As promised, an explanation of Health Savings Accounts.

According to the United States Treasury Department a Health Savings Account, commonly called an HSA was created by congress to allow individuals to have a tax advantaged way of paying for qualified health expenses. These accounts are opened by people who have high deductible health insurance and no other way of paying for their out of pocket expenses.

Here is how it works.  You open a savings account where you deposit money deducted from your paycheck before taxes and use that money to pay for health expenses approved by the treasury department. At the end of the year you may roll the account over and not pay income tax on the amount you put in and do not spend in your HSA.

There is an annual limit for how much you can put into an HSA plan. In 2013, the maximum amount for a person with a self-only high deductible insurance plan is $3,250. For a person who has family coverage the maximum contribution to an HSA is $6,450.

In order to qualify as a high deductible plan a minimum out of pocket expense of $1,250 is needed for an individual and $2,500 for a family. The maximum out of pocket expense for an individual is $6,250 and for a family $12,500. These amounts are indexed for inflation and change each year.

Advantages of an HSA

• You are the owner of the account and determine how much money to set aside for you and your family’s health care costs.
• You control how the money in your HSA is spent. This allows you to search for the best health care at the best cost.
• Even if your employer contributes to your HSA, you own it, control and keep the contributions even when you change jobs.
• Each year, left over money in your HSA stays in your account without being taxed.
• All money contributed by your employer and yourself to your HSA is tax-free.

HSA Drawbacks

• Health is not predictable making it difficult to budget accurately for you and your family’s health care expenses.
• Finding quality health care at reasonable cost is very difficult and takes hard work.
• Withdrawing money from your HSA for non-medical use means you have to pay taxes on the amount used.
• HSA deductions from your paycheck are forced savings that might be challenging. Older people and people who are sicker may not save as much as healthier and younger people.

Don’t Be Stupid

In my opinion, a Health Savings Account where an employer contributes is pretty much like an IRA with an employer match. Only an idiot turns down free money!