What is an HSA?

Have you heard the news about HSA's?? What is an HSA anyway?

HSA stands for Health Savings Account, and is NOT the health insurance plan, although we commonly use the term HSA to refer to both the health insurance policy and the savings account. An HSA is an account that can only be used if you are covered on a qualified High Deductible Health Plan (or HDHP). The IRS defines a HDHP as a plan that has a deductible of at least $1,100 and must meet certain coverage requirements, like no first dollar coverage, which includes office visit copays and pharmacy copays. You can open an HSA at almost any bank today, but you can also visit http://www.hsabank.com/ to get further information on setting up an account. The HSA itself is a wonderful tax saving tool because:

• your gross income is reduced for each dollar deposited into your account
• the money grows in your account tax-free (and you can often invest the funds in mutual funds once you built up enough)
• and, the money can be used tax-free so long as it is used for a qualified medical expense (more on this in a future post).

Again, you can ONLY take advantage of the tax savings if you are covered by a qualified HDHP. With that said, you can use HSA funds for medical expenses incurred by a qualified dependent (spouse or child for example), even though they may NOT be covered by a HDHP. You can read more about this in my future post entitled, "When Can I Use My HSA Funds?".

You can realize SOME premium savings by moving to a HDHP coupled with an HSA. I strongly recommend that you use those savings, or at least a portion thereof, to fund your HSA. This will help reduce the biggest anxiety of these plans: the lack of office visit copays means you will owe more when you go to the doctor. So how much more will you owe if you are covered by a HDHP and you go to the doctor? Here is an example: your old, traditional plan had a $25 office visit copay that covered lab work and the doctor's visit. A typical doctor's office charges $100-$125 for a basic appointment, but this is NOT what you owe. You still get to take advantage of the insurance companies discount with that doctor! This is usually around 40%, so your bill gets reduced to $60-$75 instead. In addition, the amount you pay under a HDHP applies to your annual deductible, whereas, copays do not get applied to your deductible. This may lead some to think that a HSA-eligible plan works well for people that rarely go to the doctor, but in actuality you can see savings no matter what your usage is. More on this later in blog entitled, "The Math Behind HSA's".

I hope this gives you a basic understanding of an HSA!!