Health savings accounts: Is an HSA right for you?

Health savings accounts (HSAs) are used to save money for future medical expenses. Discover how these plans work.

A health savings account (HSA) is an account into which you can deposit tax-free money to be used for future medical expenses. Health savings accounts were established in 2003 and are becoming more common. Health savings accounts are part of a larger trend known as consumer-directed or consumer-driven health care. HSAs and consumer-driven health care plans have been promoted by companies and the government as one way to help control health care costs. The goal of an HSA is to reduce the money spent on health care by placing more of the responsibility on you to shop for health care.

Supporters and critics of HSAs have different takes on the pros and cons of HSAs:

Pros (benefits of HSA)	Cons (potential risks of HSA)
More control over health care decisions.	Favors healthy people. Older, sicker people may pay more.
Allows you to set aside and budget money for health care costs.	Illness can be unpredictable, making it hard to accurately budget for health care expenses.
Ability to shop around for care based on quality and cost.	Some information, including cost and quality, is difficult to find.
Your employer may contribute toward your HSA.	Some worry that the pressure to save the money in your HSA might cause you to avoid seeking preventive treatment.
Money can be placed in your HSA on a pretax basis or may be deducted from your taxable income.	If you withdraw funds from a health savings account for nonmedical expenses before you turn 65, you have to pay taxes on it plus a 10 percent penalty.

The choice of whether to start an HSA is not an easy one. So, before you start an HSA, carefully examine the potential savings and costs associated with a health savings account. Here are some frequently asked questions regarding health savings accounts:

How does a health savings account work?

It's like a savings account, only with an HSA the money can only be used to pay for medical expenses. The money in an HSA is owned and controlled by you, not your employer, health insurer or anyone else.

Is a health savings account right for me?

It's hard to say because your health situation is different from the next person's. In general, if you're a relatively healthy person and your dependents are healthy, an HSA might be a good option for you. This is because your annual health care expenses may be relatively low, allowing you to save up for health care expenses that arise later. If you have a chronic condition that requires a lot of medical care and expense, an HSA might not be your best choice.

Who can set up a health savings account?

You can start a health savings account on your own through a bank or other financial institution, or your employer may offer a health savings account option.

To qualify for a health savings account, you must be under age 65 and carry a high-deductible health insurance plan. This high-deductible health insurance plan must be your only health insurance coverage, and you can't be covered by other health insurance. However having dental, vision, disability and long term care insurance doesn't disqualify you from having an HSA.

What's a high-deductible insurance plan?

As its name implies, it's a health insurance plan that has a high deductible (the amount of medical expenses you must pay annually before insurance coverage kicks in). The premiums (a regular fee you pay to obtain coverage) for a high-deductible insurance plan are typically lower than premiums for more traditional insurance plans. However, a high-deductible plan doesn't pay for the first several thousand dollars of health care expenses. This unpaid portion of expenses is known as a deductible. (Some high-deductible plans do cover preventive services, such as mammograms, before the deductible is met, so check your plan's coverage details carefully.)

You can use your HSA to pay deductible expenses, copays associated with the plan, coinsurance payments and other noncovered health care expenses.

One thing to consider very carefully is what medical expenses are covered by your high-deductible plan. If you receive care for something that's not covered by your high-deductible health insurance plan, the cost likely won't count toward your deductible.

What counts as a high-deductible health plan?

The Internal Revenue Service decides each year what amount qualifies as a high-deductible health plan. A good source of the most up-to-date information on those amounts is the Department of the Treasury's Web site. In addition, look at the plan's out-of-pocket maximum. This amount refers to the maximum amount you'd be required to pay out of pocket in the year for any medical expenses.

Can you use pretax money to fund a health savings account?

If your employer offers a high-deductible insurance plan, you may be able to deposit money into an HSA on a pretax basis. If you open an HSA on your own, you can deduct your deposits when you file your income taxes.

How much money can you deposit annually into a health savings account?

The Internal Revenue Service decides how much you can contribute each year. A good source of the most up-to-date information on those amounts is the Department of the Treasury's Web site. In recent years, the contribution limits have been about $3,000 for individuals and about $6,000 for family coverage. The limits are indexed for inflation and usually change each year. Unspent money in your HSA can be rolled over each year.

Can my employer contribute to my health savings account, too?

Yes. But the total of your employer's contribution plus your contribution still must be within contribution limits.

Are health savings accounts similar to flexible spending accounts?

Yes, but one key difference is, unlike a flexible spending account, with an HSA you can keep (roll over) any unspent money each year. Also, you can't take money from an employer-sponsored flexible account with you if you quit or take a different job. Money put into an HSA is yours and can be taken with you if you switch jobs or retire. Also, it's important to know that in most cases you can't have both an HSA and a flexible spending account.

How do health savings accounts and high-deductible health insurance plans limit health care costs?

The theory is you will be more cost-conscious while seeking medical care if the expenses come out of your pocket. It's hoped this increased financial responsibility makes you a better consumer of health care.

It's hoped that if you're exploring all of your health care options, the competition among health care providers will reduce health care costs for you and others. Some doctors worry that the pressure to save the money in your HSA might cause you to avoid important preventive care. You should carefully weigh any health care decision with your doctor and not let cost be the sole factor in your decision.

How do I find information regarding medical costs and quality so that I can make informed health care choices?

It can be challenging. Right now it's difficult to get reliable information regarding the cost and quality of treatment options, doctors and hospitals. Your employer or health plan may offer some Web-based tools, as well as access to someone by phone who can give you some basic information. The hope is that as health savings accounts and other consumer-directed health care options become more widespread, the access to information about cost and quality will expand.

Can you withdraw money from health savings accounts for nonmedical expenses?

If you withdraw funds from an HSA for nonmedical expenses before you turn 65, you have to pay taxes on it as well as a 10 percent penalty. If you take money out after you turn 65, you don't have a penalty, but you must pay tax on the money taken out. You can still withdraw money tax-free from an HSA for medical expenses after you turn 65.