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What is a HSA?

An HSA, or Health Savings Account, is a bank account with special tax benefits that can be used in conjunction with specifically designed health insurance plans. They typically offer savings over a copay based plan with lower overall premiums and total annual costs.

Advantages:

Funds in Account are yours.
You can change health care providers and plans with no penalty and keep your money.
Funds in account can be used to purchase any items related to medical expense, as outlined by IRS, without paying income tax, social security, or Medicare tax on money spent.
Funds grow tax free.
Supplemental coverage is allowed.
Accident and Critical Illness Insurance can be used to pay deductible in case of a major event.

Disadvantages:

10% tax penalty to remove funds before age 65 with few exceptions.
Must have eligible insurance plan.
Most HSA plans are structured so that you pay for all costs before deductible is met, other than preventive care.

HSA Plan Requirements - HDHP Plan Requirements

HSA Plans, also referred to as HDHP plans, are required to open an HSA Bank Account. They have specific federal requirements to qualify for the designation and allow you to open an HSA account.

Plan Benefit Requirements:

Minimum Deductible of 1200 for individual or 2400 for family.
No first dollar benefits other than preventive care.

Deductibles and Contribution Limits

	Individual	Family
Minimum Deductible	1200	2400
Maximum Annual Deposits	3050	6150
Annual Catch-up (over age 55)	1000	1000 each
Max Out-Of-Pocket	5950	11900

What happens to funds in the account?

You can spend funds inside the account to pay for any medical expenses, or allowable dental and vision expenses, as outlined in the IRS publication 502. A easy way to do so is to have a debit card used to pay for those specific expenses.

You can also use the funds to purchase securities, stocks, bonds, or other investments depending on the account servicer, and all earnings are tax free until deducted from the account, and are taxed at your current income tax rates at that time. The tax deferrment is very similar to a 401k plan.

At age 65 or in the case of death or disability you can remove funds from the account with no penalty, only paying standard income taxes as if you had earned the amount withdrawn from working in the current year.

Before age 65, there is a 10% tax penalty for removing funds in addition to any other income taxes that might be owed on interest growth. This does not apply if moving funds from one HSA account to another, such as changing banks.

Where do I get a HSA account?

There are local banks which have available HSA accounts, along with banks online that offer better rates and lower fees. Here is a list of banks that do have HSA accounts available, along with Fee Structure and benefits. I reccomend the online only HSAbank.com because they have lower fees, along with better benefits than the local accounts available. Some of these accounts pay interest, and allow you to purchase stocks or mutual funds inside the account and earn interest totally tax free. These are the banks in the Cookeville, TN, area, other banks may vary in benefits and fees.

Bank Name	Monthly Fee	Annual Fee	Monthly Fee Limit	Max Interest	Allows Investing	Online Enrollment
HSA Bank	$2.25	0	$3000	2%	Yes	YES
Bank of America	$4.50	0	unlimited	unknown	Yes	YES
US Bank	$2.50	$20.00	$2500	1.98%	unknown	YES
First Tennessee Bank	$2.50	unknown	unknown	unknown	unknown	YES

The monthly Fee Limit is the amount of money necessary to keep in the account to avoid being charged the monthly fee. All information in the above table was gathered from the company websites, so areas where it says "unknown" the information was not available.

Case Study

Here are 4 examples of premiums, differences in a typical co pay plan for a family of 4, 2 adults age 40, and 2 children aged 12 and 10.

Plan	3000 HSA	10000 HSA	2500/80% Copay	3500/80% Copay
Monthly Premium	496.14	232.81	584.86	419.92
Deductible	1500 per person	5000 per person	2500 per person	3500 per person
Out of Pocket Max	3000	10000	9000	11000
Annual Premium	4993.68	2793.72	7018.32	5039.04
Maximum Annual Costs	7993.68	12793.72	16018.32 plus copays	16039.04 plus copays

As you can see, the lowest liability option for this family between these 4 plans is actually the 3000 HSA plan. The reason is very simple: They have the lowest maximum potential cost with that plan. Their drug costs, doctor visits, any hospital visits, or any other covered medical expense cannot exceed 1500 dollars per person, or 3000 for the entire family for the entire year. If they budget the amount necessary to pay the entire deductible, or $3000 for the year, that would be a monthly contribution of 250$. They could also set aside those funds, and replace them as used and have a monthly contribution equal to their expenses. This can change based on supplemental insurance and average expenses, but the overall lowest risk is acheived through the lower deductible HSA plan, with a much lower cost than the copay plan.

The lowest total cost plan is the HSA plan with the $10,000 family deductible. Even though it has a much higher deductible, the maximum total liability is still lower than both the copay plans because of the nature of how the deductibles work.

Either HSA option is better overall than the copay plans. When choosing a deductible, my advice would be to not take a higher deductible than you could possibly pay if necessary. The average family of 4 meets their deductible once every 4 years. If you have the discipline to put the money necessary to meet the deductible into your HSA account, a natural strategy to save money would be to start with a lower deductible plan, such as a $3000, and move the deductible upwards as you have the money in the HSA account to cover the higher deductible.

That wraps up this short explination of the difference between copay and HSA medical insurance, if you have any questions please contact me anytime, I'd be happy to answer them in any way that I can.

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