Chances are, when you started working, you had a meeting in the HR office about all your medical and insurance benefits and something called an “HSA” was blown over and mentioned here and there. This little gem in the insurance world might be your answer to paying for medical expenses without having to empty your savings.
What is an HSA?
An HSA or a health savings account is a tax-free savings account created for the purpose of paying medical expenses. Basically, it’s a way to automatically save money for medical bills. So why use this instead of a traditional savings account? Here are three reasons:
1. An HSA is tax-deductible – just like your IRA.
2. Deposits into your HSA are tax-free (and never taxed); so is the interest earned.
3. HSA money is yours, it doesn’t expire at the end of the year like an FSA.
An FSA or a flexible spending account is similar to an HSA, but remember that the “F” in FSA stands for forfeited, any unused money in your FSA is lost.
An HSA is intended to work in conjunction with high deductible health insurance; it’s a way to save for your deductible, should you need that money in the future. The money you contribute to your HSA can be used for your deductible payments or other qualified medical expenses, including those not covered by the health insurance, like dental and vision care. You actually can use your HSA funds for non-qualified medical expenses, but at that point your withdrawal is subject to your regular income tax as well as a 10% tax penalty.
HSA vs. Traditional Health Care Plans
There are some definite differences between an HSA plan and a traditional health care plan. Typically, consumers want a low monthly premium, so they exchange a lower payment for a higher deductible. On the other hand, you can pay higher monthly premiums in exchange for a lower deductible? An HSA plan allows you to use the money you saved on your premiums in a tax-advantaged savings account to build interest, whereas with a traditional plan, more money is spent on premiums regardless of how much health care you actually use.
Traditional plans may include: higher monthly premiums, a smaller deductible, as well as copays and/or coinsurance. HSA plans may include: lower monthly premiums and a higher deductible. So depending on your health needs, a high-deductible plan may very well cost less overall than repeatedly paying a traditional plan’s copays and coinsurance.
If you think that an HSA plan might be a good choice for you, talk to your insurance professional about getting started saving today!