I was talking with a physician this past week about health care. I mentioned that HSAs seemed like a step in the right direction for dealing with health insurance. He gave me a blank look and I realized he didn’t know what I was talking about. If a doctor doesn’t know about this wonderful new tool, some of my readers would probably benefit from a 5 minute explanation.
An HSA is a Health Savings Account. Most people are familiar with “flex spending” type medical savings accounts where you set aside money pre-tax in order to pay for health related expenses throughout the year. If you don’t use the money for health care, you lose it at the end of the year. So if you are healthy you obviously don’t want to put too much money into this type of an account.
An HSA functions in a similar way, but you don’t lose the money at the end of the year. It basically functions as an IRA that you can withdraw money from for health care costs. The catch is, you can only put money into it if you have a high deductible insurance plan. Some employers are finding that they can switch to high deductible insurance which lowers their premiums and put the savings into HSA accounts for their employees. This works out particularly well for healthy employees because instead of all the money going to an insurance company “just in case”, a portion builds up in the account for their use later.
If you ever plan to start your own business, this is particularly valuable. Lets say you spend several years working and set aside $15,000 in a health savings account. When you start looking for insurance for yourself in your new business, you can take on a plan with much lower premium and much higher deductible because you have a $15,000 cushion. Even better, your business can make contributions to the account for you and you don’t have to pay any taxes on that contribution (subject to certain limits).
If your company offers some type of HSA setup, you should definitely look into it. Depending on your health and your future plans it can be one of the best ways to prepare for the future and free you up so you can make decisions that are driven more by what you want to do and less by the cost of health care and insurance.