Everyday it seems like health care costs are increasing, and a Health Savings Account (HSA) is one way employers assist employees when they have a high deductible insurance policy.
What is a Health Savings Account?
My mom has a Health Savings Account because her health insurance deductible is $4,000 per year (It was $5,000 until this past year). Her employer contributes $2,000 per year into her HSA (divided by all the paychecks in the year, so a small amount is added with each paycheck), and she contributes money each paycheck as well. When the deductible is met, the insurance starts covering expenses. Any remaining money is the employee’s.
Advantages of a Health Savings Account:
- Tax deductible contributions (Like an IRA)
- Tax free – any withdrawals made to pay qualified medical expenses are not taxed.
- Tax-deferred – accrued interest is tax-deferred and if used for medical expenses is not taxed.
- Your money is yours – as we discussed about Flexible Spending Accounts, the unused money for an HSA is yours to keep and grow. However, FSA money is lost if you don’t use it.
As someone who has had experience with this type of plan, the bad news is that the deductibles are high, and these are usually bare bone plans. If you are someone who rarely visits the doctor, this plan could have economic advantages. However, as a family of four, this type of plan would be very tough for our family, since we would have a very high deductible to meet each year. However, if you are close to retirement it may be more attractive, because the money in the HSA can be used to offset costs of medical care after retirement. See what the IRS says about Health Savings Accounts.
On a side note, the year my mother’s employer went to this type of health insurance, she had two kidney stones, and the deductible at that point was $5,000. After two emergency room visits, it made it very difficult for her to catch up in the first year. This is why we recommend our Financial Freedom Plan, so that every family has enough money saved to cover these type of expenses. Her employer switched with very little notice, and it didn’t give her enough time to come up with $5,000. This was a tough financial lesson learned for our family.
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