Alternatives to Health Savings Accounts

Many people do not qualify for the new Health Savings Account plans that became effective January 1, 2004. The new type of health plans are supposed to save money by cutting health insurance costs and adding a tax-deductible savings account to cover most out-of-pocket health costs for those few who qualify. But even the most optimistic forecasts predict that less than one percent of Americans will use HSAs by the end of the decade. The vast majority of us need to find alternate ways to control health care costs.

This article does not cover the many reasons most people cannot use a health savings account since that topic has been covered at length in other articles reprinted at www.tonynovak.com. This article focuses on alternatives that may be available to replicate the tax and insurance savings of a health savings account.

Other Employer Sponsored Health Plans

A health plan called a “Health Reimbursement Arrangement” is an attractive option when an employer wants to cover out-of-pocket health expenses for employees. Unused benefits can accumulate year after year similar to a health savings account but ultimately the unused benefits revert to the employer. A similar design that allows employees to use their own salary to pay for health benefits on a pre-tax basis is called a “Flexible Spending Account” or “FSA”.The Flexible Spending Account plan has a “use it or lose it” feature that limits the benefits to the current year. Both of these are employer-sponsored plans so an employee cannot enroll in one of these plans without the employer’s sponsorship. These plans cost about $50 per month for a typical small business, but often save thousands of dollars in wage taxes and health insurance premiums. A chart comparing all three types of plans is available. Neither of these employer-sponsored plans can be used by self-employed people.

Self-employed Pension Plan

For self-employed people, it is easy to incorporate coverage for post-retirement out-of-pocket medical costs into a comprehensive retirement plan. The liberal designs allowed in pension plans make these natural vehicle to fund post-retirement health benefits. Unfortunately, there is no easy way for a self-employed person to have their business cover current out-of-pocket health expenses on a pre-tax basis.

PPO Discount Plan

Almost anyone who pays cash for health care expenses can save money by using a PPO discount plan that covers medical visits, prescriptions, dental care, vision and other related expenses. A PPO plan member typically pays about 25% less than a cash-paying patient for the same services.

Unfortunately a number of disreputable PPO plans have entered the market and are currently being promoted on the Internet.A good plan should cost less than $20 per month (inclusive of medical, dental, prescription and vision) for a family plan and should offer you a free trial period to test the amount of the network discounts like the PPO discount plan from Fortis at www.ehealthdiscountplan.com. An article that helps make the distinctions between PPO plans titled “Comparing Health Discount Plans” can be found at www.tonynovak.com.

Low Cost Health Insurance Plans

Most low cost health insurance plans are not HSA plans. There may be other insurance options that save money by cutting out benefits that you do not need or limit the length of coverage to the time you expect to need the insurance. If you have a clear medical history then a discounted "preferred risk" rate plan may be available. See Freedom Benefits for a listing of low cost health insurance plans. Low cost health insurance plans are not available in Massachusetts, New Jersey, New York and Vermont.

IRA Accounts

IRA accounts may be used to cover medical expenses in the same manner as an HSA except that the withdrawals are taxable.The chart below summarizes the differences.IRAs are available to a much wider range of individuals than a health savings account.See www.tonynovak.com/investment.htm for the account disclosure forms that include details on tax treatment of IRAs.

	Individual Retirement Account	Health Savings Account
Typical maximum contribution	$3000	$2600 (single) $6150 (family)
Are contributions tax deductible?	Yes, for most people	No, unless in a qualified health plan
Health insurance Requirement?	No	Yes, specific coverage is required.
Are withdrawals for medical expenses taxable?	Yes	No