By Art Forrest
A few months ago I went to get an oil change and wound up hanging out all morning while they did other things to my car – truth is I know as much about nuclear warheads as I do about the inner workings of my car, but it was the kind of stuff that gets old and has to be replaced when you hit 80,000 miles or so.
It cost me around $500 and, get this, my auto insurance didn’t pay a dime! Are you stunned? Of course not.
My auto insurance, like yours, is there in case I have a wreck. What if I could sell you an auto insurance plan that would allow you to pay a $35 “copay” every time you had to get some work done on the car, and maybe gave you a couple oil changes for free each year? What do you suppose that would cost?
Why auto insurance can’t work that way
Health Savings Accounts (HSA) – Can They Help You?
Imagine a health insurance plan that gave you “collision coverage” by putting a cap on your expenses at a pre-determined deductible each year (for our example, let’s call it $5,000). Rather than paying for oil changes and new tires, it simply gives you the peace of mind of knowing that whatever happens, you’ll never pay more than $5k for your family’s medical needs each year.
Do you think your premiums would look different?
The mechanics of HSA’s
The idea behind health savings accounts (HSA’s) is pretty simple. Everyone needs protection against the big-boy expenses that come with American healthcare, but most people are paying WAY too much in premiums because they are paying for services they don’t really use that much.
The HSA concept is that you lower your premiums by getting catastrophic health insurance coverage and take care of the front-end stuff on your own (though that front-end stuff typically counts towards your deductible).
You then take some or all of the money you save on your premiums and put it into a tax-advantaged health savings account (HSA). Let’s outline a few key concepts on the HSA itself that will help get some common misconceptions out of the way:
- The money has a triple tax advantage: It is not taxed going in, it grows tax free, and it is not taxed when you use it for qualified medical expenses. And the IRS definition of “qualified medical expenses” is actually broader than your insurance policy’s definition. Without confusing the issue, suffice to say you can use HSA funds to pay for things that may not be covered by your insurance policy, like dental or chiropractic care.
- You cannot use it to buy an iPad without paying the income taxes plus a significant penalty.
- Your HSA is yours, it does not belong to the insurance company.
- Your HSA funds roll over year to year – this is not a use-it-or-lose-it deal.
The Health Savings Account benefit: lower premiums, greater flexibility
The goal is to get to the point where you have 100% of the funds needed to cover your deductible in your health savings account. Then you’re totally good to go. It’s kind of like putting some money away each month for new tires, routine maintenance, and the other inevitable expenses that come with your car so you’re not freaked out when it’s time to pay for your 80,000 miles checkup…but doing so with tax free money!
To be eligible to open and contribute to an HSA, you have to:
- Have a qualified health insurance plan, meaning one that meets certain criteria–that’s where I come in!
- The deductible must be high (but not too high), and
- the plan cannot offer “first dollar benefits” (think copay and drug card) before the deductible, with the exception of preventive care.
In short you lower your health insurance premiums, lower your taxes, and put a cap on your total risk exposure each year. If you can overcome “Copay Anxiety,” the HSA probably makes a lot of sense for you.
If you like what you’ve read here and would like more information…Art Forrest is owner and founder of A.C Forrest insurance group, a family-run business that focuses on the needs of individuals and small businesses. With offices in suburban Atlanta and in Greenville, SC, AC Forrest serves clients in the Southeast, and maintains a referral network throughout the United States. For more information in regard to the content of this post, or for any other insurance matters, feel free to contact him via email.
Do you have an HSA now, or have you had one in the past? How is it working for you? Do you find it to be a real advantage over traditional plans?
Yeah, we’re about ready for the ol’ HSA. Our premium was relatively low for a while, but when my husband and I turned 30 a few months ago, things went up fast.
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I hate my insurance. We pay 650 dollars a month to cover our family and our copay is 30 dollars a visit. (This insurance is your my husband’s employer too, not something we took out ourselves.)
It seems like nothing is covered the first time around, I am billed for everything. I then have to call and argue and then wait to see what they decide. I hate it, but we have no alternative.
I could probably use an HSA- I especially like the fact the amounts roll over each year as opposed to the Health Care Account we have through my husband’s employer.
Thanks for giving me something to think about!!
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We’re on COBRA right now, but the HSA looks really attractive and may be the route we take in a year when the current plan expires. We’re not big users of the healthcare system to begin with, so catastrophic coverage seems like the way to go.
COBRA until the end of the year, then going to be going with something with an HSA
I have heard about HSA but i never paid any attention to it .. but it really sound impressive; i will certainly find out more about it.
