When I introduced a number of benefits for parents, some concepts included the flexible spending account (FSA) and dependent care account (DCA). Today, I have a new one for you, the health savings account, otherwise known as the HSA. The HSA offers an interesting twist on the approach to health care insurance. Let’s walk through the rules regarding the HSA.
The first requirement is that you must have a high deductible health plan, a minimum $1,200 if single, $2,400 minimum if for family coverage of 2 or more people. Note – the numbers below are effective for both 2010 and 2011:
|Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
Along with such a high deductible comes a lower premium for the coverage. Consider an example: If the doctor visit cost is $150, and as a single person you have three visits over the year, you won’t receive any reimbursements at all but you will save more than that $450 in reduced premiums. When you do the math for your situation, it may be that the reduction in premiums is enough that there’s only a small gap between that savings and your maximum out of pocket for the year. Your risk is limited in a year of high expenses, and you get to put the saving away from year to year in the HSA that goes along with the high deductible coverage.
Now we’ve come to where the HSA fits in. The HSA is an account that lets put aside pre-tax dollars from your income (similar to the FSA) to be used for the medical expenses you incur during the year. The greatest benefit comes from the fact that in contrast to the FSA, the HSA has no use-it-or-lose-it provision. The money set aside is yours, and can be invested as you wish, even in mutual funds, depending on the custodian and the balance in the account. You may find after a few years the balance in the account is enough to cover the maximum out of pocket and choose to reduce your deposits the upcoming year. For those who have saved the maximum in their 401(k) and/or IRAs, the HSA can provide a great long term solution to your medical expenses. As shown in the chart, the deposit limit is lower than that of an IRA, but as an account to cover your medical expenses it will still have the potential to grow significantly over time. Those over 55 can deposit a “catch-up” additional $1000. The deposits not only avoid federal income but the state tax of most states. By choosing the HSA, you also avoid the 7.65% combined FICA and medicare tax. This can easily add up to a combined tax savings of nearly 40%.
As long as you are spending the funds on medical, dental, or vision, the withdrawals remain tax-free. By the end of 2009, there were 8 million workers covered by the high deductible plan/HSA combination, if your employer does offer this, it may be time to speak up and ask.