You're self-employed. Or you're employed but taking a bigger out-of-pocket hit for health care costs.

You're seeing the writing on the wall about full employer health coverage.

And you're hearing a lot about health savings accounts. Long advocated by the Bush administration, HSAs form the core of the new consumer-driven health care movement designed to help us take charge of health care expenses -- and, just maybe, lower them.

The debate continues, however, about whether lower costs will really be the outcome and whether the less fortunate or less healthy will suffer.

The jury's still out on that one, but I do favor consumer-driven health care just as I favor consumer-driven car prices and a whole lot of other things. Consumers need price visibility and choices so they can manage their own expenses and risks.

How does it work? HSAs allow participants to set aside funds in an IRA-like arrangement, in which deductible funds are set aside to meet qualifying health care expenses.

HSAs must be tied to a so-called high-deductible health plan, or HDHP -- that is, a health insurance policy with minimum deductibles of $1,100 (individual) or $2,200 (family) for 2007.

HSAs are evolving and gaining prominence as financial tools. And that evolution just took a quiet but important step forward, so we should all watch closely.

As a last ditch, 11th-hour effort (and I really mean really 11th-hour), the Tax Relief and Health Care Act of 2006 was passed the Friday night before Congress adjourned for the year, and was signed into law Dec. 20.

No doubt this was a last hurrah of the outgoing Republican majority to drive its health care agenda.

But even as the control of Congress has shifted, I believe this adjustment will set the tone for things to come.

Here are the major provisions:
  • Expanded individual contributions.

    Before, if eligible for an HSA, you could contribute (and deduct) only up to the amount of your actual deductible. Now all participants get the full limit, up to $2850 per year for individuals, $5,650 per year for families. And that amount will be indexed for inflation. This is powerful, as I'll show below.
  • Employers can play more, too.

    More employers realize they can save on health insurance costs by buying high-deductible health plans and depositing part of the difference in employee HSAs. The new law expands the power to do that, especially for lower-paid workers. You'll see more employers using HSAs to attract and retain workers.

Click here for the video version of this story from Jennifer Openshaw.

And two more hidden gems that are not big now but could get huge:
  • One-time IRA rollover.

    Now you can roll IRA funds into an HSA. This is nice, especially if you've met retirement objectives and are now concerned about health care.

    It's also beneficial to avoid penalties for qualified health expenses or mandatory IRA withdrawals at age 70½. But for now, it can only be done once up to the $5,650 limit.
  • One time FSA rollover.

    Got leftover funds in your Flexible Spending Account? Now, instead of losing them, you can roll them over into an HSA.

    Like the IRA rollover, it can be done only once and is subject to the annual limit. But in the future -- if eventually expanded to allow yearly rollovers -- this takes a huge risk away from FSA accounts.

Now, let's look at the additional savings power.

To the extent that your annual HSA savings exceed your out-of-pocket health care costs, you effectively have another deductible IRA -- or a savings plan specifically aimed to cover higher medical expenses down the road.

Suppose you put $5,650 away, starting at age 42, and withdrew $2,000 per year to cover deductibles, co-pays, and a few dental and over-the-counter medication expenses. The net savings, $3,650 annually (without the inflation adjustment), invested at 6% would grow to some $180,000 by age 65 -- over and above your IRA, 401(k) and other retirement savings plans.

As Congress, the health insurance community and the general public adapt to the idea, HSAs are gaining altitude as a powerful and easy-to-use health and retirement planning tool.

As they ascend, keep those binoculars trained.
Jennifer Openshaw, a passionate advocate for helping Americans improve their finances and build their personal fortunes, is CEO of The Millionaire Zone and America Online's personal finance editor. In addition to appearing regularly on TV shows such as "Oprah" and "Good Morning America" and on CNN, Openshaw is host of ABC Radio's "Winning Advice" and serves as an adviser to some of America's top corporations. Her new book, "The Millionaire Zone," will hit bookstores in April 2007.

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