2010 is time to take a second look at health savings accounts

Higher maximum contributions for 2010 mean health savings accounts offer greater tax benefits than ever before. The increasing financial benefits of HSAs coupled with qualified high-deductible insurance plans are driving a surge in the popularity of this combination among individuals seeking better ways to control health care costs.

"Everyone wants an insurance plan that has low or no deductibles and co-pays for office visits and prescriptions. What they don't realize is that they're paying a lot for those privileges," said Jeff Marshall, director of sales for the AVMA Group Health and Life Insurance Trust, who notes that 25 percent of Trust participants are covered by HSA-qualified plans.

"If they can afford to self-pay for the smaller things, it definitely behooves them to look at HSA-qualified plans, because the premium differential alone can often save thousands of dollars."

Marshall recently assisted a Florida veterinarian who was seeking a lower-cost alternative to the traditional medical plan he had purchased through GHLIT years earlier. After a careful evaluation of available options, the veterinarian decided to switch to one of the Trust's four HSA-qualified high-deductible plans.

Though his annual deductible and maximum out-of-pocket expenses increased, the veterinarian's annual premiums were cut in half. As a result, the switch to an HSA-qualified plan netted an annual savings of approximately $3,000.

"Premium savings can be invested using pre-tax dollars, up to the annual contribution limit, into an HSA and withdrawn tax free to defray the cost of higher deductibles, co-insurance, and qualified out-of-pocket expenses," Marshall said. "Plus, every dollar they put into that account reduces their taxable income, so it's a real savings vehicle."

(See IRS Publication 502, www.irs.gov/publications/p502/index.html, for a list of qualified medical expenses.)

For 2010, the maximum contribution to an HSA is $3,050 for those with individual coverage and $6,150 for family coverage. In 2009, the maximum contribution has been $3,000 for individual coverage and $5,950 for family coverage. HSA holders ages 55 and older can contribute an additional $1,000.

The financial benefits of HSAs don't end with lower premiums and tax free account contributions. Depending on the financial institution, participants have a variety of investment options to grow their HSA funds—such as mutual funds, stocks, certificates of deposit, and money markets. Further, because funds are not subject to a "use it or lose it" provision, they grow tax free.

HSAs also can play a role in retirement planning. Funds can be used to pay premiums for qualified long-term care plans, for example, as well as Medicare premiums, deductibles, co-pays, and co-insurance (but not for supplemental or Medigap policies). Further, whereas individuals younger than age 65 who use HSA funds for nonqualified expenses must pay a 10 percent penalty in addition to taxes, the penalty is waived for account holders age 65 and older.

"The beautiful thing about HSAs is that you're lowering your taxable income and your money can grow tax free until you need it," Marshall said. "Most important, you have more control because you're creating your own path for spending your health care dollars."

The GHLIT insurance program is underwritten by New York Life Insurance Co. New York Life advises individuals to consult with their accountant or tax adviser before opening an HSA to determine whether the savings vehicle is available and appropriate. The GHLIT and New York Life are not responsible for the establishment or administration of any HSAs that individuals may open.

Information on GHLIT's benefits, including HSA-qualified medical plans, is available at www.avmaghlit.org. For more information—including plan details, rates, exclusions, limitations, eligibility. and renewal provisions—or to find a GHLIT agent, call the Trust office at (800) 621-6360.