What Are Health Savings Accounts and How Do They Work?

Health Saving Accounts (HSA) coupled with a High Deductible Health Plan (HDHP) are growing in popularity by leaps and bounds. They are an excellent way to cover your family’s health insurance needs and the benefits are numerous. As people learn how this strategy works they are not only warming up to the idea of using them to meet their health insurance needs, but they are becoming very enthusiastic about the great value they bring.

So how exactly does this strategy work and why are so many people adopting it as their go-to solution?

Let’s define a few things first and that will help in understanding how it all works.

There are two main parts to the strategy: a high deductible health plan (HDHP) also known as an HAS-qualified plan, and a health savings account (HSA).

An HSA is basically a bank account that is used to pay for qualified medical, dental, and vision expenses on a tax-favored basis. You own the account — the money is yours.

An HDHP is a health insurance policy issued by an insurance company to pay for medical expenses after a deductible has been met. Think of it like auto or homeowners’ insurance that doesn’t pay for small losses incurred by the policyholder, but rather takes care of claims after a deductible like $1,000 or $2,500 is met.

The IRS does not allow an individual to open and contribute to an HSA unless they have an HSA compatible health plan (or high deductible health plan). The IRS sets the minimum deductibles for these compatible plans and they are currently $1,300 for self-only coverage and $2,600 for self+dependent coverage.

Since there is a higher deductible on these types of plans they are usually less expensive to buy than the typical copay plan. One strategy is to take the difference of the cost in the two types of plans and open an HSA and deposit the savings in the account.

The IRS allows a person covered by a self-only HDHP to deposit $3,400 into their HSA and $6,750 if you have dependents enrolled on the HDHP too. Also, if you are 55 or older you are allowed to put in an additional $1,000 per year.

The huge win about the money deposited into the HSA is that you can deduct the amount deposited from your income when you file your taxes, any interest it earns while in the account is not taxed, and when you take the money out and use it to pay for qualified expenses, it is not taxed!

So now let’s put the two together and see how they work. You purchase an HDHP at a lower cost than you are currently paying for your current copay-type health insurance. You open an HSA and begin to make deposits in the account. When you receive medical services, you use the money from the HSA to pay for the services received. If you do not have medical services in that year, the money stays in the account and grows.

This is very simplified, but once you begin to understand how it works and get into the details of this strategy, you can see why over 18 million people are currently enrolled in a high deductible health plan coupled with a health savings account. In fact, it’s projected to have 27 million participants by the end of 2018!

Stay tuned for more info and ways to maximize this strategy for your benefit.  And of course, contact me to see how this could work for you at ansonm@dhbteam.com or (888) 884-4574.