I get emails often from readers who are struggling with Health Insurance related issues – whether they are fully un-insured as a family or they are just paying for their children’s insurance, among many other scenarios. I’m no expert in this area, but we’ve done a lot of research in trying to figure out what is best for our family. PLEASE feel free to add your input or experience in thecomments section below.
Today I’ll be covering the HSA (Health Savings Account) and assuming you are a married couple without children. I’ll also write a brief example at the bottom of this post for a family like ours with 4 kids.
What is an HSA?
An HSA is basically a savings account for medical expenses with the added benefit that anything you deposit into this account is done BEFORE taxes and is 100% free from any taxing. You are limited to how much you can deposit annualy, 2010 are $6150 for Family, $3,050 for individuals. (HSA holders 55 and older get to save an extra $1,000 which means $4,050 for an individual and $7,150 for a family) You’ll get a debit card associate with your HSA account that you can use on doctor visits, etc. You can also use your HSA to cover dental and vision expenses.
Can anyone sign up for an HSA?
Yes and no. Yes, you can IF you also have a High Deductible Medical Insurance Plan. I know, this scares many of you because high deductibles mean quite a bit out of pocket when you visit the doctor. However, high deductible plans also mean low monthly premiums. So if you’re able to save 2-3 hundred dollars each month in monthly premiums, and instead you put that TAX FREE money into and HSA to cover any doctor visits (or lack thereof) then little will change for you.
You must also:
- Covered by high deductible health insurance plan
- Not covered under other health insurance
- Not enrolled in Medicare
- Not another person’s dependent
What are the financial benefits to an HSA?
Let’s play with the numbers I got at the time I wrote this post (Dec. 2010) when I used the Kaiser Health Plan Calculator to get an idea of what your savings/cost would look like. Remember this is for a married couple.
- $618 per month – $25 Copayment Plan (or $7416 per year) : The Copayment 25 plan offers broad coverage, predictable out-of-pocket costs and prescription drug coverage — for a higher monthly rate. Office visits have fixed copayments and no deductible.
- $255 per month – $5000 Deductible Plan w/ HSA (or $3,060 per year): This plan features a $5,000 deductible, low premiums, and no cost for covered services (after the deductible). Open an HSA to enjoy tax advantages with this plan. Maternity coverage is provided.
So let’s see how the math would look, assuming you’re a fairly healthy active couple and visit the doctor infrequently. You’d be surprised to know that even with an HSA you aren’t paying 100% out of pocket every time you visit the doctor, you still have low a co-pay for several services just as you would with a standard Copayment Plan. For example well-child visits and routine exams are FREE with no co-payment or deductible paid.
$618 – $255 per month = a savings of $363 per month.
If you put that $363 into an HSA for 12 months, you’d be close to maxing out your HSA account ($6150 for Family, $3,050 for individuals). You’d have $4,356 in savings and you didn’t pay a penny in taxes on that money. Now let’s say you got a really bad cold or had a reaction to a spider bite and you had to visit the doctor once or twice this year, and let’s just say your deductible was $150 per visit you’re still ahead of the standard Copayment Plan by thousands of dollars and the money is YOURS and is sitting in your HSA account instead of in Kaiser’s pocket for coverage and doctor visits you never needed.
What about in a “Worst Case Scenario?”
Ok, I’ll admit the above is in a best case scenario with a healthy couple that only took 2 trips to the doctor last year. Let’s assume (God forbid) that you or your spouse is involved in a car accident this year or you get really sick. If you’re putting the $363 into your HSA, hopefully you’ll have some funds to draw from to cover your deductible, but remember the MAX is $5,000 OOP and after that everything is covered. So absolutely WORST CASE SCENARIO you’d pay $255 per month and you’d have to pay $5000 in deductible costs this year, you’d be out a total of $8,060 which is just $644 more than the standard Copayment Plan. In my world, that’s a risk I’d be comfortable taking seeing as though I’ve never had an expense that high other than child birth (and even that is covered in some high deductible plans). Even in that case, it’s only 1 per year (hopefully!) and if you’re planning ahead and saving that $363 per month, and if you take a year off between babies, financially you’d still be ahead!
