How do HSAs Work?

What is a health savings account plan?

An HSA is a special tax-sheltered savings account for medical bills. It is similar to an IRA. Instead of buying high-priced insurance with low co-pays, you buy a low cost policy (with a “high” deductible) for the “big” bills and save the difference–in the HSA–to cover “small bills”. Money deposited into the account is 100% tax deductible and can be easily accessed by check or debit card to pay medical bills tax-free (even stuff not covered by insurance like dental and vision). What you don’t use for medical bills is yours to keep–it stays in your account and keeps growing on a tax-favored basis to a) cover future medical bills; or b) supplement retirement, just like an IRA. In sum, the HSA offers 1) lower premiums; 2) lower taxes; 3) freedom of choice; and 4) more cash at retirement.

Establishing an HSA plan is as easy as 1-2-3…

1. Take out a “high deductible” HSA-Qualified health insurance policy. Your monthly premiums will be low because of the nature of the policy. CAUTION: Not just any policy with a so-called “high deductible” will qualify you for the HSA plan—it must be a policy that meets the specific HSA design specified by Congress.

2. After the HSA-Qualified insurance policy is issued and in-force, then establish the actual HSA savings account at a qualified financial institution. Under the HSA law, you have a wide variety of investment options in addition to fixed accounts, including mutual funds, stocks and bonds. You are always free to maintain the account at any financial institution that is a bona fide HSA custodian registered with the IRS. Blue Cross offers a program through Mellon Bank.

3. Begin funding the savings account. There is no minimum contribution required; however, just like an IRA, there is an annual maximum. Be sure not to contribute more than the maximum amount allowable each year. Click here to learn more about the current HSA guidelines (as established by Congress).

Etcetera…

• When you file your taxes each year, all of the money you have deposited into your own HSA will be tax-deductible on line 25, front page, of your 1040 form (assuming you have qualifying income as a self-employed person or you are participating as an employee at a company with under 50 employees). This will cut your tax bill by an average of $1,200 for a family (and about $500 for a single). It is absolutely correct to say that with an HSA, you are paying medical bills with money you would otherwise have paid in taxes! How cool is that? (see examples below—you also save money on the actual bill in most cases)

• When you visit a physician, you pay with tax-free money from your savings account. The account is easily accessible by debit card or check. If your provider is a member of the PPO discount network you have joined (with your HSA insurance policy), your bill will actually be reduced before you have to pay it. (Example: $60 Dr. visit reduced to $42. You pay the $42 with tax-free money from your HSA.)

• When you need to purchase prescriptions, simply visit a participating PPO discount pharmacy (most all major chains participate) and pay your discounted amount on the spot either by debit card or check directly from your HSA account (again, with tax-free money).

• Some medical expenses not covered by the insurance policy may still be considered allowable expenses under the HSA. For example, dental work, including braces, vision care, including glasses, eye surgery, alternative therapies such as acupuncture, etc. can all be paid for with tax-free money from the HSA.

• Keep funding the HSA every year to the maximum amount allowable by year (now up to 100% of the deductible amount with the new HSA). This will reduce your taxes each year plus, more importantly, will give you a larger and larger cushion against unexpected “catastrophic” type claims in the future. After only two or three years of good health and steady funding of the HSA, there should be more than enough in the savings account to cover any foreseeable medical expenses without ever having to dip into your pockets. (Note: dipping into your HSA savings account is not the same as dipping into your pockets—your HSA is the functional equivalent of “insurance” coverage for the small bills—what you don’t have to use is yours to keep—which is dramatically different than paying an insurance company a few thousand dollars a year to do virtually the same thing…insure the “small” bills)

• Remember, what you don’t use for medical bills from the HSA is yours to keep—just like an IRA. The balance continues to grow and grow on a tax-sheltered basis. Once you reach age 65, the account can basically be used just like a traditional IRA (withdrawals subject only to income tax-reporting—no “premature withdrawal penalties”).

We hope you have found this information to be helpful.

The truth about Long-Term-Care

In general, Americans are not sufficiently prepared to pay for long-term care. Many of them go through their lives simply hoping that they won’t ever need it. Unfortunately, in the event that you or a loved one does need long-term care, hope won’t be enough to protect you from potential financial ruin.

Also, the odds that you will need some kind of long-term care increase as you get older.

Self-Insurance as an Option

To self-insure — that is, to cover the cost yourself — you must have sufficient income to pay the rising costs of long-term care. Keep in mind that even if you have sufficient resources to afford long-term care now, you may not be able to handle rising future costs without drastically altering your lifestyle.

