Health Savings Accounts Help Curb Insurance Costs

As health insurance costs continue to skyrocket, many employers are exploring alternatives to traditional, 100% employer-funded group health insurance plans. For many, the solution may lie in the relatively new Health Savings Account (“HSA”), which Congress created just last year.

A Health Savings Account is a tax-sheltered savings account similar to an IRA, but earmarked for medical expenses. Deposits into the account can be made by both the employer and the employee, and all contributions are 100% tax-deductible.

Withdrawals from the account are made by check or by debit card to pay routine medical bills with tax-free dollars. Larger medical expenses are then covered by a low-cost, high deductible health insurance policy. What is not used in the HSA each year stays in the account and continues to grow on a tax-deferred basis. Once the HSA participant reaches retirement age, withdrawals can be made from the account for any purpose without penalty, just like an IRA. Moreover, like with an IRA, the HSA participant has absolute control over the investment of the money in the HSA.

When combined with a low-cost, high deductible health insurance policy (which is required by law), an HSA is often the perfect replacement for a traditional high-cost group health insurance policy. While traditional group health insurance policies usually contain numerous restrictions on medical choices, an HSA gives the participant a high degree of freedom of choice. Because the HSA participant is paying his or her medical bills in cash, virtually any health care provider is open for business. Similarly, while traditional group health insurance policies usually result in the healthy paying for the sick, an HSA actually rewards those who remain healthy by allowing them to accrue large sums of money in their accounts.

Although often an attractive alternative to traditional group health insurance, HSAs do not work in all situations. Where an employee regularly incurs high medical and/or prescription costs, the HSA will usually end up costing the employee more out of pocket dollars than a group policy would. Similarly, because HSA participants pay their costs directly to the health service provider, rather than through a negotiated health insurance contract, the fees charged by health care providers to HSA participants are sometimes higher than the fees charged to individuals under a group health insurance policy.

If you would like more information about Health Savings Accounts, please feel free to call our office.