Health Savings Account - The New Health Plan?

With the health insurance industry in a state of flux as new reforms are enacted and existing policies are subjected to revisions, now is the best time to plan for the future in terms of health care. One great option that is sometimes overlooked is a health savings account, or HSA. Here I examine what HSAs are, why they may be the best option for health insurance, what the risks of having a health savings account are, and what the future has in store for health savings account holders.

What is a Health Savings Account?

A health savings account is a federal income tax friendly savings account specifically for medical expenses. This sort of savings account is available to those enrolled in a high deductible health plan, or HDHP. Under such plans, the enrollee will pay a maximum out of pocket total of $5,950 for individual plans or $11,900 for individual and family plans. It is important to note that both the policy holder and the policy holder’s employer can contribute to a HSA plan.

Federal income taxes are not levied on contributions to a health savings account. However, like IRAs, or individual retirement accounts, penalties may be incurred if withdrawals are made for non-medical expenses before retirement age. However, no penalties are applied for withdrawals for approved medical expenses, even if taken before retirement.

As recently as 2010, over the counter medications could be paid for using funds in a health savings account. However, starting in 2011, a doctor’s prescription, even for over the counter medications, is necessary in order to avoid any penalties that may apply when using HSA funds for such expenses.

Why Choose a Health Savings Account?

There are a number of benefits associated with having a HSA. Heath savings accounts are a great way to avoid the hassle of negotiating coverage with an insurance company. Moreover, they offer the opportunity for individuals to save for their future health needs.

For those considering opening a health savings account, one of the most important benefits is being able to decide when and how any money is spent. Moreover, unused funds from a particular year remain in the account and can be rolled over, or put toward future treatments. Rather than being subjected to set payments for a health insurance policy, HSAs allow account holders to determine how much they will contribute to their health care each year.

For those concerned about having to use “in network” care providers, a health savings account may be the best choice. Account holders are able to select the best care providers based on their own criteria, rather than having to rely upon a list of pre-approved doctors covered by a particular insurance policy.

In terms of funding a HSA account, individuals and employers alike can make contributions. Moreover, those contributions are tax-deductable, or they can be made pre-tax, meaning an individual’s employer can make a contribution based on the employee’s income before taxes are deducted.

What Are the Risks of Having a Health Savings Account?

Like any insurance plan, there are also some potential risks associated with HSAs. One of the main arguments against HSAs is that those in good health will stop investing in insurance policies through insurance carriers, reducing the amount of money in the health insurance pool to cover less healthy members. Meanwhile, those in poor health will likely steer clear of HSAs because their poor health will require more medical interventions and thus added expenses.

Another important consideration is the unpredictable nature of illnesses. It is hard to plan ahead for catastrophic health problems, and those who are unfortunate enough to suffer from poor health may also find it difficult to save money with a health savings account because of the relatively greater amount of money spent on their health care.

While the freedom to select a health care provider at will and decide which treatments to undergo can be liberating, it can be extremely difficult to gather unbiased information regarding medical treatments and health care providers. Thus, evaluating the best course of action may be challenging.

Financial concerns must also be considered when weighing the pros and cons of a health savings account. As of January 2011, withdrawals for nonmedical expenses will incur both taxes and a 20% penalty if the withdraw occurs before an individual reaches retirement age. After reaching 65 years of age, no penalty will be applied, but the individual will have to pay taxes on any funds withdrawn from their health savings account.

What the Future Holds for Health Savings Accounts

Health savings accounts offer individuals the opportunity to invest in their future medical well-being. HSAs also offer financial benefits that make long-term sense in terms of tax-deferred investments and retirement savings. The attractive, low premiums associated with health savings accounts makes them an excellent choice and is part of the reason HSAs continue to increase in popularity. As their popularity grows, it is likely that comparative data regarding doctors, treatments, and facilities will become more accessible as well.

Financially, the major benefits of opening a health savings account include the potential for untaxed interest on the money placed in the HSA, and the ability to count health care expenses as deductions on annual tax returns. This translates into savings today and investment interest tomorrow. Since there are no penalties for withdrawals that occur after reaching 65, health savings accounts may also serve as an additional source of retirement income, a great option in today’s shaky economy.

 

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