The following is a guest post by Kim, an optometrist by day and blogger by night. You can follow her journey toward 20/20 financial vision at Eyes on the Dollar. She’s been a huge supporter of BFS and I am very happy to have her featured today!
With health care costs on the rise and lots of confusion about new health care laws, it might seem easier to ignore the whole thing. While tuning out the politicians and insurance companies might be appealing, one option you need to follow through on is having some sort of health insurance. Even if you are young and healthy, what would happen if you were hit with a serious injury or extened illness? A week in intensive care could set you back $100,000. If you don’t have that kind of emergency fund, you need health insurance. If your employer offers a very complete plan at little or no cost to you, that would be a great option. If not, you will have to decide which type of policy makes sense for your needs and budget. While there are several options available, I think the advantages of a health savings account far outweigh other types of health plans.
What is a Health Savings Account Plan?
An insurance policy that is health savings account eligible is a high deductible health plan. Generally, the premiums are less than a plan with a low deductible, the theory being that the savings in premiums will be more cost effective that paying a higher bill each month for coverage you don’t need. To go along with the plan, you set up a separate health savings account at a bank or other institution that offers this type of service. When you have an eligible medical expense, put money into and pay the bill from this account. You can make regular deposits up to the maximum annual contribution limit, or you can put money in only when you have an expense.
Who Benefits from a Health Savings Account Plan?
If you are healthy and only go to the doctor for an annual physical and the occasional illness, this is a great plan for you. If you have a chronic condition that requires multiple doctor visits and several medications, this might not be the best idea.
My husband is a teacher and has wonderful health insurance that is covered in full by his employer. My five year old daughter and I could be added to his plan. It covers most everything with small copays for some services. To be added to my husband’s group plan, the cost is $500 per month. We elected to go through the private sector and purchased a high deductible HSA plan that costs $190 a month, effectively saving $3720 per year in premiums alone. If your annual medical expenses averaged more than $6000 a year, the group plan would probably be the better option.
Tax Advantages
A huge advantage of a health savings account is the tax benefits. If you have an eligible plan and set up a corresponding HSA account, any money deposited into this account is subtracted from your Mean Adjusted Gross Income for tax purposes. For 2013, the maximum amount you can contribute is $3250 for individuals and $6450 for families, with an extra $1000 “catch up” contribution allowed if you are over age 55. We generally average around $2000 per year on doctor visits, dental visits, and medicines. In our tax bracket, using the HSA to pay medical bills saves $600 a year in taxes.
Last year our income was just over the threshold to include my husband’s master’s program tuition as a deduction. By switching $2000 from savings into our HSA, we qualified for the deduction, which saved an extra $1600 in taxes! You have until April 15 of the following year to contribute for prior year’s tax benefits. If you need some tax help for 2012, you still have time.
Interest earned on HSA money also grows tax free, forever. There is no “use it or lose it” penalty like with flexible spending accounts. If you withdraw money to pay for qualified medical expenses, you will never have to pay taxes or penalties. While I haven’t done it, you can set up an HSA account to invest in stocks, bond, CD’s, or annuities, but always consider volatility and how fast you can get to that money if you need it.
What are Eligible Medical Expenses?
Another wonderful advantage of health savings accounts is the variety of things you can do with them. If you have money in your HSA account, it can be used for regular doctor visits, dental visits, optometrist visits, glasses, contacts, braces, LASIK surgery, medicines, chiropractor visits, physical therapy; the list of eligible expenses is very long. You can even use HSA money for over the counter medicines IF you have a prescription from your doctor. If your doctor recommends that you take vitamins or use aspirin, have him or her write that in a prescription.
Are There Any Penalties?
If you do use your HSA money for non-elilgible expenses, you will have to pay regular income tax and a 20% penalty. Much like taking money from your 401(K), you need to think really long and hard before you use this money for something other than it’s intended use.
You also can’t use HSA money for non-dependent care. With the new health care laws, you are able to keep adult children on your health plan until age 26, but if you don’t claim them as a dependend, you can’t use HSA money for their medical expenses.
Final Thoughts
While it might be nice in theory to have expansive insurance coverage, it is expensive. Financially, an HSA plan makes more sense for my family. Last year alone, it saved us over $5000 in taxes and premium payments. No one likes to pay money for health coverage, but you really can’t afford not to. If a health savings account makes sense for you, it is a great way to take some of the sting out of the high cost of health care.
Crystal’s Comments: Thank you for the explanation, Kim! Does anybody else have experience with HSA’s? Anything to add to Kim’s breakdown?
Very cool, Crystal!! I shopped around for a HSA in NJ recently and could not find a darn thing. They are tough to come by over here for sure. Great post!
