A Health Savings Account Primer
Jenny Thomas heaved a sigh of relief. A month ago she checked
into her local hospital to deliver her first child, but
unanticipated complications necessitated an emergency surgery.
Fortunately both she and the baby were fine. But if it hadn't
been for her family's health savings account (HSA), she could
have ended up owing the hospital tens of thousands of dollars.
An HSA is smart savings plan that you use for unanticipated
medical expenses. Usually, money that you sock away into the
plan comes out of your paycheck before payroll taxes are
computed, so that you maximize your savings rate. Furthermore,
any income that the HAS plan itself generates (such as from
interest or investment appreciation) is also tax free, so it
grows fast. Some employers even contribute extra matching cash
to the plan to encourage you to save.
In most parts of the country, to be eligible for an HSA you also
need to hold a High-Deductible Health Plan (HDHP). An HDHP is a
plan where the deductible - that is the amount that you pay out
of pocket, before the insurance "kicks in" is somewhat higher
that what you might have seen before: usually in the
neighborhood of $2000 to $3000. The big idea behind the HSA/HDHP
combo is that the premiums on the high-deductible plan are so
much lower that even though you pay the first couple of thousand
"out-of-pocket" - actually out of your HSA - you save money in
the long run over a traditional plan.
Hundreds of banks, credit unions and insurance companies offer
HSAs, and it's easy to sign up. Once you're enrolled, you can
use the money in the account for most any approved medical,
dental, vision or disability health care or expense.
HSA's differ from one another mostly in the ways they grow. Some
HSA's grow like traditional savings accounts, with interest
compounding daily. Other HSA's let you be more aggressive and
pick money market funds, mutual funds or other investment
vehicles so that you can maximize the growth of the account.
It's up to you, and you should make sure you understand the
investment choices available to you before you select your HSA
institution. After you have opened an HSA, managing the account
is pretty easy. You setup automatic deductions from your
paycheck, usually totalling an annual amount less than your HDHP
deductible. You then invest your accumulating HSA funds in
interst-bearing accounts, stocks, bonds and/or mutual funds,
depending on the choices available to you at your HSA
institution. Returns on these investments are tax-free, so they
compound fast! If, in some year, your don't use the cash, it
automatically gets carried over to the next year. So in this way
HSA's are different from "Flexible Spending Accounts" which
typically follow a "use it or lose it" approach.