Health Savings Account (HSA)

Given the high cost of health care and the high cost of health insurance, many people are taking advantage of a fairly new law which allows them to set up a Health Savings Account (HSA). An HSA account allows individuals to pay for medical needs, including a high-deductible health care policy to protect them from a catastrophic accident or illness, using tax-deductible dollars.

Employers with fewer than 50 employees are finding the HSA accounts very cost-effective when it comes to providing their employees with health coverage.

The way an HSA account works is fairly simple. Individuals or employers contribute tax-deductible dollars into a Health Savings Account. As long as funds in the account are used to pay for healthcare, including prescriptions, insurance premiums for a high-deductible insurance policy, visits to the doctor and similar medical costs, money can be withdrawn from the account at any time, tax-free.

Any money left in the account at the end of the year rolls over into the next year, and money can even earn tax-free interest. Any money left in the account at age 65 is yours to spend any way you choose.

A health plan associated with a HSA account must have a deductible of at least $1,000 and may have a deductible of as much as $2,600 a year for an individual and $5,150 per year for a family. With most accounts once the deductible is reached, the health plan pays 100 percent of all additional health expenses for the year, although it is possible that there could be a gap between the deductible and the maximum-out-of-pocket yearly expense.

The idea is that individuals and/or employers will contribute 1/12th of the yearly deductible into the tax-free account each month. The insured will use the tax-free savings account to pay for any needed medical care until the deductible is reached – at which point the insurance plan takes over all payments.

Most people won’t use all of the money deposited into their account each year. Unused money rolls over into the next year. This gives the insured the choice of reducing the amount deposited each month the following year or to continue depositing the same amount and to build up a tax-free retirement account which can be freely accessed upon reaching age 65.

HSA accounts are not perfect. People with pre-existing conditions, for example, may still have trouble getting even a high-deductible insurance policy to immediately cover a pre-existing condition, but until something better comes along, the HSA savings plan is a workable answer for many employers and individuals.