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.