The Medicaid Option

Medicaid is a joint federal and state program that covers medical bills for the needy. If you qualify, it may help pay for your long-term-care costs. Unfortunately, Medicaid is basically welfare. In order to qualify, you generally have to have few assets or will need to spend down your assets.

State law determines the allowable income and resource limits. If you have even one dollar of income or assets in excess of these limits, you may not be eligible for Medicaid.

To receive Medicaid assistance, you may have to transfer your assets to meet those limits. This can be tricky, however, because there are tough laws designed to discourage asset transfers for the purpose of qualifying for Medicaid. If you have engaged in any “Medicaid planning,” consult an advisor to discuss any new Medicaid rules.

Long-Term-Care Insurance

A long-term-care insurance policy may enable you to transfer a portion of the economic liability of long-term care to an insurance company in exchange for the regular premiums.

Long-term-care insurance may be used to help pay for skilled care, intermediate care, and custodial care. Most policies pay for nursing-home care, and comprehensive policies may also cover home care services and assisted living. Insurance can help protect your family financially from the potentially devastating cost of a long-term disabling medical condition, chronic illness, or cognitive impairment.

Long-Term-Care Riders on Life Insurance

A number of insurance companies have added long-term-care riders to their life insurance contracts. For an additional fee, these riders will provide a benefit — usually a percentage of the face value — to help cover the cost of long-term care. This may be an option for you.

Estate Planning Tools to Know About

Planning is a part of nearly everything we do in life. It’s even a part of dying. How will you preserve your assets from estate taxes and probate fees? How will you ensure distribution according to your wishes? Who will make financial and medical decisions in the event of your incapacity? By taking steps in advance, you have a greater say in how these questions are answered. And isn’t that how it should be?

Wills and Trusts

Wills and trusts are two of the most popular estate planning tools. Both allow you to spell out how you would like your property to be distributed, but they also go far beyond that.

Just about everyone needs a will. Besides enabling you to determine the distribution of your property, a will gives you the opportunity to nominate your executor and guardians for your minor children. If you fail to make such designations through your will, the decisions will probably be left to the courts. Bear in mind that property distributed through your will is subject to probate, which can be a time-consuming and costly process.

Trusts differ from wills in that they are actual legal entities. Like a will, trusts spell out how you want your property distributed. Trusts let you customize the distribution of your estate with the added advantages of property management and probate avoidance.

Wills and trusts are not mutually exclusive. While not everyone with a will needs a trust, all those with trusts should have a will as well.

Durable Power of Attorney for Finances

Incapacity poses almost as much of a threat to your financial well-being as death does. Fortunately, there are tools that can help you cope with this threat.

A durable power of attorney is a legal agreement that avoids the need for a conservatorship and enables you to designate who will make your legal and financial decisions if you become incapacitated. Unlike the standard power of attorney, durable powers remain valid if you become incapacitated.

Health Care Proxies and Living Wills

Similar to the durable power of attorney, a health care proxy is a document in which you designate someone to make your health care decisions for you if you are incapacitated. The person you designate can generally make decisions regarding medical facilities, medical treatments, surgery, and a variety of other health care issues. Much like the durable power of attorney, the health care proxy involves some important decisions. Take the utmost care when choosing who will make them.

A related document, the living will, also known as a directive to physicians or a health care directive, spells out the kinds of life-sustaining treatment you will permit in the event of your incapacity. The directive creates an agreement between you and the attending physician. The decision for or against life support is one that only you can make. That makes the living will a valuable estate planning tool. And you may use a living will in conjunction with a durable health care power of attorney. Bear in mind that laws governing the recognition and treatment of living wills may vary from state to state.

What types of Health Coverage are available?

Rising health-care costs have driven the demand for, and the price of, medical insurance sky-high. The availability of group coverage through employment has helped many Americans face such costs. However, people who are not currently covered by their employers have few affordable sources for group coverage. If you are not covered at work, inquire about coverage through your religious affiliation, professional organizations, or alumni association.

Individuals seeking medical coverage on their own can explore purchasing an individual health insurance policy. And those aged 65 and older may qualify for Medicare coverage.

There are three general classifications of medical insurance plans: fee-for-service (indemnity), managed care (e.g., HMOs and PPOs), and high-deductible health plan (HDHP). Older persons may be eligible for Medicare coverage.

Fee for Service

With a basic fee-for-service (indemnity) insurance plan, doctors and hospitals are paid a fee for each service provided to insured patients.

