Health Savings Accounts: Are They Just What the Doctor Ordered?

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a health savings account (HSA).

How does this health-care option work?

An HSA is a tax-advantaged account that's paired with a high-deductible health plan (HDHP). Let's look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is "catastrophic" health coverage that pays benefits only after you've satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible.) For 2011 and 2012, the annual deductible for an HSA-qualified HDHP must be at least $1,200 for individual coverage and $2,400 for family coverage. However, your deductible may be higher, depending on the plan.

Once you've satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan's annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $6,050 for individual coverage and $12,100 for family coverage for 2012 (increasing by $100 and $200, respectively, from 2011.) Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

Because you're shouldering a greater portion of your health-care costs, you'll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you're saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA can be a powerful savings tool. Because there's no "use it or lose it" provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren't foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you've built up a balance), you could deplete your HSA or even face a shortfall.

How can an HSA help you save on taxes?

HSAs offer several valuable tax benefits:

• You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
• If you make contributions on your own using after-tax dollars, they're deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
• Contributions to your HSA, and any interest or earnings, grow tax deferred.
• Contributions and any earnings you withdraw will be tax free if they're used to pay qualified medical expenses.

Consult a tax professional if you have questions about the tax advantages offered by an HSA.

Can anyone open an HSA?

Any individual with qualifying HDHP coverage can open an HSA. However, you won't be eligible to open an HSA if you're already covered by another health plan (although some specialized health plans are exempt from this provision). You're also out of luck if you're 65 and enrolled in Medicare or if you can be claimed as a dependent on someone else's tax return.

How much can you contribute to an HSA?

For 2012, you can contribute up to $3,100 for individual coverage (up $50 from 2011) and $6,250 for family coverage (a $100 increase from 2011.) This annual limit applies to all contributions, whether they're made by you, your employer, or your family members. You can make contributions up to April 15th of the following year (i.e., you can make 2011 contributions up to April 15, 2012). If you're 55 or older, you may also be eligible to make "catch-up contributions" to your HSA, but you can't contribute anything once you reach age 65 and enroll in Medicare.

Note: You may be able to make a one-time tax-free rollover of funds to your HSA from a health flexible spending account (FSA), a health reimbursement arrangement (HRA), or a traditional IRA (certain limits apply).

Can you invest your HSA funds?

HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How can you use your HSA funds?

You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can't use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.

There's no rule against using your HSA funds for expenses that aren't health-care related, but watch out--you'll pay a 20% penalty if you withdraw money and use it for nonqualified expenses, and you'll owe income taxes as well. Once you reach age 65, however, this penalty no longer applies, though you'll owe income taxes on any money you withdraw that isn't used for qualified medical expenses.

Questions to consider when weighing your options

• How much will you save on your health insurance premium by enrolling in an HDHP? If you're currently paying a high premium for individual health insurance (perhaps because you're self-employed), your savings will be greater than if you currently have group coverage and your employer is paying a substantial portion of the premium.
• What will your annual out-of-pocket costs be under the HDHP you're considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.
• How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building up a cushion against future expenses.
• Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you're assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.
• Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.
• How does the coverage provided by the HDHP compare with your current health plan? Don't sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.
• What tax savings might you expect? Tax savings will be greatest for individuals in higher income tax brackets. Ask your tax advisor or financial professional for help in determining how HSA contributions will impact your taxes.

IMPORTANT DISCLOSURES The information presented here is not specific to any individual's personal circumstances. To the extent that this material and/or website concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials and/or website are provided for general information and educational purposes only based upon publicly available information. Information throughout these materials and/or website, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable - we cannot assure the accuracy or completeness of these materials and/or website. These materials and/or website do not constitute a complete description of our investment services or performance, and nothing in this information should be interpreted to state or imply that past results are an indication of future performance. There are not warranties, expressed or implied, as to the accuracy, completeness, or results obtained from information contained within these materials and/or posted on this website or any "linked" website.   The information in these materials and/or website may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of CA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.

