Saving Money on your Medical Insurance Premiums As part of the HIPAA laws of 1996, Congress authorized Health Reimbursement Accounts and Medical Savings Accounts for the beginning of 1997. The act established a pre-tax account to be used to pay the expenses of a large deductible medical plan. The expectation was for a large number of group medical and individual plans to switch over.  A limit was imposed of no more than 750,000 plans were to be allowed. That limit was never reached. There were too many issues with the structure of the HRA/MSA plans resulting in few individuals or businesses taking advantage of this medical plan. Effective the first of January 2004, a new plan was allowed called Health Spending Accounts (HSA). The HSA took the best ideas of the HRA and corrected many of the disadvantages. Essentially the new Health Savings Account will replace the MSA. HRA’s will still be offered.  (see the chart comparing the two different plans for more details.) Thanks to Congress there is a new way to save on medical insurance premiums, it’s called a Health Savings Account. What is an HSA (or Health Reimbursement Account)? With the increasing costs of medical care and the resulting spiraling cost of medical insurance alternatives were needed. In the short run there is not much we can do about the cost of care but we can make an immediate effect on how a medical plan pays for the medical costs. One direction is to move to large deductible plans. The larger the better. By choosing a large deductible medical plan, the premiums will decrease. The advantage of the HRA/HSA is a deductible can be financed with a pre-tax account. The HRA required the employer to fund it. The HSA allows the employer and/or the employee to fund it. Yes, making this kind of change is shifting the costs of care. Does this idea really work? Yes, most people do not exceed their deductibles each year. Only about 12% of people actually have excessive medical expenses each year.  Most of us have a large deductibles on our car insurance, why is that? Few people actually have a claim on their car insurance each year, so it makes sense to have a large deductible and save those premiums. Medical insurance works the same way.  Pay for a small or no deductible health care plan and you are pre-paying medical claims that you may not have. Instead consider changing to a large deductible plan and save that difference in premium. With an HSA, you can put that savings into a pre-tax account that works very much like an IRA. In almost every case, the premium savings on the cost of the large deductible plans will more than offset the deductible over one to two years. Another important point is by shifting the front end medical expenses to be self insured by the employer/employee, those costs are not paid by the insurance company. Each year when the rate increases are determined, one of the key questions is what were the claims paid by the medical plan? If few or no claims are actually paid by the insurance company, then the primary consideration is the inflationary trend, hypothetically speaking. Why offer an HSA? Medical Expenses are low for most of us. This chart shows Annual Medical Expenses for the United States population by percentage: Money Spent on Medical Care Annually Percentage of U.S. Population No Medical Expenses  $0 33% $1 - $500 40% $501 - $1,000 9% $1,001 - $2,000 7% $2,001 - $5,000 6% $5,001 - $10,000 3% $10,001 - $25,000 3% $25,001 - $50,000 .5% $50,001 - $100,000 .2% $100,001 - And Up .05% Seventy-three percent of the population spend $500 or less on Medical Expenses per year. Most people will not spend all of their HSA funds in a year. What is not spent is yours to keep and earn interest. So what can you do with an HSA? An individual or business can save premium costs by changing from full paid plan to a $1,000 or larger deductible. The deductible is funded with a pre-tax account The deductible account can be added to each year regardless if any expenses are taken out of it Expenses can be paid from the account in addition to medical costs such as eye glasses Certain insurance premiums can be paid out of the account and not be subject to income taxes Medicare Part B premiums can be paid out and not taxed as income Long Term Care premiums You could prefund Medicare Part B or Long Term Care costs with pre-tax dollars with NO income taxes At retirement, the account can be used to supplement retirement but is subject to income taxes (the 10% penalty is waived at age 65) What are the deductible levels for a High Deductible Health Plan that qualifies for an HSA? For an individual the minimum deductible level is $1000 and the maximum is $5000 out of pocket. For a family the minimum deductible is $2000 and the maximum is $10,000 out of pocket. All family members must apply toward one deductible in the family policy. Employer Points Nearly everyone qualifies HSA's are permanent and do not need to be renewed by Congress Fixed medical premiums can be reduced HSA's finally make health care affordable Contributions are tax deductible The employer and the employee can both contribute pre-tax to the account The employee should have an interest in the cost of medical care to foster consumerism therefore the best plans have the employee paying part of the deductible How the deductible works is totally up to the employer; it is best to only partially fund the deductible leaving the balance up to the employee The account is owned by the employee and vested The deductible can be increased periodically as the account balances increase reducing the insurance premiums The pre-tax account contribution can be changed each year or not contributed to at all. It can be treated like a profit sharing approach. i.e. This year the employer is going to contribute $X amount or none at all The owner employee can use the HSA account as a supplemental retirement plan. Each year new contributions can be added regardless if the account was used or not. At age 65 the 10% early withdrawal penalty goes away. The large deductible involves the employee creating an awareness and better consumerism towards the usage of medical coverage Employee Points Nearly everyone qualifies HSAs are permanent and do not need to be renewed by Congress The HSA gives the employee a cost savings on medical premiums Contributions are tax deductible Money you put in grows tax-free Withdraw money any time for expenses not covered by health insurance, which may include: Doctor's office or hospital visits Glasses Dental work Long-term care insurance premiums Over-the-counter drugs If you have an HSA, expenses for family members can be paid for even if they are not on your health insurance Creates a pre-tax supplemental retirement plan The account can be used to fund Medicare B and long term care premiums essentially pre-funding those costs for some future date The funds are owned by the employee The account is portable and goes with the employee Upon death, HSA ownership may transfer to the spouse on a tax-free basis Anyone can contribute to the account such as parents, grandparents, the employer, etc. - The tax deduction goes to the owner not the contributor though even if the account beneficiary does not itemize. The exception to this are employer contributions. Individuals age 55 – 65 may make additional “catch-up” contributions of up to $500 in 2004, increasing to $1,000 annually in 2009 and thereafter.  A married couple can make two catch-up contributions as long as both spouses are at least 55. Excess funds may be rolled over into a traditional IRA Click here for more information from the Treasury Department and the IRS