Ways to save for medical bills (The San Francisco Chronicle)

Kathy O’Loughlin of San Francisco has been buying her own insurance since she retired last year, so when she read about tax-advantaged health savings accounts in January, she started shopping for one.

Almost a year later, she still has not found one. “I called a couple different mutual fund families, I went to a couple banks, they didn’t know what I was talking about at all,” she says. Even though she used to be a financial planner, O’Loughlin says she finds the accounts “confusing and frustrating.”

HSAs will never be simple, but they are getting a little easier to find.

At least eight insurance companies are now selling HSA-eligible health policies to individuals in California. Four of them — including biggies Blue Cross of California and Blue Shield of California — are offering them with an optional savings account.

At least three dozen banks or trustees are opening health savings accounts for customers nationwide, although most of them are not household names. To open an account at one of these institutions, you will have to first obtain an HSA-eligible insurance policy.

To maximize your annual contributions to an HSA, it’s best to buy a qualifying high-deductible health insurance policy in January. If you are thinking about getting one, here are some rules, tips and Web sites where you can find information:

— Eligibility: To qualify for an HSA, you must have a qualified high-deductible health plan, you may not be covered by other medical insurance, you can’t be eligible for Medicare and you can’t be claimed as a dependent on someone else’s tax return.

If you have a flexible spending account (which lets you set aside pretax dollars for medical expenses on a use-it-or-lose-it basis), you generally cannot have an HSA unless the flexible spending account can only be used for vision and dental (not medical) expenses.

For more information, go to www.treas.gov and click on Health Savings Accounts HSA.

— The insurance: To open an HSA, you must first buy a high-deductible health insurance policy that meets myriad federal requirements.

The annual deductible must be at least $1,000 for an individual and $2,000 for a family. After the deductible is met, the insurance company starts paying for some but not all of your expenses.

Once the customer has paid a certain amount out of pocket, the insurance company picks up the entire tab. To qualify as an HSA policy, this out-of-pocket maximum may not exceed $5,000 for an individual or $10,000 for a family.

If the plan will pay part of your medical expenses before you reach your deductible for the year, it’s not an HSA policy, with two exceptions: It can provide coverage before the deductible for preventive care. And until Jan. 1, 2006, it can provide a separate rider for prescription drug coverage with a customer co-payment.

To make sure the policy meets these and other requirements, ask the insurer if it is HAS-compliant.

— The savings account: Next, you must find a bank or other financial institution that offers health savings accounts.

The financial institution will ask if you have an HSA-eligible policy, but it probably won’t make you prove it.

“The IRS says no proof is required,” says Cora Tellez, chief executive of Sterling HSA in Oakland.

Each year, you can deposit into the account an amount equal to your annual deductible — but not more than $2,600 for individuals or $5,150 for a family. People older than 55 can make additional catch-up contributions.

You get a tax deduction for money you put in, even if you don’t itemize deductions.

The money grows in the account tax-free and remains tax-free when you take it out, if you spend it on qualified medical expenses. If you spend it on something else, you will owe income tax and, if you are under 65, a 10 percent penalty.

You can pay for medical expenses out of your account with a check and/or debit card. If your health care provider won’t accept that form of payment, you can generally pay with cash or a check and reimburse yourself out of a health savings account.

The money can’t be used to pay health insurance premiums until age 65, when it can be used to pay some premiums.

Neither the bank nor the insurance company will check to see if you are spending your HSA dollars on medical expenses. But if you get audited, the IRS could demand proof.

“In many ways, this is a relationship between the taxpayer and the IRS,” says Tellez.

If you don’t use the money in the account one year, it continues to grow and can even be passed on to your heirs.

You can usually invest your money in a range of options, from FDIC-insured savings accounts to uninsured money-market, bond and stock funds. Some institutions will make you keep a certain sum in a savings account or money-market fund before you can start investing in stock or bond funds.

You have until April 15, 2005 to open an account for 2004. However, your allowable contributions for 2004 will be pro-rated based on how long you had your high-deductible policy this year.

For example, if you got your HSA-eligible policy on July 1, you could only put in one-half of your deductible for 2004. That’s why, if you want to maximize your contributions, it’s good to start your policy early in the year.

— Integrated accounts: You can choose one company for your health policy and a separate company for your savings account.