Evaluating a Job Offer

If you're considering changing jobs, you're not alone. Today, few people stay with one employer until retirement. It's likely that at some point during your career, you'll be looking for a new job. You may be looking to make more money or seeking greater career opportunities. Or, you may be forced to look for new employment if your company restructures. Whatever the reason, you'll eventually be faced with an important decision: When you receive an offer, should you take it? You can find the job that's right for you by following a few sensible steps. How does the salary offer stack up? What if the salary you've been offered is less than you expected? First, find out how frequently you can expect performance reviews and/or pay increases. Expect the company to increase your salary at least annually. To fully evaluate the salary being offered, compare it with the average pay of other professionals working in the same field. You can do this by talking to others who hold similar jobs, calling a recruiter (i.e., a headhunter), or doing research at your local library or on the Internet. The Bureau of Labor Statistics is a good source for this information. Bonuses and other benefits Next, ask about bonuses, commissions, and profit-sharing plans that can increase your total income. Find out what benefits the company offers and how much of the cost you'll bear as an employee. Don't overlook the value of good employee benefits. They can add the equivalent of thousands of dollars to your base pay. Ask to look over the benefits package available to new employees. Also, find out what opportunities exist for you to move up in the company. This includes determining what the company's goals are and the type of employee that the company values. Personal and professional consequences Will you be better off financially if you take the job? Will you work a lot of overtime, and is the scheduling somewhat flexible? Must you travel extensively? Consider the related costs of taking the job, including the cost of transportation, new clothes, a cell phone, increased day-care expenses, and the cost of your spouse leaving his or her job if you are required to relocate. Also, take a look at the company's work environment. You may be getting a good salary and great benefits, but you may still be unhappy if the work environment doesn't suit you. Try to meet the individuals you will be closely working with. It may also be helpful to find out something about the company's key executives and to read a copy of the mission statement. Deciding whether to accept the job offer You've spent a lot of time and energy researching and evaluating a potential job, but the hardest part is yet to come: Now that you have received a job offer, you must decide whether to accept it. Review the information you've gathered. Think back to the interview, paying close attention to your feelings and intuition about the company, the position, and the people you came in contact with. Consider not only the salary and benefits you've been offered, but also the future opportunities you might expect with the company. How strong is the company financially, and is it part of a growing industry? Decide if you would be happy and excited working there. If you're having trouble making a decision, make a list of the pros and cons. It may soon become clear whether the positives outweigh the negatives, or vice versa. Negotiating a better offer Sometimes you really want the job you've been offered, but you find the salary, benefits, or hours unfavorable. In this case, it's time to negotiate. You may be reluctant to negotiate because you fear that the company will rescind the offer or respond negatively. However, if you truly want the job but find the offer unacceptable, you may as well negotiate for a better offer rather than walk away from a great opportunity without trying. The first step in negotiating is to tell your potential employer specifically what it is that you want. State the amount of money you want or the exact hours you wish to work. Make it clear that if the company accepts your terms, you are willing and able to accept its offer immediately. What happens next? It's possible that the company will accept your counteroffer. Or, the company may reject it, because either company policy does not allow negotiation or the company is unwilling to move from its original offer. The company may make you a second offer, typically a compromise between its first offer and your counteroffer. In either case, the ball is back in your court. If you still can't decide whether to take the job, ask for a day or two to think about it. Take your time. Accepting a new job is a big step.

IMPORTANT DISCLOSURES The information presented here is not specific to any individual's personal circumstances. To the extent that this material and/or website concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials and/or website are provided for general information and educational purposes only based upon publicly available information. Information throughout these materials and/or website, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable - we cannot assure the accuracy or completeness of these materials and/or website. These materials and/or website do not constitute a complete description of our investment services or performance, and nothing in this information should be interpreted to state or imply that past results are an indication of future performance. There are not warranties, expressed or implied, as to the accuracy, completeness, or results obtained from information contained within these materials and/or posted on this website or any "linked" website.   The information in these materials and/or website may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of CA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.

