Health savings accounts (HSAs) operate like personal savings accounts. Money put into an HSA can only be used for health care costs. The individual has total control over the amount of money in the account; they choose how much to save, when to deposit money, and whether or not to use that money. The owner of the account can invest the money in bonds, stocks, or mutual funds. The money put into an HSA is not taxed as long as it is not withdrawn from the account for anything other than medical expenses. For a person to be eligible to open an HSA, he or she must have a high-deductible insurance plan, to provide coverage should there be a need for extensive health care.
HSAs were created in 2003 as a way to give more options and control to the individual. This is called consumer-driven or consumer-directed health care. HSAs were also theorized to keep health care costs down. The logic is that if individuals are spending their own money, they will use health care more wisely and conscientiously. It was also said to make the market more competitive and lower the rates set by health care providers. The IRS determines the limits on how much money can be contributed to an HSA. In recent years, the limits have been around $3,000 for individuals and $6,000 for the average family.
HSAs have several advantages. They give more control to the individual and they help prepare for the future. Because the money is not based on the current state of an insurance plan, there is no way the individual will not be able to access his or her healthcare savings. Especially for younger people who are healthy, HSAs allow them to save money that they would otherwise be giving to an insurance plan, without any “return” on the monthly premiums when they do not need health care. Then when they are older, they will have a safety net for medical costs.
Another advantage to HSAs is cost-effectiveness. The money a person contributes to their account is not taxed. This again makes it advantageous to younger people who generally have less tax exemptions and deductions. It allows them to “keep” a greater portion of their income. At some point in almost everyone’s life, health care expenses will be incurred. From a long-term perspective, money in an HSA account means less money has been paid in taxes.
Finally, employers can contribute to their employees’ HSA plan. Due to tax regulations, the employer will generally contribute via a cafeteria plan, which may include set contributions or matching contributions. Having a second party add funds to an HRA account means more money that the individual decides how to spend, as opposed to employer-purchased insurance, where payment decisions are made by the insurance company.
An HSA can be opened through a bank or through an employer using the HSA option. To open an HSA, a person must be under the age of 65 and have a high-deductible insurance plan. Individuals with HSAs must use high-deductible plans as their only form of health insurance (vision, long-term care, disability, and dental plans are permitted).
A high-deductible plan has advantages as well. The premiums for this type of plan are low because the deductible paid when health care is rendered is higher than normal plans. By using an HSA in conjunction with a high-deductible plan, a person is in control of their health care spending while protected should something catastrophic happen. For instance, an emergency room visit for a broken bone would generally be paid for entirely by the policy holder because the cost would not be high enough to exceed the deductible. This deductible would then be paid using the HSA account. If extensive health care was needed, the deductible would be exceeded and insurance would cover some of the costs. Some high-deductible insurance plans cover some preventative procedures, such as pap smears, before the deductible is met, making the HSA/high-deductible combination plan even more advantageous.
In conclusion, there are many benefits to having an HSA plan. They offer control over healthcare spending, untaxed investment opportunity, and greater decision-making power for the individual. Because they are used in combination with a high-deductible insurance plan, there is still a safety net should something catastrophic happen. Health care savings account are popular among young professionals because they help them save for future expenses while taking advantage of tax breaks. HSAs allow people to have power over how much money they save for health care and how that money is spent.