Healthcare 101 – What is a Health Savings Account?
Part 5 in our series to introduce you to some basic concepts about your health care.
As the costs for health care continue to rise, individuals and companies are trying to find ways to control these rising costs. Some look for ways in the insurance products they use while many companies institute wellness programs and other creative ways to help people stay healthier and thereby reduce serious health care episodes that can drive up costs.
In terms of insurance plans, one of the increasingly popular methods is the use of the “high deductible/health savings account” option. These plans normally have a cheaper premium for the insurance, but the insured needs to pay a certain part of the full cost of health care up to a certain amount, called the “deductible”. For many plans, this deductible can be anywhere from $1,500 to $3,000 and must be met in a single year before the insurance plan starts paying for health expenditures. For example, Sue is a single person who elects a high deductible plan. Her plan has a $1,500 deductible, with a maximum out-of-pocket limit of $3,000. In this case, when Sue goes to the doctor, she will need to pay the full cost of the visit (or the “allowable” that the insurance company has determined will be paid to the doctor for that visit). She will continue to pay that full cost for every subsequent visit until she has paid in $1,500. After that, normally health insurance plans will share in the cost of services (say, 80% by the insurance company, and 20% by Sue) and she will continue to pay the 20% (the “coinsurance”) until her total out of pocket expenses reach $3,000 (which includes the $1,500 in deductible she paid, and all of the 20% coinsurance amounts). After she reaches the $3,000 in a single year, she will not have to pay anything for her health care expenses until the start of the next year. She is limited to the $3,000 in a single year.
Along with the high deductible plan, employers will pair a “health savings account” or “HSA” with it. An HSA is pre-tax savings account, much like your 401(k) retirement plan, that allows you to save away money for your out-of-pocket health expenses and save the taxes on the money saved. When you incur an out-of-pocket medical expense (such as your doctor visits for meeting your deductible), you can reimburse yourself for that expense from your HSA account. This operates much like a health care flexible spending account, however, there are a couple of differences.
In an HSA, you can save a larger amount in a single year (for 2016, the individual limit is $3,350), compared to $2,550 in a flexible spending account. Also, you can carry over your balance in an HSA from one year to another with no limitations, similar to your 401k plan. If you don’t incur a lot of healthcare expenses in a year, you can grow the balance in your HSA to use for expenses in another year when you might need it.
Check to see if your employer offers an HSA/High Deductible plan option at your work. In some cases, employers may even contribute to the HSA on your behalf as well, which makes it even more valuable.
