Health Savings Accounts

What's in it for you?

If you're like most Americans, you're probably pretty concerned about the costs of health insurance and medical care. What once was a reasonable expense seems to be shooting off into a stratosphere of unaffordability for many folks. Legislation in recent years has opened the way for Health Savings Accounts (HSA) to replace the limited Medical Savings Accounts that went into effect in 1996. HSAs allow participants to save money in a special account that can be used for almost any healthcare expense. If your company is considering such a program, jump on board. It's a good way to take back control of your own health care.

Specifically, an HSA consists of two elements: a savings account coupled with an insurance policy that meets the federal definition of a high-deductible plan. You own the HSA and can take it anywhere. The money you contribute to the HSA is not taxable as long as it is used for qualified medical expenses. The deductible ranges from about $1000 to $5000 for singletons and $2000 to $10,000 for families.

If the term "qualified medical expenses" causes you to question the HSA's usefulness, don't. Medical expenses covered include vision, dental, and almost all medications or treatments prescribed by your doctor. The key is making sure your doctor prescribes the item or treatment. HSAs even include alternative treatments like acupuncture and may extend to items as exotic as a special education teacher to work with your learning-disabled child. Excluded items are predictable such as cosmetic surgery or health club memberships.

HSAs can be set up by companies for their employees or by the self-employed for themselves. This differs from the 1996 Medical Savings Accounts (MSA) that were designed for sole-proprietors and the self-employed. The account can be administered any of a number of companies licensed to do business in your state who offer HSAs in conjunction with qualifying high-deductible insurance programs.

Alphabet soup: HSAs, FSAs, and MSAs

There are too many acronyms and abbreviations floating around insurance generally, but for the sake of clarification, here's what you might want to know about the difference betweeen HSAs, MSAs, and FSAs.

Program Description Advantages Disadvantages
HSA (Health Savings Account) Coupled with a high-deductible insurance policy, HSAs are replacing the older, more limited MSA programs. It's a tax-free account that can be used for any qualifiying healthcare expense.
  • Money contributed to HSA account is completely tax free up to the IRS-defined limit
  • It's always your money: you never lose it
  • Completely portable
  • Gains interest tax free
  • Empowers you to take control of your own healthcare
  • Pay for routine healthcare from the HSA account
  • Provides money for out-of-pocket, unexpected healthcare expenses
  • People older than 55 can contribute more to the account
  • Investment account can be bequeathed to your heirs
  • Takes time to build up an account.
  • Reduced benefit with age
  • Not available to individuals with Medicare coverage or other health plans that duplicates HD plan
  • Pre-existing medical conditions may make program problematic
  • You are responsible for your own healthcare decisions
  • Many program carriers are not available in all states
  • Funds used for non-medical expenses can be taxed and a penalty assessed.
Archer MSA (Medical Savings Account) Replaced by HSA    
FSA (Flexible Savings Account)  
  • Any type of health plan qualifies.
  • Funded by pre-tax dollars.
  • Owned by employees
  • Doesn't accrue interest.
  • Use it or lose it. Funds must be spent by end of year, otherwise they go back to the employer.

More HSA Advantages

Though it's true converting to an HSA can be problematic for some people, generally it's a valuable program for many. One of the most potent benefits of the HSA is the ability to participate in your own health care. You make the decisions about what the cost-benefit-risk is, which means interesting conversations with your physician are inevitable. No longer will you passively be inclined to follow your doctor's orders. As an engaged participant, it's likely you will want to find out what tests, procedures, and medications are actually necessary. It's a huge incentive to take charge and even make lifestyle choices that will result in lower long-term medical and dental costs.

Because the money comes out of an interest bearing account, you have a powerful incentive to get the most possible from your health care dollar. Because expenses up to your deductible are paid from the account with a check or debit card, you are effectively paying cash. Most doctors, dentists, and labs are happy to give you a cash discount because they don't have to cover the expense of insurance billing.

In addition to saving for health care, your HSA may actually provide more savings potential than your 401(k) plan. With its favorable tax free terms, the ability to accrue significant interest over time makes it higher yield that many other long-term savings plans.

HSAs are not a pancacea for what ails the country in terms of health care coverage for all Americans, but for many it provides a useful vehicle for funding health care while empowering the individual to make the decisions that ultimately affect not only his or her health but also their financial bottom line.

For information about health insurance options, visit Deschutes Insurance .

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