There are two and only two situations where you can and should consider a health savings account (HSA): 1) when you have a high deductible health insurance plan, or 2) you’re relatively healthy and are paying high premiums for a low deductible health plan.
HIGH DEDUCTIBLE
Individuals who are unable to obtain a health insurance plan without a high deductible are eligible to start an HSA. A high deductible is defined (in 2007) as any deductible that is above $1,000 for an individual or $2200 for a family. The total amount contributed is lesser of 100% of the deductible or $2850 for an individual or $5650 for a family. The maximum annual contribution will change each year. The total amount contributed each year can reduce your adjusted gross income. In addition, if the savings account earns interest, that interest will not be taxable (as long as withdrawals are made for qualified medical expenditures).
WEALTH MANAGEMENT
Another innovative use of the HSA is by those individuals who are relatively healthy and don’t anticipate significant health care in the near future. Such individuals can change current insurances policies with low deductibles to policies with high deductibles. This has two benefits.
First, higher deductible plans for healthy individuals have lower monthly premiums. Thus, someone in this situation can cut down on their monthly expenses, or use all or a portion of the savings to fund their HSA.
Second, the high deductible plan makes the individual eligible to set up a tax-free HSA. The money that is contributed reduces your taxable income, thereby saving an additional amount equal to your federal income tax rate.
At some future time, the individual can change back to the lower deductible, but keep the HSA (although no longer be able to contribute to it). The HSA balance will continue to accrue tax-free and can be used for qualified medical expenses without penalty even though the individual no longer qualifies to continue funding the account. This is a loophole in the law that may make sense for select people.
These are the only two situations where an HSA is a health care option. If you fall into either category, it’s worth considering how an HSA fits into your health care strategy. The HSA can lessen the financial risk and burden of individuals unable to secure lower deductible plans and/or experiencing high health care costs. The HSA can also be a smart wealth-management strategy for select individuals, although it will entail some risk.