Health savings accounts, a relatively new option under the Federal Employees Health Benefits Program,
are worth considering during open season — as you weigh your options for health insurance coverage in
2006. Under the right circumstances, participating in a health savings account (HSA) can result in significant tax savings and cash accumulation for medical or retirement living expenses.

An HSA is actually the savings component of a two-part system that must also include a high-deductible
health plan (HDHP). The idea is that if you are willing to elect coverage under a lower-cost health
insurance plan with a high annual deductible, you will be eligible to participate in a special savings plan to help accumulate tax-advantaged funds to help cover your out-of-pocket medical costs — allowing you to partially self-insure. The potential advantage of this scheme is that, if you are careful and lucky, you might actually lower your overall health care costs and keep some of the money in the savings account for other things.

For example, if you are married with children, you could select a plan with an annual deductible of $2,500 and an annual catastrophic out-of-pocket maximum of $8,000 on in-network medical expenses. When you pay your premium, the insurance company will pass through to an associated HSA enough each pay period to accumulate $2,500 by the end of the year. The HSA balance may then be used, tax free, to pay for qualified medical expenses not covered by the health plan. The risk is that you might wind up with more in expenses than you have accumulated in your HSA — a serious risk to consider. In this example, which is typical, it will take at least 3.2 years to accumulate enough in your HSA to cover the out-of-pocket maximum for a single year. That level of savings will take longer if you use any of the funds as you go.

However, if your health cooperates, your HSA balance will grow larger and can eventually be withdrawn,
subject to income tax, and used for any purpose at your discretion. The potential advantage of the
HDHP/HSA arrangement is that you may reserve for yourself amounts that would otherwise be lost to
insurance premiums.

The HSA is generally a tax-deferred, interest-bearing investment account, held by a custodian on your
behalf. It is fully portable and the balance remains available, once established, until the arrangement is
discontinued and the funds are exhausted. Additional catch-up contributions are allowed for participants
age 55 and older. HSAs are not open to FEHBP participants who also are enrolled in Medicare.

Clearly, the risk posed by these arrangements means they are not appropriate for everyone, but for those in the right circumstances they can be an attractive option. HSAs are most attractive to those in relatively good health and with adequate financial resources to comfortably handle the worst possible scenario. They are relatively more attractive to single participants than those with large families and greater odds of serious illness or injury.

These arrangements are definitely not appropriate for anyone with, or likely to develop, chronic health
problems, or for anyone who would be subject to financial hardship by unexpected medical costs in the
first few years of participation.

You can learn more about HSA arrangements at

Written by Mike Miles
For the Federal Times
Publication November 28, 2005