Your Health, Your Bucks
The odds are increasing that you'll be offered a health savings account. Should you accept?
(MONEY Magazine) - When President Bush brought up health savings accounts (HSAs) in his State of the Union address, proposing to sweeten the tax breaks for people who sign up for them, not everyone's eyes glazed over.
Financial services and insurance companies, for example, reacted by scrambling to get a piece of the HSA business, anticipating a boom in the controversial but increasingly available accounts. HSAs are 401(k)-like tax-advantaged accounts designed to help you fund your own health care, and Bush has been pushing them for years. How likely is it that they'll catch on? And should you get one if you have a choice?
At the heart of the debate over HSAs is the idea that making U.S. consumers more accountable for their health care would lower costs. Here's how HSAs work: You sign up for a health insurance plan that has a deductible of at least $2,100 for families ($1,050 for singles).
Then you invest pretax bucks in the HSA. As long as you use the money for health-care-related expenses, you aren't taxed on either earnings or withdrawals. Unused funds roll over from year to year, and if you change jobs, you keep your HSA. (These are two key differences between HSAs and flexible spending accounts, or FSAs, another common tax-advantaged means of saving on health-care costs.)
After age 65, you can use your HSA funds for anything at all. The allowable contribution maxes out at $5,450 a family ($2,700 for an individual) each year, but under the president's new proposal, the limit would increase to $10,500 a family ($5,250 for singles).
"The idea is that employees will view it as 'their' money, so they will be more conscientious shoppers," says Gary Claxton, a vice president at the Kaiser Family Foundation, a health policy research group.
Forcing health-care providers to compete for your business, advocates argue, will result in higher quality at a lower cost. Meanwhile, the chance to salt away an extra 10 grand each year for retirement--tax-free--is a swell deal. Critics, however, contend that rather than shop smarter, people will skimp on care they need.
"This does raise concerns," says Sara Collins of the Commonwealth Fund, a consumer group.
Some 29% of large companies plan to offer HSA-qualified plans this fall, up from 8% last year. Start thinking about these factors now and you'll know what to do if you find one on the menu come open-enrollment time.
• What you spend: In general, HSAs are best suited to the healthy. Start tracking every health-care expense to develop an idea of your annual spending.
• The terms of your policy: Not all high-deductible insurance policies look alike. Some may exempt certain preventive-care costs from the deductible, and some employers are helping to fund HSA accounts for their workers. If you're getting an HSA on your own, comparison shop at hsafinder.com and healthia.com.
• Your out-of-pocket expenses: Monthly premiums for high-deductible insurance plans are generally very low, but meeting a four-figure deductible can itself be punishing--especially in the first year, before any HSA rollover funds have had a chance to pile up.