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Health Savings Accounts (HSA's)

Health savings accounts (HSA’s) are tax advantaged savings accounts designed to help Americans save money on health care costs. HSA’s were created by the Medicare bill signed by President Bush on December 8, 2003 and are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. The HSA concept is quite similar to the Medical Savings Accounts (MSA’s) and the Archer medical plan which the health savings account now replaces (although there are some Archer medical accounts and MSA’s still in existence – however no new accounts can be formed).

A health savings account is an alternative to traditional health insurance in its plan design yet still has all of the comprehensive health benefits of traditional health insurance. Where traditional health plans may have copays for doctors visits and prescriptions, a wide range of deductible levels, some form of coinsurance (usually 80/20) – HSA’s are quite different.

Health savings accounts are in fact very simple and straightforward. There are two components: the insurance component and the savings account component. The insurance component is a standard high deductible plan with no coinsurance and no copays. The nice thing about this type of plan design is that your maximum out of pocket cost is always equal to your deductible.

With an HSA you will always pay medical expenses starting at dollar 1 until you reach your deductible. Everything is covered under most HSA plans including doctor’s visits, lab fees, prescriptions, surgery, hospital fees, etc. Once you reach your plan deductible for the year then everything is covered 100% (usually up to a lifetime maximum of $3,000,000 or higher with most reputable insurance companies).

For example, if you have a single HSA with a deductible of $2,850 then the most you will ever have to pay during the calendar year is $2,850. If you go to the doctor 3 times and the cost is $150 each time then you will pay $450 (not taking into consideration the fact that all large insurance companies will still negotiate lower rates for you from their in network providers). If you break your leg and the hospital bill is $30,000 then you will pay $2,850. If you get cancer and the bill for chemotherapy and other treatment is $225,000 then you will pay $2,850. You get the picture - your annual maximum out of pocket is always equal to your annual plan deductible!

The nice thing about the insurance component of the health savings account is 1. Your monthly premiums are much lower than traditional plans because of the higher deductible and 2. Your maximum out of pocket cost for any given year is always equal to the plan deductible – no matter how large the bill may be.

The savings account component of the health savings account allows for some very attractive tax benefits when properly utilized. In a nutshell, all money contributed into the savings account can be deducted on the front of the 1040 (up to certain IRS limits) much like a traditional IRA. The money in the account grows tax free and is able to be withdrawn to pay for qualified medical expenses tax free. The money in the account rolls over from year to year (unlike a Flexible Spending Account (FSA) which you may have heard about from an employer). The money in the account is even able to be used for retirement or other types of expenses when the account holder reaches age 65.

With an HSA it should be a goal to grow a nice little balance in the savings account component of the plan and that way (as the money rolls over from year) the money in the account can be used to pay medical expenses and work toward the plan deductible every year – all the while enjoying some very appealing tax benefits. Compare free HSA health insurance quotes from top insurance companies side by side!