For budget-minded health insurance shoppers, the plan with the lowest monthly premium has obvious appeal. And often that lower-cost option is a "high-deductible plan," since one trade-off for a lower monthly rate is higher out-of-pocket costs as you get medical care.
In general, if you agree with at least three of the statements below, a high-deductible plan with an HSA might be your best choice.
1."I'm looking for a tax advantage."
When you combine a high-deductible plan with an HSA, you get three kinds of tax breaks that allow you to put money aside for medical expenses.
- Your contributions to your HSA are pre-tax, so they reduce the amount of your income that is subject to taxes. Depending on the type of bank account you set up for your HSA, you can earn interest and investment returns that are not taxed.
- Qualified medical expenses you pay using HSA funds are not taxed. You can use HSA funds to meet your deductible by paying for office visits, coinsurance and other un-reimbursed medical expenses, including prescriptions, vision and dental.
- If you have an HSA plan option through your employer, they can automatically deposit (pre-tax) money from each paycheck into the account. Some employers even make their own annual contribution to your account.
2. "I'm healthy and don't anticipate high medical expenses."
With a high-deductible plan, you're solely responsible for your medical expenses until you meet your deductible. But if you don't often go to the doctor and have few healthcare expenses, that's not much of a worry. Year to year, you can keep adding money to your HSA and build a healthcare expense nest-egg for the future.
On the other hand, if you have an unexpected medical expense — like an injury from an accident — having a high deductible means you might have to cover much or all of that cost (depending on how much you've spent on medical treatment so far that year). This is where that nest egg will come in handy.
3. "I have time to carefully manage my family's medical expenses."
An HSA requires a bit of bookkeeping. You'll need to keep track of your receipts so that when it's tax time, you can justify and reconcile withdrawals from your HSA account. To take full advantage of an HSA plan, you should know your family's healthcare needs and anticipate costs for the coming year, so you can plan and save accordingly.
If you're buying an individual plan, one expense you won't have to pay for is preventive care, which is 100 percent covered under the Affordable Care Act. Routine annual physicals, health screenings, and well-child visits don't cost you anything.
4. "I'm looking to save money for future healthcare needs."
You own your HSA — it's not "use it or lose it" each year. Unlike a flexible savings account (FSA), HSA funds simply roll over from year to year and grow, tax-deferred. You don't have to withdraw from it each year, so you can save for the future. In fact, after age 65, you can use it for non-medical expenses and not be penalized (although you will be taxed on withdrawals).
You can also contribute funds to your account at any time during the plan year, not just when you renew your plan. So if you have a major upcoming expense, such as a surgery, you can put additional funds in the account to help cover those costs. However, the total money you put into your HSA in a given year is tax-free only up to a certain amount; you may still contribute beyond that amount, but those contributions will not be deducted from your income when you calculate your taxes. Remember to check your contribution limits, as set by your health plan, to ensure you maximize your deductions.
* You're eligible if you are not already covered by another plan, claimed as a dependent on someone else's plan, or age 65 and over and receiving Medicare.