The subject of H.S.A.s has popped up more recently in the news. Specifically, the new administration is talking more about H.S.A.s, which have been around for a long time. There’s nothing new about them. Over a decade ago, they were called M.S.A.s – medical savings accounts. Now, they’re H.S.A.s – health savings accounts.
In order to have a health savings account, you have to have a qualified health plan. A qualified H.S.A. health plan is designed a certain way. First, the qualified health plan comes with a deductible. After meeting the deductible, the insurance company then pays (normally) 100% on all cover charges. Meaning, you don’t have a co-pay for the doctors; you don’t have a co-pay for your prescriptions. You have a deductible, but after meeting the deductible, the carrier pays 100%. With this plan, you can then set up a health savings account. It’s basically a medical I.R.A.
The money put into a health savings account becomes tax deductible off your gross income. The tax benefits are not contingent how little or how much a person makes. However, there is a cap to how much can be contributed to an H.S.A. and get the tax benefit. For an individual in 2017, it is $3,400. As for a family (2+ individuals), it is $6,750. Every year the prices are adjusted by the IRS.
With the tax-free money in the H.S.A., you can take the money and pay for your deductible and out-of-pocket expenses on the health plan. No matter how you do the math, it’s the most cost efficient health plan. You can use none of the tax savings in the H.S.A., use only a little, or use all of it to meet your deductible. If the year ends and you don’t use the tax savings, the money will roll over to the next year. It’s not a use-it-or-lose-it plan. Moreover, these plans are typically less expensive than a co-pay plan.
A co-pay plan is considered a rich-benefit plan, meaning low co-pays for doctor visits and prescriptions. However, with low co-pays come high premiums. Whereas a qualified high-deductible health plan, or rather an H.S.A. health plan, is less expensive because it’s less in premium and has a tax advantage. Plus, the money in the H.S.A. can be used for qualified medical expenses without paying tax on it. It’s easier.
Right now the deductibles are higher than the contributions a person can make to the H.S.A. The new administration is actually trying to raise the contribution levels to coincide with the maximum out-of-pocket. By doing so, a person can become self-insured after one year for their deductible if they don’t end up using any of their H.S.A. money. Because again, the money in the health savings account rolls over year to year. The money continues to grow in the H.S.A. So if after years of being healthy and contributing the maximum amount into the H.S.A., you have a major accident; all your tax-free money can go towards the deductible.
As a business owner, an H.S.A. qualified plan makes sense. It makes sense for someone whether healthy or unhealthy because regardless of health they still get the tax advantage. With a co-pay plan, however, you have to meet your deductible, as well as pay higher premiums, out-of-pocket expenses, and sometimes higher co-pays. Moreover, co-pay plans don’t come with the tax advantage of having an H.S.A. In most scenarios, a high-deductible, H.S.A. health plan usually wins.
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