside tax-deferred funds, as a nest egg, for future health care expenses. Congress expanded these benefits to allow account holders to save at higher rates beginning this year. Previously, account holders were limited to depositing an amount that could not exceed their health insurance deductible. But for 2007, insureds with single coverage can deposit up to $2,850 in their HSA, even if the minimum single person deductible of $1,100 is selected. Insureds with family coverage can deposit up to $5,650, even if the minimum family deductible of $2,200 is selected. HSA holders who are 55 years or older can make an extra catch-up deposit each year until the date they enroll in Medicare. In 2007, the maximum allowable catch-up deposit is $800. This catch-up amount will increase to $900 in 2008 and will remain at $1,000 beginning in 2009.
The money in an HSA can be used to cover out-of-pocket medical costs. During a year when little or no out-of-pocket medical costs accrue, the money in the HSA account rolls over to subsequent years. Or, some insureds prefer to pay medical costs on their own, allowing their tax-deferred HSA to grow over time and have it available in case of a catastrophic medical incident, or for future increased medical costs associated with aging. Account holders who can afford to subsidize their own out-of-pocket medical costs during their working years could accumulate funds to help offset expenses during retirement, when medical costs are traditionally higher and when income is likely reduced.
Congress has made several other changes as well. Another change allowing insureds to maximize HSA contributions is the abolishment of prorating of contributions. Previously, contributions were prorated during the first year on the basis of when the policy went into effect. For example, an effective date of July 1 meant the contribution was limited to 50 percent of the maximum allowable contribution. Congress stated that provision was unfair, since deductibles are not prorated. Beginning this year, insureds can contribute up to the full amount to an HSA no matter what month of the year the policy goes into effect.
Congress has also enacted new rules governing the movement of money into HSAs. Insureds are allowed a one-time, tax-free rollover of funds from an existing Flexible Spending Account or a Health Reimbursement Account into an HSA. This move could be advantageous to many account holders, since an HSA offers flexibility, rollover provisions, and portability features that are not offered by an FSA or HRA.
Also, insureds are now allowed to make a one-time transfer of money from an existing Individual Retirement Account into an HSA. This move should be considered with care. In essence, this move simply transfers money from one tax-deferred fund to another, so no new benefits accrue. Insureds who are nearing retirement might use this rule to transfer some money out of an IRA and defer or even avoid paying taxes on that money, since HSA funds used for medical expenses are not taxed going in or coming out. Younger insureds might be better off leaving their IRA intact and fully funding their HSA to maximize tax benefits for the year. (Consult with a tax adviser.)
Another helpful change is the requirement that the cost-of-living adjustments be indexed earlier in the year. In 2006, indexing was based on a 12-month period ending Aug. 31. The new rules change the base period to a 12-month period ending March 31 and require that adjusted amounts for the year be published by June 1. This change provides individuals with more time to make decisions about their health care for the following year.
The AVMA Group Health and Life Insurance Trust provides HSA-qualified, high-deductible plans to help members gain better control over health care costs. The HSA has already proved its appeal to AVMA GHLIT members, most of whom are self-employed and pay for their own health care coverage. In 2004, 12 percent of AVMA GHLIT health insurance certificates in force were HSA-qualified, high-deductible plans. By the end of 2005, that figure had grown to 21 percent. By the end of 2006, 26 percent of AVMA GHLIT health insurance certificates in force were HSA-qualified, high-deductible plans.
New this year, the AVMA GHLIT offers an embedded deductible benefit on three HSA-qualified plans: Plan S2 ($5,200 Family Deductible), Plan S3 ($7,000 Family Deductible), and Plan S4 ($10,000 Family Deductible). The embedded individual deductible for each of the plans is 50 percent of the family deductible. When any family member insured under one of these plans incurs eligible medical expenses in a calendar year that reach the embedded individual deductible limits, their deductible is satisfied for that year.
The AVMA GHLIT program is underwritten by New York Life Insurance Company (NY, NY 10010). AVMA GHLIT and New York Life Insurance Company bear no responsibility for the establishment or administration of any HSA. For more information on AVMA GHLIT plans, including eligibility, rates, renewal provisions, exclusions, and limitations, or to find a GHLIT agent in a particular area, call the Trust office.