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Understanding Health Savings Accounts

Health Savings Accounts (HSAs) were introduced in 2003 by President Bush who was, at the time, looking for ways to improve and modernize the healthcare options available. There has been some controversy over the value of HSAs to the average citizen and the most recent statistics suggest that the take-up has been low and is limited to the more wealthy taxpayers. Let’s see how the HSA is designed to work and then discuss whether an HSA might be the right solution to your health insurance problems.

HSA Contributions

As the name suggests, the first component of an HSA is a savings account that holds the funds you will use to pay the deductibles of your health insurance policy. HSAs pay interest and, in any one year, an individual can contribute a maximum of $3,050. The maximum contribution for families is $6,150. All the deposits are tax-deductible so HSAs offer an attractive means of tax savings. Any unused contributions in the account accumulate over the years and, before you retire, you can make tax-free withdrawals to pay for medical care. After retirement, you can use the money in the account for any purpose without paying tax.

The High Deductible Component

HSAs can only be used in conjunction with the issuance of a high deductible health insurance policy. High deductible health insurance policies are those that have a large out-of-pocket expense that the insured must pay before the health insurance policy begins to pay claims. In order to be considered high deductible, a health insurance policy must have at least a $1,200 deductible for an individual and a $2,400 deductible for a family. They also must have copayment and out-of-pocket expense limits of $5,950 for an individual or $11,900 for a family.

Because the deductible is high, the health insurance premiums are significantly lower than they are for conventional health insurance plans. You also save tax on the money both when deposited and when paid out. These factors can make the plan look attractive, particularly because the definition of medical services is quite broad, including dental, vision and even over-the-counter drugs. The theory behind the design is to establish a link in the consumers mind between savings and medical expenses. The hope is that once people see themselves as managing their own affairs more directly, they will shop more wisely. If enough consumers avoid high-cost services, there will be a general fall in costs for all. Further, because the out-of-pocket expenses are capped in each year, you can save on copayments as against a conventional plan if there is a major medical emergency.

The Case against HSAs

Critics argue that the plan illustrations only give you the best outcome, which occurs if the HSA money goes unused and stays in the account while accumulating interest over the years. This would infer that the plans are best suited to younger people with reasonably high earnings and good health. There are also administrative and management fees payable on the accounts which can take the edge off the tax savings.

HSAs are good health insurance supplemental options for those who can afford the amount of out-of-pocket expenses that go along with high deductible insurance policies. For those who do not have the disposable income to set aside for these expenses, it may be more cost-effective to stay with a conventional health insurance plan which pays most of the costs on routine treatments. Be sure to compare online quotes to help determine which plan is best for you.




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