Health insurance can be expensive and confusing. For many people, a health savings account (HSA) combined with high deductible insurance is a great option that is cheaper, offers tax advantages and puts the power of choice back in their hands.
Health savings accounts have been called “A powerful financial tool to cover medical expenses and save for the future.” by Kiplinger Financial. They are often referred to as “Health IRAs” because they operate in much the same way. Money is put into a tax deductible account each month either by the consumer or their employer. It can be spent on many healthcare expenses like medical bills, prescription drugs and other qualified expenses.
Funds that accumulate in a health savings account remain tax deferred until age 65, when they can be withdrawn with no penalty if not spent on medical expenses.
There are contribution limits to this powerful and flexible tool. In 2017 the tax deferred limits are $3,400 for an individual and $6,750 for a family. For individuals over 55 years of age, the government allows an additional $1,000 in contributions each year. In order to qualify as the required insurance under the Affordable Care Act a health savings account also has to be accompanied by a high deductible policy with an annual deductible not less than $1,250 for an individual or $2,500 for a family.
Health savings accounts are especially attractive for small businesses who want to offer insurance to their employees but feel they cannot afford a traditional plan. High deductible insurance is usually hundreds of dollars per month cheaper than a comprehensive policy. Employers can provide all or part of the difference as their contribution to an employee’s HSA, fitting the cost of providing health care to their own budget. In addition, relatives can make gift contributions to a health savings account. It’s then up to the consumer to find the healthcare of their choice.
One important change which came with Obamacare was to eliminate prescription drugs from qualifying health savings account expenses. All other health expenses still qualify, such as doctor’s visits, prescription glasses, and other medical devices. If expenses for an illness exceed the limits of the accompanying high deductible policy, that kicks in to cover the rest.
There are many benefits to a health savings account beyond your health care. Money not spent from an HSA in one calendar year is rolled over to the next year with no penalty, providing a source of pre-tax investment. Many financial advisers now offer interest bearing HSA plans which operate like an IRA. Plans which include an HSA are offered by most major health insurance provider as well.
For all of the advantages of a health savings account, there are some potential pitfalls. For example, the cost and quality of health care now falls on the consumer, and that information can be hard to find. Persons with chronic health problems, which require regular care, may also find that a high deductible health plan with an HSA isn’t right for them. The Mayo Clinic has a good guide to how to decide if they are right for you based on your own situation.
With all the advantages, health savings accounts are growing rapidly. While only 8% of all Americans have one, or about 15.5 million people, they are growing at a rate of 15% per year. The popularity of an HSA comes from both the flexibility to make your own health choices as well as the financial and tax advantages, according to the same survey by America’s Health Insurance Plans, a trade association of insurance providers.
Health savings accounts are a great alternative to the traditional, higher cost, whole-health insurance model for people who want to manage their own health care. The ability to put savings from good health practices away in a tax-deferred account while saving money over a comprehensive plan is a great benefit. The required high deductible plan also means that you are covered in the case of a catastrophic event.