As retirement looms for baby boomers, financial advisers are finding additional uses for their clients' health savings accounts, including covering the cost of long term care insurance.
HSAs, which allow users to stow away dollars and use them for qualified health costs on a tax-free basis, have become a source of premium dollars for LTC coverage, as that allows investors to start putting money toward the insurance on a tax-friendly basis.
“Most of my clients are in their mid-50s and concerned because they have parents who are in long term care,” said Diana DeCharles, an adviser at Pinnacle Asset Management Group LLC. The Shreveport, La., firm manages about $65 million. “A lot of them have high-enough incomes that they can't deduct their [individual retirement accounts], so they get an HSA, and they pay for long term care insurance.”
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As of January, 8 million people used HSAs in tandem with a high-deductible health plan, up from 6.1 million a year earlier, according to America's Health Insurance Plans in Washington. Enrollment in the individual market has also increased, rising to 1.8 million in January from 1.5 million a year earlier. Of that, 53% of individual enrollees were 40 and up.
Anecdotally, advisers reported that banks and clients are catching on to the idea of HSAs, but the concept of finding other health-related purposes for the accounts isn't necessarily popular — even though the
Internal Revenue Service permits it.
For instance, clients may cover LTC insurance contracts with the balance in their HSAs with certain limitations. The insurance must cover only qualified services such as diagnostic, therapeutic and personal-care services, and the contract can't provide a surrender value or reimburse expenses that otherwise would be reimbursed by Medicare.
When reporting deductions from medical expenses for the 2008 tax season, HSA holders were able to deduct between $310 and $3,850 in LTC premiums per individual, with the lower deduction for those 40 or younger and the higher deduction for those 71 and older.
For advisers who have started using the HSAs as a way to cover LTC insurance premiums, clients generally have high income, are in their 50s and are looking for a way to reap tax benefits.
Among Ms. DeCharles' clients are two married physicians, 53 and 55, who participate in a high-deductible health plan and an HSA. For 2009, the couple will be able to contribute up to $5,950, plus an additional $1,000 as a catch-up contribution for the 55-year-old.
Of that, Ms. DeCharles expects to use $1,200 to $2,000 in annual premiums for LTC insurance.
Aside from the tax benefits, clients also pay less for LTC coverage in the end because the premiums are covered pretax, said Diana G. Simpson, managing partner at Fee-Only Planning Professionals LLC, a Birmingham, Ala.-based firm that manages $50 million.
“You're guaranteeing that the premiums are all paid pretax, and you can probably buy more coverage because you can write it off,” Ms. Simpson said.
Investors also give more thought to their LTC coverage choices when they are paying through an HSA, she added. Ms. Simpson also owns an HSA and has been funding an
LTC insurance policy through a 10-year payment plan.
“I'm much more aware of what I'm spending,” she said. “When you pay these high premiums to the insurance company, you'll have that CT scan even if you don't necessarily need it, but now I'm so much more careful.”
Of course, there are also limits. For instance, an HSA with a poorly performing investment will probably require more planning, HSA experts said.
A certain amount of money would have to be held in savings to be kept liquid and cover medical expenses, including LTC premiums, while the portion intended for growth would have to be invested separately, said Reggie Karas, senior vice president of HSAs at Millennium Trust Co. LLC. The Oak Brook, Ill., firm offers HSAs and acts as a custodian.
Ms. Karas added that using an HSA to pay for LTC premiums is more of a tactic for those whose accounts have grown into the $50,000 to $60,000 range, rather than for someone whose account still needs time to accumulate.
Although the HSA has its place as a
financial planning tool, using the savings vehicle to fund LTC insurance or even health benefits via the Consolidated Omnibus Budget Reconciliation Act in the event of unemployment, educating clients and advisers will help both to find more ways to use the account.
“We really look at it as a complement to a retirement plan and another avenue for people to help pay for their medical expenses,” Ms. Karas said. “We look beyond it as a checking or deposit account and more as an integrated account.”
E-mail Darla Mercado at [email protected].
