Each year, millions of people spend money on health insurance premiums. Whether it is a deduction from your paycheck by your employer, or a purchase through the marketplace, this is an expense that is paid by most. When people think of health insurance, the opportunity to save and invest is not the first to come to mind. People view health insurance similar to any other type of insurance, you pay a premium now, with the hopes that should something catastrophic or damaging happen in the future, that you will have coverage and help to offset any financial obligations. Well, I am here to share information about Health Savings Account, which is an opportunity for you to help save some money to pay for medical expenses.
So what exactly is a Health Savings Account (HSA)? A Health Savings Account is a FDIC insured account that is held by a custodian (an organization / financial institution that your employer designates to hold your funds), which is used to save money to be used only for qualified medical expenses either now, or some time in the future. One important benefit of a HSA, is that the funds saved are tax-exempt, meaning that the government does not tax this money if it is used for its intended purpose (pay for qualified medical expenses). In addition, this money is a pre-tax deduction on your payslip, meaning that the funds you allocate for your HSA, will be removed before you are taxed, which reduces the amount of taxes that you pay per paycheck.
In order for you to get a HSA account, you need to have a High Deductible Plan. If your employer offers High Deductible Plans as an insurance option, chances are, you will be able to get the HSA to go along with it, as they work hand-in-hand. The High Deductible Plan, is one in which your premium is very low, but should you have any medical expenses, you will have to pay a higher deductible (amount out of pocket), before your insurance provider steps in to assist with your expenses. If you are more likely to have medical emergencies, or frequent medical visits, then opting for a insurance plan that has a higher premium, but have a lower deductible (pay a lesser amount at time of service, or only requires a copay) may be your best option. The High Deductible Plan with the HSA is best if you do not foresee a need where you will have a lot of medical expenses within a year. The better your health, the more you may see the benefit.
Some employers may choose to make a contribution to the employee’s HSA. The amount contributed could range from a few hundred dollars to a few thousand dollars. This is basically “free money” that your employer gives you, as a jump-start to help build your savings. The method I personally use to determine how much to save in my HSA is to take the difference between the premium of the most expensive insurance plan that my employer offers (most likely has the lowest deductible & best benefits), and the premium of the High Deductible Plan. For example, say the premium on my employer’s most expensive insurance plan option is $300 per month, and the premium on the High Deductible Plan is $100 per month, then I would save the difference of $200 in my HSA. If I took the most expensive insurance plan, and paid $300 per month, at the end of one year, I would have spent $3,600 on insurance premiums. Say I did not have any medical emergencies that year, then the $3,600 would have been a sunken cost. If I had the High Deductible Plan, at $100 per month, at the end of one year, I would have spent $1,200 on insurance premiums. Also, the $200 difference that I have been saving each month, at the end of one year, I would have $2,400 in my HSA. In the second scenario, only $1,200 would have been my sunken cost, if I did not have a medical emergency that year, and $2,400 would have been money saved in the HSA, which can be rolled to the next year. Unlike Flexible Spending Accounts (FSA), which have to be spent by the end of the year or you lose the money in it, HSAs can be rolled each year up to retirement.
The custodian of your HSA will pay a monthly interest on the amount of cash balance saved. Once you have more than $1,000 saved, then you are eligible to invest anything over $1,000 in different mutual funds/stocks that your custodian offers. Please note that anytime you choose to invest in mutual funds/stocks, that you run the risk of losing your investments. This is a great way to earn some extra money on your savings, however, if you do not want the uncertainty or risk, then leave your money as a cash balance, and earn the monthly interest payment, similar to a bank savings account .
HSAs may not be ideal for everyone, as it depends on how your health is. However, if you are in relatively good health, and would like to save some of your premium instead of losing it all to insurance providers, then this may be a good option.
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