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Health Savings Account
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Health Savings Account (HSA)

Date: 11/03/2004

An HSA is a special tax-sheltered savings account for medical bills. It is similar to an IRA and works in conjunction with a special "high deductible" health insurance policy to provide comprehensive coverage at the lowest possible net cost.

Instead of buying high-priced insurance with low co-pays and a low deductible, you buy a low cost policy with a "high" deductible for the "big" bills and save the difference--in the HSA--to cover "small bills".  Money deposited into the account is 100% tax deductible and can be easily accessed by check or debit card to pay medical bills tax-free (even stuff not covered by insurance like dental and vision).  What you don't use for medical bills is yours to keep--it stays in your account and keeps growing on a tax-favored basis to a) cover future medical bills; or b) supplement retirement, just like an IRA.

  1. In sum, the HSA offers
  2. lower premiums;
  3. lower taxes;
  4. freedom of choice; and
  5. more cash at retirement.

Here's a graphic of how it works. Take the money currently spent on a high cost health insurance policy (usually an HMO or PPO with co-pays) and split it up like this: Put a portion towards a lowcost, high deductible HSA health insurance policy and deposit the balance into the HSA savings account (100% tax-deductible!).  Use the HSA account to help pay smaller, routine medical bills until the deductible is met: then, should the need arise, the high deductible policy will kick in and pay covered medical expenses.

HealthSavingsAccount_1

Is the new wave in health insurance for you?

By Liz Pulliam Weston

Health Savings Accounts pair high-deductible insurance with tax-free savings that participants can use to stay healthy or to retire someday.

The plans fit self-employed people well. Do they fit you?

Self-employed clients deluged insurance agent Gail McElroy with calls after Congress created the Health Savings Accounts in December 2003. From everything the clients had heard, the new account would be better than sliced bread:

  • Consumers can make pre-tax contributions to cover health-care costs.
  • The contributions can be invested, and the earnings will be tax deferred, much like an Individual Retirement Account.
  • The money in the account can be rolled over from year to year, potentially building up to hundreds of thousands of dollars.
  • Withdrawals for medical expenses are tax-free. Withdrawals in retirement for any purpose are penalty-free.
  • The accounts come with “catch up” provisions, allowing people older than 55 to contribute even more.
  • The accounts are no longer limited to the smallest businesses. Just about anyone, including employees at large companies, potentially could be eligible.
  • The accounts are portable and can be transferred from job to job.

At first, McElroy had trouble finding any information about the new accounts. Although authorized starting Jan. 1, 2004, providers and details were scarce.

The more information she did find, though, the fewer clients were interested.

HSAs are complex and come with a big drawback: They can’t be used unless the client has a high-deductible health insurance plan, and many people don’t want to pay $1,000 to $5,000 out of pocket, even with tax-advantaged money.


“Most people don’t like that high deductible,” said McElroy, who works for an agency in Westlake Village, Calif. “It’s very confusing, and people did not understand how these worked.”
 

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