From the Department of “Stop and Think”.

Colleen Debaise, writing in today’s Wall Street Journal thinks she has found a flaw in Health Savings Accounts.  A flaw that’s titled Unhealthy Strategy?

Well, her logic has a flaw big enough to drive an ambulance through it, with room to spare.

Here’s her article, see if you can spot the flaw.

Unhealthy Strategy?

 - Wall Street Journal, Print Edition, Colleen DeBaise
March 12, 2007

Health savings accounts are increasingly being used to stash retirement money. That may not be the smartest approach.

For
some people, health savings accounts are becoming less about paying for
health care now and more about saving for expenses in retirement.

HSAs,
created by the federal government in 2003 chiefly as a way for
employers to save on rising health-care costs, put the onus on
individuals to pay for medical expenses and negotiate the best prices
for procedures. The accounts allow individuals with high-deductible
health-insurance plans to use pretax money to cover their medical
costs. They can invest the money tax-free until they need it and pay no
taxes on the investment growth and withdrawals as long as the money is
used for qualified medical expenses.

HSAs also come with a perk
that’s fast becoming their most enticing feature: the ability to roll
over unused money year to year — allowing people to potentially build
up savings that they can use to pay for medical costs in retirement.
The nonprofit Employee Benefit Research Institute estimates that
medical expenses could reach as much as $164,000 for today’s
65-year-old retiree who lives another 20 years.

In fact, many
individuals who open an HSA seem to value it more it as a
retirement-savings vehicle than as a health-care plan, says JoAnn Laing
Mills, author of the Consumer Guide to HSAs and president of
Information Strategies Inc. in Fort Lee, N.J., a research firm that
tracks HSAs. “This is a trend that we’re seeing,” she says. “People are
putting in as much as possible, and not touching it. They are not
paying current medical bills with it. They’re maximizing the
contributions because of retirement.”

But individuals should
consider their overall physical and financial health before deciding to
hoard away money in their HSAs. As a savings vehicle, HSAs really only
work best for people who can afford to pay current medical costs with
other money, so that the HSA money can accumulate. And financial
experts stress that since there’s no guarantee that individuals won’t
need to tap the money sooner, rather than later, to pay for unforeseen
medical costs, HSAs should be used in tandem with 401(k)s, IRAS and
other forms of saving — not replace them.

Currently, an
individual can contribute up to $2,850 a year to an HSA, and families
$5,650. Those who are 55 and older can contribute an additional $800
each year. The amounts are adjusted annually.

Socking It Away

Chris
Bateson opened a family HSA to cover himself, his wife and young child
when his employer switched to HSAs in 2005, from a traditional Blue
Cross plan.

Mr. Bateson, a finance director at
PrintingForLess.com in Livingston, Mont., says he will use pretax
dollars from the HSA to help pay for medical costs if he and his wife
have a second child. But other than that, he says he’ll pay most
incidental medical expenses — such as routine doctors’ visits or
prescription drugs — out of pocket.

“I really do intend to
preserve this for later, in order to protect my retirement funds,” he
says of the HSA. “I learned a long time ago, if given the choice
between spending money now and putting it away for retirement, I’m the
type to put it away.”

Mr. Bateson, who has maximized his yearly
contributions to his 401(k), believes the HSA is a better
retirement-savings vehicle. At retirement, money that comes out of his
401(k) will be taxed, while money that comes out of his HSA for medical
expenses won’t be. “There aren’t many ways to permanently protect your
income from taxes — and this is a big one,” he says.

‘Math Matters’

Using
an HSA as a retirement-savings vehicle is not for everyone, however.
Critics say the accounts only provide a retirement benefit to those who
are young, healthy and financially secure enough to pay for medical
expenses on their own.

MEDICAL PLAN

- What’s New:
More people are choosing to hoard money in health savings accounts for
retirement, rather than using funds to pay for current expenses.

- The Advantages:
Money could grow considerably over time, leaving more to cover medical
costs at a time when many people live on a fixed income.

