A Health Savings Account, or HSA, combines the advantages of reduced premiums -- realized through selecting a higher deductible medical plan -- with the ability for Vermont business owners and their employees to accumulate tax-deferred funds (principal, interest, dividends and capital gains) from year-to-year without penalty to pay for current and future "Eligible Medical Expenses". Eligible groups include employers of any size and self-employed individuals. To more likely satisfy the needs of their employees, many Vermont employer-groups offer two medical plans (referred to as a "dual option") with the HSA plan being one selection.

Over the past four years Benefit Design and Strategies has implemented HSA plans with over half of its Vermont group clients while only one employer group decided to return to a more traditional health plan. Benefit Design can evaluate if your company and employees will benefit from the introduction of an HSA plan using an exclusive factual methodology.

Contributions to HSA accounts from all sources are limited to the "statutory limits" established each year by the U. S. Treasury Department. The 2007 limits are $2,850.00 for persons with single coverage and $5,650.00 for those with two-person and family coverage. There is no limit, however, on the amount that can be accumulated in an account over time. Accountholders age 55 and older can make an additional "catch-up" contribution in excess of the statutory limits of up to $800 for 2007. A recent change in the law eliminated the much-criticized pro-ration of contributions to HSA accounts for health plans commencing in the middle of the year.

Upon attaining the age of 65, a participant can use the accumulated savings for any purpose without penalty; however, funds used for non-medical purposes MUST be added to one's taxable income in the year withdrawn.

An HSA account is often confused with the Medical Expense Reimbursement Accounts offered through a Section 125 Cafeteria or Flexible Benefit Plan. The major differences are:

1) the ability to carry over unused funds in an HSA account each year without penalty,

2) the ability of owners, partners in a partnership or stockholders of an S corporation to participate, and

3) the ability to use the HSA account as another retirement savings vehicle.

HSA funds can be used to pay for or reimburse the following eligible expenses:

1. Out-of-pocket health expenses covered by the HSA-qualified medical plan;
2. Certain over-the-counter drugs, other then those used for cosmetic purposes or to promote good health (i.e. multi-vitamins, toothpaste, etc);
3. Vision exams and corrective eyewear, including contacts and solution;
4. Dental fees, dentures and braces so long as the orthodontics is not strictly for cosmetic purposes;
5. Hearing exams and hearing aids, including batteries;
6. Smoking cessation programs, but not nicotine patches;
7. Most naturopathic medical services;
8. Routine physicals, female well-care and diagnostic screening services; and
9. Premiums for long-term care (nursing home/home health) insurance, but not Medicare Supplemental policies.

Check out a more complete list of eligible medical expenses or go to www.irs.gov. You may download the latest edition of I.R.S. Publication 502 here.

ADVANTAGES TO THE EMPLOYER AND EMPLOYEES

• Savings of between 25 to 40% on health insurance premiums compared to traditional low deductible PPO and most HMO plans.
• Owner/partner participation in HSA accounts is permitted (unlike a Section 125 flexible benefit plan).
• Both employer and employee can make contributions into an employee's personal HSA bank account so long as the annual limit is not exceeded.
• Funds in HSA accounts can be carried over to future years and are able to grow tax-deferred. Funds can also be transferred into an investment account and remain tax-sheltered.
• A special provision of the Section 125 flexible benefit law now permits employers to amend their flex plan so that employees can have contributions taken out in pre-tax dollars (free of both income and payroll taxes) and direct-deposited into their respective HSA accounts.
• The carry-over feature of HSA deposits provides an incentive for employees to make wise healthcare decisions, unlike a flexible spending account with the "use-it-or-lose-it" proposition.
• Small employers are able to offer several benefits – dental, vision, complimentary medicine and retirement – all in one simple package.
• Many HSA plans now pay for most preventative care services at 100% for adults and children, and also female well-care.
• Greater employee satisfaction with their medical plan due to expanded medical services and products (such as homeopathic services and over-the-counter medications) that can be paid for from the account.
• Employer HSA contributions deposited into employees' HSA accounts are treated as a business expense by the IRS, and thus tax exempt.