Health account can work as a nest egg

Steve Shirley wasn't instantly sold on a family health insurance policy that carried a $3,000 deductible. But when the vice president of marketing for Guaranty Bank regarded the health plan as something else -- another way to build a nest egg -- he changed his mind. Shirley took advantage of a health insurance plan offered by his employer that features a health savings account, a new creation of federal tax law.

Health savings accounts -- also known as HSAs -- pair a high-deductible, low-premium health insurance policy with an investment account. Instead of making co-payments for health care, you use account money to cover medical expenses up to the deductible or for other expenses that aren't covered.

Accounts are established with employees' pretax money and, often, the employer's matching contribution. The money grows as it's invested; it comes with no time limit on when it must be used, and it belongs to employees even if they leave the company.

HSAs, which remain relatively rare, were created by the Medicare Prescriptions Drug, Improvement and Modernization Act in December 2003. By then, most employers had their benefits in place for 2004, so this is really the first year they have been used.

They will become more common as consumers learn about them from their friends or work colleagues, said Inez Seaney, senior consultant for human resources firm Watson Wyatt.

Turner Investments Partners estimates only about 1 percent of consumers were enrolled in HSAs by the fourth quarter of 2004, and the number probably won't get past 3 percent within the next three to five years.

Workers contribute pretax money to HSAs and can pay the deductible out of the account, along with any other out-of-pocket health care expenses.

The HSA may supplant the flexible spending account, which also lets employees set aside pretax dollars. The main difference is, with flex accounts, the amount must be spent by year's end or it's lost.

"One of the best features is not having the use-it-or-lose-it," said certified financial planner Tom Dwyer with Financial Design Group.

Some consultants say employers must prime the pump by making matching contributions to the accounts, much like a 401(k).

Without the contribution, the benefit appears to be a conspicuously deficient offering, according to Turner Investment analyst Frank Susterisic.

"Unless employers are willing to make generous contributions to HSAs, employees who have become accustomed to the $20 co-payment for health care under the current system will be as likely to open HSAs as to drink a pint of turpentine," Susterisic wrote.

Inside HSAs

• A policy must have a deductible of at least $1,000 for a single person, $2,000 for a family. Must have no more than $5,100 in out-of-pocket expenses for an individual; $10,200 for a family.

• Maximum annual HSA contribution is the lesser of the plan deductible or $2,650 for individuals and $5,250 for a family.

• The pretax contribution, including any employer match, is deposited into an investment account every payday. The money earns returns, it rolls over to the next year when the policy is renewed, and it becomes part of your estate if you die.

• Withdrawals are tax-free for health-care expenses only.

-- SOURCE: LOCKTON DUNNING BENEFIT CO.

WHO BENEFITS

• Young, healthy singles. The lower health-care costs translate into bigger savings accounts.

• Health insurance companies. Coverage doesn't kick in until after high deductibles are met.

• Alternative medicine users. Tax-free funds can be used for doctor-prescribed medicine.

• The uninsured. Price cuts may lure some who can't afford traditional plans.

WHO DOESN'T

• Those with chronic conditions. Regular out-of-pocket expenses make saving difficult.

• Families with young children. If deductible is not waived for preventive care, co-pays may be the way to go.

• People in a lower-income bracket. They have less money to set aside and get little to no tax benefit.

• The elderly. Costly prescription drugs could outweigh premium savings.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.