With health care costs on the rise and lots of confusion about new health care laws, it might seem easier to ignore the whole thing. While tuning out the politicians and insurance companies might be appealing, one option you need to follow through on is having some sort of health insurance. Even if you are young and healthy, what would happen if you were hit with a serious injury or extened illness? A week in intensive care could set you back $100,000. If you don’t have that kind of emergency fund, you need health insurance. If your employer offers a very complete plan at little or no cost to you, that would be a great option. If not, you will have to decide which type of policy makes sense for your needs and budget. While there are several options available, I think the advantages of a health savings account far outweigh other types of health plans.
What is a Health Savings Account Plan?
An insurance policy that is health savings account eligible is a high deductible health plan. Generally, the premiums are less than a plan with a low deductible, the theory being that the savings in premiums will be more cost effective that paying a higher bill each month for coverage you don’t need. To go along with the plan, you set up a separate health savings account at a bank or other institution that offers this type of service. When you have an eligible medical expense, put money into and pay the bill from this account. You can make regular deposits up to the maximum annual contribution limit, or you can put money in only when you have an expense.
Who Benefits from a Health Savings Account Plan?
If you are healthy and only go to the doctor for an annual physical and the occasional illness, this is a great plan for you. If you have a chronic condition that requires multiple doctor visits and several medications, this might not be the best idea.
My husband is a teacher and has wonderful health insurance that is covered in full by his employer. My five year old daughter and I could be added to his plan. It covers most everything with small copays for some services. To be added to my husband’s group plan, the cost is $500 per month. We elected to go through the private sector and purchased a high deductible HSA plan that costs $190 a month, effectively saving $3720 per year in premiums alone. If your annual medical expenses averaged more than $6000 a year, the group plan would probably be the better option.
A huge advantage of a health savings account is the tax benefits. If you have an eligible plan and set up a corresponding HSA account, any money deposited into this account is subtracted from your Mean Adjusted Gross Income for tax purposes. For 2013, the maximum amount you can contribute is $3250 for individuals and $6450 for families, with an extra $1000 “catch up” contribution allowed if you are over age 55. We generally average around $2000 per year on doctor visits, dental visits, and medicines. In our tax bracket, using the HSA to pay medical bills saves $600 a year in taxes.
Last year our income was just over the threshold to include my husband’s master’s program tuition as a deduction. By switching $2000 from savings into our HSA, we qualified for the deduction, which saved an extra $1600 in taxes! You have until April 15 of the following year to contribute for prior year’s tax benefits. If you need some tax help for 2012, you still have time.
Interest earned on HSA money also grows tax free, forever. There is no “use it or lose it” penalty like with flexible spending accounts. If you withdraw money to pay for qualified medical expenses, you will never have to pay taxes or penalties. While I haven’t done it, you can set up an HSA account to invest in stocks, bond, CD’s, or annuities, but always consider volatility and how fast you can get to that money if you need it.
What are Eligible Medical Expenses?
Another wonderful advantage of health savings accounts is the variety of things you can do with them. If you have money in your HSA account, it can be used for regular doctor visits, dental visits, optometrist visits, glasses, contacts, braces, LASIK surgery, medicines, chiropractor visits, physical therapy; the list of eligible expenses is very long. You can even use HSA money for over the counter medicines IF you have a prescription from your doctor. If your doctor recommends that you take vitamins or use aspirin, have him or her write that in a prescription.
Are There Any Penalties?
If you do use your HSA money for non-elilgible expenses, you will have to pay regular income tax and a 20% penalty. Much like taking money from your 401(K), you need to think really long and hard before you use this money for something other than it’s intended use.
You also can’t use HSA money for non-dependent care. With the new health care laws, you are able to keep adult children on your health plan until age 26, but if you don’t claim them as a dependend, you can’t use HSA money for their medical expenses.
While it might be nice in theory to have expansive insurance coverage, it is expensive. Financially, an HSA plan makes more sense for my family. Last year alone, it saved us over $5000 in taxes and premium payments. No one likes to pay money for health coverage, but you really can’t afford not to. If a health savings account makes sense for you, it is a great way to take some of the sting out of the high cost of health care.
Crystal’s Comments: Thank you for the explanation, Kim! Does anybody else have experience with HSA’s? Anything to add to Kim’s breakdown?