Guest Post by Wiley Long, HSA for America
As a licensed insurance professional, I have been asked countless times to recommend a health insurance policy that will cover catastrophic events yet allow the consumer to have some control over how they spend their health care dollars. My most recommended product is a high-deductible health plan (HDHP) combined with a health savings account (HSA).
An HSA allows you to deposit funds to be used for health-related expenses into a specially created savings account. You can then use these funds to help pay the cost of your health care. The funds can be used to help meet your deductible and pay for medical services that may not be covered by your insurance plan. Some of these may include dental care or alternative health care like chiropractic care.
Alternately, you can keep the funds in your account and pay your medical expenses out of your pocket. In this way, the funds can stay in the account and accrue interest over the years. You can then reimburse yourself in the future, after you have benefited from the tax-deferred growth.
Money you put into your HSA is tax-deductible, it grows tax-deferred, and withdrawals to cover medical expenses are tax-free. If you fully fund your HSA account, you can take a deduction of that amount on your 1040 when preparing your taxes, regardless of how much other income you might have.
So, if you are a single person who funds your HSA with the maximum contribution limit of $3,250, your taxable income is reduced by $3,250. For families, the maximum amount is $6,450, and in either scenario, people over the age of 55 are allowed an additional deposit of $1,000 per year.
Additionally, if you are in good health and do not spend large amounts of money on medical expenses yearly, your HSA acts like an interest-bearing savings account that grows tax-deferred, similar to an IRA. You can invest the money in stocks or mutual funds, just like you may with an IRA, and you can use the money for medical expenses at any time without having to pay a penalty or taxes. However, you need to be aware that if you use the funds for non-medical reasons, you will be assessed a 20 percent penalty.
If you choose to leave the funds in the account, you can withdraw them for any reason after you turn 65. You will not pay a penalty even if you use the funds for non-medical reasons, although you will have to pay taxes on the amount you withdraw at that time.
If you own an HSA account and contribute the maximum amount yearly, it is possible for you to accrue as much as $500,000 or more over a 30-year period. Of course, the accrued amount will vary depending on how much you contribute, the return you get, and how much of your funds you use for medical expenses. Regardless, you can easily see what the long-term financial benefit could be.
Another excellent benefit to combining an HSA with an HDHP is that, because you are shouldering more of your medical costs yourself, the premiums are typically considerably lower than a more traditional health insurance policy. This can save several thousands of dollars a year in premiums alone.
Also, since you are paying most of your health costs yourself and are using cash to do so, you are in the position to shop around for the best prices on most medical services. Doctors will often offer a cash-up-front discount to save them the hassle of billing to an insurance company. This also has the potential to be a huge money-saver.
For the most part, the ACA has not had a huge impact on HSA accounts. However, the HDHP you choose must be compliant with all of the federally required mandates, and in some areas there are now fewer options available. However, premiums for HSA-qualified plans are still usually significantly lower than other more traditional health policies.
Also, the tax deduction you get from having an HSA account actually lowers your modified adjusted gross income (MAGI) by the same amount. For example, if you contribute the maximum amount allowed of $3,250 for a single person, your MAGI is lowered by that amount. Since premium subsidies or tax credits for purchasing an HSA plan are based on your MAGI, this means that your HSA contribution may help you qualify for additional help paying health care costs.
Many people are under the assumption that an HSA-qualified health plan cannot be purchased on the insurance exchange, but this is untrue. Both on and off the state or federal exchanges, there are HSA plan options.
Since my primary goal as an insurance advisor is to help people save money on their health insurance and other medical expenses, I feel an HSA combined with an HDHP is by far the better way to go for most people. Maximize your contribution every year in order to get maximum tax benefits and be a smart consumer when spending your HSA money. You’ll lower your monthly premium, reduce your taxes and hopefully end up with a nice nest egg one day.
Wiley Long is President at HSA for America, an insurance brokerage specializing in high deductible health plans and health savings accounts. He blogs at
America’s HSA Blog.