Reader Question: Health Savings Account Explained
Reader JY writes in, “I was wondering if you have written anything regarding the Health Savings Account and high deductible health insurance plans. I have recently signed up for this through my new employer as the idea sounded really great. Previously I was paying for one of the more expensive plans, the Kaiser HMO. Now I’m going a completely different route with an HDHP combined with an HSA. The HSA allows for tax free savings for medical expenses and I have been trying to learn more about it. Unlike the FSA it is not use a it or lose it savings account.”
Health Savings Accounts have been around for a while and many employers now offer them as a standard option. I’ve had one for 3 years now and I’ve amassed almost $9,000 of tax free money for my future medical expenses. The HSA is a tax advantaged medical savings account available to taxpayers who are also enrolled in a High Deductible Health Plan(HDHP). As reader JY alluded to, unlike an FSA, the funds deposited into your HSA account rollover from year to year and accumulate if not spent. And since the individual owns the HSA, if you were to leave the company those funds go with you, unlike an HRA.
Benefit to Employer and Employee
Employees generally only see the cost of health care they are forced to pay each paycheck. But most companies tend to subsidize health care so that employees only see a fraction of the cost. The basic HMO option at my workplace costs the employee $70 per paycheck(pre-tax) while the employer pays around $280, or 80% of the total biweekly cost. By switching to an HDHP, my premium goes down to $35 per paycheck and my employer also gives me a $500 annual contribution into my HSA. The employer premium will also go down to $180.
So my premium goes down, the employer premium goes down and I get $500 a year. Sounds like a win-win for everyone right? Well, it is! These plans are typically best suited for young, healthy, single(no kids) individuals. I haven’t seen a doctor in three years for anything other than routine check-ups and my HSA balance has grown accordingly. I’ve realized $1,500 in free money from my employer that can be used for any future medical expenses. We all know the cost of healthcare is skyrocketing, and the HSA is one of the best tools to combat that. If you’re still on the fence, take a look at this example:
An Example of the Tax Savings:
Jose is a 25 year old male. His work offers a Basic HMO for $80/per paycheck or a HDHP for $40/per paycheck with a $500 contribution to a HSA. If Jose chooses the HMO plan, he will pay $2,080 pre-tax after one year. With the HDHP/HSA combo his yearly cost is cut in half, to $1,040. Jose can take that $1,040 along with his employer contribution of $500 and at the end of one year, his HSA is valued at $1,540. For the same cost as the HMO plan, if Jose never sees the doctor, he has accumulated $1,500 in his health savings account.
Although every plan is different, the savings are generally around the range mentioned above. For 2012, an individual is limited to a HSA contribution of $3,100, which includes the employer and employee contribution. The contribution limit for a family plan is $6,250.
Additional Benefits of a HSA(Yes there are more!)
Although I never needed braces when I was little, my eyes weren’t so lucky. I have horrible vision: nearsighted and astigmatisms in both eyes; my last prescription for contacts came in at -9.00! When I visit the optometrist, I have to get some additional expensive tests done and my bill, with insurance, usually ends up around $200. And then I have to spend another couple hundred dollars on contacts. Luckily, I can withdraw money from my HSA to pay for all of this. So depending on your tax bracket, you could get a 30-40% savings on all of this necessary healthcare. Should I decide to buy a Groupon for laser eye surgery in the future I can use my HSA to pay for it tax free.
HSA’s can also be used for many other expenses not covered by traditional medical plans including vision, dental, chiropractic, accupuncture, medical equipment and even transportation costs related to medical care. According to the IRS, you can even pay for medical expenses out of pocket and save the receipts for reimbursement at any point in the future. I max out my HSA every year, and pay for all my medical expenses out of pocket so that at some point in the future, I can take out that money tax free. During that time frame, I can invest the money in my HSA in stocks, bonds, or anything my provider offers.
HSA’s are tax advantaged federally, but in certain states, you will have to pay state taxes on the money you put in and any gains you may realize. There aren’t too many financial drawbacks to an HSA, but they tend to favor young, healthy individuals. I like the idea of a HSA, because they are part of consumer driven healthcare. The idea is that you use your HSA account to pay for the small routine expenses and your HDHP will cover the large catastrophic events.
If you’re constantly visiting the doctor, or have monthly prescriptions you need to fill, the HSA may not be the best option for you. But for most young, healthy individuals, the HSA should be a no brainer if it’s offered by your employer. The HSA is the only tax advantaged account that allows you to put your money in tax free, withdraw your contributions tax free and withdraw your gains tax free, as long as it’s for medical expenses. There is no other tax advantaged account that offers this type of triple-tax savings.
Readers, have you thought about switching to a HSA? Does your employer offer you comparable plans?
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