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If anyone has questions or wants more information, you can click on the email link at the bottom of the post. Art has extensive experience in HSA’s.
Great analogy with the car insurance – HSA’s are a pretty good option. We save into ours throughout the year and then use the “debit card” it comes with for routine things like over-the-counter medicines or doctor visits etc.
Best part is the tax advantages!!
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Thanks for all the comments. It’s worthwhile, I think, for people to think about their health insurance (and all the rest: auto, life, home, etc.) in terms of “risk management.” With all of them, you’re trying to “manage your (financial) risk.” Most health plans, with their emphasis on doctor & drug copayments and low out of pocket limits, are simply “health-care financing vehicles” and not insurance. By “kicking the copay habit” & buying an HSA-eligible plan and funding the HSA piece, too, most folks will lower their premium (a fixed expense) and improve (by saving $ in the Health Savings Account) their financial/cash position. In a rare fit of common sense, Congress and the IRS continue to allow people access to plans of this type. Save $ (premium) and save money (tax-sheltered savings): makes a lot of sense to me. What do you think?
How does the HSA work? Does some of the premiums paid each month go into this savings?
Tonya – No; the insurance and the savings account are actually 2 different things. You could buy the insurance, but are under no obligation to set up or fund the HSA itself. On the other hand, though, you canNOT set up the HSA account (because it’s a tax-deferred account) without having first set up a “qualifying” health plan. Also, the amount of money you put into the HSA savings account can be as little (or even “zero”) as you like, or be as much as the $3050 annual limit for 2010 (or $6,150 if you have a family health plan). Also, you can save that same amount every year that you have the health plan, so the amount will compound on a tax favored basis annually. Conversely, some people only put money into their HSA account when they know they’re going to have some health expenses (like, say, a $500 physical or $1,000 worth of dental work, etc.). That way their health care is, effectively, tax free: the money deposited into the account is deductible from your tax return, any interest it earns is tax-deferred, and pulling it out to pay for allowable healthcare expenses is also non-taxable (this makes the HSA plan a “triple-tax advantaged” plan).
Health Savings Accounts make a lot of sense for many individuals and families. However, for those living with chronic conditions, such as diabetes,the tax benefit is nice, but when the max annual contribution is half that of the annual out-of-pocket max, then the HSA dollars never have a chance to add-up or roll over from year-to-year thus missing out on the whole 401k aspect of the HSA.
Hi Jacob–I agree. Most plans that lower premiums or offer tax shelter status for unused out of pocket contributions don’t work terribly well if you have ongoing health problems. With all health insurance we’re betting we won’t need to use the benefits so we can take some chances. If you have health conditions and will be using the benefits, you’d be better off with the best health coverage for the lowest out of pocket you can afford.
We have an HSA for the second time and we always enjoy it. One thing that I like is that I don’t always have healthcare budgeted for. I have 2 kids and can’t always predict when we might need to head to the doctor. Well, having that HSA account allows me to just swipe a card instead of having to use “Blow” money or pull money from another envelope. We have almost depleted our account from so many doctor’s visits this year, but it was well worth it!
Hi Whitney–When you have kids you have to be as flexible as possible, you never know when or how much healthcare you’ll need so you have to be ready for anything! HSA’s help with that because they force out of pocket medical costs to be built into your budget. With kids, that has to be a budget line item all itself!
We’ve managed to go some years without emergency doctor/emergency clinic/hospital visits, only to make it up the following year. Its always more a matter of “when” and not “if” with kids and healthcare. That’s why I’ve recommended on other healthcare posts on this site to get health insurance coverage for your kids even if you can’t afford to have it for yourself and your spouse.
Whitney and Kevin — your points are valid and common concerns. Many people find that adding an inexpensive supplemental or “gap” plan to their personal HSA coverage makes a lot of sense.
For example, we use (meaning I personally purchased and we also sell to our clients) a gap plan that costs $46/month but pays up to $5,000 for expenses related to an accident/injury. For a family with kids, if you actually meet that deductible, there’s a good chance it’s because someone fell off the monkey bars or got hurt in a soccer game or something like that. This basically provides you the money to pay the deductible.
It also pays $5k if someone has a heart attack or stroke or is diagnosed with a critical illness like cancer. Anyway… worth considering. You can contact us at the link above for more info if you’re interested.
Thanks Alex! With deductibles climbing due to higher premiums, that kind of coverage makes a lot of sense.