What can I use my HSA Savings account funds to pay for?
I’m going to write this next section assuming it’s already 2011 because this info will be changing effective 1/1/2011. Here is the exact description from the HSA Center:
A qualified medical expense is one for medical care as defined by Internal Revenue Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. Most expenses for medical care will fall under IRC Section 213(d).
However, some expenses do not qualify:
- Surgery for purely cosmetic reasons
- Health club dues
- Illegal operations or treatment
- Maternity clothes
- Toothpaste, toiletries, and cosmetics
In the past you were able to use your HSA account for over-the-counter medicines, however that will not be the case in 2011. You also cannot use your HSA to pay for your monthly insurance premiums. If you withdraw this money or use it for non-health related expenses, you can expect to see a 20% tax penalty – so just don’t do that. If an individual is age 65 or older, regardless of whether the individual has been enrolled in Medicare, there is no penalty to withdraw funds from the HSA.
FOR THE FAMILIES:
Using the exact same theories from above, I will run the numbers on our family of 6 (2 adults and 4 children).
- $1,062 per month – $25 Copayment Plan (or $7416 per year) : The Copayment 25 plan offers broad coverage, predictable out-of-pocket costs and prescription drug coverage — for a higher monthly rate. Office visits have fixed copayments and no deductible.
- $366 per month – Deductible 30/2700 with HSA: The Deductible 30/2700 with HSA plan offers the lowest monthly premium of all HSA-qualified Plans. It also offers an optional tax-advantaged health savings account. (NOTE: This was the lowest option for our family size, and also note that there is still a small co-payment AFTER the $2700 annual deductible)
$1,062 – $366 per month = a savings of $696 per month.
If you put that $696 into an HSA for 12 months, you’d MAX OUT your HSA account ($6150 for Family, $3,050 for individuals). You’d have $6,150 in savings plus an additional $2,202.
Damon Collins via Facebook January 10, 2011 at 10:49 am
Fan-tastic! We have been using a HSA (and high deductible insurance) for about 5 years now and it has save us tons of money while providing outstanding coverage.
via Facebook January 10, 2011 at 10:52 am
Thanks Damon, so glad to hear it’s working for you too. I highly suggest it in most cases.
Damon Collins via Facebook January 10, 2011 at 10:55 am
It certainly isn’t for everyone…but it is for MOST everyone! Thanks again!
Melyssa January 10, 2011 at 11:39 am
Nice breakdown Julia.
My hubby’s company has an HSA program because they don’t have enough employees to qualify for a small business discount with other providers. But we are covered by my company’s benefit.
But if we weren’t then I’d definitely look into HSAs.
Ever since Dave Ramsey mentioned it on his radio show I was curious. To me, it makes sense.
And as with most insurance policies, opting for the higher deductible is usually a smart choice. Well, that’s what I do.
I am glad they changed some of the restrictions for the FSA and the HSA. I mean really, it’s nice not to pay tax on toiletries and your gym membership, but it’s not really qualified as a medical expense. Now I think people will use these programs as they were intended and not take advantage of them. Well, unless someone finds another loophole.
SueBee January 10, 2011 at 1:16 pm
Thank you!! This is a change we are looking to make pretty soon so this is really timely information. I am just curious, though- is the HSA like a flex spending account in that you MUST use all the funds in it by year-end or lose it, or can you roll your savings over from year to year?
Julia January 10, 2011 at 3:13 pm
Sue, sorry I was out this afternoon – but NO it’s YOUR money! It rolls over every year, the only thing is that there is a max amount you can contribute into the account each year. I hope that helps!
Harmony January 10, 2011 at 1:49 pm
Thank you for this! Those high premiums seem like such a waste when you’re healthy (thank God) and rarely visit the doctor. I will have to crunch some numbers for myself. So, as I understand you, after the age of 65 you can take out your HSA money and use it for any purpose?