- The Pitfalls:
Using HSAs as a primary retirement fund is risky, especially for people
with chronic conditions or little disposable income since they may need
to tap accounts earlier rather than later.

Keep in mind, an
individual who opens an HSA must use its high-deductible plan as his or
her principal health insurance. Typically, those plans only cover
catastrophic events, such as hospital stays and surgery. “I wouldn’t
recommend that someone who has diabetes jump into HSAs” both from a
health and retirement standpoint, unless you have plenty of
discretionary income, says Tom Schneider, an independent financial
adviser in Farmington, Conn. Frequent doctor visits and health-care
expenses could easily eat up the money in the account, leaving little
– if anything — to roll over from year to year. “You really should be
healthy to take advantage of it,” he says.

Even healthy people
who are thinking about switching to an HSA should tally expected
medical costs and then see how much of that can be covered with
discretionary income, says Jerry Ripperger, director of consumer health
for Principal Financial Group, an HSA provider in Des Moines, Iowa.
“Math matters at the end of the day,” he says.

And you never
know when you might need the money, as serious — and costly — health
problems can arise unexpectedly. So advisers say HSAs should be viewed
as investments that can be easily liquidated.

Mr. Ripperger
recommends that people investing HSA money keep a portion of the
balance that equals the deductible amount in a conservative
money-market account, which is easy to access. Under the law, the
deductible must be at least $1,100 for an individual, or $2,200 for
families. Often, people opt for an even higher deductible — as much as
$2,500 for an individual, and $5,000 for a family — to save on
premiums, he says.

He says the balance can be invested in more
aggressive stock funds. And for individuals who can easily cover
deductibles or other medical expenses with out-of-pocket money, “it may
be a totally appropriate strategy for them” to place all HSA
contributions in mutual funds, he says.

But some people,
looking to maximize their potential investment growth for retirement,
are putting money into less-liquid and riskier places. Hugh Bromma,
chief executive of Entrust Group, a retirement-plan administrator in
Reno, Nev., says a handful of clients are choosing investments that
combine money from their HSA, IRA and 401(k) to buy real estate. Some
are even looking to alternative investments like funding the projects
of oil-drilling companies.

It’s a gamble for higher returns, he says, and “it’s not for the unwary or the people who are risk-averse.”

Small Piece of the Puzzle

Most
advisers recommend investing HSAs much like a 401(k) or an IRA,
typically in mutual funds. And don’t get too caught up in the notion of
using an HSA to build a big nest egg — a common sales pitch by HSA
providers, the government and employers who switch to them.

“The
biggest selling point is for the employer to lower their medical costs,
and then for the employee to control how you spend your medical”
expenses, says David Schwartz, president of First Capital Equities, a
wealth-management firm in Great Neck, N.Y. “I think they were really
designed to do that, not add extra money to your retirement.”

Don
Rotanz, a self-employed real-estate investor in Chalfont, Pa., is
trying to strike a balance. Mr. Rotanz, who opened an HSA to cover his
family’s medical expenses when he left his corporate job two years ago,
says he uses his pretax contributions to simultaneously pay for his
children’s braces and build an extra nest egg for retirement.

But
he views the account as his health plan, first, and part of his overall
retirement strategy, second. He also has a Roth IRA, a 401(k) from his
previous employer and investments in several rental properties, all of
which will provide a stream of income in retirement. “So this is just
one more thing,” he says. “It’s a piece — but it’s a small piece.”

–Ms. DeBaise is an associate editor at SmartMoney.com in New York.

The flaw in all this breathy prose hyperventilating  about HSA’s.

The author is oh-so-worried about HSA’s accumulating money in them when the owner can’t afford to pay current expenses.

Yoo…hoo….Earth to Coleen….. if somebody DOES run into trouble paying current medical expenses, they they will take the money out of the HSA!

Just because I’m planning to let the money accumulate and grow for 25 years doesn’t mean I can’t change my mind in different circumstances.

And, surely I’m better off with money saved than money NOT SAVED.

Topics: Health Savings Accounts (HSAs) |

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