The ins and outs of Health Savings Accounts

Although some business owners have had little choice, they may feel guilty about having to offer only high-deductible health insurance coverage to their employees. Well, one hopes the new Health Savings Account (HSA), effective this year, will help set their minds at ease.

To open an HSA, participants must have a relatively inexpensive but high-deductible health plan. (An example of a high-deductible plan is when coverage begins after you pay the first $1,000 for individual coverage or the first $2,000 for family coverage.) They can use funds to cover the deductible and other health-related expenses for themselves and their spouses and dependents.

HSAs are flexible: You or your workers could set one up and make contributions to it, participants need no earned income to create one and, unlike flexible spending accounts, account balances roll over from year to year. When participants reach age 65, they can use any remaining funds to supplement their income — the assets will be subject to income tax, but no penalties.

But there are drawbacks. For example, you and your workers can contribute only up to the amount of the health plan deductible (in 2004, up to $2,600 for individuals and $5,150 for families) and employees can’t be covered under another medical plan. And HSA funds used for nonqualified medical purposes are taxable and subject to a 10% penalty.
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Here’s how the Health Savings Account works:
You buy a tuition certificate that you can use at member colleges. (Currently more than 220 participate.) Let’s say that your child plans to begin college in a decade. Assuming tuition continues to increase at about 7% per year, your tuition bill will be about $50,000. But by creating an Independent 529 plan and buying a tuition certificate for $20,000 (the current cost of attending a private college), you’ll save about $30,000.Keep in mind that participating in an Independent 529 plan offers no guarantees that your child will be accepted to the college. If your child does not attend a private college operating in this plan, you can roll over the assets into another family member’s account or into a state-sponsored 529 plan. You may opt for a refund, but there is a 10% penalty. Just like other education savings plans, your child’s or grandchild’s financial aid package may be affected by an Independent 529 plan. Aid eligibility may be reduced dollar for dollar.

Extra, Extra: Independent 529 plans
Are you worried that a child or grandchild won’t be able to attend a private college because of the costs? (This year, tuition at a private four-year college was approximately $20,000 on average, according to the College Board.) if so, consider an Independent 529 plan, introduced just last year, which allows you to lock in tuition rates and fees at participating private institutions at today’s prices. And this prepaid tuition plan offers tax-deferred growth and tax-free withdrawals until 2010. (But don’t get this program confused with state-sponsored prepaid 529 plans, which also can allow you to lock in future tuition rates at today’s prices.)