Understanding an HSA
Health Savings Accounts are a unique vehicle to both provide health coverage
and help fund your retirement. Essentially, it is a high deductible health plan that is attached to a HSA account ( think of it as a "Medical IRA"). This account is
managed by a third administrator (usually a bank). The deductible on an
HSA is indexed to inflation and is adjusted upward every year on newly issued
plans, (it stays fixed on a plan that is already in force however).
The idea behind an HSA is that it allows you to have a tax deduction for voluntary contributions to your HSA account. These contributions over time would also accumulate in value and be tax deferred, with the understanding you could make withdrawals anytime for qualified medical expenses (see Section 213 of the IRS tax code.
Your contributions however, cannot be used to pay for your monthly
health premium. At age 65 the accumulated funds can be used for any purpose
you see fit, with no penalty for withdrawals. Prior to age 65, unqualified
withdrawals have a 10% penalty, plus you pay the applicable personal income
tax rate on the amount withdrawn.
Example of an HSA versus a normal copay plan
(assumes a family four, husband/wife age 40, 2 kids)
HSA Copay plan
$5000 single family ded. $2500 ded. (2 ded. per family max.)
Mo. premium $440 $560
Annual prem. $5280 $6720
Claims for year : $1500 $1500
(E.R., Dr. visits, Rx)
HSA deposits: $2400 n/a
(28% tax bracket)
Tax deduction: $672 n/a
(.28 x $2400)
Net Outlay for yr. $6108 $8220
(annual premium + claims - tax deduction)
Net plan difference => $2112 (savings)
The key with the HSA is in order to make it cost-effective, you must make
enough voluntary deposits to make it worth your while. In 2014 a family can
deposit up to $6550 per year tax free, and a single person $3300.
Approximately 80% of the people who take out an HSA make no deposits to their account, therefore the HSA would end up costing them more that a normal copay plan (if for example, there was a single hospital claim of $30,000).
