Healthcare costs are rising faster than incomes, and healthcare insurance is also becoming increasingly unaffordable. Census Bureau estimates indicate that 45 million Americans lack health insurance, and the number has been growing steadily every year. There are some options however, and many Americans have found a solution to the rising costs by combining high-deductible insurance with a Health Savings Account (HSA).
Health insurance pricing is complex, and it varies between carriers, but in general, your premium is higher when you have a low deductible. Individuals or families who are heavy users of medical services may do better by keeping a low deductible, to avoid constant outlay. But if you are reasonably healthy, it is often advantageous to take an insurance policy with a higher deductible.
The HSA works hand-in-hand with a high-deductible policy, allowing you to put money, up to your deductible amount, in a special tax-deferred account. You can use funds from that account for all of your deductible expenses, and certain other healthcare expenses that are not covered by your policy at all. For example, you can use your HSA to pay for prescription or over-the-counter medications, even if your health insurance plan does not have a prescription benefit. It can also be used to pay for dental or vision care.
Money in your HSA cannot be used to pay your insurance premiums, but it can be used to pay for COBRA coverage if you become unemployed. If there are funds left in your account at the end of the year, you can roll it over to the next year. Older “flexible spending accounts” work like an HSA, but if you do not use the money by the end of the year, you lose it. HSA funds stay with you, and any money in your account that you do not use, continues to earn interest.
To qualify to purchase an HSA, you must have a qualified, high-deductible health insurance policy that meets the IRS guidelines. Your insurance carrier will tell you whether or not any given policy complies. The policy must have at least a $1,000 deductible for individuals, or $2,000 for families. You can contribute up to $2,650 a year to your HSA if you are single, or $5,250 if you are a family, but only up to the amount of the actual deductible. There are no income limits, and you can still have an IRA at the same time as an HSA. In case of a financial emergency, you may withdraw the money out of your HSA for non-medical use, but there will be a 10 percent penalty if you take it out before you are 65.
Spending money from your HSA is easy. Your provider will usually give you a debit card or checkbook tied to the account, which you use to pay for your healthcare services. Alternately, you can pay for services out of pocket, and then pay yourself back out of the HSA. Of course, don’t forget to save your receipts showing that the expenses were legitimate.
You can set up your HSA through your insurance carrier if they offer it, but even if they don’t, you can still have an HSA through a third party such as a bank or other financial institution. The benefits are substantial. Your monthly premiums may be half what you would otherwise pay for a lower-deductible policy, and you also gain a major tax break. There’s no question, healthcare is expensive no matter how you cut it — but the HSA plan helps to make it a little more manageable.