Health Savings Accounts offer you a means to save money on employee health insurance. For smaller companies, HSAs provide a means to affordable health insurance for you and your employees.
Created by the Medicare bill that was signed into law on December 8, 2003, an HSA is a tax-free fund that works in conjunction with a High Deductible Health Plan (HDHP). The insured sets up a HSA as a way to pay their primary medical expenses that fall below the deductible of their HDHP, such as doctor visits and prescriptions. They put money into a HSA and these funds are invested according to their instructions. The contributions are above-the-line deductions, meaning that the contributions reduce taxable income. Also, if not used by the insured, HSA contributions build up year to year.
HDHPs are sometimes termed “catastrophic” insurance, because they only begin paying once your medical expenses reach the deductible. This is often anywhere from $1,000 to $5,000, depending on the policy and its provisions. The main benefit of HDHPs is that their premiums are much lower than traditional health plans. This comes at a time when health insurance premiums are going through the roof and inflating business expenses.
As a consumer looking to open a HSA, you must first have a HDHP. You cannot have any other form of medical insurance, such as a traditional heath plan or Medicare. The only types of insurance that you can have in order to qualify for an HSA include:
- Long-term Care Insurance
Rather than something you purchase, a HSA represents a savings account into which you can deposit money on a tax-preferred basis. The only requirement in setting up a HSA is to first have a HDHP. The HSA is intended to be a way for you to pay any medical expenses that fall under your HDHP deductible. The HDHP pays for medical expenses that exceed what you have in your HSA.
When purchasing an HDHP, you should get several quotes on the costs. Not all HDHPs are the same. Things to be aware of when comparing plans include:
- The amount of the deductible — the higher the deductible, the lower the rate.
- The amount of the co-pay — Even after the deductible, a HDHP can require that you co-pay a percentage of your medical expenses.
- Maximum lifetime amount — Some HDHPs have a maximum amount that they will pay throughout the lifetime of the insured.
Banks, credit unions, insurance, and other approved companies can be trustees or custodians of Health Savings Accounts. In addition, employers may set up a HSA for their employees. Often they will match the contributions of each employee. Unlike traditional health plans, employees take the HSA with them when they leave the job. They own the HSA and it is theirs to keep.
The basic advantages to owning a HSA are:
- HSA contributions are tax deductible
- Interest earned on the plan is free from tax
- Qualified medical expenses are covered tax-free, including prescription purchases
- Insured owns the money in the plan, and any funds left over from one year roll over into the next year