As the owner of an independent health insurance agency and the founder of a website for comparing health insurance providers (http://www.healthinsuranceproviders.com) I often get asked, “What type of health insurance do YOU have?” Of course, no one health insurance company or health insurance plan is right for everyone because everyone has different needs, lives in a different area, etc… but I can certainly feel comfortable telling people that I personally have a Health Savings Account (HSA) and I absolutely love it!
Here are 7 reasons why I love my HSA:
1) All Contributions to my HSA are Tax Deductible
Every single dollar that I contribute into my HSA every year is deductible on the front of my personal 1040 tax return (up to certain annual limits imposed by the IRS – for 2010 the maximum deductible HSA contribution is $3,050 for singles and $6,150 for families with those age 55 or over getting an extra $1,000 allotted maximum contribution amount).
This HSA contribution deduction is great because it is an “above the line” deduction meaning that it is deducted before arriving at your Adjusted Gross Income (AGI) number. To make this deduction even better there are absolutely no income phaseouts for the HSA contribution deduction so you could be Bill Gates or Warren Buffet and still take the full HSA contribution deduction.
The more money you make the more attractive this deduction is to you.
2) The Money in my HSA Grows Tax Free
All of the money in my Health Savings Account grows tax free as long as I use the money in the account for qualified medical expenses or wait until I am age 65 or older and use it for my retirement. Yes, you heard me right “Tax Free” not just “Tax Deferred” as you may be accustomed to hearing about with a 401K or other similar tax deferred account.
3) I Can Choose any Health Insurance Company I Want
Another reason I love my HSA is that the HSA itself is simply a savings account with some special paperwork so that it receives special treatment from the IRS.
The HSA itself is NOT health insurance but is simply the second component of what is commonly thought of as a HSA health insurance plan with the first component being a high deductible health insurance plan (according to the IRS a high deductible health insurance plan is any health plan with a deductible of at least $1,200 for singles and $2,400 for families – so still pretty low minimums).
What this means is that many different banks (health savings account providers) offer Health Savings Accounts and you can choose the bank that you prefer to set up your HSA and then buy your high deductible health insurance plan from any insurance company that you like. You can even purchase a plan from United Healthcare one year and then shop around in year two and switch to a potentially cheaper plan with Humana and then in year three switch to Blue Cross Blue Shield, etc.
This ability to constantly comparison shop and not be tied to one particular insurance provider is a great benefit to an HSA (as your actual savings account component of the plan still stays with your original bank).
4) I Pay Very Low Monthly Premiums
The higher the deductible is on your health insurance plan then the lower your monthly premium payments will be. Since a high deductible health insurance plan is a requirement for opening a Health Savings Account then one of the nice things about the plans is that the monthly premiums are comparatively very low!
I would much rather save a large sum of money every month by paying less in premiums each month than paying extra for a very low deductible and co-pays.
5) I Am Firmly In Control of My Health Care Dollars
The beautiful thing about an Health Savings Account as compared to a Flexible Spending Account is that while Flex Spending Accounts require you to use up the money in the account every year all of the money that you contribute to an HSA rolls over from year to year.
In fact, as mentioned above, even if you don’t end up using the money in your HSA for medical expenses (a good thing!) then when you reach age 65 you can withdraw the money tax free for your retirement. Most HSA custodians will give you an option to place your HSA money into a savings account, investment account, etc. as the decision is up to you as to where you place your HSA account money.
6) I Can Rest Easy
Admittedly some people simply sleep better at night knowing that they have a very low deductible and low co-pays for things like doctor’s visits and prescriptions and I understand that but I like to think of it like this – After your first year of contributing the maximum to your HSA then unless you use up all of the money with a large unforeseen medical bill then you will have enough money in your HSA for years two and on that even if you have to meet your deductible then as long as your HSA health insurance plan covers all expenses 100% once the deductible is met then you effectively have zero out of pocket costs because you already have the money in your HSA account!
