Every year, more and more people become eligible to open Health Savings Accounts (HSAs) as a result of enrolling in High Deductible Health Plans (HDHPs). HDHPs trade-off lower upfront premiums for higher deductibles, enabling people to reduce their upfront health insurance costs. HSAs are bank accounts containing pre-tax money that can be used to pay for medical expenses, or in some cases, used towards retirement. As a result of their multi-purpose nature, managing an HSA may be more complex than it initially appears.
In 2012, the HDHPs necessary to qualify for an HSA were required by law to have deductibles of at least $1,200 for individuals and at least $2,400 for families. Except for certain preventive services, HDHPs do not provide reimbursement for care until the deductible is reached. After reaching their deductible, people are typically required to pay additional co-payments and coinsurance on the care they receive, making out of pocket spending that can potentially be higher than the deductible. Different plans have different deductibles. If you do not have adequate money in your HSA to cover your deductible, you may have to incur medical expenses using taxable income. Thus, it is important to have enough money to cover your deductible in your HSA.
In 2012, the maximum out of pocket expenditure for in-network care on an HDHP was no more than $6,050 for individuals and no more than $12,100 for families. Thus, the true amount one may spend if very ill is far higher than the deductible. To assist people in paying for their care, the government allows untaxed money to be placed in HSAs so that it may later be used on medical expenditures. When deciding how much to contribute to your HSA, it is important to keep your maximum out of pocket expenditure in mind. If you exceed your deductible, but have exhausted your HSA, you may have to use taxable income to cover your expenses until you reach your maximum out of pocket expenditure.
While you may wish to immediately contribute your maximum out of pocket expenditure to your HSA, that may not always be possible. In 2012, HSAs had a contribution limit of $3,100 for individuals and $6,250 for families. As a result, multi-year planning may be needed to achieve an HSA balance adequate to cover health care expenses up to the maximum out of pocket limit.
You can use your HSA as an investment vehicle in a similar manner to an IRA, as HSA balances can be invested. Money contributed to an HSA is sheltered from taxation until it is withdrawn and is not taxed if it used for qualified medical expenses. While money can be withdrawn for other expenses, it is subject to income tax at the time of withdrawal. An additional 20% penalty applies if you withdraw money for non-medical reasons, unless you have reached the age of 65 or are disabled.
At the end of your plan’s year (which may very well be an arbitrary date such as July 31st, rather than December 31st), your deductible will reset. As a result, you will have to once again spend up to the deductible before your expenses are covered. If you have already exceeded your deductible and have something that isn’t urgent that you would like a physician to look at, it is better to do it before the plan year is over, rather than after it has passed.
It is important to compare the total costs of ownership of an HDHP to that of a traditional plan. A high-deductible health plan is not the right plan for everyone. If you exceed your deductible every year, you may be better served by a health plan with a lower deductible and a higher premium.
To determine which type of health insurance is right for you, a good approach is to look at your medical spending over the past few years, under two or three different types of plans, and pick the one that would historically cost you the least amount of money. However, it is essential to consider your risk tolerance and ability to absorb an expense when doing so. While an HDHP usually costs less each month, it does so at the expense of exposing members to more risk.
When managing your HSA, you should always keep in mind the fine print. In particular, it is important to be aware of your deductible, your maximum out of pocket payment, and your annual contribution limit. You should review your plan each year to determine whether the design of your plan is well-matched to your typical medical spending and your tolerance for risk.
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