5 things to know about health savings accounts

health_savings.top.gif By Amanda Gengler, Money magazine writer

(MONEY Magazine) -- More companies are offering HSAs in which you can stash cash to cover your medical bills. Here's what you need to know before signing up.

1. Your employer is more likely to offer this option.

When you get your open-enrollment packet in the next month or so, you may see something new on the benefits menu. Companies are increasingly offering a health insurance package that includes a high-deductible policy plus a tax-advantaged health savings account (HSA) in which you can stash cash to cover your medical bills.

Some 45% of large companies will be providing the option, up from 25% in 2007, reports human resources firm Towers Watson.

The appeal for you is lower premiums -- typically 10% to 40% less than those of a traditional plan, says Roy Ramthun of HSA Consulting Services. Employers, meanwhile, like this plan because it gives you an economic stake in your own wellness.

2. These plans look cheap ...

While you'll save on premiums over a traditional plan, the deductible (at least $1,200 for individuals; $2,400 for families) is a lot higher. You'll foot every dollar of your bills -- excluding, usually, preventive care -- up to that amount.

Enter the HSA: To cover costs, you can put pretax money in one -- up to $3,050 for individuals in 2011, $6,150 for families, plus $1,000 more if you're 55 or older. Your employer may also contribute. Withdrawals for medical bills are tax-free. Unused dough rolls over year to year, growing without being taxed.

3. ... And may make sense for certain people.

Some people may save money by choosing a high-deductible plan. Young and healthy people, for example, can fare better because they pay low premiums and don't use much care.

If you have a particularly costly medical condition, such as cancer, you too may benefit, says Jay Savan, who is a consultant with Towers Watson and a financial planner.

Once you hit the plans' out-of-pocket maximum -- no more than $5,950 for individuals, $11,900 for families -- you pay nothing. Comparatively, in traditional plans you'll never stop owing co-pays.

4. But you should run the numbers for yourself.

The deductible, and coverage after the deductible, in these plans varies widely. So you'll want to do the math to see if enrolling will be worth your while.

Your company may provide a calculator to show how you'd fare in this plan, vs. other options, based on last year's health costs. But if not, ask your insurer for a breakdown of your 2010 expenses, and add up how much you'd have paid under each plan.

Pay close attention to prescription costs. In a high-deductible plan, drugs typically aren't covered before the deductible.

5. An HSA can double as a retirement account.

If you have cash to pay health bills out of pocket, you might use an HSA to supplement your nest egg. Even in retirement, you can tap the funds tax-free for medical needs. And starting at 65, you can withdraw penalty-free for any reason, though you'll owe income taxes.

You choose how the account is invested. If you're saving it for retirement, go with low-cost mutual funds. (Don't like your employer's options? You can go elsewhere -- access Vanguard funds, for example, via hsaadministrators.info) But if you'll use the money for current health costs, a savings account is the right bet.  To top of page

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