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Health Savings Accounts – The Basics, Part 1

Dec 12th, 2009
by jblankenship.
3 comments

physican by a.drianA Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a bank or other US financial institution which allows you to pay or be reimbursed for qualified medical expenses.  The HSA must be used in conjunction with a High Deductible Health Plan (HDHP).  The HSA can be established using a qualified trustee or custodian that is separate from the HDHP provider.  Contributions to an HSA must be made in cash or through a cafeteria plan.  Contributions of stock or property are not allowed.

Benefits of an HSA

There are quite a few benefits to an HSA:

  1. Contributions to an HSA are deductible from income – even if you don’t itemize deductions;
  2. If your employer makes contributions to an HSA on your behalf (such as via a cafeteria plan) the contributions can be excluded from your gross income;
  3. Your account contributions can remain in the account year-after-year until you use them – there is no annual “use it or lose it” clause;
  4. Growth in the account (via interest, dividends, or capital gains) is tax-free;
  5. Distributions from the account are tax-free if used for qualified medical expenses; and
  6. Your HSA is portable – not tied in any way to your employment with a particular employer.  You take the account with you if you change employers or leave the workforce.

Qualifications for an HSA

In order for you to qualify for an HSA, the following conditions must be met:

  1. You have an HDHP;
  2. You (and your spouse, if married) cannot have any other health plan beyond the HDHP, with the exception of another plan that is limited to the following coverages:
    1. accidents,
    2. disability,
    3. dental care,
    4. vision care,
    5. long-term care,
    6. benefits related to worker’s compensation laws, tort liabilities, or ownership or use of property,
    7. specific disease or illness, or
    8. a fixed amount per day (or other period) of hospitalization.
  3. You are not entitled to Medicare benefits (i.e., beginning with the first month that you are eligible for benefits under Medicare, you can no longer contribute to an HSA.  You are still allowed to take distributions from your existing plan, however.); and
  4. You cannot be claimed as a dependent on someone else’s tax return.

Qualified Medical Expenses

Qualified medical expenses are those that qualify for the medical and dental expenses deduction under §213. Examples include amounts paid for doctors’  fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses must be incurred after the HSA has been established.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free amount of the distribution from your HSA.

In Part 2 we’ll cover the contribution limits as well as some of the other special considerations for the HSA.

Photo by a.drian

Health-Care Reform

Sep 21st, 2009
by jblankenship.
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Confused by the ongoing health-care reform debate? If so, you’re not alone. With multiple bills and proposals in play, it’s often hard to get a grasp on even the most basic elements of the discussion. While the outcome of the debate is uncertain, here are some of the major issues that are being discussed.

Universal vs. mandatory coverage

One of the main goals of health-care reform is to make affordable health coverage available to all Americans. To help provide coverage to individuals and families who can’t afford it, most of the proposals provide assistance in various forms, including new tax credits, an expansion of eligibility for Medicaid, and insurance premium subsidies.

In fact, most of the major proposals currently being discussed actually require individuals to obtain health-care coverage (i.e., “mandatory” coverage). Under these proposals, individuals who refuse to get coverage would pay a financial penalty. Similarly, employers would be required to offer health-care coverage or pay a fine.

The “public option”

One of the most significant areas of debate centers on the so-called “public option.” The term “public option” generally refers to the establishment of a government-run health-care plan that would compete with private insurers and provide coverage to millions of uninsured Americans. There has also been some discussion of establishing health-care cooperatives (nonprofit organizations that would be completely independent of the federal government) as an alternative to a government-run health-care plan.

Paying for reform

The costs associated with most of the health-care reform proposals being discussed are significant. The nonpartisan Congressional Budget Office (CBO) estimates that the legislation currently being considered in the House would cost more than $1 trillion over ten years, with a corresponding increase to the federal deficit over that period of time exceeding $200 billion. To help pay for health-care reform, reductions in Medicare spending are built into the House bill. Other proposals to raise revenue include raising taxes on high-income families, and taxing high-end health plans.

In his address to Congress on September 9, 2009, President Obama proposed a health-care reform plan he estimated would cost $900 billion over ten years, and pledged that he would not sign legislation that increased the deficit. The President described a plan in which savings within the current health-care system paid for most of the cost, with at least a portion of any shortfall paid by charging insurance companies a fee for their most expensive policies.

An evolving landscape

There are, of course, many specific provisions being discussed that we haven’t mentioned here, and not all of them are controversial. For example, any health-care reform legislation is likely to tackle some of the current issues relating to pre-existing conditions. The entire discussion is evolving very quickly, however, with new proposals and ideas coming into play daily. The legislation that emerges will affect all of us in one way or another, so it’s important to stay informed.

Medicaid and Retirement Accounts

Jul 24th, 2009
by jblankenship.
2 comments

Statistics are telling us that approximately 25% of us will need some sort of extended long-term nursing care during our lives – and as our life spans increase with improvements in medical care, this number is likely to go up.

Most of us have had situations with family or friends where we’ve witnessed this firsthand – and since Medicare doesn’t really provide much in the way of long-term care benefits, the individual is left with three possible sources to pay for long-term care:

  1. private payments from your savings and other sources
  2. long-term care insurance coverage (LTCI)
  3. Medicaid

old man and sheep by Kris HaamerGiven the tremendous costs for long-term care, many individuals are faced with the distinct possibility that any savings that they have amassed over their lifetimes (and that they hoped to pass along to their heirs) could be quickly wiped out or drastically reduced with a stint in a skilled-care facility.  Then who will take care of the sheep?

