If you're like most people, you probably don't have time to figure out traditional health insurance, let alone explore alternative options like a Health Savings Account (HSA) to see if one would be appropriate for your situation. In case you haven't already heard of them, HSAs are an alternative to traditional health insurance in that they allow consumers to pay for medical expenses with pre-tax dollars while reserving major costs for a corresponding health insurance plan. The idea is that your total financial outlay will be cheaper.
HSAs are often touted to be an ideal plan for soloprenuers because of the tax breaks and low premiums. So theoretically, an HSA should be a done deal for most of us if it saves us cash flow, right? In reality, like everything in this world . . . it depends. Since there are so many "moving parts" to an HSA, this article will cover HSA basics, and my next article will go through a real life example of factors to consider when trying deciding whether or not an HSA might be appropriate for you. With that in mind, following is a breakdown of the HSA's primary features.
HSA Mechanics. You contribute to an HSA roughly the amount of money that will cover your estimated medical expenses for the year (not including health insurance premiums). Individuals can contribute a maximum of $3,000 and families can contribute a max of $5,950. You can contribute less if you want to. Why are you doing this?
- You get to deduct from your taxes whatever you put into the HSA, regardless of whether or not you itemize deductions. This lowers your taxable income.
- As your money stays in the account, it grows tax-deferred . . . which means you don't have to pay taxes every year on growth or interest. You can leave money in there to pay for stuff in future years, like a surgery or other procedure you know is coming up.
- Depending on which institution is the administrator for your HSA, you will have options on how to invest the money: an interest-bearing account, CDs, money market fund and/or mutual funds.
- You can withdraw the money any time to pay for qualified medical expenses. What are those? There's a lot of them, so here's a list.
- You can also take money out for non-medical purposes, but it will be taxed as normal income and will subject to a 10% penalty if done prior to age 65.
It's actually very easy to get to your money. Typically, an HSA will provide you with a checkbook or debit card for you to use when you pay for a qualified medical expense. You do not need to get approval and you also do not need to submit receipts, although you should save them in case of an IRS audit. You DO need to establish the HSA before you incur medical expenses; otherwise the expenses will not qualify.
You also need the corresponding "HSA-eligible" health insurance plan. This is often referred to as a High Deductible Health Plan, and typically has lower premiums than traditional health insurance plans. Just to be clear: you pay lower premiums with the HSA plan because you are expected to foot more of the incidental costs of your health care. The high-deductible insurance plan provides a limit on your economic output in the event of the catastrophic. Like all plans, there is a ceiling on your deductible, then you usually get to pay a percentage of costs incurred (this is called "coinsurance"). A health insurance plan must meet the following criteria to be considered HSA-eligible:
The health insurance plan must have an annual deductible of at least $1,100 for individuals and at least $2,200 for families.
The sum of the annual deductible plus other annual out-of-pocket expenses required to be paid under the plan (other than premiums) does not exceed $5,500 for individuals and $11,000 for families.
So what are some of the reasons you might NOT want and HSA?
Detractors. Some consumer organizations say that HSAs benefit only healthy, younger people and make the health care system more expensive for everyone else. With group insurance, the younger participants' lack of claims may create a surplus for the insurance company that will offset the older participants' larger and more frequent claims. Sort of like how workers don't pay into their own social security; they are paying for someone else and expect someone to pay for them when they need it.
Consumer satisfaction results have been mixed. One study by employee benefits consultants Towers Perrin found that people currently enrolled in such plans were significantly less satisfied with many elements of the health benefit plan compared to those enrolled in traditional health benefit plans.
In 2006, a Government Accountability Office report concluded that HSA-eligible plan enrollees generally reported positive experiences, but most would not recommend the plans to all consumers. Those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible. Just to clarify, maintenance drugs are medications prescribed for chronic, long-term conditions and are taken on a regular, recurring basis. Examples of chronic conditions that may require maintenance drugs are: high blood pressure, high cholesterol, and diabetes.
So, what's the bottom line? Clearly, it's different for everyone. In my next article, I am going to compare my own health insurance policy to an HSA, and see what would have been the best option for me.