Julia January 10, 2011 at 3:14 pm
That is what I understand, of course – I am NOT an expert, but from my research that is the current law.
Christina Levasheff January 10, 2011 at 1:54 pm
Julia…
This is SUCH helpful information and SO pertinent for our family right now. Thank you!
Julia January 10, 2011 at 3:14 pm
Oh Christina, that brings me so much joy!
Melyssa January 10, 2011 at 3:34 pm
Julia is correct. Unlike an FSA, the HSA can be rolled over to the next year. So ‘no’ you do not need to use it all up by December 31st. I, too, am not an expert but have spoken to others who use HSA and I’ve also done some reading online.
StacyK January 10, 2011 at 7:50 pm
AWESOME article! We just moved from California to Tennessee so we had to get new health insurance.
Imagine my SHOCK to learn that only ONE company (Blue Cross) even offers maternity/prenatal coverage. Thanks to the 111th Congress and our new health”care” laws there is just NO more maternity coverage ~ NO prenatal care and NO labor and delivery. (Just do a Google search for Obamacare and Maternity Coverage for the ugly truth)
We did opt for an HSA because we felt there was just no other option for us as a married couple with no children, infertile for the last six years, small business owners that needed to purchase something for ourselves. Your article just confirmed the decision that we made:))
I’m still pretty upset about the newest law of the land, putting our country into horrendous debt and completely disregarding the most vulnerable in our society.
Juli January 11, 2011 at 7:51 am
Something else to consider, which I love about the high deductible plan . . . if you ever do hit your max, it’s a great year to get all those tests or elective (covered) procedures done. We were in an accident and immediately maxed out last March. I was determined to get my money’s worth out of all the “free” that remained through December. It will save us in the long run! Now it’s back to reality . . . I have to pay to go to the doctor!
We love our plan — even though it still costs us a fortune, it seems! It’s just not cheap to have health care!!
Thanks for an intelligent write up about the HSA. Most people just don’t understand that the risk isn’t as high as they think. Thank you for helping others see the whole picture.
Marie January 11, 2011 at 8:07 am
We have a high deductible plan and HSA account with my employer. At an inservice, they clarified that in 2011 OTC meds would not reimbursable with HSA funds UNLESS you have a note from you physician stating that the OTC med is prescribed. So basically, my MD signed a letter I drafted that said the following OTC meds are prescribed for the following individuals – and I listed every OTC med that I could think of for me, my spouse, and our kids. The HR rep said the letter would have to remain on file at home and would NOT have to be obtained yearly. This would suffice if your HSA was ever audited. A way to continue to take advantage of HUGE savings, as my employer contributes to my HSA.
Amy January 11, 2011 at 8:16 am
We have used an HSA since we had kids and it’s works beautifully for us. Fortunately, my husband’s employer pays the premiums, but they aren’t much since we have a fairly high deductible. My husband divides the family deductible by the number of paychecks and puts that in our HSA account each time he gets paid. We miss the money less since it’s taken out automatically, and we are able to cover our deductible with tax-free money. Since two of our three kids have medical issues, we meet our deductible every year — without feeling too pinched in the pocketbook. It’s been the best thing for us.
Vanessa January 12, 2011 at 11:40 am
My husbands employer offered a high deductible insurance and we switched last March. It was a little scary at first while we were waiting for the HSA to build up money, but it seems to be working well for us so far. It is nice to be able to have control over our own money!
One thing that has been frustrating for us is that we have taken more notice of what the pediatrician has charged us for and I have been SHOCKED at some of the charges. I took my son to his pediatrician for an annual checkup and during the visit the doctor discussed with me the possibility that my son may need to be tested. This was a 10 minute conversation that I was charged an extra visit for!! After talking to the doctor’s office and the hospital that they are affliated with, I still haven’t been able to get the extra charge removed.