Sure, if you start an HSA tomorrow and you have only contributed a couple hundred dollars into the account so far and you get hit with a big medical bill then you will have to come out of pocket for your deductible amount but once you have maxed out your HSA contribution for a year or two then you are essentially home free with potentially no additional out of pocket costs even for large medical bills!
7) HSA Setup is Very Easy
If you can open a savings account then you can open a Health Savings Account just as easily. If you can apply for a regular health insurance plan then you can apply for a high deductible health insurance plan just as easily.
Almost every bank has HSA’s available and almost every health insurance company has high deductible health insurance plans available. Setting up an HSA is so easy that I probably took twice as long to write this article as it would take you to apply for both a Health Savings Account at your bank and a high deductible health insurance plan at your health insurance company.
What are you waiting for? What do YOU think about Health Savings Accounts!
Here are a couple of places to look for and compare health insurance quotes:
eHealthInsurance
Health Plans of America
About the Author: Joel is a CFP© that loves writing personal finance articles and anything related to small business. You can find him working on some of his most recent projects which include websites for comparing credit cards (http://www.creditcardchaser.com) and car insurance (http://www.carinsurancecomparison.com/).
You say you can have a HSA as long as you have a “high-deductible health plan”. I still have an open HSA account (little to no $$$ in it) from previous employment, but have since done nothing with it as I acquired other traditional health insurance with my current employer. What does it take for me to be able to legally start contributing $$$ to that HSA? What qualifies as a “high-deductible health plan”? I am planning to obtain family health insurance on the open market very soon and am wondering if or how I can start contributing $$$ to my HSA again.
Here are the current rules from the IRS for when you can and can’t contribute to your HSA and also some information about high deductible health plans: http://www.irs.gov/publications/p969/ar02.html#en_US_publink1000204045
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Greg,
Also look at options from your employer, many companies provide matching contributions to HSA accounts or just some initial contribution to encourage you to save.
We had an HSA and a high-deductible insurance. It stunk for us. We did not have enough cash money in the HSA when the medical bills came in droves- we ended up spending all our savings and going into debt over medical bills. HSA and a HD Insurance plan are GREAT if you have extra cash and a good savings setup. It will save you money in the long run- but if you do not- take the security of a solid plan. Especially if you have small kiddos. IMHO. I do want to move back into an HSA and HD plan sometime- as you can pay for dental and orthodontic stuff with the HSA as well. But for now! A great plan that lets us pay copays with good insurance coverage until we are at a better place financially.
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You are right in that the first year that you have the HSA if you haven’t contributed any money to the HSA then it doesn’t do a whole lot of good until you actually contribute money into it.
The positive thing is though that if you get a high deductible health plan with 100% coverage after the deductible is met then your maximum out of pocket cost in any one year is limited to your deductible.
This means that for a family you could have a high deductible health plan with a $2,400 deductible ($1,200 for individuals) and your maximum out of pocket cost in any one year is only $2,400 ($1,200 for individuals).
$15,000 broken leg = you pay $2,400
$87,000 surgery = you pay $2,400
$950,000 cancer treatment = you pay $2,400
Pretty good deal to me. (Of course, not all high deductible health plans are created equal but if you choose a strong plan from a reputable company like United Healthcare, Humana, etc. then you are in good shape.)
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Our HD plan is not that good. Ours is $2400 deductible for a family, but we found out that it only pays 90% after that. So our little hospital stay for our little sick baby ended up costing us our annual out of pocket maximum of $5400!!! Ouch!
I joined my company’s HSA plan 2 years ago, and I’m happy with it.
We were nervous the first year, because if we needed the money for an health expense, and it wasn’t in the HSA, we would have to pay out of pocket, but luckily we had some reserves and went ahead with it.
My company puts some extra money in our HSA too, not a lot, but it’s a nice perk.
