It's open enrollment season, and every year I go digging through that mountain of paperwork your HR person calls your Open Enrollment Kit (you know, that one-inch-thick packet they hand you so you can re-enrolled in health insurance, disability insurance, life, and the retirement plan). And every year I manage to unearth a gem hidden among the pages of the packet. This year I found a real diamond in the rough: the Health Savings Account.
But wait a minute. If you're thinking "I already have this," you might be wrong.
When I recommended that my clients enroll in the HSA, three separate families told me they were already enrolled. But in fact, NONE of these families had ever used a Health Savings Account before. (I know, because last year their employers didn't even offer it.)
So what's going on here?
Just like all the other consumers of healthcare, physicians are confused about their health insurance options, too. In this case, these physician families thought the new Health Savings Account option was the same as their old Flexible Spending Account (you know, the old "use it or lose it" plan).
What's so cool about the Health Savings Account?
The HSA is a super tax saving tool that's a perfect fit for most physician families.
- You make contributions to the Health Savings Account on a pre-tax basis, meaning you don't pay FICA tax, federal income tax, or state and county income tax.
- The earnings on the HSA grow tax-deferred.
- Withdrawals from the Health Savings Account - as long as you use them for healthcare expenses - are tax-free.
In 2007, you can set aside $5,650 or more* for your family and never pay a dime of tax on it. This is no gimmicky tax deal though: it was buried in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and it's one of the best, legitimate tax savings tactics available to physicians.
So how much tax could you save? Since you're in the top tax bracket, you would have to earn $9,852 and pay 35% in federal taxes plus 7.65% in FICA tax to net that same $5,650 on an after-tax basis, meaning you save $4,201 in taxes by fully funding your HSA. And if you're self-employed and living in a state with high income taxes (like California or Oregon), you could save as much as $8,335 all told. HSA contributions are made on a pre-FICA basis and not subject to income tax in most states.
What's the catch?
To have a Health Savings Account, you must be covered by a "high deductible health plan" (HDHP) and you must NOT be covered by any other traditional health insurance or Medicare. That means you'll be paying out-of-pocket for some of the healthcare expenses that may have previously been covered by a traditional, first-dollar insurance plan.
In my experience though, physicians tend to be very healthy people who don't go to the doctor very often, so paying for routine visits out-of-pocket is not a roadblock. And while you may have to pay a very large out-of-pocket if you have a bad year medically (think cancer, stroke, etc.), most plans have an annual cap in the $8,000 to $12,000 range. A surprise medical bill - even one as high as $10,000 - may be unwelcome but it won't break the bank.
How To Get Started
It all depends on how you're employed.
If you're not self-employed (for instance, if you work for a non-profit hospital or clinic), talk to your HR person. If they offer the HSA, you're in luck and you can enroll. If they don't, you're out of luck. Get your colleagues together and petition for it at the next management pow-wow.
If you're an equity stakeholder in your practice, ask your group administrator if the HSA is available. If it's not, you can set one up, but don't expect your employees to be thrilled about it. The out-of-pocket aspect of the high deductible health insurance that accompanies HSA's make these unpopular for lower earners. Some insurers offer a split, or two-tier plan where employees can stick with the first-dollar coverage option while you go for the HDHP/HSA combination.
Who is the HSA not good for?
The Health Savings Account is not for everybody, and you may want to stick with your first-dollar coverage if you:
- Have a chronic, expensive health problem
- Have children or family members whose health status is not well-known
- Would have difficulty paying a large out-of-pocket bill
Otherwise, the HSA is a real gem.
*If you're 55 or over, you can make an extra "catch-up" contribution to your HSA of $800 in 2007 and later years.