Health Savings Account (HSA) Overview

	Individual & Family Health Insurance
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General Characteristics of HSAs

Health Savings Accounts (HSAs), introduced in 2004, have become the fastest growing method for financing health care.  The reason:  HSAs provide a better way to minimize overall health care expenditures.

Here we present useful HSA overview and commentary .  For an in-depth study of HSAs, check out the US Treasury website.

Two Components to HSA Package

Tax Advantages

Your deposits to a Health Savings Account (HSA) reduce your taxable income, and withdrawals from the account are never taxed -- as long as these funds are used to pay qualified expenses, which are defined by the IRS.  In other words, HSAs allow you to fund out-of-pocket health care expenses with pre-tax money.

Unused HSA funds are yours to keep, and can remain in your account, without tax consequence, for as long as you live.  You can make tax-advantaged HSA deposits until age 65.

HSA Funding Limits

The maximum you may contribute to a Health Savings Account (HSA) is:

For the 2008 tax year, HSA holders age 55 and older can make additional annual contributions of $900.  For 2009, this additional contribution increases to $1,000.

HSA Tradeoffs and Advantages

For the large majority of consumers, HSAs produce a net financial gain.  But there's a tradeoff:  You'll likely have a less generous health insurance plan.

With an HSA, you may have a higher major medical deductible, and you won't enjoy office visit and prescription co-pay benefits typical of PPO and HMO plans.  Your potential out-of-pocket health care expenses may increase.

Changing How We Buy Health Care

HSAs were designed to motivate better health care purchasing decisions.  The underlying idea is that people make smarter financial choices when they're spending their own funds -- especially when the money would otherwise grow in a tax-advantaged account.

To make better health care purchasing decisions, you need better preliminary information about health care expenses.  This issue of "cost transparency" is a key element of the health insurance industry's growing Consumer Directed Health Care (CDHC) movement.  With increasing online access to hospital/physician fee data, more useful information is becoming available, but health care cost transparency is still in its early stages.

Retirement Savings vs Current Expenditures

You can treat your HSA as a pure retirement account -- like an IRA or a 401k.  You can make HSA deposits to age 65, withdraw no funds and generate tax-deferred investment income to be disbursed in your retirement years.

However, a more financially sensible approach is to use some HSA funds for current health care expenses.  It's a matter of paying bills with pre-tax income, as opposed to paying with after-tax income.

Use your HSA to save, but spend when appropriate.  For most people, the HSA functions both as a tax-deferred retirement account AND as a tax-advantaged health care funding tool.

How High a Deductible?

The higher your HSA-compatible plan deductible, the lower your health insurance premium.

In 2009 you can get HSA annual deductibles as low as $1150/single and $2300/family, but the most popular choices are deductibles near the maximum annual HSA contribution limits.  For 2009 these amounts are $3000/single and $5950/family.

As your HSA balance grows, you may be inclined to purchase a higher deductible and further reduce your health insurance premium.  Many of our clients are now purchasing HSA deductibles of $5000/single and $10,000/family.

Are HSAs Right for You?

If you're not already enrolled in an HSA, you should give it serious thought.

Over the years we've evaluated countless health insurance situations, leading us to this general conclusion:  HSAs usually provide a significant financial upside, but a very limited (if any) financial downside.