Should I Consider a Health Savings Account and High Deductible Health Plan?

By Jason Van Steenwyk

Image Credit: Vector Portal

Health savings accounts, or HSAs, are increasingly popular health insurance and savings solutions, with millions of Americans now contributing to them. These tax-advantaged savings vehicles were first introduced in 2003, as part of a concept called consumer-driven health care or patient-driven health care.  The concept: The assumption that if consumers were spending their own money, and not the insurance company’s money, they would spend less.  The result: Lower overall health care costs. And ultimately, lower premiums.

Here’s how they work: To contribute to an HSA, you must also own a high-deductible health plan, with a minimum annual deductible of $1,200 for individual plans, and twice that for family plans. HSAs allow you set aside up to $3,100 in tax-deferred dollars, each year for individual plans, and lets families save up to $6,250. You can let the balance build up every year. If you have medical expenses, you can tap your HSA to pay anything under your deductible. Contributions to HSAs are tax deductible, and any withdrawals to pay for qualified medical expenses are tax free.

Is the experiment successful? Has the introduction of HSAs and HDHPs resulted in lowered costs? So far, the evidence is encouraging. Premiums for HDHPs are generally significantly lower than for conventional medical insurance plans.

Should I Consider an High Deductible Health Plan?

If you and your family are in good overall health, with no conditions requiring ongoing treatment, and your income allows you to contribute to your health savings account each year, then owning an HDHP and contributing to a health savings account may make great sense for your family. But remember that no single plan suits every family. Here are some of the major considerations:

Control. Health savings accounts give you more control over how your health dollars are spent.  Care providers will be more eager to keep you happy, knowing that you, and not a distant, impersonal third party, are writing the checks.

Discounts.  In some cases, your insurance company may have negotiated favorable pricing with the provider. This may also benefit you when you pay expenses that  don’t meet your deductible – the discount may apply to your out of pocket expenses, too.

Employer contributions. Your employer may make contributions to an HSA on your behalf. This is like getting free money!

Premium savings. All things being equal, premiums are lower with high deductible health plans than with similar plans with lower deductibles.

That said, all plans have advantages and disadvantages. You should also be aware of the disadvantages of high-deductible health plans:

  • You may not be in a position to afford to contribute to an HSA. If you aren’t able to save in advance for your out-of-pocket medical expenses, even with the lower premiums, then that higher deductible is probably going to hurt you when you do have a medical event.
  • Even with an HSA, not everyone is comfortable with a minimum deductible of $1,200, or $2,400 for family plans.
  • Some people may skimp on needed preventative or diagnostic care if they have to pay out of pocket. However, some HDHPs provide expanded coverage for preventative and diagnostic services, as well as ‘first dollar’ coverage for immunizations, well-baby visits and other routine services with preventative value.
  • These plans may not be economical for those with ongoing, chronic medical needs requiring treatment every year.
  • Penalties for using HSAs for expenses other than qualified medical expenses are steep: Income tax plus a 20 percent penalty. HSAs are not good general-purpose savings vehicles. The tax law encourages you to earmark them for medical care.
  • HSAs no longer cover over-the-counter medications.

Do I Qualify?

You can contribute to a health savings account if you are not on Medicare, if you own a high-deductible health plan, and that plan is your only major medical insurance coverage. If you are married, and your spouse has coverage, your spouse must also have a high-deductible plan. Owning long term care, disability, health, vision, dread disease or other supplemental medical coverage does not disqualify you from contributing to an HSA.

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