7 Things You Need To Know About Health Savings Accounts

As health care costs continue to soar (medical insurance premiums alone are expected to rise an average of 8.7 percent this year), Americans continue to look for ways to afford medical insurance and to pay the increasing costs of medical treatment. One of the newest weapons in the fight against growing expenses is the health savings account (HSA), though for many the HSA remains an unknown entity. Personal finance guru David Bach recognizes that most people are unfamiliar with the HSA and takes up the task for educating readers on the definition and uses of HSAs, starting with a short description of what HSAs are:

“You can think of an HSA as a 401(k) or an IRA dedicated to paying for your medical expenses. You contribute to the account with pre-tax dollars if you save through your employer’s plan, or your contributions are tax-deductible if you have an individual plan. Contributions are invested much like your retirement savings (investment options vary by provider), which allows for compounded growth of your savings over time. When you have qualified medical expenses, you can use the money you’ve built up in your HSA to pay for them without incurring any tax consequences.”

He then lists seven things we all need to know about health savings accounts:

7. HSAs aren’t the same as HRAs or FSAs.
6. Once you hit 65, the money is all yours — penalty free.
5. HSAs offer real flexibility, and portability.
4. Eligible expenses go beyond those that count against your deductible.
3. You contribute to HSAs just like retirement accounts.
2. You need a high-deductible health plan to qualify.
1. HSAs are essentially tax-free medical savings accounts.

It’s a good, basic overview of what will likely become a more commonplace fixture in many American’s plans to afford quality health care.

For more information on HSAs, check out the Treasury
Department’s brochure on the subject
.

Seven Things to Know About Health Savings Accounts [Yahoo Finance]

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(Photo: james.thompson)

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  1. namenomore says:

    Is the title of this post meant to convey sarcasm or a question?

    Either way, I would like to see more of it.

  2. SadSam says:

    I don’t know too much about HSAs, but it seems like there is one big omission from the list. Until you reach your deductible ($10,000 at my company for a high deductible health plan) you are paying for your own medical care (I wonder – do you get the insurance discount or are you paying ‘off the street’ prices). It probably makes sense if your are single and super healthy and the only reason you would use your health insurance plan is in a big emergency.

  3. t-ray says:

    HSA’s are great, if you’re rich and healthy. Low income families do not benefit from pre-tax savings and worse yet, they often forgo needed preventative care. Women do not have much to gain from HSA’s either. More routine visits to the doctor will result in higher out-of-pocket expenses for women than men. As more and more companies shift to these types of plans, consumers will have less choice in terms of picking a health care provider. With a low premium and high deductible, it unfortunately becomes the only choice for some.

  4. namenomore says:

    I was serious about seeing more question marks…

  5. skinny2 says:

    We’ve had a HSA for almost a year now. The savings is considerable to say the least. Before I was guaranteed to spend $10,800 on premiums (nevermind co-pays and co-insurance) for a healthy family of four. So far we’ve spent $4,000 in premiums and medical expenses. The nice part is we’re still in a network so the doctors only charge us the contracted prices for services. We had hospital lab work that was reduced from $600 down to $85 due to the network contract. Obviously people that get insurance as a benefit from their employer don’t spend this kind of money, but anybody that’s self-employed or without employer benefits should be looking at these.

  6. AD8BC says:

    Interesting article.

    For the longest time I thought HSAs were like the healthcare savings account my company offers where you can deduct pre-tax from your paycheck and use it to pay for your deductibles and any medical bills not covered by insurance… the caveat was, at the end of the year, what you didn’t use you lost (to where, I don’t know).

    I’m going to have to study these and re-analyze my positions.

  7. SadSam says:

    Skinny2 – Thanks for answering my question about in service pricing.

    I’d personally be nervous about going with such a plan as I (always healthy) ended up in the hospital twice this year. I would have been out a full $10,000 under this plan as 2 hospital stays (even with in contract prices) exceed $10,000 after 2 days.

  8. phantomfly85 says:

    You forgot one little, tiny thing: if you don’t use all the money in a year, it goes away.

