Health Benefits Considerations

This posting is presented to help you understand the benefits of a high-deductible health plan (HDHP) paired with a health savings account (HSAs).

HSAs are individual accounts typically offered by employers in conjunction with an HDHP to cover qualified medical expenses. If you put money in an HSA and use that money to pay for a doctor’s visit or another qualified medical expense any time in the future, you never pay federal taxes on the money.

Additionally, HSAs are not subject to the “use-it-or-lose-it” rule. Funds remain in your account from year to year, and any unused funds may be used to pay for future qualified medical expenses.

You can use your HSA to pay for some or all of your qualified medical expenses each year and let the rest of the money in your HSA potentially grow for use in the future, including in retirement. Or, if you have the cash to pay your medical costs out of pocket, you can let your HSA grow tax free for future qualified medical expenses.

You may be wary of enrolling in an HDHP plan because you are concerned about potential out-of-pocket costs. You may worry, “What happens if I get really sick or have a catastrophic accident? Where will I get the money to pay the higher deductible?”

These are valid considerations. To start with, you should factor in the deductible and any out-of-pocket costs. But what you may not realize is that you may be paying more every year in premiums for a “lower-deductible” plan (such as a traditional preferred provider organization plan)—whether you need services under the plan or not. A “worst-case scenario” typically is going to occur only for a small number of people, and HDHPs generally provide generous coverage above the higher deductible, including an out-of-pocket maximum for protection.

Generally, those who choose traditional health plan options may be paying higher premiums, while those who elect an HDHP generally pay a lower premium for health coverage and can direct those premium savings to their HSA to help cover any “worst-case” expenses.

Consider contributing enough into your HSA so that you have enough cash on hand to cover anticipated or unanticipated out-of-pocket qualified medical expenses for the year. This approach can help you better prepare for an unexpected trip to the emergency room or an unforeseen health issue in the coming year.

Many financial professionals suggest that individuals can benefit from tax-advantaged vehicles such as 401(k) retirement plans and HSAs. Generally, an HDHP with an HSA enables you to set aside pretax dollars through payroll deductions. These contributions can accumulate tax free and can be withdrawn tax free to pay for current and future qualified medical expenses, including those in retirement. An HSA balance can remain in your account from year to year, and you can take it with you when you leave your job. Therefore, HSAs offer a number of benefits both for short-term spending and for saving for longer-term qualified medical expenses, including those in retirement.