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Health Savings Accounts
As health care reform under the Affordable Care Act begins to take hold, it appears to be raising more questions and concerns among Americans hoping to find lower cost health care solutions that can meet their needs. One solution, which has been garnering more attention in recent years, is the Health Savings Account (HSA) for its potential to lower overall health care costs consumers pay while increasing their control and flexibility over health care choices. In an era of diminishing choices and increasing costs, that may sound too good to be true, but the HSA, which has been around since 2003, now counts more than 14 million insured Americans as believers.
What is a Health Savings Account?
HSAs are tax qualified accounts very similar to IRAs except the funds that accumulate inside the account must be spent on eligible medical expenses. In 2017, individuals may make tax-deductible contributions up to $3,400 ($6,750 per family). ). Insureds age 55 and older can add an additional $1,000 as part of a “catch up” provision.
There are no current taxes on earnings inside an HSA, and withdrawals are tax-free when used for eligible expenses. Any funds remaining in the account at the end of the year are rolled over into the next year. Once the insured turns 65, the accumulated funds can be used for any purpose on a taxable basis.
The one requirement is that an HSA must be linked to a high deductible health insurance plan (HDHP). HDHPs are catastrophic insurance plans which must have a minimum deductible ($1,300 per individual and $2,600 per family in 2017), and maximum deductibles can range as high as $8,000. Insureds must pay medical expenses out of pocket up to the deductible before coverage is available. There is also an upper limit on out-of-pocket expenses individuals and families are required to pay.
Although HDHPs are designed to cover catastrophic medical needs, they may also provide preventative care benefits without a deductible.
How an HSA Can Lower Your Health Care Costs
There are actually three ways an HSA can lower your overall health care costs:
- Because of the triple-tax advantages of a current tax deduction, tax-deferred earnings, and tax-free withdrawal, you’re using much cheaper dollars to pay for health care. It’s like getting a discount every time you pay for services.
- The premiums for HDHP are typically much lower than premiums for standard PPO or HMO insurance plans. It’s the tradeoff for higher deductibles.
- Because you are, in essence, using your own cash to pay for medical expenses, you can shop and compare prices on any medical service; and even then, you are in position to negotiate the cost of care. That’s the way to bend the health care cost curve down.
The HSA in Action
John and Susan established an HSA to cover themselves and their two children. The premium for their HDHP that has a $5,000 deductible is $600 per month, which is about $400 less than the HMO plan they left. They are using the monthly savings towards their contribution to their HSA, and they contribute an extra $150, towards their maximum contribution of $6,650. The tax savings they realize from deducting the contribution from their income will offset the extra $150 per month contribution.
Within nine months, they will have accumulated enough in their HSA to cover their deductible costs; so, their only cost going forward will be the co-pays. If they don’t use all of the funds in the current year, they will have a head start on covering their deductible in the next year.
With the freedom to choose any medical provider they desire, they were able to shop, compare and negotiate prices enabling them to save as much as 50 percent on many medical services. Those savings are left in their HSA to accumulate tax-deferred.
HSAs Put You in Control
Aside from rising health care costs, the angst felt by most people over the health insurance stems from their lack of control and flexibility over basic health care decisions. HSA owners control everything about their health care, from which providers to choose to how they invest their HSA funds; and it is another way to get control of your taxes and your overall budget. And, because, they are individually owned, it’s yours for as long as you want to keep it.*
HSA/HDHPs are easy to establish, easy to understand and simple to manage. If you’re current health insurance plan seems too costly or inflexible, a Health Savings Account may be the solution you’ve been looking for.
*To be eligible for an HSA, you must maintain a qualified, high-deductible health plan (HDHP) and you cannot be covered by any other health plan (including Medicare). Also, you cannot be claimed as a dependent on another person’s tax return. You must have a Social Security number and a primary residence in the U.S.