Health Savings Accounts

By Laura Alexander

Much talk has been thrown around recently regarding health savings accounts (HSAs). “But what exactly is a Health Savings Account,” you ask, “and how can I benefit from it?”

In effect since January 1, 2004, the new HSA is really the next generation of MSA (Medical Savings Accounts) plans. At the end of 2003, Congress released a Medicare reform bill including plans for HSAs. In doing this, they created a new way for small businesses and individuals to obtain affordable health insurance. Essentially, an HSA is a tax-sheltered savings account similar to the IRA, but earmarked for medical expenses.

To briefly outline how an HSA works, you take the money spent on a traditional health plan and allocate it two ways: a portion buys a low cost, high deductible medical policy and the balance is put into a tax-deductible HSA. The money in the HSA can be easily withdrawn by check or debit card to pay routine medical bills with tax-free dollars. The idea of using the money provided through HSA can then be used to help pay smaller covered medical expenses until the deductible on the lower-cost, high deductible medical policy is met.

HSAs offer many benefits to those who wish to make use of them. The benefits can be put into four major categories: affordability, tax advantages, portability, and availability.

The expense of healthcare benefits is important to consider and HSAs offer an affordable solution. The National Small Business Association indicates that high deductible insurance policies offered with HSAs are up to 40 percent less than a traditional medical insurance policy.

The tax benefits with HSAs are immense. HSAs can, in effect, be triple tax-free: 1) HSA deposits are tax-free when made, 2) HSA investment earnings grow tax-free, and 3) HSA withdrawals are tax-free when used to pay for qualified medical expenses. With HSAs, people can decide what medical expenses their money will cover without worrying about taxation on their account.

Another huge advantage to the system of HSAs is that they are portable. This means that if someone working for a particular company chooses to leave, he or she can take their HSA with them. Because the health care provider can remain constant, making changes works more fluidly. Also, HSAs allow patients to take more control over their own health-care payments by using their account to pay for routine medical costs below their deductibles. Since the deductible is higher, patients can dramatically reduce their premium costs for health insurance.

Given the amount of people who may be able to use HSAs, the availability is a strong advantage. Unlike their predecessors, medical savings accounts, HSAs are available to almost everyone under a high-deductible insurance plan. With increased availability, more people than ever before can have the reassurance of saving money for medical expenses. A new study by a leading firm offering HSAs shows that 43% of those opening the new accounts since January 1 were previously uninsured; this, in itself, is a tremendous accomplishment of the HSA legislation.

Initially, some people have had misconceptions relating to HSAs, but those misunderstandings can be explained in order to calm fears. One misconception is that HSAs can seem to be only for younger people. Contrary to this idea, a study revealed that more than 70% of HSA purchasers are over age 40. In fact, the people who choose to take advantage of the plan reflect the general population’s demographics, proving that there is not a specific age group dominating those who have utilized HSAs.

Another misconception is that HSAs are only for wealthy people. Nearly half of HSA purchasers earn under $50,000 a year. Clearly, one does not need to be wealthy in order to take advantage of the HSA’s options.

What about the people who have tried to find coverage and been denied repeatedly? Only a very small proportion of applicants were denied high-deductible HSA coverage. In fact, about ninety-four percent of all applicants are granted approval.

Another worry is that with people having more control directly over their money, they won’t want to spend it and will neglect going to the doctor. Again, this is a false notion with preventative doctor visits up by 31% among owners of HSAs. Individuals with HSAs own their account, so they can have a choice regarding who provides their medical care. In addition, HSAs allow for portability, so when changing jobs, people can continue working with the same health care provider because the choice is up to them.

The last fear is that HSAs will cause more people to not have health insurance. Once again, this is a false presumption. Fifty-six percent of those purchasing HSAs with incomes under $15,000 were previously uninsured and 46% of those earning $15,001 to $35,000 didn’t have previous coverage. This provides evidence that HSAs are making it that much easier for families to take their health care into their own hands.

Doubts always exist when something new and different commences. However, when the advantages and limitations of HSAs are balanced, the scale tips largely towards the advantages. HSAs appear to present Americans with new, more cost-effective medical insurance opportunities.

Laura Alexander is an English major at Hope College and is planning to become an Elementary Teacher.

[From Connection Magazine December 2004]

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