    *cough*singlepayeristheonlysolution*cough*

  9. MeOhMy says:

    @SadSam: Depending on the deductible and your employer’s contribution it can actually work out in your favor. For instance in my case the monthly premium plus a monthly HSA contribution of 1/12 the deductible is only $30 more than the previous monthly HMO premium.

    But since the deductible is also the out-of-pocket maximum, if I have any major expenses I come ahead compared to the HMO where I would have had co-pays.
    If I don’t have any major expenses I really come out ahead since a sizable portion of my monthly cost is now essentially being paid to myself instead of to the insurance company.

    In theory I really like this idea…the HMO is not sustainable. I haven’t been using it long enough to evaluate how it works in practice.

  10. Tonguetied says:

    I think that HSA’s are a great idea for someone relatively healthy and relatively young, say early 30’s and younger. You can build up ‘equity’ while you in the bloom of health and once you hit the middle age years and start having to see the doctors more often you have a cushion to fall back on.

    I think that starting in your 40’s or 50’s is pushing it.

    I wish they had been around 10 years ago.

    Of course the question will be, how many folks will be wise enough to look ahead and plan for their later years. I think it could be a snowball effect with more and more people every year coming to value what they can get out of HSAs.

  11. Tonguetied says:

    @phantomfly85:

    *cough*wrong!*cough*

    This is a Health Savings Account not a Health Care Spending Account which is a Use it or Lose it setup.

    HSA’s build up over time.

    *cough*singlepayerdoesntwork*cough*

  12. AD8BC says:

    Does the HSA money go away in one year if not used? What about the line “Once you hit 65, the money is all yours — penalty free.”?

  13. kellsbells says:

    I’m still “in the bloom of youth” (25) and when I went off my mom’s excellent healthcare two years ago I was fretting, because of my entry level-salary and invested interest in maintaining me health. I knew my company had a high-deductible insurance plan and I was NOT happy about it.
    Enter the HSA. Since they paid a lower premium, my small company could afford to contribute a fixed amount to my HSA annually. I get to pick where it’s invested. Even though it doesn’t cover my entire deductible it gets me about 60% of the way there. Plus I don’t have to pay the market rates. Even though I only technically have “hazard” dental insurance, which covers emergencies ONLY, I can still pay for cleanings and checkups from my HSA (again, not out of my pocket). Plus the rate is adjusted through my insurance carrier.
    To sum it up: this year I’ve been twice to the lady doctor, once to the sports physician, twice to the dentist, have a $135 prescription filled every three months, and I have yet to exhaust my HSA for the year. Plus it’s earning dividends as we speak. No complaints at all so far from me.

  14. kellsbells says:

    @ad8bc: No, the money simply carries over and builds on any future contributions you make.

  15. RandomHookup says:

    I’m surprised, but I had never heard of this. Way too easy to confuse with the Health Care FSA, which lots of us have at work (even my backward little employer added one of these).

  16. Thorzdad says:

    If you actually have the cashflow to be able to afford to direct money into an HSA and still make the huge premium payments (assuming you’re in a private account), an HSA is an awesome product.

    Unfortunately, it’s the premiums that people can’t afford. Until the simple cost of getting and keeping a policy in the first place is solved, things like HSAs, good idea though they may be, will just be so much window-dressing.

  17. adrock75 says:

    I have an HSA and I really like it. I was paying $500 per MONTH for my wife and I through work and that was a $1500 deductible. I now have a $3800 deductible, pay $189 per month and put money in a high yield savings account every month that is MY money and always will be…

    *cough*singlepayerwillworkbetterthananythingelseandeveryonedeservestobecovered*cough

  18. egs says:

    I looked for, but can’t find anyone offering High Deductible / HSA plans to individuals in New York. Anyone have a lead for me? Would sign in a heartbeat!

  19. CurbRunner says:

    An HSA is a major hassle when you go to have your taxes done by a tax service. None of them seem to know a damn thing about how to work them into your tax forms.

