Unlike many financial planners and personal finance bloggers who tout the benefits of a health savings account (HSA) – I actually have one. That is not to say of course that just because someone does not have a Health Savings Account that this somehow precludes them from talking about the benefits of HSA’s but as someone who has studied HSA’s, runs a consumer health insurance website, who owns a Florida health insurance agency that sells HSA’s, and also as someone who has personally had an HSA for close to 4 years I can say without reserve that I think there are many benefits to having an HSA. Here are 5 reasons why you should consider using an HSA yourself (and then please let me know your thoughts on HSA’s via the comments below):
#1 Tax Savings, Tax Savings, Tax Savings
When I began to make this list I quickly realized that I could fill up even a much longer list of HSA benefits strictly from the tax savings category. I love Health Savings Accounts because they enjoy in a sense a triple benefit of tax savings goodness. What do I mean by that?
1) Contributions to an HSA are deductible as an “above the line” deduction on the front of your 1040 personal income tax return with NO AGI phaseouts (Bill Gates can take the same HSA contribution deduction that you or I can – incidentally, if Bill Gates saw a $1,000 bill on the ground it technically would not be worth his time to pick it up according to this estimate – just something to think about 🙂 )
2) All of the money in an HSA grows tax free and rolls over from year to year (note that I said “tax free” like a Roth IRA and not “tax deferred” like a traditional IRA)
3) Money in the HSA that is used for qualified medical expenses OR for retirement past the age of 65 comes out 100% tax free.
This triple tax benefit is rarely seen in the tax code because quite often if you get a tax deduction for a contribution to something then you end up paying taxes on the back end (and example would be a traditional IRA) and if you pay taxes on the front end then you may be able to take out money on the back end tax free (an example would be the Roth IRA). The beauty of the HSA is that you get tax benefits for contributions (up to certain annual IRS limits), annual growth in the account, and even when you use the money in the HSA.
#2 High Deductible Health Plans are CHEAP
While an HSA is strictly the savings account portion of the “HSA health plan” the true health insurance plan component (required in conjunction with the HSA by the IRS) is the high deductible health plan or HDHP. The beauty of the HDHP is that since they are by definition health plans with high deductible then the monthly premiums are much lower than traditional health plans with low deductibles and copays. The higher the deductible the lower the monthly premium. After all, even if you are typically a fan of low deductible health plans don’t you think that monthly premium savings of $100 or more a month to accept a deductible that is $1,000 or so higher (in some cases) is well worth it? Why not put that monthly savings into your HSA and let the money accumulate from year to year and simply use the funds in your HSA should you have a large medical expense?
#3 HSA Setup is Simple
If you can set up a savings account or a checking account then you have all of the necessary expertise for setting up a health savings account as well. If you should decide to set up an HSA for yourself be aware that when you apply for your required high deductible health plan from a health insurance company that although almost every health insurance companies will attempt to steer you into also setting up your health savings account with the bank that they recommend (or in many cases own) then you are certainly able to (according to the IRS anyway) set up your HSA at a different bank altogether that may offer you a higher interest rate, lower fees, the chance to invest some of your HSA funds in the market, etc. HSA setup is simple but just like you should shop around for the best online savings account rates and also just like you likely shopped around for the best insurance quotes before choosing a health plan you should also shop around to find the best HSA bank for your needs.
#4 HSA’s Help to Bend the Health Care Cost Curve Down
Rising health care costs in the US is a certainly a concern almost regardless of who you ask – from either political party (wow – consensus across party lines on something!). When you use an HSA and act as a price conscientious shopper for your health care – in fact, even if you are 1/10 as price conscious as you are at the grocery store shopping for groceries then you likely are much more price conscious than the average US consumer, you help to drive health care costs down for everyone.
Essentially, when the system is set up so that 100% of the costs are borne by a 3rd party payor (i.e. the insurance company) starting at dollar 1 then people have no incentive to price shop or even care one flip about the cost of their physical, colonoscopy, pap smear, etc.
However, if you are responsible for paying for your health care bills out of your HSA (until you reach your deductible and then your HDHP kicks in) then you will likely be much more price motivated then someone with a copay plan and no deductible or a very low deductible.
#5 HSA’s are a Great Savings Vehicle
As I alluded to earlier in the tax savings section you can use an HSA as a very attractive vehicle for accumulating retirement savings. You not only get the great tax benefits all along the way along with a nice growing sum of money that can be used for medical expenses but you also get a great vehicle for accumulating some retirement funds if you should (hopefully) not have to use the money in your HSA for medical expenses. This is also contrasted to a flexible spending account where you have to use the money in the flexible spending account every year – with an HSA the money rolls over from year to year all the while growing on a tax free basis. Compound interest + no taxes = HSA bliss.
What do YOU Think About HSA’s?
Do you have any other reasons for why you think HSA’s are a good idea (or a not so good idea for that matter)?
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Great article! Thanks for sharing.
My wife and I set up an HSA in the 1990s and used it for about 10 years before we retired and Medicare took over our health insurance.
The above article is spot on.
