|By SARAH B. AUBREY
ANDERSON, Ind. — Of those line-item expenses that keep going up, healthcare can be counted among the most expensive this year. Unless a farm family is insured by an off-farm employer that offers a healthcare benefit, the cost of buying insurance for family and employees can border on outrageous.
Given this, many financial and insurance planning professionals are recommending Health Savings Accounts (or HSAs) in lieu of traditional premium-only plans. According to Bill Ehrlich of Insurance Solutions in Anderson, Ind., an HSA is a combination of a major medical plan with a high deductible and a bank account where the policyholder deposits savings to be used for medical expenses.
“Quite simply, HSAs are handled like any other insurance account,” Ehrlich said. “You purchase the plan with a deductible suitable for you, then you must set up a savings account to contribute to monthly.”
Why select a HSA plan?
“The HSA plan premiums are generally lower than standard health programs like a PPO,” Ehrlich pointed out.
The reason for a lower initial cost are high deductibles, often between $1,100 and $10,000 for a family plan annually, but Ehrlich said these are maximum out-of-pocket amounts each year.
Another possible reason for lower costs is that these plans don’t cover ancillary benefits such as regular doctor visits and prescription drug coverage.
“These plans are best for very large amounts of coverage for catastrophic medical events,” Ehrlich added.
“The market now is such that many people should really try to self-insure. Farmers are among those I’d recommend HSA plans to,” noted Wendy Gooding, a State Farm agent also from Anderson.
“The savings account feature helps the owner to save toward medical expenses and use the money to pay their deducible costs,” she added.
All providers require a monthly minimum contribution into the savings account feature. Monthly deposits depend on the plan, but can be as low as $25 per month.
This money is set aside in an actual bank account set up with the insurance coverage (the financial institution is usually specified by the insurance program selected) and has the typical features of a bank account including check writing, debit cards, and interest earning. One major benefit to those seeking tax breaks is that all contributions are tax deductible.
“The IRS heavily regulates these plans, so they are all rather similar; the main difference is the premiums,” said Ehrlich who advised consumers to shop around.
Underwriting standards are the same for HSA plans as traditional health insurance as well. The premiums are tax deductible, too making two tax advantages available with the HSA style medical coverage. The maximum contribution to the savings account is $5,150 annually.
These dollars can be used before age 59 1/2 to cover any IRS-eligible medical expenses, even including things like eyeglasses, dental visits and ambulance transportation. The money in the savings account always belongs to the contributor and can be taken out for non-medical purposes but expect to pay a 10 percent IRS penalty.
Once the money is removed for non-medical needs it is also considered taxable income for that year. For those over 59 1/2, the money is not subject to penalty, but similarly to a traditional IRA, it is then added to the annual taxable income.
“These plans are really becoming a trend because people are going to high deductible plans to save money and plan for the future,” Gooding said. “We hope people will explore this option and see how they may benefit.”
To learn more about HSA plans, contact an insurance or financial-planning professional.
(This is the first in a series of articles on financial planning tips.)
Published in the January 11, 2006 issue of Farm World.