  20. Benny Gesserit says:

    @Tonguetied: Phantomfly may, like me, be from Canada where HSA’s (Healthcare Spending Accounts) exist as part of cafeteria style health benefits, are highly regulated and, as he/she said, disappear in one to two years (depending on the plan.)

    The HSA in this article doesn’t exist, as far as I can tell, up here. I guess it’s tied to your healthcare system and ours is so radically different this HSA can’t really exist.

  21. skinny2 says:

    @sadsam- once you hit your ANNUAL deductible ($5,000 in my case) the insurance kicks in and pays at whatever coinsurance % (90% in my case). So your $10,000 hospital stay would have cost me $5,500 out of pocket. I consider these plans to really only cover major events, which is what insurance should be for IMHO. Keep in mind this isn’t much different than a normal employer plan. My previous non-HSA group plan had a $1,500 deductible and payed 80%. So a $10,000 hospital stay would have cost me $3,200 (deductible plus 20% of balance). The difference is my monthly premiums are $700 less per month. Don’t forget most of these plans have a maximum out-of-pocket as well. I believe mine is around $10,000.

    @curbrunner- just means you might want to find a real tax service provider, not one that hires homeless folks for a couple months a year.

  22. murrayb says:

    PHANTOMFLY85

    Unused HSA dollars roll over each year and are owned by the employee. Moreover employers can and frequently do make contributions to these accounts with the money they save upfront.

    These HSA accounts and high deductible plans frequently have lower out-of-pocket exposure than traditional plans with co-pays and coinsurance requirements that can leave you with a hefty bill if you are hospitalized or have a chronic condition. Carriers are also providing increased incentive to use preventive care and most companies report lower useage of doctor visits and name brand drugs but increased use of preventive care (100% covered under newer plans) and maintenance programs. People on these plans are older, less healthy, and make less money than you would guess – the numbers bear this out in study after study.

    As for single-payer being the answer it’s terrific if you want to get on a four-month wait list for treatment when your cancer will go terminal in two. Also nice if you want to give half your money to a government that will make sure that elected officials get first crack at quality service.

  23. uncleezno says:

    I’m confused. I’m 25, and I get health insurance through my non-profit employer. Blue Cross PPO for $40 a month covers me. I pay $10 for any visit, anywhere, no referrals necessary. If I visit the ER and end up as a patient, everything is covered. If I visit the ER for an outpatient service, I pay $50.

    Do I just have amazing insurance? I don’t make much money. If I leave my current job for something in the private sector, should I expect to pay a lot more for what I’m getting now?

  24. MeOhMy says:

    @uncleezno: I’m no expert but I would consider your employer’s insurance plan to fall under the “awesome” category.

    It’s not necessarily a for-profit vs. non-profit thing as much as other factors such as the company size/demographic and how much the employer is willing to subsidize the costs. You can find good insurance plans in the for-profit sector as well.

  25. skinny2 says:

    t@uncleezno: Sounds like your employer has a pretty good policy. This varies greatly from employer to employer depending on a lot of factors, mainly how much the company is willing to pay, health of employees, etc. I would also imagine if you had a family your premium would be higher because employers are only required to pay a certain percentage of the employees premium. Some pay more than required obviously, but again, it varies.

    I used to have several employees working for me that I provided health insurance. Prices varied a lot depending upon the health of your employees, demographics, etc. For example, when it was just single guys, the policies were ridiculously cheap (less than $100/month). Add a couple child-bearing age women or unhealthy/smokers/etc. and the prices skyrocketed. Now I’m self-employed, married w/two kids and a mediocre policy was running $10,800 annually. And I was still spending $20 on copays, coinsurance, prescriptions, etc. The HSA so far has saved me significant money and really, the only way I’d spend anywhere near the $10,800 in medical expenses is if we have multiple relatively major problems or have another child.

  26. thorzdad says:

    @uncleezno:

    Yes, you have a fantastic policy!

    Just for fun (shock? horror?), go ask your HR person what the company’s share of the cost for your coverage is. Then imagine having to cover that cost all on your own.