What is a health savings account (HSA) and should I have one?
What is a Health Savings Account?
In 2003 U.S. President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act. Health Savings Accounts are part of that program. A Health Savings Account (HSA) is an account available to individuals who are enrolled on a High Deductible Health Plan (HDHP). The money that you contribute to your HSA is pre-tax. This means that the money in your Health Savings Account is not subject to income tax. Your HSA cannot be used for just anything. You can only withdraw money from your HSA to pay for certain health care related expenses.
How is a Health Savings Account Different from a Flexible Spending Account?
A Health Savings Account sound similar to a Flexible Spending Account (FSA), but, they have some important differences. A FSA is always set up through the employer and account money is deducted in equal increments from every paycheck in a given year. If there is money left in the FSA at the end of the year that money does not roll over to the next year and is therefore forfeited. A HSA, on the other hand, does carry over form year to year. Although there is a limit for how much you can contribute to your HSA, you do not have to contribute on a set schedule or directly through your paycheck. The HSA is income tax exempt and the FSA is payroll tax exempt. Both the HSA and the FSA are meant to help individuals set money aside for health care costs.
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What are the Advantages of a HSA?
The main advantage of having a Health Savings Account is that you benefit from not having to pay income taxes on the money that you set aside for health care. Also, having a HSA provides individuals needing health care with a separate account that they can draw from, reducing out of pocket costs. The government sees Health Savings Accounts as a good thing because they are components of "Consumer Driven Health Plans." The HSA is consumer driven because it encourages its beneficiaries (holders of High Deductible Health Plans) to be frugal in their health care choices. When you have an insurance plan with a high deductible, the theory is that you will shop around more to find good deals (i.e. look for generic drugs instead of brand name drugs). Doing this fosters the pull between supply and demand the therefore promotes healthy economical changes.
What are the Disadvantages of a HSA?
In order to be eligible for a HSA account you must be enrolled in a High Deductible Health Plan (HDHP). This means that you will be paying a great deal of money out of pocket before your health insurance covers applicable expenses. Critics of the Health Savings Account say that it is a program that is helping the healthy young population and hurting the older and poorer population. Those with poor health could never afford a HDHP because of the frequency of doctor visits. They have no choice but to pay high premiums and receive adequate coverage. The poorer population cannot afford high monthly insurance premiums and sign up for high deductible plans. But when it comes time for them to see a doctor they have to pay all costs out of pocket until they reach their high deductible. The young and healthy people rarely visit the doctor and therefore save a lot of money by paying very low premiums and only occasionally having to see a doctor and pay out of pocket. In addition, the young and healthy population only use their HDHP coverage in the case of an accident or emergency, thereby causing more financial pressure on the insurance companies and in turn raising premium costs for those who cannot afford it.
Who should have an HSA?
HSA are a good idea for people who choose to enroll in High Deductible Health Plans and want to have some money (and savings) set aside for when they take that unexpected trip to the doctor or the pharmacy.
