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With health care costs rising at a 15 percent-plus gallop each year, it’s no wonder that small firms need to rein in expenses any way they can. And the newly created Health Savings Account just might offer the relief they’ve been seeking. Only available since January 1, 2004, HSAs work in much the same way as individual retirement accounts. In fact, they’re being touted as medical IRAs.An HSA plan consists of two basic components: a tax-sheltered savings account and a qualifying high-deductible insurance plan. Individuals or their employers can take a tax write-off for contributions made to the account, up to the amount of the insurance policy’s annual deductible. The deductible must be at least $1,000 for individual coverage and $2,000 for family coverage. Another limitation: For 2004, contributions are capped at $2,600 for individuals and $5,150 for family plans. The accumulated deposits can be used to pay for routine medical care and even vision, dental and alternative therapies, which normally aren’t covered by traditional insurance policies. Unlike Flexible Spending Accounts, any money left over at the end of the year rolls over to the following year and the money continues to grow tax-free. HSAs are portable and employees can withdraw funds for any purpose at age 65 without penalty, so they can also be used to shelter retirement savings from taxes. Income tax will have to be paid unless the money is used for health care. “What a great way to save for your medical expenses later on,” says Pamela Dumonceau, a financial planner with Consistent Values in Aurora, Colo. “Because let’s face it, at age 65, you’re going to have medical expenses.” Some companies are eager to establish HSAs because they cost less than traditional insurance plans. The high deductibles can cut the cost of premiums in half. What’s more, HSAs provide an incentive for employees to make judicious health care decisions — an important factor in keeping premium costs down. Critics warn that HSAs are best suited for young people with few health care problems. Older workers with recurring illnesses can quickly drain their accounts by paying for frequent routine care. That’s what Richard Solomon and his brother Paul, trial lawyers in Lawrence, N.Y., are grappling with. They started looking at HSAs this year because their high-deductible catastrophic plan offered by Mutual of Omaha will no longer be available to them. They like the high-deductible plan because they’re young and healthy, so they pay only for what they need. But they worry that they may not find the right insurance plan to work in conjunction with the HSA account. “It balances our need for a high-deductible a la carte plan plus coverage if something really awful happened,” says Richard Solomon. Ilana Polyak is a New York City-based freelance writer. Her work has appeared inMoney, SmartMoney andThe New York Times . E-mail: [email protected] .

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