Health Savings Accounts – They aren’t for everyone… but may be for many of you

Tuesday, February 3rd, 2009 by Charles Mayfield, CFP®


January marks the 5 year anniversary of the Health Savings Account (HSA) legislation being passed.  I still remember, with such excitement and anticipation, making the first call to one of our clients.  The HSA was going to change the face of employee benefits and healthcare.  I was ready to champion the cause.   Let’s get a few things straight before I go into the mechanics:

  • 1. HSA’s are not health insurance: they’re accounts that you put money into to pay for health care expenses. They work very similar to IRA’s.
  • 2. You must have a High Deductible Health Plan (HDHP) in order to qualify for an HSA.
  • 3. The deductible of your HDHP should coincide with your HSA.
  • 4. As compared to your traditional health insurance plan (HMO’s, POS’s, PPO’s), HDHP plans tie all of your benefits under one single deductible.

Yes, lots of acronyms and room for confusion.

Bottom line:

  • - HDHP plans are designed for the insured to pay the deductible before any benefits are paid out by the insurance company
  • - This is the driving force behind HDHP plans usually being potentially far less expensive that traditional plan designs
  • - All services; preventative, wellness, prescriptions, in/out patient, hospitalization are all covered under the one deductible.
  • - The insured uses money in their HSA Account to pay for the services needed
  • - Money can be contributed by either insured or employer
  • - If money in HSA is not used, it rolls over to the following calendar year
  • - 2009 contribution limits are $3000 for individuals and $5950 for families
  • - Plan designs allow for 100% coverage once deductible is satisfied.

I have an HSA plan and we have several clients with them.  I can’t say that it is a good fit for everyone.   However, I strongly encourage any individual or small business to explore the opportunity.  Why does this approach make so much sense for so many people?  HSA plans don’t cost the insurance companies much money until the deductible has been met.  It is this factor that drives the health insurance premium down.  It may be the case that you rarely go to the doctor.  Most people want protection from catastrophic loss right?  Why pay exorbitant premiums for coverage you’re not using?  Here is a brief example to illustrate my point:

Current situation:

  • - John & Suzy Q Public have a traditional PPO Plan with Insurance Company X
  • - Deductible is $2000 for each of them & $40 to go see the doctor
  • - Premium for their insurance is $700/month
  • - John hasn’t been to the doctor but twice in the last 4 years and Suzy goes once a year
  • - They are spending $8400/year
  • - This does not include cost of doctors visits/checkups

HSA Solution

  • - John and Suzy switch to a HDHP PPO Plan with Insurance Company Y
  • - The deductible for each is $2500 (for a total of $5000)
  • - Premium for the HSA Plan is $450/month
  • - John and Suzy take the $250/month in savings and put that toward their HSA Account each month
  • - Now they are spending $5,400 in premium and saving $3,000 into their HSA Account
  • - If they continue to be healthy, very little of the $3,000 savings will be needed
  • - Whatever money they save, rolls over to the following year.

It’s time to explore the opportunities available with an HSA.  Talk to your financial professional or the human resources director at your employer.  Depending on your situation, this may be a great way to save money and make you a wiser consumer of health insurance.

Any and all earnings in an HSA grow tax deferred. Withdrawals used for medical expenses (must be considered qualified per IRS definitions) are not subject to income taxation.  If funds are withdrawn for any other reason, income taxes apply and any distribution prior to age 59 ½ may be subject to a 10% penalty.

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