–Submitted by Susan Smith, HSA Insurance super fan

Health Savings Account: What is it?

HSA insuranceA health savings account (HSA) is a medical savings account for individuals enrolled in a High Deductible Health Plan (HDHP). Monies contributed to an HSA insurance plan are not taxed at the time of deposit. But unlike a flexible spending account (FSA) which returns unspent funds to the employer at the end of the year, HSA funds roll over and continue to accumulate year after year. Heath Savings Accounts are owned by the individual and are used to pay for qualified medical expenses without incurring federal tax liability. Withdrawals for non-medical expenses, on the other hand, are treated similar to those of an IRA…a tax advantage if taken after retirement age but penalties incurred if withdrawn earlier.

HSA Benefits

  • Lower premiums. Premiums for an HDHP is usually less than the premium for traditional health insurance. Higher deductibles lower the premium since the insurance company is no longer paying for preventive healthcare. The insurance experts believe that if Americans see a relationship between medical costs and their bank accounts, they will consume less medical care, shop for bargains, and be more sensitive to excess and fraud in the health care industry.
  • Lower out-of-pocket expenses. In catastrophic situations the maximum out-of-pocket expense liability with HSAs can be less than that of a traditional health plan because a qualified HDHP typically covers 100% after the deductible without a coinsurance.
  • No time constraints. HSA insurance accounts have an advantage over Flexible Spending Accounts because deposits aren’t tied to expenses in a particular plan or calendar year. They are automatically rolled over for future medical expenses, or used to reimburse qualified expenses from prior years (as long as the expense was qualified under an HSA plan at the time incurred).
  • Supplemental retirement funds. Over time, if medical expenses are low and contributions are made regularly to the HSA, the account accumulates significant assets and can be used for retirement on a tax-deferred basis.
  • Tax-free money for dental, eyewear, etc. Most medical expenses not covered by the underlying HSA insurance policy may still be considered allowable expenses under the health savings account. For example, dental work, including braces, vision care, including glasses, eye surgery, alternative therapies such as acupuncture, etc. can all be paid for with tax-free money from the HSA.

Potential Downsides

  • Benefit a few. Some consumer organizations have rejected HSAs because it is their opinion that they benefit only healthy people and make the health care system more expensive for everyone else.
  • Exclude the poor. Critics also say that low-income people do not earn enough to benefit from the tax-breaks offered by HSAs. The tax breaks are too modest—when compared to the actual cost of insurance—to encourage significant numbers to buy this coverage. There is also concern that the lower premiums of HSA-qualified high-deductible health plans might attract lower-income individuals who cannot afford to fund an HSA account, and may avoid necessary health care services under the HDHP.
  • Financial risk. As is the case with any investment, HSAs are subject to market risk. While the potential upside from investment gains can be viewed as a benefit, the downside and possibility of capital loss may make the HSA a poor choice for some.