The Pros and Cons of the HSA (Health Savings Account)

The Pros and Cons of the HSA (Health Savings Account)

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We discuss the HSA and whether it's appropriate for your financial situation.

The Pros and Cons of the Health Savings Account

Health savings accounts (HSAs) are used to save money for future medical expenses.  Discover how these plans work and whether or not they are right for you.

A health savings account (HSA) is an account into which you can deposit tax-free money to be used for future medical expenses.  HSAs were established in 2003 and have rapidly risen in popularity.  They are part of a larger trend known as consumer-directed health care.  The aim of consumer-directed healthcare is to reduce the money spent on health care by placing more of the responsibility on you to shop for health care.  Want to spend less on hospital visits - smoke less, eat healthier, and exercise.  Because the days of your employer footing the bill are no more!

Account Advantages

The HSA is equipped with several advantages, many in the form of Uncle Sam's generous tax benefits. Contributions to the plans are tax deductible. The contributions can come from you, as well as your employer, if you have an HSA through work. Individuals age 55 and older can make additional catch-up contributions to the account each year until they enroll in Medicare.

All HSA earnings are tax-free, and there is no limit to how much you can accumulate in the account. When you take money out to pay eligible medical costs, those distributions are tax- free, too. But perhaps the most appealing part of an HSA is that there are no time constraints on when you can spend it. If you don’t use all the account money on healthcare costs, you don’t lose it. You can carry any money that’s in the account at year’s end over into the next year to pay for future medical costs.

One Plan, Two Components

The first consideration when it comes to HSA participation is the required companion healthcare policy. Although the potential for HSA participation was opened up a few years ago, you must have a specific type of coverage.

The first criterion in any situation is that you have a high-deductible health plan. These are just like they sound; the insured policy holder will initially pay greater out-of-pocket costs.

Eligible plans are available through various insurance companies; however, they all have deductibles for 2009 of at least $1,150 but no more than $5,800 for singles and between $2,300 and $11,600 for covered families. If your healthcare costs reach the deductible level, the policy coverage kicks in.

Once you get your insurance policy, then you can open your health savings account. Currently, an individual can put up to $3,000 a year in an HSA. An account for family coverage can be as much as $5,950. HSA contributions often come from savings by paying the typically lower premiums charged for the accompa- nying high-deductible policy. Then, when you have to meet some deductible costs, you use HSA money to pay. The deductible part is pure insurance costs and healthcare costs.  The side fund, the HSA, is a sep- arate entity, an actual savings account. You have the opportunity to put money aside for those emergencies when you do need to meet the deductible.

While a high-deductible insurance policy and HSA works well for many, it’s not a good fit for everyone. Some folks find that a traditional employer- provided plan, while it generally costs more in up-front payments, is more cost-effective over the longer term.  In any traditional health plan, you will have an office visit and prescription co-pays, but that’s not the case with an HSA. There is no office visit or prescription co-pay.

There are a lot of cases, such as young families making really good money, who would appreciate the tax advantages of HSAs but have small children that will have to go the doctor three or four times a year for shots, checkups and illnesses picked up at day care. In those cases, more traditional healthcare coverage is the better financial and medical choice. But for individuals or families who are in good health, HSA-eligible cover- age could be a better prescription. An HSA is particularly good if you’re rea- sonably healthy, in a higher tax bracket and your kids are older and don’t need regular checkups. Then you can really take advantage of the tax benefits of an HSA.

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  • JoAnn M. Laing

    April 12, 2010

    HSA Allowable Limits 2010

    Individual Minimum Deductible $1,200
    Individual Maximum Out-of-Pocket $5,950
    Individual Maximum Contribution $3,050

    Family Minimum Deductible $2,400
    Family Maximum Out-of-Pocket $11,900
    Family Maximum Contribution $6,150

    Catch-up Contribution (55+ years old) $1,000

  • Roger

    May 17, 2010

    Does the $6,150 include employer contribution? For example, if the employer contributes $1,000/yr to the HSA, is the employee family maximum contribution $6,150/yr (or $5,150/yr)?

  • Virginia

    June 10, 2010

    The employee family maximum contribution for 2010 is $6150 ($7150 for age 55+) and includes contributions made by the employer. If you employer contributes $1000 on your behalf, you can contribute up to $5150.

  • ChrisCD

    October 27, 2010

    I have found the HSA more affordable and easier to manage than an HMO and PPO. HMOs (these days) are very expensive and quite limiting.

    PPOs are less expensive than an HMO, but I was burned on the deductibles.

    At least with an HSA, I know what my yearly medical expenses will be and I can plan better.

    My biggest complaint is that the HSA contribution limit really isn't high enough when you factor in Dental, Eye, and especially if you end up needing a few speciality tests/

  • Jerry

    December 30, 2010

    If I have an individual HSA with my employer and my wife and daughter are under her family HSA. Can we share the same savings acount?

  • Dave

    December 30, 2010

    Jerry, I asked your question yesterday to a provider. Your daughter can share the HSA only if she's a dependant on your taxes. I considered including my two older sons (under 26) in my HSA plan. Each would have their HSA. But the out-of-pocket risks argue against it. If one of them on my plan needs a large procedure, we'd potentially pay my total out of pocket ($10K). But if they had their own insurance, they pay only their own max out of pocket ($3K).

  • Diane

    February 25, 2011

    Does your employer also contribute to your HSA?

  • Jim Eggen

    August 30, 2011

    Can you name some or all of the banking institutions that offer HSA accounts? I have an HSA with a particular bank but would like to know if I have other options.

  • Loui

    November 29, 2011

    Can I claim my medical expenses on my taxes if I pay my medical bill from my HSA?

  • Rosemary

    May 15, 2012

    Does an HSA cover all dental procedures other than routine cleaning? If not which ones? Where in the IRS code are they listed? I am self employed and have an HSA I fund myself. Is this ok?

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