Health Savings Accounts

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Created in 2003, Health Savings Accounts (HSA) provide traditional medical coverage and a tax-free way to build savings and help you meet future medical expenses. HSAs can give you greater flexibility and discretion over how you use your health care benefits.

There are several factors to consider before you sign up for an HSA. First, they must be linked to a High Deductible Health Plan (HDHP). These plans feature higher annual deductibles (a minimum of $1,050 for Self-Only and $2,100 for Self-and-Family coverage) than other traditional health plans. The maximum out-of-pocket limits for HDHPs are $5250 for Self, and $10,500 for Self-and-Family enrollment. These figures are adjusted annually to keep pace with inflation.

When you enroll in an HDHP, the health plan determines if you are eligible for a Health Savings Account. If you are already enrolled in Medicare, you are not eligible for an HSA. Every month, the plan will automatically credit a portion of the health plan premium into your HSA, based on your eligibility as of the first day of the month. You can elect to pay your deductible with funds from your HSA, or you can choose to pay your deductible out-of-pocket, allowing your savings account to grow. Whichever method you opt for, you must pay the annual deductible before the plan will pay benefits, unless the cost incurred is for preventive care. Preventive care services are generally paid as first-dollar coverage or after a small deductible, or co-payment. A maximum dollar amount, up to $300, for example, may apply.

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An attractive feature of HSAs is that, unlike other plans, you are allowed to carry over unused funds from year to year. Also, as with IRAs, employers can contribute to their workers' Health Savings Accounts. Depending on the HDHP you choose, you may have the choice of using in-network and out-of-network providers. Using an in-network provider will save you money.

The chief drawback to HSAs is that you have to have money to fund them up front - a difficulty for young families without many resources. However, people who can afford to create an HSA and who don't need to draw them down entirely to cover annual medical expenses will be able to let them grow tax-free. In retirement, the excess savings can be used to purchase long-term care insurance and to pay for other qualified medical expenses.