5 Things to Know About Health Savings Accounts

Consumers who have these accounts behave differently than consumers who don’t, and as a result, their health costs are lower. That benefits the consumer and the employer.

By Giovanna Fabiano

As Americans continue to navigate the latest round of health insurance reforms, employers are increasingly offering one plan they say yields myriad cost benefits: the Health Savings Account (HSA).

Partnered with a high-deductible health insurance plan, the tax-free HSA has fostered many debates about its advantages for consumers, some of whom are scared away by the out-of-pocket payments.

But most employers agree the plans drive down crippling healthcare costs.

prescriptiondrugs_OKJudging from the rapid growth of the accounts since they were first offered a decade ago, both employers and employees are jumping on the HSA bandwagon.

The number of firms nationwide offering HSAs increased from 7 percent in 2007 to 17 percent today, according to the Kaiser Family Foundation.

“When these first started in 2004, nobody knew what they were,” said Jay Garriss, National Director of Client Relationship Management at Benefit Wallet, A Xerox Company.

“Today, there are 7.2 million accounts, which translates to more than 15 million people covered.”

“Employers can see that consumers who have HSAs behave differently than consumers who don’t, and as a result, their health costs are lower,” Jay explained. “That benefits the consumer and the employer.”

While the account has largely become a standard part of health insurance options for larger employers, there still seems to be some confusion about what HSAs are and how employees and employers can benefit.

Here’s what you need to know about HSA plans:

An HSA Is a Bank Account for Health Expenses

The account, owned by employees, and accumulated through payroll deduction, is similar to an IRA or a 401(k), except that they use the money to pay  out of pocket healthcare expenses. The employee decides how much to contribute each year —$3,300 for single coverage and $6,550 for family coverage in 2014. 

HSAs Are Combined with a Low-Premium, High-Deductible Health Insurance Plan

Employees typically use the HSA to pay for out of pocket costs until they reach their deductible.

This is the part that historically scared initial consumers, Jay said. “Consumers were insulated from any pricing info because there was always someone else paying the bill.”

“Now, employees have visibility into what things actually cost, so they develop more of an ownership mentality.”

An HSA Is Tax-Free

Called the triple-exempt plan, an HSA is tax-free when it goes in, it earns tax-free interest, and the withdrawal is tax-free as long as it’s used for a health-related expense.

“When you take your money out of a 401(k), you’ll pay income taxes on it. With an HSA, when you take the money out, you don’t pay taxes on it,” Jay said.

An HSA Doesn’t Expire

Often confused with a Flexible Spending Account (FSA), which typically runs out at the end of the year, an HSA is your money and “it never goes away,” Jay pointed out.

“With an FSA, it’s use it or lose it, but with an HSA, you can just have it grow and grow.”

Jay said he puts the maximum amount each year in his HSA and tries not to spend it.

“The reality is that as we get older, our out of pocket medical expenses increase because our bodies wear out and break down. I know my medical expenses in the future will be higher than they are today, and I want to start saving the money now.”

Most Employers Contribute to HSAs

As more employers see cost savings, they are continuing or increasing the contributions they make to HSAs. If your employer has a good contribution or matching policy, you get more bang for your buck and end up with more in your account.

“If you’re going to pay $1,500 out of pocket before the insurance kicks in during your first year, it hurts a little, but if your employer is contributing, that helps a lot and makes it worth it,.” Jay pointed out

(This article was first published on Real Business, a website from Xerox that provides ideas and information for decision makers in business and government.)

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