If you’ve read our previous columns and done the calculations and estimates suggested, you have an idea of what you actually spend in total for health benefits. By adding your health insurance premium costs to your estimated out-of-pocket expenses, you now have your total out-of-pocket pre-tax health care costs.
Now it’s time to calculate whether you could save money by opening a Health Savings Account, and perhaps raising your deductible so that you can pay a lower premium cost. (Check out our Health Insurance Glossary for quick and easy explanations of terms like "deductible" and "premium.") With “open season” upon us, you are probably being required to choose what health insurance to purchase for the upcoming year.
Health Savings Accounts, or HSAs, were legalized in 2003. Here are the basics about these types of accounts that you should know:
- It allows you to save for qualified medical expenses (diagnosis and treatment of disease, including prescription drugs). You own it and, similar to your IRA, it goes with you if you change jobs.
- An HSA can only be created if you have a qualified high deductible health insurance policy. Co-pays and prescription drug benefits are not allowed because you pay these expenses from the Health Savings Account.
- The qualified high deductible health insurance policy must have a minimum deductible of $1,050 per individual and $2,100 per family. Contributions to the HSA may be 100% of the deductible up to a maximum of $2,700 for an individual and $5,250 for a family.
- Both you and your employer can make contributions to your HSA. Employer contributions are non-taxable and employee contributions are made on a pre-tax basis; that is, you can’t be taxed on them.
- Investment earnings on an HSA accumulate tax free just like an IRA. HSA distributions are also tax free if used for qualified medical expenses. Upon death, HSA ownership may transfer to a spouse on a tax-free basis.
Health Savings Accounts are the vehicle that the government is sponsoring to put us in charge of how we spend for our routine healthcare. The hope is that once we are in charge of our routine expenditures, we will change our demand for medical services, only selecting necessary care. The co-pay we currently pay at the doctor’s office does not assist us in discerning between necessary and unnecessary health services or expenditures. Therefore, we believe that someone else’s money is paying for our health services—not our own.