The ABCs of HSAs

 

By Robert Hurley, eHealthInsurance vice president and consumer expert

 

There has been a lot of talk about Health Savings Accounts lately.  Many consumers may be confused by these high-deductible health insurance plans coupled with IRA-style savings accounts.  In reality, they’re pretty simple and getting more and more popular. 

 

What is an HSA? 

HSAs were developed to maximize your savings on health insurance while providing you with a valuable tax break.  An HSA program has two parts, an eligible, high-deductible health insurance plan and a tax-advantaged savings account.  For an individual, an HSA-eligible health insurance plan must have an annual deductible of at least $1,100 --which means you’ll have to pay the first $1,100 of medical expenses before your health coverage kicks in. 

 

The second part of an HSA program is an IRA-style savings account that allows you to reduce your taxable income by building savings.  You can deposit funds up to the total of your health plan’s annual deductible into the HSA account each year. So, within certain regulatory limits, the higher your health plan’s deductible, the more you can tuck away tax-free.

 

What health benefits can I expect?

Online health insurance agent, eHealthInsurance, recently released a report detailing the plan benefits for HSA-eligible health plans.  The benefits provided are surprisingly comprehensive once the deductibles are met.  Here are some interesting facts from the eHealthInsurance report, Health Savings Accounts: January 2005 - December 2005:

·        Nearly 80% of the plans had 100% coverage, after the deductible, for x-rays/lab, hospitalization and surgery

·        At least 83% of the plans had some type of prescription drug benefit

 

How does the Tax Savings work?

If you make $40,000 a year and you put $2,000 in your HSA, you’ll only pay taxes on $38,000.  What happens to that $2,000? Like an IRA, the HSA is meant to encourage you to save for retirement. Funds placed into your HSA can be invested to earn tax-free income and the balance will roll over from year to year until retirement age. But, unlike an IRA, you can use your HSA funds to cover qualified medical expenses without penalty.  The funds in the account may be used to cover any qualifying medical expense, which in many cases includes over-the-counter drugs and eyeglasses, as well as co-payments and medical costs incurred before your annual deductible is met.   

 

Who buys HSA-eligible plans?

The eHealthInsurance report also included interesting information on the types of people who have purchased HSA eligible health insurance plans.  Contrary to many skeptics who assumed that HSA purchasers would be only the young and wealthy, findings show that is not the case.  Here are some interesting findings on HSA-eligible health plan purchasers:

·        Their average age is 38

·        45% of them earn $50,000 or less per year

·        More than 40% of them were previously uninsured

·        At least 95% of them pay $200 or less per person per month

 

Can I afford an HSA-eligible plan?

Depending on where you live, HSA-eligible health insurance plans can be an affordable option for you.  In fact, people who purchased HSA-eligible plans through eHealthInsurance in 2005 paid an average of 17% less than those who purchased plans in 2004.  The average premium for an HSA-eligible plan in 2004 was $138, compared to $114 in 2005.   Affordable premiums coupled with a tax-advantaged savings account make the HSA solution an attractive option for a growing number of Americans.

 

If you’re looking for a way to maximize your tax savings while reaping the benefits of a quality health plan from a reputable insurance company, look no further than HSA-eligible health plans. As always, you should consult a tax advisor to make sure you’re getting the most savings possible.  In the meantime, to see free online quotes, visit eHealthInsurance.com.