Health insurance plans can be complicated to figure out. With all the different options, it can be difficult to decide which one is best for you. One thing to consider above all is whether or not you want a Health Savings Account. A Health Savings Account is a huge deal in the health insurance industry. This article takes a look at what a Health Savings Account is as well as the benefits and drawbacks.
What Is A Health Savings Account?
A Health Savings Account (HSA) is a savings account designated for eligible medical expenses. It offers several tax advantages. You must have a high-deductible health insurance plan (HDHP) in order to qualify for an HSA. An HDHP is defined as a policy with an annual deductible of at least $1,300 for an individual and $2,600 for a family in 2017. Once you have an HDHP, you can set up an HSA and begin making contributions either with after-tax dollars on your own or with pre-tax dollars through your employer.
Benefits Of A Health Savings Account
There are three main benefits of an HSA:
- Contributions are tax deductible
- Earnings grow tax-free
- Distributions for eligible medical expenses are untaxed
The first benefit of an HSA is in regards to your contributions. When you make contributions to your HSA from your bank account with after-tax money, those contributions are tax deductible. This means you can claim those contributions on your tax return to save money. In 2017, the contribution limits for an HSA are $3,400 for an individual and $6,750 for a family. Some employers allow employees to contribute to their HSAs with pre-tax money through payroll deductions. If you contribute to your HSA with pre-tax dollars, you won’t be able to claim the contributions on your tax return. But you’ll still experience tax savings because the contributions reduce your taxable income throughout the year. Some employers even contribute money to their employees’ HSAs as an additional perk.
The next benefit of an HSA is that the earnings grow tax-free. You can invest the money that’s in your HSA into stocks, bonds, mutual funds, ETFs, etc. Unlike regular investments, you won’t pay taxes on the gains. This is a huge benefit because your money can experience compound interest on those gains. Over time, your HSA balance can grow considerably; and you won’t have a tax liability. Since HSA funds don’t expire, you can use the money you contribute for medical expenses all the way into retirement.
The last benefit of an HSA is that the money you withdraw for eligible medical expenses is also untaxed. For example, when you pay for a $50 prescription, you could either use your HSA debit card or you could pay from your after-tax money and then get reimbursed from your HSA for the full $50. In this way, the distributions from your HSA are untaxed.
Drawbacks Of A Health Savings Account
There are some drawbacks when it comes to HSAs as well. The main drawback is that you must be enrolled in a high-deductible health insurance plan (HDHP); and HDHPs come with their disadvantages. For one, you could be unexpectedly hit with a large medical bill. If you’re involved in an accident and need to have a surgery performed, you’ll need to pay the full deductible upfront before your health insurance will cover the cost of the surgery. That deductible would be at least $1,300 but could be much more.
Another drawback of HSAs is that you might be discouraged to get necessary medical care if you haven’t saved enough money in your account yet. Since you’ll be responsible for the full price of your medical care (except for preventive care) up to the annual deductible, you may avoid going to the doctor if it’s too expensive. If you prefer more predictable medical bills, a regular health insurance plan without an HSA may be better for you. You’ll pay more in monthly premiums, but you won’t have to pay large amounts upfront when you need to see a doctor.
Situations When A Health Savings Account Would Be Beneficial
An HSA is beneficial under certain circumstances. You’ll have to evaluate your situation to see if it makes sense for you to enroll in a HDHP and start an HSA. Here are a few situations when an HSA would be beneficial:
- You are in generally good health and don’t plan to have a baby, major surgery, or other large medical expense in the near future.
- You can afford to pay the full amount of your annual deductible should a large, unexpected medical expense come up.
- You have money to contribute to your HSA on a regular basis – even better if you can contribute the maximum annual amount.
Regular health insurance plans make medical expenses more predictable. Although the monthly premiums tend to be higher, a regular health insurance plan may be better for you than an HSA under certain circumstances. Here are a few situations when a regular health insurance plan would be beneficial:
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You’re planning to have a baby, major surgery, or other large medical expense in the near future.
You have a chronic condition that requires you to visit the doctor frequently.
You are elderly or have small children, making it more likely for you to seek medical care.
Final Thoughts
Which type of health insurance plan you choose is a highly personal decision. The most important thing is that you’re able to get all the medical care you need. Both HDHPs with HSAs and regular health insurance plans include coverage for preventive care no matter what your deductible is. Beyond that, you’ll have to pay more upfront for your medical care when you have an HSA. But keep in mind that once you reach your deductible, many HDHPs will pay 100% of the cost of your medical care after that.
Having an HSA is especially risky for low-income individuals who don’t have the money to pay upfront for expensive medical care. Although HSAs can save you money in the long run with their tax benefits, low-income individuals may benefit more from a regular health insurance plan that won’t put them in debt should an emergency occur and require a large medical bill to be paid. On the other hand, if you have the money to contribute to an HSA on a regular basis, it’s worth looking into for the tax benefits previously mentioned.
Do you have an HSA? What do you think of it?
