The bluesman Rev. Gary Davis once famously sang, “They tell me it'll kill me, but they won't say when.” He was referring, of course, to a very specific sort of denial, but advisors know too well that his words are easily applied to the general population's reluctance to plan for their inevitable bodily decline.
Want some evidence? Take the government's tax announcements of the last year. The federal tax-cut package was greeted with a great deal of fanfare, while a new tax-advantaged health care savings plan went all but unnoticed. That's a shame, because the Health Savings Account (HSA), a component of the recently passed Medicare reform bill, can be a great benefit to clients and advisors alike.
A Healthy Primer
HSAs, unveiled at the beginning of 2004 to supplant Archer Medical Savings Accounts, were created to help individuals save for medical costs. HSAs mimic IRAs in that qualified individuals can make tax-deductible contributions that grow on a tax-deferred basis. In addition, an eligible person can establish an HSA with a qualified custodian. There are no tax implications for HSA withdrawals used for qualified medical expenses.
HSAs appeal most to self-employed individuals and workers at businesses that do not provide health insurance. Unlike their predecessors, HSAs can be established by people who are covered by high-deductible health plans (HDHPs). For an individual, an HDHP is a plan that has an annual deductible of at least $1,000, and out-of-pocket expenses not exceeding $5,000. For family coverage, the numbers are $2,000 and $10,000. Out-of-pocket expenses include deductibles and co-payments, but not premiums.
Individual HSA account owners can make annual cash contributions up to $2,600, while families can put aside a maximum of $5,150 each year, subject to limitations. People between ages 55 and 65 can also make a “catch-up” contribution of $500 in 2004. This amount will increase by $100 annually until the catch-up amount reaches $1,000 in 2009. Qualified contributions are “above the line” deductions from adjusted gross income (AGI), and taxpayers need not file itemized returns to take the deductions.
How to Use Them
HSAs can be an effective way for certain clients to accumulate assets to cover medical expenses. Unlike the “use-it-or-lose-it” restraints imposed by flexible spending arrangements, unused money in an HSA can be carried over to the next year. As such, your clients can accumulate a significant amount over time to cover rising medical costs.
Clients who own an Archer Medical Savings Account may roll that money into an HSA, with no annual contribution limitations. In addition, if a person holds an account through their employer, the account is deemed completely portable and remains the employee's asset if they leave the company.
HSAs can be useful to cover select insurance costs. For example, while health insurance premiums are not generally considered “qualified medical expenses,” qualified long-term care insurance, COBRA continuation coverage and health care coverage while a person is receiving unemployment compensation, typically are allowable.
It's important to note that HSA withdrawals not used for qualified medical expenses are taxed as income and subject to a 10 percent penalty. The exception to this penalty rule is if the distribution is made on or after reaching age 65, or because of death or disability. Should the account owner pass away, the money remaining in the account passes to the stated beneficiary. If the surviving spouse is the beneficiary, he or she takes control of the asset and is not subject to any tax unless withdrawals are used for nonqualified expenses.
In addition to educating clients about the benefits available from HSAs, advisors might wish to partner with third-party professionals to generate qualified referrals of self-employed and small business owners. For example, CPAs can refer clients in need of such an account.
As research shows us time and again, the more problems advisors can solve for clients, the more satisfied clients will be.
Susan L. Hirshman is vice president at JPMorgan Fleming Asset Management. jpmorganfleming.com