I was talking to a friend of mine the other day and the conversation turned to Health Savings Accounts (because we’re cool like that).
An HSA is a savings account that is never hit by income tax as long as the money is used for qualified medical expenses. The money can be saved year over year and used when needed (unlike an FSA which must be spent by the end of the year). The catch is that you are only eligible for an HSAif you have a high deductible health insurance plan.
If you are in the 25% tax bracket, that means you get an immediate 25% return on your “investment” by just earmarking money for health expenses.
My friend is getting married soon and he was wondering if he could use money in his HSA to pay for medical expenses for his spouse once they are married, even if she is on a low deductible plan and not eligible for an HSA herself.
Combine Low and High Deductible Health Plans to Save Money
Both my friend and his future wife have health insurance through their companies. He has a high deductible plan with an HSA, she has a regular low deductible plan.
Legally he CAN use his HSA dollars to pay for any medical bills she incurs (he could also use the HSA for kids if they had any). That means his wife essentially has a low deductible health insurance plan with an HSA along with it. That’s pretty sweet!
Another way to have a low deductible plan with an HSA is to save up a bunch of money in your HSA over your healthy years. Single people can save a maximum of $3,100 a year in their HSA, while if you have a family plan you can save $6,250 a year (those limits will rise in 2013 to $3,250 and $6,450). If you can save in your HSA for about five years without needing to use any of the money in those accounts, you could have anywhere from $15,500 to $31,250 in your HSA.
At that point you could just switch to a low deductible health insurance plan and use the money saved up in your HSA to pay for any medical treatment.
Pro-Tip: While you are young and healthy, get a high deductible health plan max out your HSA. You’ll save money on premiums and build up a nice financial safety net for medical expenses.
Readers: Do you have an HSA?
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Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
Back when I was (trying to be) an insurance agent, I found that the combo HSA and HDHP was a tough sell, for reasons I never quite fully understood. It could just be because I sucked at insurance sales.
I wrote an article about how to get the best deal on healthcare (partially from the viewpoint of the agent) at http://chl-tx.com/2009/09/how-to-get-the-best-deal-on-health-care/ which you might be interested in reading. I discovered a really eye-opening thing in my search for the best deal on a relatively expensive procedure over 20 years ago, which I explain in the article.
Great tips! Just like the matched 401k, many of us don’t take advantage of the HSA and FSA to their full potential. Regardless of what type of insurance you carry, if you ever experience a large medical bill from a hospital it is a good idea to apply for financial aid to help reduce some of the out-of-pocket expense. I’ve been shocked at the amounts some hospitals will reduce even for patients with good income.
Nice article pointing out the benefits of the HSA. I have a question though. I currently have an FSA through my job (the only option they have), can i go out and get an HSA from an independent provider? Can i have an HSA and an FSA?
You can’t have both (unless your FSA is specific to certain things like dental or vision)
Also, you can only have an HSA with a high deductible health plan. $1,200 deductible for a single person, and $2,400 for a family.
If you have a high deductible plan and your employer doesn’t offer an HSA, you can get an HSA yourself. Again, the key is to have the High Deductible Health Plan (HDHP)
We have used FSAs in the past but this is the first year we are using a HSA. We definitely have a HDHP, $9000 deductible – ouch!
I just became eligible for an HSA this year and have signed up already. While I am not maxing it out I imagine I will down the road. It is a great program and I know at some point in my life I definitely will have medical expenses!
I was under the impression that any money you didn’t use would expire. Am I totally off on that?
You are thinking of an FSA (where the money expires at the end of the year if you don’t use it).
The HSA is a true savings account. Like I said above, you are only eligible for the HSA if you have a high deductible health plan. You trade the expensive deductible for lower premiums and the ability to save money in an HSA.
One other caveat about who you can use your HSA funds on… they must be your dependent or spouse for tax purposes. My employer allows me to cover my domestic partner under my high deductible plan. However, because he isn’t considered my spouse for tax purposes, we must keep and maintain separate HSA accounts, making sure to track our separate expenses out of the correct account.
Not all HSA’s are the same, as they have different deductibles that you have to reach. For comparison I’ll share my plan with you, which is Cigna. My plan requires that I pay all medical expenses up to $3000. The bill is still submitted to Cigna first before it comes to me. Cigna has it’s prearranged amount that it would normally pay for a particular service and that is the amount that I am responsible for, not the entire original bill. By using this process after I reach $3000 that I have paid, I then have roughly the same plan my co-workers have which is, I pay 20% of the Cigna approved bill until I have paid $4000 more. So in a worst case scenario on any given year, I may have to come up with $7000, but after that amount I am no longer responsible. There are no co-pays with my HSA and I do not need referrals. Other perks that come with it are that my employer donates $2000 to my HSA and the premiums are a little over $1000 cheaper than the non HSA plan.
Prior to last year, I had made out like a bandit in that my healthcare expenses never even came close to $2000 in any given year and sometimes not even $1000. Last year I was able to experience the flip-side of paying the entire $7000 deductible. My 5 year old needed an emergency appendictomy. I maxed out having to pay the full $7000. You might think that this would have soured me on HSA’s, but not so. The previous years savings more than paid for last year. You can never tell what healthcare needs you may unexpectedly be in need of, but if your family is normally healthy and you commit to paying the full deductible if needed at the beginning of the year, then you roll the dice and see what you get. Overall it has worked out fine for me. If you are lucky you can really store up a lot of cash for use in future years. If you seem to be cursed with bad health issues year after year, then this is probably not for you.
One point to be aware of is the issue of meeting your deductible.
If your friend uses some of his HSA money to pay for an expense for his wife, this money *won’t* be counted towards meeting the deductible and annual out of pocket maximum of his insurance.
Also, this use of HSA funds can be handy for avoiding dental and vision insurance, too. It may be cheaper to pay out of pocket using your HSA dollars than to purchase insurance packages for these services. (Again, remember that paying for the services won’t be counted towards your deductible.)