Retirement Plans for Your Small Business

A retirement plan is a critical part of a competitive benefits package. Although small business owners can sponsor a qualified retirement plan like a traditional 401(k), profit-sharing, or defined benefit plan, these plans can be expensive to maintain and relatively difficult to administer. Luckily, there are a number of simpler alternatives.

Simplified employee pension (SEP) plans

A SEP plan allows small business owners to set up traditional IRAs, called SEP-IRAs, for themselves and each employee. You must generally contribute a uniform percentage of pay, up to 25%, for each eligible employee (up to $50,000 in 2012), but you don't have to make contributions every year. The plan must generally cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $550 or more during the year.

Your employees don't directly contribute to the SEP plan, although they can make their regular annual IRA contributions to their SEP-IRAs if they choose (SEPs are traditional IRAs and can't accept Roth IRA contributions). All contributions to the plan are fully vested (that is, immediately owned by your employees), and your contributions are fully deductible.

Most employers, regardless of size, can establish a SEP plan. SEP plans have low startup and operating costs, and can be established using a two-page IRS form.

SIMPLE IRA and SIMPLE 401(k) plans

You can adopt a SIMPLE IRA plan if you have 100 or fewer employees who earn $5,000 or more. A SIMPLE IRA plan lets your eligible employees contribute a percentage of their salary on a pretax basis, up to $11,500 in 2012 ($14,000 for employees age 50 and older). Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.

You're required to either match each employee's contributions dollar for dollar--up to 3% of the employee's compensation--or make a fixed contribution of 2% of compensation for all eligible employees. (The 3% match can be reduced to 1% in any two of five years.) Like SEPs, all contributions to the plan are fully vested, and your contributions are fully deductible.

SIMPLE IRA plans are easy to set up (you fill out a short IRS form to establish the plan), easy to administer, and inexpensive to maintain. You can let each employee set up a SIMPLE IRA account at a financial institution of his or her choosing, or you can select the financial institution that will serve as trustee and initially hold all plan contributions.

Note that unlike any other retirement plan, early withdrawals (before age 59½) from SIMPLE IRAs during the first two years of participation are subject to a 25% penalty tax, unless an exception applies. After the first two years of participation, the penalty tax drops to 10% (consistent with other retirement plans).

SIMPLE 401(k) plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. And in most cases, you don't have to perform complicated discrimination testing. But because they're still qualified plans (and therefore more complicated and costly to establish and administer than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven't become popular retirement plans.

But don't rule out a 401(k) plan entirely

No employees? Then there is one qualified plan you should consider--the individual 401(k) plan (also known as a solo 401(k) plan).

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. You can elect to defer up to $17,000 of your compensation to the plan for 2012 ($22,500 if you're age 50 or older), just as you could with any 401(k) plan. Contributions can be pretax or Roth. In addition, as with a traditional profit-sharing plan, your business can make a tax-deductible contribution to the plan of up to 25% of your compensation.

Total contributions to your account in 2012 can't exceed $50,000, plus any catch-up contributions (or, if less, 100% of your compensation). If you're self-employed, compensation is your earned income from your business.

Since an individual 401(k) plan can cover only the business owner and his or her spouse, it isn't subject to the often burdensome and complicated administrative rules and discrimination testing requirements that generally apply to regular 401(k) and profit-sharing plans.

If you're a small business owner and haven't established a retirement savings plan, what are you waiting for? It's time to select the plan that best fits your needs, and the needs of your employees.

IMPORTANT DISCLOSURES The information presented here is not specific to any individual's personal circumstances. To the extent that this material and/or website concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials and/or website are provided for general information and educational purposes only based upon publicly available information.  Information throughout these materials and/or website, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable - we cannot assure the accuracy or completeness of these materials and/or website.  These materials and/or website do not constitute a complete description of our investment services or performance, and nothing in this information should be interpreted to state or imply that past results are an indication of future performance. There are not warranties, expressed or implied, as to the accuracy, completeness, or results obtained from information contained within these materials and/or posted on this website or any "linked" website.   The information in these materials and/or website may change at any time and without notice.    This communication is strictly intended for individuals residing in the state(s) of CA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.