It’s mind boggling how expensive some employer sponsored health insurance can be. We just became eligible for insurance through my work, and after looking at the monthly costs vs what was covered we had to pass. Luckily we live in Canada and doctor’s visits and hospital stays (though not private or semi private rooms) are covered by our taxes, but it was a hard call passing up insurance. Glad to hear you found something useful for yourself shopping independently!
Our family just switched to an HSA this year. Even though we have two young kids, all of the preventative stuff is covered 100% even with the HSA plan, and it would take about $4,000 in doctor visits to make the HSA less effective, and even with kids that eat up doctor visits, that’s still a LOT of ground to cover. Actually, knock on wood, we’ve had zero doctor visits for the kids this year. The issue I have is that providers don’t seem to know exactly how to work with them. My wife had to go in for a vision related issue, and the office made us pay the full amount, which is fine, but so far I haven’t seen a corresponding claim hit the insurance company, which needs to happen so that it gets tracked against our out-of-pocket.
I LOVED my HSA. I had one when I was pregnant with my daughter. I asked the hospital for a run down of the costs I could expect then saved as close to that amount as I could in my HSA. After her delivery, I would save what I thought we would use in doctor’s visits or prescriptions. I’m now looking to see if my self insured company’s health plan qualifies as an HDHP so I can set one up on my own. Great post and very informative! A lot of people I talk too don’t see a difference but it’s such a better plan than an FSA. Just the fact that the money follows you AND rolls over from year to year is bonus enough for me.
@Tony Not sure why NJ is a stick in the mud for HSA’s. I assumed they were universal. Did you check with an agent who works with them?
@Sheryl That is exactly why group insurance made no sense for us.
@Money Beagle, you shouldn’t have to have an insurance claim submitted to use an HSA. All you need is a receipt from an approved expense, and any doctor visit should count. If it was a vision issue, medical will not cover that unless is is something like double vision or loss of vision, not routine stuff like my vision is blurry and I need stronger glasses. If you wish they can still run it through your medical plan. It will likely be denied, but some people still want to see if it will apply to a deductible. All of that should still be fine for using HSA money though.
@Mel, I agree. It is too hard to speculate what your expenses might be with an FSA, and I hate use it or lose it. The HSA makes more sense if it is something available to you.
If I did not have good medical insurance, I would go with a high deductible and get a HSA. I am very healthy, but all it takes is one hospital stay to wide out your savings. Great explanation.
We did not know about this. So I checked it out. Still awaiting an answer, but it looks like I can set one up now for my 2012 expenses, as long as I get all the paperwork, deposits, and claims in before April 15th. Cool, we may be able to save $3000 if you include the tax advantages, for last year, and over $6000 for this year, as I need some dental work and preventative stuff done that would cost us 100% on our high deductible. We only pay a small amount per month for the premium, as its a retirement perk for my husband. Weird, but it went up 600% ($6/month with $5000 deductible to $38/month with $4000 deductible) and is still lower than anyone else’s this year. This will help. We have a few items to check out first, but we went to the IRS forms and questions page and are working through them. http://www.irs.gov/pub/irs-pdf/p969.pdf
Thanks for the article!
@Krantcents, You really can’t beat teacher’s insurance, a wonderful job perk.
@retired, That’s great to hear. If you have to pay it anyway, you might as well get some tax advantages. I try to think of it as getting at least 25-30% off of medical expenses.
I love my HSA. The only thing I would caution people on before joining a plan is to make sure you have a good size emergency fund. The worst thing you could have happen is on January to have a big expense and not have any money in your HSA to cover it! It can kind of be a shock initially to pay everything out of pocket, but once you have some money saved in your account it’s a great way to pay for medical expenses.
I currently pay $290/month for my employer health benefits that comes with an HSA. I’ve shopped in the private sector before, but I haven’t found one that beats the benefits I currently receive. I currently treat my HSA like a retirement account and invest in index funds. I still keep enough liquid in case I need to get reimbursements quickly.
Our HSA provider is the same bank as our checking account (Chase) and the cards look almost identical. Last week my wife accidentally paid the car payment with the HSA card. Now, we are doing a manual deposit for the same amount and hoping the IRS doesn’t notice.
Where I work, they just offered HSA accounts to us …. yep, free untaxed money to use. Everything medical including Lasik, prescriptions, etc….
Hard to pass up free money … or paying less for what would normally be totally out of pocket. Great post.
I love my HSA and have had it since my employer first offered it. My employer contributes some on my behalf, and I fill in the rest to max out the family contribution. Then I pay medical expenses out of pocket and let the savings accumulate. I am invested in some cash, money markets, and a mid-sized growth stock fund that made over 16% last year.
I am holding on to my receipts to pay myself back if I ever need a little cushion. Added it up last night and I could get $3500 if necessary by cutting myself a check.
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