Thanks for your 7 reasons! I didn’t realize it was so easy to transfer the HSA to a different company,
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Good read. If your employer offers a HAS for your insurance plan invest in it! This is one of the sweetest deals out there. If you spend the money on qualified medical expenses you will never have to pay tax on the money. Ask any retiree how much they spend on pills! When you hit 65 and you choose not to spend the money on medical bills then the plan acts very similar to an IRA.
Tax exempt proceeds are always an attractive benefits. And the fact that it can even claimed as deductions to our tax dues, make it enticing further. But of course, it’s still better to have a comparison with other type of savings to come up with the best financial decisions. I would love to read a post that will compare some competitive kinds of savings account.
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There is no doubt that the monthly premium expense is lower with the high deductible health plan which must accompany a HSA. However, with the high deductible comes the possibility of higher out of pocket medical expenses. Additionally, studies show that 8 in 10 medical bills contain errors. Your insurance company has incentive to review the bills carefully if they are paying the bill, but have little incentive if the bill is the patient responsibility.
Hmmm… I have my HSA through my employer, so I am unable to direct my savings to any bank I wish. They chose the bank and you’re stuck with it (PLEASE correct me if I’m wrong, but I’m pretty sure we can’t elect a different bank). And we earn a whopping 0.75% on it. That is why I stopped contributing anything to it. I let my employer kick in what they give us as incentive, but unless I plan to take $ out immediately, I don’t contribute at all. If I have an expense, I basically use the account as a launder and elect to contribute and then take out the exact same amount to avoid taxes. However I find the HSA option to have a horrible interest rate. Anyone know of any higher interest rates offered by banks? Maybe I can do a rollover or something. But I’m sure that they won’t direct new contributions from my employer to a different bank.
I can’t speak for HSA accounts but a bank savings account of .75% really isn’t that bad compared to what your standard brick and mortar savings account offers.
I am earning 2.23% at OptumHealth. Balance required to be over $15k for that rate.
1. H S A’s are not always tax free. They are tax free from Federal but not every state has opted to accept H S A contributions tax free. For exaple, NJ and CA place state tax on H S A contributions but NY doesn’t. For New Yorkers, the entire H S A savings account is tax free. This is still not a con that will over power all the pro’s of an H S A as the taxation is minimal.
2. You have to think of all parts to an H S A to see it as being worth while. Yes, if you haven’t contributed a lot to begin with, you will have some out of pocket costs. But health care in this country isn’t free and hasn’t been so why don’t you have savings already dedicated to health emergencies???
3. An H S A is very much like an IRA. If you want, once you turn 65, you can use the H S A dollars to pay for your medicare Plan B premiums – TAX FREE! So why not start saving now? AND, if your employer contributes to an H S A and you’re about to turn 65, you can then take the $ out tax free like a 401k….the $ the company contributed really is like a match to a 401k…in other words, free money.
4. With an H S A, you are in charge of the H S A dollars you spend. Therefore, with a consumer driven health plan, you have the ability to judge the quality, efficiency, and price of the care you’re receiving. If you can save money by using a generic prescription vs. a brand name drug, why wouldn’t you? More savings for later. The idea behind consumer driven healthcare is to be a consumer. So when you go car shopping, are you going to pay $30,000 for a car you could get for $20,000 just because you’re already at that car dealership? Or will you shop around a couple places to see what you can get for your $$.
5. With an H S A, you have the option to invest your funds. How do you think the billionaires of the world became billionaires? By counting each penny in their savings account? No, by investing responsibly and watching their dollars multiply. You have this option with an H S A.
HSA advocate
What a great comment!
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Sounds like a pretty good deal. I’ve heard quite a bit about HSAs in passing, but never having worked at a company that would offer them, I didn’t know all the details. It’s always fun to learn new things.
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So how will the new horrible government takeover of health care affect people with HSAs and HD plans? Will they suffice as “proof” of insurance for the gov’t mandate? I’m going to be switching jobs and I really like the idea behind HSAs but am not sure where the legal avenues are going for things like that.
