NEW YORK (MONEY Magazine) -
Hidden in the new Medicare bill is a gift for people under 65 who want to cut their health insurance bills. It's called the health savings account, or HSA.
And many experts, including John C. Goodman, president of the National Center for Policy Analysis, expect these accounts to revolutionize health care.
HSAs are rolling out into the market as I write this. Here's what you need to know to figure out whether one is right for you.
How do HSAs work?
HSAs are a little like IRAs. You buy a qualified health insurance policy with a minimum deductible of $1,000 for singles, $2,000 for families.
That enables you to open a health savings account, into which you can deposit pretax dollars up to the level of your deductible each year (capped in 2004 at $2,600 for individuals and $5,150 for families). You don't have to deposit a lump sum all at once. Generally, you'll be able to make monthly deposits by automatic debit.
Once the money is in the account, it's yours to spend -- tax-free -- on health care. If you don't use it, your money can remain in the account and grow tax deferred. (We'll get to your investment choices later.)
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That gives HSAs a leg up on flexible spending accounts (FSAs), where you lose any funds you don't use within the year.
If you withdraw money before you reach age 65 for things other than IRS-approved health-care expenditures, it will be taxed as income, and you'll pay a 10 percent penalty. At age 65, the penalty vanishes.
At all times, though, the money in the account belongs to you. If you change jobs, you can take it with you.
What kind of health insurance will I get?
What we're mostly seeing so far are preferred-provider organizations (PPOs) that offer you discounted rates on a network of physicians and hospitals until you reach your deductible and cover 80 to 100 percent of in network bills after that. These are basic policies, with some limitations on coverage.
How do I open an HSA?
Some employers are planning to add HSAs to their menu of insurance options at open-enrollment time. Right now most HSA policies are being purchased by people who are self-employed or who don't have insurance at work.
A good place to start looking for a policy is eHealthInsurance.com, which offers 140 different policies in 26 states.
Is an HSA right for me?
If you already have a high-deductible individual policy, adding an HSA is a no-brainer for the tax savings alone.
Otherwise, it may be a good bet if you are basically in good health. You should consider an HSA if you've been paying more for health insurance premiums than you've been using in care.
Take a typical family of four in San Diego, who would pay $828 a month for a traditional PPO with a $500 deductible. Premiums for an HSA policy with a $4,800 deductible would run $226 a month -- a savings of $602 a month, or $7,224 a year.
If the family puts $4,800 into an HSA, that still leaves them with savings of $2,424 a year. And assuming they pay 34 percent in combined federal and state taxes, they'd save $1,632 more on taxes. Even if they spend every dollar of the $4,800 they put into the account, they come out way ahead.
How can I pick a good HSA?
Shop around, paying particular attention to how easy it is to access your money. Plans that come with checkbooks or debit cards are easier to administer than those that make you file paperwork to get reimbursed.
The other deciding factor: your investment options. Some plans offer a fixed return on any money you deposit in the account. (Golden Rule currently pays 4 percent.) Others allow you to invest the money in a menu of mutual funds.
Whether you want to put your health-care dollars at risk depends on whether you have other reserves.
Editor-at-large Jean Chatzky appears regularly on NBC's Today. Contact her by e-mail at moneytalk@moneymail.com.
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