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Health Savings Account (HSA)

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Eric Stauffer is a former insurance agent and banker turned consumer advocate. His priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best...

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UPDATED: Sep 10, 2013

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HSA - Health Savings AccountNo matter what type of health insurance you carry, you will most likely be responsible for many out-of-pocket expenses.  Insurance companies keep their operating costs low by shifting some of the financial burden to patients.  This is especially true of the more affordable policies, which usually feature high deductibles and high out-of-pocket limits.  Fortunately, if you have such a policy, there are ways to reduce the financial burden of your health care expenses.

A health savings account, or HSA, is an excellent way to save money for medical expenses.  The HSA allows you to put money aside before taxes, which increases the amount you can save.  With employer-based insurance, the HSA withdrawal might be taken straight from your paycheck.  You can still set up an HSA even if you buy your insurance independently, however.

How Does a Health Savings Account Work?

An HSA works similar to a traditional IRA, which allows you to put pre-tax money into an account for later use. The pre-tax part is important because it effectively reduces your overall taxable income for the year. Where the HSA is different from a traditional IRA is at the time of withdrawal. Traditional IRAs are taxed when money is pulled out, but an HSA is not as long as the money is used for a qualified medical expense.

HSAs are hailed by many financial advisers as one of the best tools a person can use to lower their annual tax liability because you never pay taxes on the money if used for qualified expenses. You can also save the money and roll it over for years. The money in the HSA can be invested to help it grow, and can be used later in life when medical expenses may be very large.

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What Expenses Will an HSA Cover?

A health savings account will pay for any qualifying medical expense that you may incur throughout the year.  This includes deductibles, co-payments, coinsurance and prescription drug costs.  In some cases, you may also be able to use your HSA to pay for certain over-the-counter drugs, vaccinations and other medications that insurance would not pay for.  If you have an HSA, you should be able to apply those funds toward prescriptions even if you do not have prescription drug coverage through your insurance, which is a primary benefit of HSAs for many patients.

Having money set aside in your HSA helps to mitigate the expense of a high-limit policy.  Since you can use the pre-tax dollars in the HSA to pay for medical expenses, you reduce the amount you must spend on medical care and keep more money in your pocket.

Can Anyone Qualify for a Health Savings Account?

Not everyone can set up a health savings account.  In order to establish an HSA, you must be under the age of 65 and carry a high-deductible or catastrophe insurance plan.  This plan must be your only health insurance, and your spouse must also be enrolled in a high-deductible plan if he or she uses your insurance as secondary coverage.  For HSA purposes, a high-deductible plan is one with a deductible higher than $1,250 for an individual or $2,500 for a family plan.

Once you’ve determined that you qualify for an HSA, establishing the account is fairly simple.  If you receive insurance through a group plan, your employer can set it up in your name.  Otherwise, you can speak with your insurance company or a local bank for guidance.  By setting up a health savings account right away, you can take advantage of the low premiums offered by a high-deductible policy without spending as much on medical expenses.

About Eric Stauffer

Author: Eric StaufferI am a former insurance agent and banker turned consumer advocate. My priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best place to get it.

2 Comments

  1. My husband has an HSA and I use this as a secondary insurance. It doesn’t seem quite fair that they expect me to meet the $2000 deductible as they are only asked to cover the co-pay. So what happens is when I go to the dr., I tell them I have two insurances and they have to submit to secondary only to find out that I am in fact responsible for the co-pay. This doesn’t make a lot of sense to me but did not know if its even worth me being on his plan. Any thoughts?

    Reply
    • Hi Robin,

      An HSA is not an insurance policy, it is a savings account that can be used for qualified insurance expenses. In order to deposit money into this type of savings account, you must have a qualified HSA-eligible insurance plan.

      Having two insurance plans doesn’t prevent you from paying your co-pays. A secondary insurance policy simply kicks in after your primary. You are still responsible for paying your deductibles, unfortunately.

      Best,
      Eric Stauffer

      Reply

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