Medicaid

Briefly, Medicaid was originally introduced in 1965 as a “safety net” for healthcare, directed to poverty-stricken people.  Along in the late ’80′s, it became clear that this safety net could be quite beneficial to people of modest means, and so the laws were changed to allow for additional beneficiaries of the program through some simple planning.  Later during the early ’90′s, some of the eligibility requirements were tightened up a bit, but there is still benefits to be had for folks who need them.

Eligibility for Medicaid is based upon the amount of assets available – only about $2,000 is allowed to remain in savings vehicles.  Community (joint) accounts are subject to special rules, and depending upon how your state chooses to administer the program, half of these jointly-held accounts could be used as eligible assets.  Other assets, including primary residences, annuities, and life estates, receive special treatment under Medicaid eligibility rules as well.

Retirement Accounts and Medicaid Eligibility

So how are your IRA, 401(k), and other accounts viewed with regard to Medicaid eligibility?  As a general rule, retirement accounts are included as available assets when considering Medicaid eligibility – even if the individual is under age 59½ and otherwise ineligible for distributions without penalty.  This account must be liquidated before the individual would be eligible for Medicaid coverage.

One way to protect assets from liquidation is if the account is in periodic payment status – such as subject to Required Minimum Distribution (RMD) either due to age 70½ requirement or if the IRA is inherited and subject to RMD.  In some states the account in periodic payment status is considered an income source rather than an asset, and so the circumstances might help to protect the account’s assets from being included as a whole for Medicaid eligibility.

For example, if an individual was in RMD status due to being over age 70½, his account would be considered in payment status.  If the account was worth $200,000, this amount would not be counted against him for Medicaid eligility, but the periodic income stream would be.  If he were age 72, his annual required payment from the account would be roughly $7,812, which would be considered for his income budget, approximately $651 per month.  If this was his only income, that amount would be reduced by $60 for personal needs allowances, and the remainder would be paid to the nursing home – with the balance of the cost of the nursing care paid by Medicaid.

If the individual is married and the other spouse is not subject to long-term care, there are allowances made for monthly minimum maintenance needs as well (this varies by state – see the link below for additional information on a state-by-state basis).

What About a Roth IRA?

So, if you’re thinking ahead you’re wondering how this impacts a Roth IRA… since a Roth IRA is not subject to minimum distribution rules.  Rightly so – the Roth IRA is never in a payment status as long as the original owner is living, and as such, Roth IRA assets are counted toward Medicaid eligibility status.  These assets would have to be spent down before the individual could become eligible for Medicaid.

Bottom line…

So the bottom line is that you need to consider lots of things as you think about Medicaid eligibility.  If you have significant assets available, you could be better off to consider a Long-Term Care Insurance strategy, as otherwise your assets might have to be spent down and quite possibly depleted.  Unfortunately there isn’t a “rule of thumb” to use in determining whether LTCI makes sense – each individual’s situation will be a little different, taking into account medical history, family medical history, asset base, age, etc..  This is the sort of analysis that you should do as you near retirement age in order to consider whether or not LTCI or Medicaid could be a part of your future healthcare plans.

4 Things to Consider About Healthcare in Retirement

Mar 29th, 2009
by jblankenship.
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heres-health-by-robert-brookAs we all are painfully aware, the costs and complexity of healthcare are skyrocketing, and nothing seems to be slowing things down.  Granted, it seems like the present administration is making overtures to give the appropriate attention to the problem, but… as we all know, paths to places we don’t want to go are paved with good intentions.  At this point I would not hold my breath for the next great proposal on healthcare costs, there are far too many other fires for this administration to fight in the meantime.

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Recent information from Fidelity suggests that a 65-year-old couple who retired in 2008 can expect lifetime healthcare costs to top $225,000 over their remaining lifetimes.  And that doesn’t include long-term care (nursing home or assisted-living) costs.

Four Things to Consider About Healthcare in Retirement

  1. It’s not solely Medicare. If you haven’t checked into it yet, and you thought Medicare would be your only insurance in retirement, you’re in for a surprise:  with the co-payments, “holes” in coverage, and coinsurance payments, it’s almost a requirement that you have a supplemental healthcare policy to help out – and it ain’t cheap.  Industry averages for a couple, aged 65, in good health start around $7,000 per year, and go up from there.
  2. Retiring early increases the costs. If you’re planning to retire early (and therefore lose employer-provided health coverage) you’ve got to replace it somehow.  These policies are even more expensive than the Medicare supplement policies discussed above – and much more variable due to the complexities of coverage.  This portion of your early retirement deserves (requires!) quite a bit of planning ahead, as healthcare costs could be a significant portion of your monthly expenses in retirement.
  3. It doesn’t help to wait. Are you just starting out to consider your options and are close to retirement?  If so, you’re quite a bit behind the curve – there are several things that could be done in the five to ten years prior to retirement that might help you with the costs.  For example, if you’re a little overweight, or a smoker, rectifying these things five or ten years before retirement can have a significant impact on your costs.
  4. Knowledge is helpful. Health insurers use a special report, called a Medical Information Bureau (MIB) report to help determine your eligibility for coverage.  Think of it like a credit report on your health.  You can order your own MIB report, in order to look things over to see if there are any red flags (much the same as reviewing your credit report).  If you have a denial of coverage on your report or any issues that could adversely impact your ability to get coverage, it’s best to know that up front and work with an agent or broker who specializes in your issues.

Although these things may seem like a lot of work, they’re excellent considerations to take into account as you plan for your healthcare in retirement.  And – most financial planners these days, myself included, can help you work through the decision-making process.  It’s not simple, and mistakes can be quite costly.

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