Health Savings Accounts as Alternatives to Health Insurance
As an alternative to a traditional health insurance plan, some Americans may prefer a combination of a health savings account and a high deductible health insurance plan. This may help lower health care costs for some people, although it does not come without drawbacks. Essentially, an HSA holds money that will be used to cover future medical expenses for the individual who deposits the funds or their family. Funds can be deposited into an HSA without being subject to tax.
You cannot use an HSA without setting up an HDHP, which offers the tradeoff of lower premiums in exchange for higher deductibles and out-of-pocket maximums. You will need to pay for medical costs until you reach the deductible, at which point the plan will cover a percentage of the costs. Once you reach the out-of-pocket maximum, the plan will cover all of the costs. These plans are often known as catastrophic health plans.
To be eligible for an HSA, you must be younger than 65 years old, such that you are not eligible for Medicare. You must not be a dependent of anyone else, and you cannot be covered by other insurance that would pay for medical costs, with some exceptions. These exceptions include insurance that covers only dental care, vision care, long-term care, accidents, workers’ compensation, or disabilities. If you have a policy that covers a specific medical condition, and it pays a set amount for claims, this will qualify for an exception as well.
You do not need to meet a certain income limit to start an HSA, and you do not need to get income from a job. If you work for a company that offers a flexible spending arrangement or a health reimbursement arrangement, you might still be eligible for an HSA, but you should investigate the situation further with an insurance professional. (Read more here about FSAs and HRAs.)
Your deductible for the HDHP must reach at least a certain threshold, which changes over time and varies depending on whether an individual or a family holds the plan. Limits on annual out-of-pocket expenses for individuals and families apply, although the limits may be greater for services received outside the network if you have a network plan.
Benefits of HSAs
Perhaps the most obvious benefit of an HSA is the reduced premium cost for the HDHP, which means that a policy holder faces lower fixed costs. You can channel the money that you would have spent on premiums into the HSA. Also, you will receive tax benefits because the money can go into the HSA without being taxed, and you can deduct any post-tax contributions from your taxable income. Money in an HSA will grow and accumulate interest without being subject to tax, and no tax applies to withdrawals from the HSA, as long as you use the money for qualified medical expenses.
Using an HSA instead of a health reimbursement arrangement through your employer allows you to control the account. Even if your employer offered an HSA as a benefit, you can take the funds in the account with you after you leave the employer.
Using an HSA instead of a flexible spending arrangement avoids the risk of losing contributions to the account at the end of each year. Funds in the account carry over from one year to the next, and you can store as much money in the account as you want for the future.