What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is simply a health insurance plan tied to a bank account that is in your name. The health insurance plan typically has a lower premium and a high deductible. The deductible and other medical related expenses can be paid from the money in your HSA bank account. You can put money into your HSA bank account with pre-tax dollars. This means you can pay your deductibles, prescriptions, glasses, dental work, etc. with money earned before paying state and Federal taxes. Many employers will also place money into your HSA bank account on your behalf as the plan has lower premiums, which actually saves them money, too.

In essence, an HSA is similar to a cafeteria plan in that you can use pre-tax dollars to pay for medical expenses. The benefit of an HSA is that it's not a use it or lose it situation. In contrast, if you do not use the money in an HSA for the current year, the money can simply carry into the next year for future medical expenses. Once the HSA amount becomes material, you can begin investing the money to achieve a greater return. All HSA accounts should automatically pay interest income.

Currently, you can only contribute $4,000 for a family or $2,000 if you are single per year to the HSA bank account. Generally, the deductibles will also range from $2,000 to $4,000. This means you will need to cover all medical related expenses up to the deductible from your HSA bank account before your insurance policy begins paying. An exception to this rule is get well check-ups, which are typically 100% covered.

So, how does it work? If you need to go to the doctor, the doctor will charge you the insurance carrier pre-negotiated rate for a doctor visit. This is the rate the insurance company negotiated on your behalf. So, typically you would pay a $20 or $30 co-pay; however, under an HSA plan, you will actually pay perhaps $85 for the doctor visit. Once you have a qualifying expense like a doctor visit, you simply notify the HSA banker to send you $85, which is your money. It is your responsibility to save your receipts as the IRS could choose to audit your HSA account and in this situation you will need to prove to the IRS that the money pulled from the HSA account is adequately supported by qualifying expenditures.

Typically, an HSA is an excellent option for a family or person that rarely goes to the doctor. In this way, you can gradually increase your HSA savings and upon retirement, the HSA can revert to an IRA and you can take distributions to help subsidize your retirement. In addition, you will have a health insurance policy to protect you in the event you get really sick. Finally, each month you can save 20 to 50% on your monthly premiums. It's really a beautiful thing.

If this sounds like something that would benefit you, simply complete our short form and we will get a licensed professional to help you find the best HSA for your situation. All the major insurance companies offer HSAs; however, like everything else, you need to shop around for the lowest premiums, highest interest rate, and lowest administration costs. Generally, the administration cost is less than the interest rate on your HSA bank account.

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