An Overview
For the most part, the government has not been doing a great job of controlling the rising cost of health care. In 2003, however, they hit the bulls eye with the creation of Health Savings Accounts (HSAs). HSAs are established in combination with insurance coverage under a qualifying high deductible health plan (HDHP). The following link will bring you to a brochure by the Department of the Treasury. It provides a lot of great information pertaining to HSA basics, what type of health insurance you need in order to open an HSA, contribution limits, and other valuable information.
HSA are unique in that you have higher deductibles for your health insurance which results in lower insurance premiums to you. To make up for the higher deductibles you are then allowed to set aside tax free contributions into a separate savings account that you control which can be used for qualified medical costs. Any unused funds from this account carry over year after year.
One word of caution, I would make sure the prescription portion of your health plan is subject to the deductible guidelines as well. If not, your insurance plan does not qualify to support an HSA account.
HSAs and HDHPs are often referred to as a consumer driven health plans. Due to ever increasing costs of health care, consumers and employers continue to express interest in engaging the consumer more directly in health care purchasing decisions. In response, many health insurance plans have developed consumer choice health plans, which encompass a variety of approaches to health care financing designed to improve consumer awareness of costs and quality of their health care. This means that the next time you get a cold, you may think twice before going in to see the doctor. If you need to have a minor surgery done, you will be more apt to shop around to find the lowest cost. I for instance live in a rather small market. My local Hospital may charge $5,000.00 for a surgery. I may find however that if I am willing to drive a few hours and stay overnight in a hotel for a few days, I may be able to get that same surgery done for $3,500.00 at a larger hospital in a bigger market. Even after the traveling costs I would be saving money. Having basically dollar one coverage, people have never even thought about these things before, which is the primary reason for escalating health costs and ultimately higher insurance premiums. People didn’t care because their insurance would “cover it,” and doctors and hospitals charged whatever they wanted knowing insurance companies would pay. HSAs provide a vehicle for people to fight back, and I truly believe will be the driving force in reversing these trends. We will finally be letting free markets do their work in the health care system that has been broken for way too long.
I have found that with the HDHP plan where I work, if I maxed out my deductible, I would only be $200.00 worse off than if I had the best plan. The money saved by going with the HDHP, invested in an HSA for a year, nearly covers the deductible. This means that every year I am healthy, I would have in my case about $1,200.00 left over and saved for a rainy day. If your employer makes a contribution to your HSA account, then they receive the upfront tax benefit. However, any contributions you make, you get the upfront tax deduction for the tax year you make the contribution for. Then as long as the funds are used for qualified medical expenses, you don’t pay taxes when the funds are taken out either. The way I like to think of it is, you get the tax benefit of both a Roth and Traditional IRA in one. You can’t beat that in my book. You can find a list of expenses HSA funds can be used for in IRS Publication 502. This information is provided as a courtesy and I recommend you seek the advice of a tax advisor or legal professional as everyone’s situation is different.
Read Part #2 Here
*Peter Swanberg is manager of the Servicing and Quality Assurance Dept. with Bar Harbor Banking and Trust in Bar Harbor, ME.
