June 2021
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What’s the Story on HSAs?

The Health Savings Accounts (HSAs) were introduced in 2003 by President Bush who was looking for ways to improve and modernize the healthcare service. There has been some controversy and the most recent statistics suggest that the take-up has been low and is limited to the more wealthy taxpayers. Let’s see how the HSA is designed to work and then discuss whether an HSA might be the right solution to your health insurance problems. As the name suggests, the first component of an HSA is a savings account that pays interest. In any one year, an individual can pay in a maximum of $2,900. The maximum for families is $5,800. All the deposits are tax-deductible so this is an efficient use of earnings. The money in the account accumulates over the years and, before you retire, you can make tax-free withdrawals to pay for medical care. After retirement, you can use the money in the account for any purpose without paying tax. This is a high-deductible plan. If you need treatment, you have to pay the first $1,100 as an individual, $2,200 for a family, before you are entitled to access care. But once you have paid the deductible and any copayments and out-of-pocket expenses up to a maximum of $5,600 or $11,200 for a family, the plan pays all the outgoings for the rest of the year.

Because the deductible is high, the premiums are significantly lower than for the conventional health plan. You also save tax on the money both when deposited and when paid out. These factors can make the plan look attractive, particularly because the definition of medical services is quite broad, including dental, vision and even over-the-counter drugs. The theory behind the design is to establish a link in the consumers mind between savings and medical expenses. The hope is that once people see themselves as managing their own affairs more directly, they will shop more wisely. If enough consumers avoid high-cost services, there will be a general fall in costs for all. Further, because the out-of-pocket expenses are capped in each year, you can save on copayments as against a conventional plan if there is a major medical emergency.

But the critics argue the plans only give you the best outcomes if the money stays in the account and accumulates over the years, i.e. the plans are best suited to younger people with reasonably high earnings and good health. There are also administrative and management fees payable on the accounts which can take the edge of the tax savings. Thus, on balance you should only go for an HSA if you can afford the high deductibles and out-of-pocket expenses without worry. Otherwise, it may be more cost-effective to stay with a conventional plan which pays most of the costs on routine treatments. So shop around. Get health insurance quotes for a range of different plans and options. If necessary, get professional advice from someone who can offer tax advice. In all this, remember that health plans may be subject to a health exam before a policy is offered. So do not just rely on the health insurance quotes. Go through the procedures to see what final offer of premium rates on each plan. Only then can you make a fully informed decision.

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