Health Savings Accounts are not just for Health Insurance

I recently made a presentation to a group of business owners about Health Savings account plans. I really enjoy these presentations because at the end I usually get great questions. There were a couple of financial planners in the audience, and we started linking some of the ideas that I mentioned with HSA’s to their clients’ goals. I have always held the belief that a benefit plan’s components all work together – disability and medical, life and 401k, etc. The question I received from this financial planner caused a joint “A-ha!” moment. “You mean to tell me”, the financial planner asked, “that if my client joins an HSA qualified plan that he can put aside over five thousand dollars pre-tax?” The answer was yes and we were off on a brain storming session.

Think of Health Savings account plans as two different pieces – a Qualified High Deductible Health Plan (QHDHP) and the Savings Account (HSA).

The Health Plan
The QHDHP is just that – health insurance. You go to the doctor and pay negotiated rates, if something major happens; your financial exposure is limited to an out-of-pocket dollar amount. The QHDHP plan just does not have bells and whistles such as prescription drug and office visit co-pays. Think of the QHDHP as an “old school” plan that pays a percentage after the deductible is met. No frills, just financial protection.

The Savings Account
Enough about the health plan; let’s talk about fun stuff – saving money for the future. If you are enrolled in a qualifying high deductible health plan, you can now open up a Health Savings Account. Through payroll deduction, you can put pre-tax money from your paycheck into this account. If you are enrolled in single coverage, you can set aside $2,850 (2007 limits); if you cover your family you can set aside $5,650 pre-tax. Remember, you must be enrolled in the QHDHP to do this. The actual account is very similar to a checking account, except you get reports at the end of the year on money that you used out of it.

Okay, here is where is starts getting interesting. The money you put into the health savings account can be used for any unreimbursed medical expense, such as deductibles, prescription drugs, over the counter medication, and other items on a very long list. (If you already take advantage of a Flexible Spending Account, the same items qualify under a HSA account). So you go to the doctor and the bill is $75 dollars – write them a check out of your health savings account. OR DON’T and let me tell you why:

If you do not use the money in your health savings account each year, it continues to accrue and grow tax deferred in the account. When you turn 65, unused money can be withdrawn without penalties. Think about it – in addition to your 401k plan, the HSA can be another retirement account. So if you have that occasional doctor visit or prescription, just pay for it with regular after tax money and let the HSA grow. Most HSA vendors either pay an interest rate on the funds or give you a limited list of mutual funds to invest in.

In conclusion, always think creatively about your benefit plan. A good benefit advisor should see the “big picture” and show you tools that fit your organization and perform multiple duties. Adding a Health Savings Account option gives the protection of a medical plan combined with tax advantaged dollars. Remember that there are many ways to design your benefits plan and it pays to think outside of the box!