We did, in fact, have a couple of medical problems, and we found that many doctors and other medical service providers are willing to reduce their fees knowing we would pay them on the spot for their services. In some cases, the fee reduction exceeded 50%. Like most of us, they simply don’t like all the bureaucracy involved in third party payors; plus, they don’t like having to wait sometimes as much as 3-4 months to get paid for their services under many insurance plans.
Also, all sorts of medically related costs can be paid out of the funds in the HSA that are not often covered by typical insurance plans such as dental bills, glasses, hearing aids, over-the-counter drugs/supplies, etc.
Compared to all the alternatives (other than being rich like Bill Gates), there is no better way for most of us to plan ahead for medical and related costs … not to mention retirement.
My company is changing our medical plans in November. One option is a high-deductible plan that comes with an HSA ($2750 deductible plus an additional $3000 in coinsurance) and the other is the regular copay plan that we’ve had in the past ($750 deductible). We won’t be informed about the premium costs until October, so I have no idea what the cost difference will be…we’ll see.
I like the idea of an HSA, but was told that I couldn’t have one if my spouse has one, and I have no idea if the “HealthFund” my husband may get is considered an HSA.
I hate insurance plans and jargon…
I’ve had an HSA for 2-3 years now and its been great. I can also use the funds in the HSA to pay my out of pocket dental and vision costs which is nice.
3) Money in the HSA that is used for qualified medical expenses OR for retirement past the age of 65 comes out 100% tax free.
This is actually incorrect. It is only 100% tax-free if used for qualified medical expenses. If you use it past the age of 65 for non-qualified expenses you will pay taxes on the entire withdrawal amount.
That being said, it is still a great retirement savings option as most people will have medical costs in retirement that they can tap into this account to cover tax-free.
2011 changes .. Over the counter medications like Tylenol or cough syrup CAN NOT be purchased (covered) anymore without a prescription. Figures, was a good thing then someone has to step in and take out the most useful (most needed) thing about the plan. I hate politicians so much.
HSA’s work only on in the mind of the theorist.
In reality if you have a family that needs to actually use healthcare, then the plans are very expensive, difficult to manage, and problematic. The US healthcare system is not designed to be consumer driven. This a problem, and largely the cause of the skyrocketing costs, when a third party is responsible for paying the consumer has no incentive to shop and compare. This is why in theory the HSA plan is a great idea, however in practice hospitals are not set up to negotiate fee’s with patients, and a patient in need of HC does not always have the luxury of time to shop around.
For routine and preventative care, HSA’s are downright dangerous, because they incentivise a patient to put off or skip care because of the cost, tax free or not, it hurts to spend $500 for a bottle of pills, or an MRI, or $300 for an office visit if you have a problem.
When I was single and had no need for healthcare, the HSA plan made great sense, but now that I have a family the high deductible is killing us, and my company doesn’t offer a traditional plan to out of state employees.
Roberto Reply:
April 24th, 2012 at 4:34 pm
@Jason B,
Spot on!
My company switched to a High Deductible HSA and it has been an eye-opener.
I had my physical recently (it had been a couple of years) and my doctor recommended I go see a specialist to get something checked out.
When I went to the specialist listed on my insurance companies webpage, the specialist could not tell me how much it would cost (either for the visit or the test). If I did not get the test the specialist recommended that I come back in six months and maybe get the test done then. As I was walking out the door, he then decided that maybe I should get the test done now. As I had already taken a day off of work for this appointment and did not want to pay for another office visit for which I did not know the cost, I agreed. Besides, if the doctor thought there was enough uncertainty as to require a test, it seemed reasonable to have the test done.
Anyway, you can guess where this is going. I get the bill for the specialist visit, and it was pricey (though cheap for the peace of mind the results brought). But I paid it with my HSA, that is what it is for, right? Except the Insurance company was very slow in crediting my HSA account and my payment gets rejected. Call up the insurance county and they straighten it out. I am about to make the payment and I decide to check my balance before paying with the HSA Visa card. They charged be a penalty for not having enough in my HSA account because they were slow in crediting my account (the Terms of Agreement states that the money deposited in my HSA are to be credited the next business day). Nevertheless, I am able to pay the bill.
This was not the end of the story, though. Months later I get a bill from a doctor with whom the specialist consulted. So another bill. Also, under my new plan physicals are no longer covered, so I just got a bill from my GP. Okay, so check-ups are covered and physicals are not. On this bill, I see my previous physicals and how they were covered by previous insurance plans. But I accept that when my company switched plans, I should have checked to see if my physical would be covered, it just didn’t occur to me since they had always been covered in the past.
The perverse thing is that for preventative care under the HSA, I must now decide whether I want to risk my health or not, which is difficult to do when they don’t tell you the costs. So how can I be a smart consumer and “bend the cost curve”? Furthermore, this entire episode has caused me to hit my deductible (and its only April). So theoretically, as everything is now covered by the insurance company, I have every incentive to get all of the tests/treatments/specialist visits done this year with no concern as to cost. How does that “bend the cost curve”?
Jason b Reply:
April 24th, 2012 at 7:00 pm
@Roberto,
It is a nightmare. I feel your pain! I know the job market is tight out there but I hope people think twice about taking a position at a company that only offers an hsa.
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