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What Are Health Savings Plans?

Health care costs are likely to affect you even if you are healthy and don't use medical care frequently, because the cost of health insurance tends to go up over time as costs increase. Health savings plans (more commonly called health savings accounts or HSAs) are tax-advantaged savings accounts available to individuals with certain types of health insurance plans. These accounts allow the policyholder to save money toward certain health care costs.

  1. HSA Basics

    • Health savings accounts allow you to save money toward medical expenses such as your health insurance deductible, coinsurance and other expenses. on a pretax basis. This means that all the money you contribute to the account is tax deductible, like contributions to a 401(k) plan or individual retirement account. HSAs are only available to individuals who are covered by high-deductible insurance plans. The IRS states that to be eligible for an HSA, you must have a health insurance plan that has a deductible of $1,200 or more for single coverage, and $2,400 or more for family coverage.

    Benefits

    • Health savings plans are beneficial in that they allow you to save more money toward health care expenses than you would otherwise, because the savings are exempt from taxation. If you spend the money you save in an HSA on qualifying medical expenses, you do not pay income tax on the money at the time of withdrawal, either. In other words, you can completely avoid income tax on money you put into an HSA if you use the money to pay for health are expenses. In addition, contributions you make to an HSA roll over from one year to the next, and can grow in underlying investments.

    Potential

    • An HSA can potentially serve as a tax-advantaged retirement account. The money you save in an HSA remains indefinitely until you use it; according to CNN, once you reach the age of 65, you can withdraw HSA money for purposes other than health care expenses without facing a tax penalty, although you will have to pay income tax on the money.

    Considerations

    • Many workers who are insured by group health plans through employers have deductibles that are lower than the amount required to be eligible for a health savings plan. Some employers offer "flexible spending accounts" that work similarly to HSAs, in that you can save money toward health expenses on a pretax basis. The drawback of flexible spending accounts, however, is that savings do not roll over from one year to the next, so you must use all the money you save by the end of the year.

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