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Yes, megcole64, a HD/HSA plan is insurance in the government’s eyes. The only impact on HSAs will be beginning next January 2011, if you use it to pay for OTC drugs (aspirin, cough syrup), the penalty is now 20%, not 10%. You can get a well-written summary of the bill at the Henry Kaiser Family Foundation website: http://www.kff.org/healthreform/sidebyside.cfm. The bill that passed is the White House/Congressional Leadership Reconciliation Bill (HR4872). Take a look.
Hmmm…Thanks Tucker. I don’t have an HSA now, but have had an FSA for a long time and there’s not a penalty for buying OTCs. I didn’t realize there was any penalty for that with HSAs. Interesting. I probably won’t get one in the near future but may eventually have an HSA if my husband’s coverage gets too much more expensive…which it will I’m sure.
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Starting next January, FSAs can’t be used for OTC items. Sorry!
But there’s some interesting stuff about what percentage of your health premium your employer will have to pay and out-of-pocket limits based on the Federal Poverty Levels. I really recommend everyone read up on the bill. The best remark I’ve heard about it is this: the main effect of the bill will be to make us become informed consumers, rather than just consumers. I personally like that.
But my favorite part is the 10% tax starting this July on indoor tanning services!
I hadn’t heard about the FSA and OTC items. If that’s the case then that’s a shame. I loved being able to use items like saline solution for my contacts in my FSA.
Oh drat. Oh well. Doesn’t really bother me that much. The main effect of the bill will be to tick people off ~ once they learn how nasty it is and how much it will limit our access to care. 🙂
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You just can’t beat the tax benefits of a HSA but you really need to fully understand any restrictions on your specific plan. A company sponsored plan I was on a few years ago offered a HSA but it had a $500 annual cap and you had to use the funds each year or you would lose them. But what you could spend the money on was pretty flexible. You could use it for healthcare items that you might not immediately think of as being covered by any type of insurance, such as hand sanitizer, sun screen, first aid kits and any over-the-counter medicine. I had about $150 that I was going to loose at the end of the year so I went to Walgreen’s and stocked up for the year 🙂
Maria – It sounds to me that you’re describing an FSA, not an HSA. An FSA, Flexible Spending Account, is “use it or lose it” and before 2010 allowed you to spend the money on over the counter items. The new rules no longer allow FSA funds to be used for those sorts of things. Also, employers can set limits on how much an employee can put into an FSA each year.
An HSA is different. You do NOT lose the funds and the employee owns the plan and can take it with them after leaving their job.
Hi I am not sure how old this thread is but I am also an advocate of the HSA. We were offered the chance to obtain one by my job this year. I like it.
I was able to make comparisons between an avg ins plan and HSA, and the HSA came out on top. Of course it really depends on how the plan is structured.
Overall last year we paid roughly $4500 out in premiums and FSA. Also we (family of four ) still had about $700 in medical bills at year end (not normal – I scheduled the expensive process at the end of the year on purpose). So in 2010 we used up every penny of our money we paid into premiums and FSA, and then some.
But on a normal year, we do not incur $3500 in medical bills. I guess this is what you have to take into account. Barring any unforeseen emergencies, we basically have normal dr visits, sick vists, etc, nothing that costs more than 100-150 a pop if we paid it ourselves.
So I said to myself – I might as well save that $4500 in an HSA because I can keep it for life. So far this has been a normal year for us (fingers crossed) and I think we have saved about 1/2 of that. Once we pay $3000 in expenses, then we have 80% coverage, and once you pay out $5000, then you are 100% covered. To make people switch the company paid the low premium for the first year. We just had to sign up and contribute. Also we still pay the contracted amount the insurance would pay out to the drs – so the reduced rate not the entire bill. So the goal is to get to a minimum balance of $5000 by the end of 2012, and then we should be able to cut down on how much we contribute going forward, unless the company changes our limits.
To sum, most insurance is use or lose it, the HSA takes quite a bit of the “lose it” out of the equation. It just takes careful planning.
