A special type of Health insurance plan, (called Qualified High Deductible Health Plans) is designed to work in conjunction with a Health Savings Account. These type plans are less expensive. ( A Health Savings Account is an account that you open at your local bank.) High Deductible Health Plans are typically configured to pay 100% of your covered expenses after you have met your deductible amount. There are no copays for doctors, or drugs, but most people find that this is the least expensive way to insure yourself and your family.
With an HSA plan, you not only save money on your insurance premium, but you save money on your income taxes. If you make a contribution to your HSA account, you will get a tax deduction. It works in a fashion similar to the tax deduction you get if you make a contribution to your IRA (Individual Retirement Account).
That amount of money you put into the IRA or an HSA account is not taxable. Assuming that you are in the 28% Federal tax bracket, and then add another 7% for the state taxes, you will save 35% on the money you put into an HSA account. That means the government is paying about 1 out of every 3 dollars of your contribution for you.
An important distinction needs to be made concerning how deductibles are computed for Qualified High-Deductible Health Plans. The family deductible is an aggregate or combined deductible. Each person’s covered medical expenses go toward meeting the family deductible. Compare this to a traditional copay plan where three of the insured persons EACH have their own deductible that must be met. It is much more difficult to have each person meet their deductible than it is to meet an aggregate deductible.
In addition, the money that is in the HSA account can accumulate. Any money that is not spent on qualified medical expenses each year can be invested to earn interest, or even be put into the stock market — it remains your money. It doesn’t get absorbed by your employer or the tax collector. (If you take the money out before the age of 65 to spend on non-medical expenses, you will pay the taxes on the money and a 10% penalty.) You have never paid any taxes on the money you contributed to the HSA, and no taxes on any investment gains or interest gains. Therefore,when you do take the money out, after the age of 65, it will finally be taxed.
Here are two factors to consider: First, you probably have a lower tax rate at 65 years old than you have now. Secondly, money that can appreciate without the burden of income taxes grows at a much greater rate. After the age of 65, you can withdraw the money to buy a sailboat if you’d like…no longer is there a restriction that you must spend this money for qualified medical expenses.
You do NOT have to make a contribution to your HSA account.
You don’t have to put money into your HSA account unless you want to. In fact, you don’t even have to open up an HSA account. It is advisable that you open one, but no one is going to knock on your door and say, “Did you make your HSA contribution?” It is totally up to you. If you do open an HSA account, usually there is a $50 minimum account size.
You can use the HSA money for a wide variety of medical expenses including eye exams and glasses, doctors, dentists, braces, drugs, fertility enhancement, chiropractor, acupuncture, psychiatrist, psychologist, surgery, and long-term care insurance. (Long-term Care insurance is the only insurance you can purchase with your HSA money. You cannot use your HSA savings money to pay your health insurance premiums.)
In summary, you should look at insuring yourself with the HSA type plan. They cost you less in monthly premium, you can further decrease your costs by getting a tax deduction, and lastly, you can keep the money in the account and never pay any income taxes on it if you spend it on qualified medical expenses.