HSAs (healthcare savings accounts)

A: HSAs can be a very effective way to help control your overall health care costs. Recent surveys show a great level of dissatisfaction with "consumer driven" healthcare and HSAs; however, often the dissatisfaction stems from entering into HSAs without full knowledge of what they really are and how they should be used.

HSAs Defined
HSAs were created by the Medicare bill signed by President Bush in 2003.  They are an alternative to traditional healthcare insurance and are designed to help individuals or families save for future qualified medical expenses on a tax-free basis.  You must be covered by a High Deductible Health Plan (HDHP) to take advantage of HSAs.  An HDHP is an inexpensive health insurance plan that often doesn’t pay for the first few thousand dollars of healthcare expenses (a.k.a. deductible) but will cover you after that.

The Reason for Being
The HSA program was established with the goal of making consumers aware of the true cost of healthcare and that by knowing this information, consumers would make smarter, cost-effective decisions – rather than thinking of healthcare in terms of co-pays.  With U.S. healthcare costs exceeding 15% or $1.7 billion of our 2005 Gross National Product (Goldman Sachs, 2005), the government wanted to push for more consumer control of overall costs.  People in support say HSAs are good because they encourage consumers to shop wisely for medical care and this will help drive down costs.  Opponents say they tend to benefit just the young, healthy and wealthy.
 
How to Use Your HSA
You can use your HSA tax-free savings to pay for medical, dental, vision or other IRS-allowed expenses.  Since on your tax return the IRS does not allow you to deduct out of pocket medical expenses that total less than 7.5% of your Adjusted Gross Income, an HSA is a good alternative.  HSA-eligible health plans allow you to save, tax free, for expenses below that 7.5% threshold.

Are HSAs for You?
Since I can’t personalize a thousand different scenarios in this small space, take a look at the following information to see if HSAs are for you.

HSAs are worth a second look if:

• You have two or more dependents on your health plan. HSAs generally have one total deductible per family, so small expenses here and there can add up.  You can also use HSA dollars to pay dental, vision, and other expenses.
• You take more than two medications on a daily basis.  Why pay a co-pay that doesn’t contribute to your overall deductible or maximum out of pocket?   With prescriptions, you can find ways to save money that may not be available to you with a traditional insurance plan.
• You see yourself with total family medical expenses, including medication, in excess of $4,000 per year.  Most HSAs are priced favorably when looking at maximum out of pocket scenarios.
• You are a saver and budgeter or have a high net worth.  Savers / budgeters can easily project their annual medical expenses and accurately allocate the required amount of money for an HSA.  Those with high net worth are able to enjoy additional tax-free benefits of an HSA.
• You are over 55 years old:  Low deductible premiums for this demographic can really accelerate.  If you are over 55, you may be able to make your own 100% coverage plan for less than the cost of a $500 deductible, 80/20 plan by fully funding the HSA.   The IRS also allows you to fund additional dollars beyond your deductible if you are over 55.

HSAs are probably NOT a good idea if:

• You are 35 or under:  If you are young, the premium savings generally don’t justify the added risk with a higher deductible.
• You are under 50 and have single coverage:  Again, the premium savings won’t justify the risk.
• You perceive yourself as having a minimum of healthcare expenses:  You will probably save more by having a higher deductible co-pay plan.

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