L ast year I wrote a lengthy post on Flexible Spending Accounts (FSA ) because the company I work for was looking for ways to help employees cut costs in light of a large health insurance premium increase that we were slated to see. Flexible spending accounts are a great deal because they allow you to set aside a certain amount of money pre-tax for expected health and medical expenses for the year, and then since the money isn’t taxed, it could mean hundreds of dollars saved on your taxes. The only proviso is that since it is a spending account, you have to spend the money that year, or you lose it.
We were expecting a baby this year, and as a result we knew we were going to have several thousand dollars in medical costs. We had read that medical costs for having a baby can run anywhere from $3-4000 after insurance kicks in, to even higher if the baby has health issues or has to go to intensive care.
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Since we didn’t want to risk losing any of the money, we put $3000 in our FSA, out of a maximum possible amount of $5000, meaning we saved almost $1000 in taxes. In the end we ended up spending closer to $4-5000 after insurance kicked in because our baby had to spend some time in the intensive care unit of the hospital – totaling almost $15,000 in health care costs. Thankfully, insurance covered most of that, another reason to have good health insurance !
Today I want to talk about another type of pre-tax account that you can use to help pay for medical costs. and save on your taxes, Health Savings Accounts or HSAs. Because of increased premium costs again this year, my company is currently looking into the possibility of dropping our traditional health insurance coverage in favor of a HSA in combination with a High Deductible Health Plan (HDHP). Here’s a rundown of how they work.
Health Savings Accounts
A Health Savings Account (HSA) is basically a savings and investment account that can be funded with your pre-tax dollars to help pay for current or future eligible medial expenses not covered by your insurance plan. Things covered include deductibles, co-insurance, and in some cases health insurance premiums. Basically it’s a great way
to save on your taxes because you’re paying for medical expenses with pre-tax dollars. It also allows your money to grow with no taxes on earnings, and it can then be spent on eligible medical expenses with no taxes taken out! Since it is used in concert with a high deductible insurance plan, it means your premiums are usually lower for insurance as well.
Who Is Eligible To Open A HSA?
Not everyone is eligible to have a Health Savings Account . There are several requirements
- You must be covered by a High Deductible Health Plan (HDHP).
- You can’t be covered under another medical health plan that isn’t a HDHP.
- You can’t be entitled to Medicare benefits.
- You can’t be claimed on another person’s tax return.
- You can’t be eligible for Tricare or have received benefits from the Veteran’s administration in the past three months.
The main requirement that applies to most people is that you must have a High Deductible Health Plan to use a HSA .
What Is A High Deductible Health Plan?
So what is a High Deductible Health Plan (HDHP)? It’s basically an insurance plan with a high deductible, and high maximum out of pocket costs. It’s basically meant to cover catastrophic health events, and you cover much of the rest. Here’s how the Treasury explains it:
You must have an HDHP if you want to open an HSA. Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn’t pay for the first several thousand dollars of health care expenses (i.e. your “deductible”) but will generally cover you after that. Of course, your HSA is available to help you pay for the expenses your plan does not cover.
So in other words your HDHP health insurance plan is generally less expensive than traditional health coverage because of the higher out of pocket costs, allowing you to take the difference in costs, and put that money into your HSA pre-tax.
High Deductible Health Plans have an annual deductible minimum (amount you must pay before insurance kicks in), and a maximum out of pocket that is set by the IRS. For the calendar years of 2010 and 2011, those deductibles and out of pocket maximums are as follows:
Category: Personal Finance