To make things easier, some insurance companies are partnering with financial institutions to market an integrated plan that lets you enroll in a health plan and savings account.

In the last two months, Blue Cross of California has partnered with JPMorgan Chase, and Blue Shield of California has teamed up with Wells Fargo to offer one-stop HSA shopping. Both will let you buy the policy with or without the savings account.

Likewise, some financial institutions, including Wells Fargo, will open HSAs for customers who have eligible health plans from insurance companies that are not their partners.

The integrated approach streamlines the enrollment hassle. But the best health plan for you may not be paired with the best savings account for you.

Dan Perrin, executive director of the HSA Insider newsletter and Web site, says consumers should focus on the health plan first and the savings account second. In the early years, you won’t have that much money in the account.

When you have more in the account, you could move it to a financial institution with better investment options. You can move an HSA from one institution to another once a year.

Perrin’s site, www.hsainsider .com, is a good place to find insurance companies offering HSA policies in California (and other states) and financial institutions offering HSA accounts nationwide.

The information on specific accounts is provided by the vendors. The site has a wealth of information on HSAs, but don’t expect to find anything critical. Perrin is an unabashed fan.

— Fees: On top of the high cost of insurance, many HSA plans charge start-up fees, monthly account maintenance fees, policy fees, transaction fees (for using checks or debit cards) and/or account closure fees.

Beware of such fees: They could offset juicy interest rates or low premiums.

— Are HSAs for you: If you have an individual policy with a low deductible and you are healthy, you could be better off in an HSA. Because it has a higher deductible, the premium will be cheaper, plus you get all the tax benefits of an HSA account.

If you already have a high-deductible policy, an HSA policy could be cheaper or more expensive, depending on the features.

For example, a Blue Shield customer living in San Francisco, age 40 to 44, would pay $100 a month for an HSA-eligible policy with a $2,400 deductible, compared with $148 for a non-HSA plan with a $2,000 deductible.

For a family in the same situation, the HSA plan would cost $280 a month compared with $414 for the non-HSA plan.

There are other differences in addition to the premiums and deductibles.

“It’s not the HSA policy that results in the differential. It’s the coverage,” says Gina Stassi, senior director of product and marketing with Blue Shield of California.

The Blue Shield HSA policy comes with or without a Wells Fargo HSA. That account charges a monthly $3.75 fee. The investment options include six Wells Fargo mutual funds. None is FDIC insured.

Blue Cross offers an HSA-compatible policy with a deductible of $3,500 for individuals and $7,000 for families. For a 40- to 44-year-old in San Francisco, the cost would be $86 per month for an individual or $245 for a family.

The Blue Cross policy comes with or without an HSA from Chase, which charges a one-time $32 application fee, $3 per month in management fees, $1.50 per check written, $1 to have a monthly account statement mailed and $25 to close the account.

The Chase HSA offers an FDIC-insured savings account. Sometime next year, it will offer five mutual funds.

John Chew, an insurance broker in San Francisco who sells Blue Cross and Blue Shield insurance, says their HSA policies are very competitive. He says he has received “a lot of interest” in the policies but hasn’t sold any yet. “We’re gearing up people to start the plan Jan. 1,” he says.

— Sleuthing: If you’re shopping for HSAs on your own, be prepared to do some digging.

O’Loughlin, the retired financial planner, heard last week that Kaiser Permanente would begin offering HSA plans with Wells Fargo. (They won’t be available in California until 2006.)

So she called Blue Shield, her health insurance provider, once again to see if it was offering something like that. She was told no — even though Blue Shield is already offering HSAs through Wells Fargo.

A Blue Shield spokeswoman says the customer service rep should have known.

Wells Fargo admits that its reps don’t all know that the bank is offering HSAs to any customer with an eligible policy.

“The problem we have as a large organization with a brand-new product is getting everyone educated about the product,” says John Reynolds, a senior vice president with Wells Fargo.

“We have not formally rolled out the offering to individuals. We’re not planning to until December,” he says.

But it’s girding for a ton of inquiries. “We put information out on the HSA Insider Web site and were overwhelmed with interest from Wells Fargo clients,”

Pender, Kathleen. The San Francisco Chronicle NOVEMBER 21, 2004, SUNDAY


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