Thanks for stopping by with your HSA experience! It helps seeing how it’s actually used by people.
I’m retired. Can I transfer tax free dollars (or rollover)from my 401k into an hsa?
I’m retired. Can I rollover 401k dollars into an hsa?
I didn’t realize how HSA’s differ from flexible spending accounts. I thought the money in an HSA had to be used before the end of a year, too. Thanks for making note of that distinction. I think I’m going to make a change to my benefit plan.
I’m glad the article helps you. I wish the two plans were more similar. It would be nice if a FSA wasn’t ‘use it or lose it.’
HSA’s are great! We contribute every year and encourage our readers, family and friends to do so as well. They also come in handy when you have kids! Things get really expensive!
We have shared this article with our readers here
http://themoneymail.com/from-the-archives/if-you-dont-have-an-hsa-here-are-some-reasons-you-should/
So, what person (with an HSA account) landed in the hospital and ended up getting billed 50000. I’d like to hear that story, not a good outcome.
My husband submitted the paperwork to HR to switch from traditional on Friday, November 30th in 2007. The following Monday, I got the results from a routine mammogram. I had breast cancer and while I did have my biopsy in December, surgery and treatment did not begin until after January 1st, when my HSA went into effect.
Wanting to encourage employees to switch to this plan, my husband’s employer had agreed to start out the accounts with an initial deposit of $1,000.00. Since I met my deductible the day I had surgery, this was a very good thing!
The hospital where I received treatment at is affiliated with my insurer. This made it extremely easy to set up a payment plan when they knew I would be paying from an HSA. I ended up having to have chemotherapy and radiation treatment as well as surgery. During that time, it was good to know that the money to pay my deductible was there in the HSA account and once that was met, I had 100% coverage.
I realize that people have concerns if there are major health issues involved but cancer was not the end of my story. Two years later I had a ruptured brain aneurysm in my sleep and a stroke. That is two major medical situations in two years. Oh, and diabetes and chemo-induced peripheral neuropathy got thrown into the mix as well. Because of these things as well as the post-treatment they require, I’ve met my deductible for the past five years. Fortunately, my husband has not and fortunately, the amount deposited in our HSA every year almost matches our family deductible. Even if my husband were to meet his deductible this year, we will still end up with several thousand dollars left in the account… and we won’t lose it at the end of the year! I refused to ever get an FSA for that very reason. I call an FSA highway robbery. Why anyone would deposit money into an account which can only be used for a specified purposed only to have that money seized at the end of the year by someone else if it is not used is beyond me. Granted, money in an HSA can only be used for certain things as well up to age 65. However, it rolls over and in the event of your death the money goes to your beneficiary. Also, it is your account. If you switch employers, you still have access to the funds.
I really love having an HSA and would recommend it to anyone.
For us, having health insurance with an HSA has enabled me to get the care I need without the worry about how I am going to pay the deductible. I think it is a great plan and truthfully,
There is no free lunch.
The catch is, your doctors bills are NOT covered 100% unless the doctor has agreed with the insurance company that their opionion on what is reasonable is okay with him.
Most docs charge WAYYYY more than any insurance company is going to cover.
When you sign those papers in the docs office, you are agreeing to pay anything over and above what insurance doesn’t cover. And let me tell you, it doesn’t cover a LOT.
So that 15,000 broken leg. You pay the full deductible. The insurance company decides that all the docs and prescriptions were only really valued at $6,000. So that is what they pay. Then ALL the docs involved send you bills for the balances. And it will amount to tens or hundreds of thousands of dollars depending on how bad your condition is. If you get sick in a major way, you are pretty much assured of going bankrupt quickly.
An HSA does NOT cause doctors to lower their fees to match what insurance companies think are reasonable charges.
If you think for one second that insurance companies are concerned about your well being and making sure you get everything you need, you best think again.
The name of the game is profits for their shareholders. And they don’t make them by paying out 100% for anyone, ever!
You live in dreamland if you think otherwise.