Health Savings Accounts
A Health Savings Account (HSA) is one of the best ways for many to set aside money for inevitable health care expenses. There are many advantages to HSAs. First, HSAs create tax-free money for otherwise unreimbursed medical expenses. HSAs earn tax-deferred growth and funds can be invested to maximize earnings. An HSA may also be an excellent supplemental retirement income source.
The federal government created HSAs to be used in conjunction with a QUALIFIED high deductible health plan. Not all high deductible plans are qualified - special rules have been created to define exactly what type of coverage allows someone to open an HSA. First, an individual may not have any other type of health coverage besides a qualified high deductible health plan to be eligible to open an HSA. Coverage such as dental, vision, disability, and accident insurance are permissible. The minimum deductible is indexed for inflation by the IRS each year. This amount for 2015 must be at least $1,300 for self-only coverage or $2,600 for family coverage. The out-of-pocket maximum cannot exceed $6,450 and $12,900, respectively. In addition preventive services as defined under PPACA are covered at 100% before applying any plan deductibles. All other expenses, including prescriptions, must be subject to the minimum deductible amount before coverage begins.*
When covered by a qualified High Deductible Health Plan, an eligible participant may also contribute to a Health Savings Account with very favorable tax treatment. For 2015, maximum contributions to an HSA are up to $3,350 for an individual and $6,650 if including dependents. Plus, if you are over age 55, you may contribute an additional $1,000! These contributions are subject to certain eligibility rules, but provide for tax deductible contributions, tax-free withdraws for medical expenses, tax-deferred earnings, and penalty free retirement income.
The premise of this type of arrangement is that it allows someone to purchase health coverage that protects them from the bad things in life but allows them to take care of the small things themselves. Those who use this type of a plan are likely more responsible for their routine healthcare costs and therefore make more cost effective decisions regarding their care. This, in addition to the increased cost sharing and reduction in administration costs, results in a substantial savings in the premiums of these plans. Quite often, the budget for a qualified High Deductible Health Plan used in conjunction with an HSA to cover the deductible is still less expensive than a comparable "traditional" plan without the deductible. This means that it makes sense for everyone to consider this strategy regardless of their age or health status.
The concept here is simple - use the same money in your healthcare budget to buy a reasonable amount of insurance for less money and put the difference in a specially treated fund that is there if you need it, and yours to keep if you don't use it!
*The preceding is meant to be a brief overview of the rules regarding what constitutes a Qualified High Deductible Health Plan by the IRS. Other rules apply.