April 19, 2006

Healthcare Savings Accounts: Emphasis on Savings, Not Healthcare

A Healthcare Savings Account allows you to put aside $2700/yr, or $5040/yr/family, tax-free, for healthcare expenses.  So what?  So sit down.

First, a primer on deductible medical expenses.  The IRS allows you to deduct  the amount you spent on approved healthcare, minus 7.5% of your gross adjusted income.  In other words, take your gross adjusted income (i.e. how much you make minus deductions) and multiply by .075.  Subtract this amount from your total medical expenses: that's how much you can deduct.

You make $100,000.  You incurred $4000 in medical expenses.

0.075 x 100000 = 7500.  7500-4000=3500.  You can deduct 3500 from your taxes.

In the above example, if you only incurred $2000 in medical expenses, you can't deduct  anything.  Think of the 7.5% as a sort of-- deductible.

Healthcare Savings Accounts are different, and complementary.  In the above example, the $4000 of medical expenses was (hopefully) made with money you earned and paid taxes on.   If you're in a 35% tax bracket, you actually had to make $5400 to come up with that $4000.  So you had to pay $1900 in taxes; and another $500 is a wash (7.5% deductible).  So your illness cost you $1900 in addition to whatever the actual medical care cost.

But in George Bush's America, not only can you deduct medical expenses, but you can also put away money tax free for use in healthcare. 

Many progressive types will complain that this doesn't solve the healthcare crisis, and they are right.  But that's because HSA aren't about healthcare, they are about savings; they are another way of sheltering income from taxes.  What they are, in effect, is 401(k)s.

Say you retire. You'll draw on your 401(k), which was funded by $14000/yr contributions, to pay for food, vacations, cable, whatever-- and healthcare.  With an HSA, you can save $14000 AND $2700 a year, and use it as necessary when you retire.  If you have medical expenses, you can just use the HSA money; the 401(k) money is for everything else. 

So you can now save $16700 a year.  AND you can deduct your medical expenses (above 7.5%)

And by the way, money in an HSA is fully investible, like a 401(k). 

But what happens if you get hit by a truck (i.e. you have catastrophic medical expenses?)

Each HSA is linked with a "High Deductible Health Plan" (HDHP).  They have high yearly deductibles of $1k-$2k, depending on the plan (which you can use saved HSA money to pay) but have maximum deductibles of about $5000 (or $10,000 per family.)  In other words, you always have to pay at least $1000, but not ever more than $5000.

Each plan also has a monthly premium you have to pay (around $90) but about 60% is placed into your HSA (called "Premium Pass Through"-- you are in essence paying money to yourself, and the rest to the plan.)  Each plan has different premiums, minimum and maximum deductibles, and penalties/enticements to use network services.  These are summarized here, and in slightly more detail here.

Look, you can argue the social policy ramifications of this all day.  But don't look a gift horse in the mouth.

By the way, you may be fascinated to know what is an allowable medical deduction.

  • Abortions
  • Acupuncture
  • Home improvements for health reasons (elevators, widening a doorway,"lowering" kitchen cabinets)
  • Fertility enhancement
  • Lead paint removal
  • Legal fees to get healthcare
  • Medical conferences and transportation (if the conference is about your/your family's illness)
  • Psychoanalysis
  • Transportation to healthcare services (gas, bus, etc)
  • Weight loss programs
  • Wigs
  • Vasectomies