Health Savings Accounts Are Great for Those with Inexpensive Health Needs

by Miranda Marquit · 7 comments

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.

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  • Barry says:

    This article is flawed. It purports to evaluate HSAs but it confuses HSAs with high deductible insurance plans. The cons cited are not cons of HSAs, they are cons of high deductible plans, mainly that if you have high healthcare costs, these plans will cost you. But this exactly when you’ll be glad you have an HSA so that those out of pocket costs are paid with pre-tax dollars. So the headline is completely upside down. If you’re going to be spending a lot out of pocket you want an HSA.

  • Mr. HSA says:

    HSAs are also great for people with large medical bills because the insurance provides true catastrophic protection that you usually can’t find anywhere else. By law, the high deductible policies (HDHPs) that pair with an HSA have strict limits on out-of-pocket that apply to all covered benefits, including prescription drugs. Very few other policies have this protection, especially for prescription drug expenses. Check the fine print of your current policy and see if yours even has an out-of-pocket limit, and if it does, are prescription expenses included. I’ll bet they’re not.

  • Thad P says:

    Love our HSA here too. Not young, but am healthy, and always prefer to have “skin in the game”. When it costs me nothing to go to the doctor it eventually costs me far more.

  • Jamie says:

    Great article – I love my HSA because I am young and so far only see the doctor once a year and the (usually expected) visit around winter when I invariably need medicine for a bad cold or sinus infection. I love having money set aside each year that rolls over tax free. The way I see it, once I have $5,000 in it, it will cover my deductible should anything major happen on a given year (knock on wood I won’t need it). It’s pretty much my emergency fund Part II.

  • Miranda Marquit says:

    Hi John:

    You need to open an account. You can check with your bank or credit union to find out about their options. Also, some online brokers offer HSAs that allow you to put your money in an account that holds index funds. Better bang for your buck. Check around and see what’s available for you.

  • John Poff says:

    Do you have any advice about the mechanics for adding additional money to the HSA? I would have thought that my insurance company (Mail Handlers) would have provided information on this, but they haven’t. Nor was calling customer service any help. That request out of the way, thanks for the article. I have a high-deductible plan and have no complaints.

  • Ornella @ Moneylicious says:

    Really great tips to find out if you should go for an HSA. I agree with you—you have to run the numbers

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