It seems like there is an article every day about how the cost of health insurance is going up, how many people don't have health insurance, and how our system for paying for medical care is broken and needs to be fixed or replaced.
What isn't talked about is that since January 1, 2004, there has been a new way to pay for medical expenses that makes health insurance much cheaper than it used to be. Health Savings Accounts, or HSAs, are the name of this new and very different way to pay for health care.
Health Savings Accounts combine a health insurance plan that pays for medical costs after a patient has spent a few thousand dollars on medical care. One unique thing about these medical insurance plans with a high up-front cost, or "high deductible," is that a patient can open a tax-favored savings account similar to an IRA to pay for the deductible. When a person is sick, they can take money out of their Health Savings Account without having to pay taxes on it.
As with a "rainy day fund," a person with an HSA saves money in his or her own savings account and also pays a health insurance premium. This way, if something bad happens, the insurance will pay out. Most other types of health insurance are more expensive than the HSA-compatible plans because they don't start paying for treatment until a patient has a few thousand dollars worth of medical bills.
The cost of the low-cost health insurance plan and the HSA savings part is probably the same or less than the cost of a traditional health insurance plan that starts paying medical bills right away. There are three ways that HSA plans save a lot of money:
- The money saved in an HSA stays with the person who has it until it is used to pay for qualified medical expenses;
- The money put into an HSA savings account is an expense that can be deducted from Federal income taxes. Many states also let HSA contributions be deducted from income taxes.
- A person who has health insurance pays less to the insurance company.
Most people only think about how much health insurance costs when it's time to pay the premium (i.e., monthly payment for the insurance.) This is true for both people and families who buy their own health insurance and companies that buy insurance for their employees and their families. For these people, HSAs make the most sense because every dollar they save on premiums stays in their own pockets.
HSAs have a unique benefit for employers: they can put some or all of their employees' health insurance premiums into their HSA savings account. Employees can also put money into their own HSA accounts and get a tax break for doing so, up to the IRS limit.
So, an employer who saves $150-$200 a month per employee could put $75-$100 a month into an employee's HSA account, get a tax break, and still spend less on health insurance for their employees than they would on a traditional plan.
The employees like this arrangement because any money deposited into their HSA account become theirs immediately (i.e., the vest immediately) (i.e., the vest immediately.) The fact that employees get full rights right away also helps companies that don't have retirement plans (e.g., 401k plan.)
At age 65, you don't have to pay taxes if you use the money in your HSA account for something that isn't medical. Many workers see this as a chance to save a lot of money for retirement, as long as they stay healthy. If they get sick, they can use the money to pay for their care.
HSAs are the new way to save money on health care costs.
