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HSAs: Affordability Vehicle or Tax Benefit?

The health-insurance vehicle may be benefiting the people who need it least.

Health savings accounts, which have been touted as a way to make health care more affordable, are becoming more popular all the time.

But they may provide more tax benefits to the wealthy than health benefits to the millions of uninsured looking for affordable medical coverage.

A recent General Accountability Office report found that average adjusted gross income for HSA participants was $139,000 -- more than double that of nonparticipants. Over half of people eligible for HSAs don't participate in them, according to the report.

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"This new piece of information confirms our worst fears," says Gail Shearer, director of health-policy analysis at the Consumers Union. These types of medical savings accounts "appeal disproportionately to people who have higher incomes and people who are healthier."

HSAs allow individuals with only qualified catastrophic coverage plans -- plans with high deductibles but relatively low monthly premiums -- to save up to $2,900, tax-free, every year to pay for medical expenses. Funds not used one year roll over into an individual's account the following year.

Proponents argued that HSAs would make health care more accessible by allowing individuals and employers to buy into plans with lower premiums and would discourage people from buying unnecessary medical services.

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As of January 2007, more than 4.5 million people had HSAs, according to the research arm of industry group America's Health Insurance Plans. But the number of uninsured continued to swell even as HSAs become more popular: 47 million people were uninsured in 2006, up from 39 million in 2000, according to the most recent Census Bureau figures.

The actual number of uninsured individuals is likely much higher: Individuals who have insurance for only part of the year are not counted as "uninsured" by the survey.

For healthy individuals who can afford to make large contributions, the benefits go beyond medical: After 65 participants can withdraw income -- penalty-free -- and use it on nonmedical expenses.

Money deposited into an HSA can be deposited pretax or claimed as an above the line deduction, earnings grow tax-free and no taxes are taken out when funds are used for qualified medical expenses. Though younger people who withdraw funds for nonmedical expenses are subject to taxes and a 10% withdrawal penalty, people over 65 can use the money for other expenses, and it's taxed only as income.

Essentially, for the healthy, (or for those who get into a more comprehensive insurance plan before they get sick) HSAs can function as something akin to an IRA.

"A health savings account is a good deal and all Americans should consider it," said President Bush in 2003 after signing the legislation which enabled HSAs. "Every year, the money not spent would stay in the account and gain interest, tax-free, just like an

IRA. And people will have an incentive to live more healthy lifestyles because they want to see their health savings account grow."

Whether the accounts are also helping the people who most need money for medical care remains to be seen.