One of the financial products gaining a little more popularity in recent years is the Health Savings Account (HSA). This type of account allows you to save up for health care expenses via favorable tax treatment.
In order to qualify for the HSA, you need to participate in a high deductible health plan (HDHP). This means that you pay more out of pocket for your health care, since the insurance doesn’t kick in until later. However, it also means lower insurance premiums — up to half off in some cases.
The great benefit of a HSA is that contributions to the account is tax-deductible at the federal levels (state rules vary), and withdrawals are also tax-free as long as you use it for medical costs.
Is a HSA Right for Everyone?
As helpful as a HSA can be, though, it’s important to note that it isn’t for everyone. The HSA is ideal for those who have inexpensive health care needs. Individuals and families that don’t have a lot of health care visits, and who don’t have a lot of high-priced prescriptions, or chronic conditions, can benefit from the HDHP and HSA combination.
If you have high-priced health care needs, though, the situation is different. While premiums are lower, your deductible is higher. If you have regular, expensive health care costs, you will pay more out of pocket even factoring your reduced premiums. If you are hitting your higher deductible every year, chances are that you won’t have a lot of extra money to put in your HSA, even with the lower premiums that come with a HDHP.
Run the Numbers
Before you decide to switch to a health insurance plan with a higher deductible in order to qualify for a HSA, run the numbers for your situation. Add up how much you spend right now for insurance premiums and co-pays.
Next, estimate how much you would pay if you had to bear the cost of an entire doctor’s visit, or for your prescriptions. Information from your health insurance company will be useful so dig up all the paperwork that the insurance company sends you. You will find ones with your claim information, which includes how much a doctor visit or prescription costs, as well as the portion that is your responsibility (the co-pay). Your co-pay on a doctor visit might be $30, but the office visit itself might cost $120.
Add up how much your costs would be if you had to pay them out of pocket. Then add that to your reduced total for health insurance premiums. In my case, the situation was pretty straightforward. Instead of paying more than $600 a month for health insurance, my family pays about $350 a month if we had to pay everything out of pocket. We have a high deductible, but our main cost is about $200 in prescriptions each month. We rarely see the doctor, and our annual visits (one visit a year is preventative and free) total maybe $450.
If I add it all up, I’d be paying $800 a month (since our prescriptions weren’t part of the plan anyway), plus about $120 in co-pays, for a total of $9,720 a year. On the HDHP, though, we pay $550 in premiums and prescriptions, and the $450 in office visits, for a total of $7,050. We save $2,670 each year by going with the high deductible plan. Plus, I put money aside in the HSA, and use that money for office visits and prescriptions. Most of our expenses, therefore, end up being tax deductible.
Run the numbers, and see if it works for you. But make sure you do spend the time to make the calculations because a high deductible plan isn’t necessarily a home run for everybody.