Indemnity plans normally cover hospitalization, outpatient care, and physician services in or out of the hospital. You select the service provider (physician) for consultation or treatment. You are then billed for the service and reimbursed by the insurance company, or you can “assign” direct payment to the provider from the insurance company. Indemnity plans typically require the payment of premiums, deductibles, and coinsurance. Limits on certain coverage or exclusions may apply. Because many policies have lifetime limits on benefits that the insurance company will pay, you should look for a policy with a lifetime limit of at least $1 million.

Managed Care

Managed-care plans became popular in the 1990s as a way to help rein in rising medical costs. In managed-care plans, insurance companies contract with a network of doctors and hospitals to provide cost-effective health care. Managed-care plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.

Health maintenance organization. An HMO operates as a prepaid health-care plan. You normally pay a monthly premium in addition to a small copayment for a visit to a physician, who may be on staff or contracted by the HMO. Copayments for visits to specialists may be higher. The insurance company typically covers the amount over the patient copayment amount.

Each covered member chooses or is assigned a primary-care physician from doctors in the plan. This person acts as a gatekeeper for his or her patients and, if deemed necessary, can refer patients to specialists who are on the HMO’s list of providers. Because HMOs contract with doctors and physicians, costs are typically lower than in indemnity plans.

Preferred provider organization. A PPO is a managed-care organization of physicians, hospitals, clinics, and other health-care providers who contract with an insurance company to provide health care at reduced rates to individuals insured in the plan. The insurance company uses actuarial tables to determine “reasonable and customary” fees for each type of service, and health-care providers accept the PPO’s fee schedule and guidelines.

The insured can see any doctor or hospital within a preferred network of providers and pays a copayment for each visit. Insured individuals have to meet an annual deductible before the insurance company will start covering health-care services. Typically, the insurance company will pay a high percentage (often 80%) of the costs to the plan’s health-care providers after the deductible has been met, and patients pay the balance.

Although insured individuals can choose physicians or providers outside the plan without permission, patient out-of-pocket costs will be higher; for example, the initial deductible for each visit is higher and the percentage of covered costs by the insurance company will be lower. Because PPOs provide more patient flexibility than HMOs, they may cost a little more.

Point-of-service plan. A POS health-care plan mixes aspects of an HMO and a PPO to allow greater patient autonomy. POS plans also use a network of preferred providers whom patients must turn to first and from whom patients receive referrals to other providers if deemed necessary. POS plans recommend that patients choose a personal physician from inside the network. The personal physician can refer patients to other physicians and specialists who are inside or outside the network. Insurance companies have a national network of approved providers, so insured individuals can receive services throughout the United States. Copays tend to be lower for a POS plan than for a PPO plan.

High-Deductible Health Plan

An HDHP provides comprehensive coverage for high-cost medical bills and is usually combined with a health-reimbursement arrangement that enables participants to build savings to pay for future medical expenses. HDHP plans generally cover preventive care in full with a small (or no) deductible or copayment. However, these plans have higher annual deductibles and out-of-pocket limits than other insurance plans.

Participants enrolled in an HDHP can open a health savings account (HSA) to save money that can be used for current and future medical expenses. There are annual limits on how much can be invested in an HSA. The funds can be invested as you choose, and any interest and earnings accumulate tax deferred. HSA funds can be withdrawn free of income tax and penalties provided the money is spent on qualified health-care expenses for the participant and his or her spouse and dependent children.

Remember that the cost and availability of an individual health insurance policy can depend on factors such as age, health (pre-existing conditions), and the type of insurance purchased. In addition, a physical examination may be required.

Medicare

Medicare is the U.S. government’s health-care insurance program for the elderly. It is available to eligible people aged 65 and older as well as certain disabled persons. Part A provides basic coverage for hospital care as well as limited skilled nursing care, home health care, and hospice care. Part B covers physicians’ services, inpatient and outpatient medical services, and diagnostic tests. Part D prescription drug coverage is also available.

Medicare Advantage is a type of privately run insurance plan that includes Medicare-approved HMOs, PPOs, fee-for-service plans, and special needs plans. Some plans offer prescription drug coverage. To join a Medicare Advantage plan, you must have Medicare Part A and Part B and you have to pay the monthly Medicare Part B premium to Medicare, as well as the Medicare Advantage premium.

Medicare Supplement Insurance, or Medigap, is sold by private insurance companies and is designed to cover the deductibles and copayments that Medicare doesn’t cover. There are 10 standard packages of coverage, designated by the letters A through J, plus two newer policies (K and L) that offer different benefits and lower premiums. Only Medigap insurers are able to offer these plans, but not all plans are available in every state.