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First, let's look at the
insurance part of it.
At its
most basic level, a
Health Savings Account includes a high
deductible plan. You pay a monthly premium
like any insurance plan to keep this protection in
force. Note that the premium is usually much
cheaper than other plans.
A
deductible means that in a calendar year for
covered expenses, you are responsible for 100% of
the deductible amount before the company begins to
pay. The other important piece is the
Maximum out-of-pocket which refers to when the
insurance company then begins to pay 100% (we are
talking about catastrophic care here).
Usually between the Deductible and the Maximum,
you are paying a percentage.
Let's
look at an example...
Medical
expense relating to surgery: $30,000
Insurance Deductible is $2,400
Maximum is $3,200
20% (of medical expenses) after
deductible until you have
met another $800 (up to your
max) out of your pocket
In
this case, providing you are in network for
covered benefits, you would pay:
Deductible at 100% $2,400
20% until total= $3,200
$ 800
Total out of your
pocket $3,200
Now
keep in mind that if you stay in the network, you
will receive negotiated rates, usually a 30-60%
discount. To understand why, you can
check out our other section,
101.
Now, with most HSA plans, the deductible is all
inclusive - hospital, doctor, prescription etc..
There may be certain preventative benefits which are handled
separately so make sure to read the full plan
brochure. If you really want a great
introduction to health insurance,
check out our section Health Insurance 101, otherwise let's look at the exciting
half...the Heath Savings Account.
Now
let's look at the exciting part for self-employed
and small business...the HSA savings account.
By
the book,
Health Savings Accounts are tax-favored
accounts set up to pay for certain medical
expenses and to allow for the build-up of savings
to pay for future medical expenses. Accounts
are set up with banks and certain other qualified
financial institutions.
Let's
dig a little deeper...
You
are allowed to fund this account with up to 100%
(up to certain limits) of your plan's annual
deductible (pro-rated for less than a year) with
pre-tax dollars. This account is set up at
a separate institution than the insurance
company. The largest administrator with
the best options are Wells Fargo, MSABank or FirstMSA. Go
here
to get more information if you already have the
insurance set up or want to investigate further.
Money
not used rolls over year to year. In fact,
it earns interest tax-deferred. Past a
certain limit, you can also choose to invest the
excess depending on the bank or institution you
choose to go with. You can continue to add
up to 100% of a year's deductible...year after
year. This money is separate from the
premium you pay each month to keep your
health
insurance in place. You own this money just
like an IRA or savings account. This is the
first part...funding and growing pre-tax.
The
second part is where this plans actually surpasses
an IRA...
For
certain medical, dental, and long-term care
expenses, payments made from your established and
funded account is not taxed or
penalized. At 65 you are able to withdraw
this money penalty-free but subject to income tax.
If you withdraw the money for non-eligible
expenses before the age of 65, it will be subject
to a 15% penalty and income tax.
So to sum it up...
High
deductible insurance
plan
combined with a tax-favored Savings account
-fund with pre-tax dollars
-accrue interest tax-deferred
-pay out medical bills tax-free |
High
deductible Insurance Plan
