Health Savings Accounts and Obamacare

Posted on November 20th, 2010 in Health Care, Newsletter Articles, Taxes by wayne

The Patient Protection and Affordable Care Act (PPACA), commonly called Obamacare, has altered much of the traditional health insurance landscape.  One health insurance plan that has remained virtually unchanged is the High Deductible Health Plan (HDHP), which can be combined with a Health Savings Account (HSA.)

The only modifications that PPACA made to HSAs were to:

  1. Restrict the use of tax-free dollars to purchase over-the-counter drugs not prescribed by a doctor and,
  2. Increase the tax on HSA distributions that are not used for qualified medical expenses from 10% to 20%.

It is important to understand that an HSA receives better tax treatment than any other savings approach.  Annual contributions to an HSA are fully deductible in the tax year in which the contribution is made, just like an IRA.  What makes an HSA unique is that all of the funds contributed plus all of the growth and income from an HSA can be withdrawn tax free to pay for qualified health care expenses, just like a Roth IRA.  An HSA is the only investment vehicle which receives both immediate tax deductibility and tax free withdrawals, as long as the funds as are used to pay for qualified health care expenses.

When HSAs are fully funded each year, the combination of lower cost health insurance through an HDHP with the generous tax treatment of an HSA, should make this approach to health insurance a virtual “no-brainer” for many people. If your family’s taxable income is above $68,000 (the beginning of the 25% marginal federal income tax bracket) and you contribute the family maximum of $6,150 to an HSA, the after tax cost of an HDHP will be always be less than a the cost of a traditional health insurance plan.

If a traditional health insurance family plan costs $400 per month, the High Deductible Health Plan will cost approximately 20% less or $320 per month.  The HDHP appears to save only $80 per month or $960 per year.  If the traditional health plan has an annual deductible of $1,000 and the HDHP has a $3,000 deductible, the $960 yearly savings may not be worth the risk of possibly paying $2,000 more in deductible expenses.  This is true, until we consider the after tax cost of an HDHP/HSA combination.

Since tax free HSA funds can be used to pay the medical expenses required for the HDHP’s deductible, the “before tax” deductible cost is the same as the “after tax” deductible cost of $3,000.  With the traditional plan, medical expenses are paid with after tax dollars.  Thus, if a person is in the 25% federal income tax bracket, a $1,000 deductible actually requires $1,333 in pretax dollars. On a pretax basis, the difference in deductibles is $1,667, not $2,000. Thus, the traditional plan, costing $960 more would provide a maximum “savings” of ($1,667 – $960) = $707.

When an HSA is fully funded, the savings by using an HDHP become significant.  For a family with taxable income over $68,000, a $6,150 HSA deposit will provide an immediate federal income tax savings of at least ($6,150 *25%) = $1,537.50.  By including the HSA contributions income tax savings, the HDHP plan costs $830.50 less ($1,537.50– $707) than the traditional plan.   And this is in a “worst case” scenario, where the annual health care costs exceed the $3,000 deductible.  If annual medical expenses are only $1,000, the HDHP/HSA combination would cost $2,830.50 less than a traditional plan.

If you are in a higher federal tax bracket or if you pay state income taxes, the HDHP/HSA savings are even greater.  Plus, HSA funds that are not required for immediate health care expenses can continue to grow in the HSA, on a totally tax free basis, until they are eventually withdrawn for qualified medical expenses.

If your family taxable income exceeds $68,000 and you have an HDHP available, choose the HDHP and fully fund the HSA.  Your financial advisor can provide a personal financial analysis to demonstrate what you will save with an HDHP/HSA combination health plan.

Thanksgiving, a Time to Celebrate Abundance

Posted on November 20th, 2010 in Financial Abundance, Newsletter Articles by wayne

For me, Thanksgiving is a time to express gratitude for my many blessings and to celebrate abundance.   It is also a time to reflect upon the seventh step in the Seven Steps Toward Financial Abundance, “Have Faith in Your Continued Financial Abundance.”

In these times of high unemployment, investment uncertainty, political turmoil and international tensions, it is fair to ask how anyone can have faith in their continued financial abundance.  While we have no control over these uncertainties, we can control most of our financial decisions.  Let’s consider what we can control as we look at the Seven Steps Toward Financial Abundance.

Step 1 – Spend Less Than You Earn

The first step on the path to financial abundance is save each payday.  This may be accomplished by contributing to a company sponsored retirement plan.  Another approach is to “pay-yourself-first.” “Pay-yourself-first” means making your first payment each payday to a savings/investment fund.   This fund can be used to buy a first house, pay for children’s education, help fund retirement or establish an emergency fund.

Finding a way to save at least 10% of after tax income will set you on the path toward financial abundance.

Step 2 -  Maximize Your Financial Resources

If you have a company matching retirement plan, contribute at least the maximum amount that will receive a company match.  Company matching contributions are “free money,” guaranteeing an immediate investment return on your retirement savings.

When saving for children’s education, Section 529 College Savings Plans reduce your taxes.  No taxes are ever paid on the growth and income from these plans when the funds are used for a family member’s college education expenses.

For most people, a high deductible health insurance plan (HDHP) combined with a fully funded Health Savings Account (HSA) provides lower health care costs.  Contributed HSA funds are immediately tax deductible (like an IRA) and their growth and income are never taxed (like a Roth IRA) when used for health care expenses.

Use all possible strategies to maximize income and growth from financial resources.

Step 3 -  Minimize Your Taxes

A spouse with no earned income may be eligible for a “spousal IRA,” allowing for a fully tax deductible annual contribution of $5,000 ($6,000 if spouse is over age 50.)

The American Opportunity Tax Credit provides for a refundable tax credit of up to $2,500 annually, if you are paying for a child’s college education.

Donating appreciated long term stocks for charitable giving provides a charitable deduction on the stock’s full value plus no taxes are due on the stock’s appreciation.

Every dollar saved through tax reductions helps build financial abundance

Step 4 – Pay Close Attention to Your Investments

Regardless of your approach to investment management, the investment approach implemented should be safe enough for you to sleep soundly at night.  If you use an investment advisor, investigate all potential conflicts between the advisor’s method of compensation and your best interests.  Remember, you are responsible for your investment success.

Step 5 – Protect Your Financial Resources

Appropriate insurance will protect your financial well being.  While the need for health, life and property insurance is often understood, disability and long term care insurance are sometimes overlooked.   Without insurance, a serious, long-term disability can destroy even the best financial plan.

Protection from catastrophic financial risks is critical to your financial abundance.

Step 6 –Control of Your Personal Finances

While many financial events are uncontrollable, we can control our spending habits, make the decision to save for our family’s financial future and get dependable financial advice on investments, taxes and risk management.  These actions help to maximize financial well-being.

The courage to control what we can provides us with significant power over our personal finances.

Step 7 – Have Faith in Your Continued Financial Abundance

Faith is a defined as belief that is not based on proof.  When we implement the first six steps, everything we can control has been done.  Having faith in our continued abundance helps diminish fears that can lead to inaction.  Faith in continued abundance is an important step on the path toward financial abundance.