Updated: May 3, 2013 12:14PM
Originally published: January 22, 2004
The Health Savings Account was hidden away in the prescription drug bill passed by Congress last December. But unlike the seriously flawed drug plan, the Health Savings Account is an exciting concept that could make health insurance available -- affordable -- for millions of Americans who aren’t covered by an employer plan.
It’s a concept so new that the insurance industry is just gearing up to make it available. Health Savings Accounts combine inexpensive, high-deductible health insurance plans with a tax-advantaged savings account. “Tax-advantaged” is a new phrase, appropriate because this new account has so many different tax benefits.
Aside from making health insurance more affordable, there’s a great social benefit to HSAs since they encourage everyone to be more watchful about unnecessary medical tests and expenses. If you don’t spend the money in your HSA account, you keep it!
So let me explain how the plans work and how much money you can save. Then, in the coming weeks as various plans start to be offered by insurers, I’ll give you some guidance about specific plans and how to compare them.
How HSAs work
First, some definitions:?183-142?
High-deductible insurance: Instead of buying a health insurance policy with a $250 deductible, you’d buy a policy with a $2,500 deductible. It costs a lot less every month, but you must pay for the first $2,500 in medical expenses each year.
Health Savings Account: The money you save on insurance premiums each year goes into a tax-deductible savings/investment account. An individual can contribute and deduct up to $2,600 in HSA contributions per year, although you don’t need to put that maximum amount of money into the account to set it up. The limit is twice as high for families.
The key tax benefits of the HSA account are four-fold:
First, the money you put into the HSA is tax-deductible. Second, the money in the account grows tax-free. Third, you can make tax-free withdrawals to pay for any IRS-approved medical expense. (There’s no need for HMO approvals!), and fourth, if you don’t spend it this year, the money rolls over to future years for medical expenses and keeps growing tax-free.
Here’s a comparison of a traditional plan versus an HSA for a 40-year-old Chicago male. (The premiums assumed here are from Blue Cross plans available online at www.eHealthInsurance.com, but most current high-deductible plans are not yet certified as HSA-eligible.)
The first alternative is a traditional health policy with a $250 annual deductible, and no co-payments above that amount. The premium for this plan would be roughly $300 a month, or $3,600 a year.
The second alternative is a high-deductible plan -- $2,500 -- and no co-payments above that amount, for an annual premium of about $1,560. (In his State of the Union speech, the president proposed making the monthly cost of this premium also tax-deductible.)
The savings between the two plans is obvious: just over $2,000 per year. (And if the $1,560 premium is made tax-deductible, individuals in the 35 percent tax bracket would have an after-tax premium cost of only about $950 per year -- a savings of more than $2,500 per year.
Those savings are what you deposit in your tax-deductible HSA account. And that’s the money you withdraw tax-free to pay that first $2,500 of medical expenses, if you have them.
OK, so you didn’t have the money to pay the $3,600 annual premium for traditional health care. When the plans become available, just buy the high-deductible insurance and put a small amount in your HSA account. (Nothing says you have to deposit the entire $2,000 or $2,500 savings in the HSA. But later in the year, if you do have medical expenses, put the money in so you get the tax deduction first, and then pay the bills.)
Unexpected medical bills
You might have a tough time finding the money for the $2,500 HSA contribution, but you probably won’t lose your house and assets over an unexpected medical situation, as could happen if you’re totally uninsured.
No more wasting money on insurance premiums for insurance you don’t use. Your lower premiums buy peace of mind. Your HSA account gives you a pre-tax way to pay medical bills. And we’ll all be more careful about what we spend.
It’s a great way to save money, give consumers free choice about medical spending, and put discipline into the health care payments system. And that’s The Savage Truth!
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange and McDonald’s Corp.