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First, let's look at the
insurance part of it.
At
its most basic level, an HSA includes a high
deductible plan. You pay a monthly premium
like any insurance plan to keep this protection in
force. Note that the premium is usually much
cheaper than other plans.
A
deductible means that in a calendar year for
covered expenses, you are responsible for 100% of
the deductible amount before the company begins to
pay. The other important piece is the
Maximum out-of-pocket which refers to when the
insurance company then begins to pay 100% (we are
talking about catastrophic care here).
Usually between the Deductible and the Maximum,
you are paying a percentage.
Let's
look at an example...
Medical
expense relating to surgery: $30,000
Insurance Deductible is $2,500
Maximum is $3,300
30% (of medical expenses) after
deductible until you have
met another $800 (up to your
max) out of your pocket
In
this case, providing you are in network for
covered benefits, you would pay:
Deductible at 100% $2,500
30% until total= $3,300
$800
Total out of your
pocket $3,300 Now
keep in mind that if you stay in the network, you
will receive negotiated rates, usually a 30-60%
discount. To understand why, you can
check out our other section,
101.
Now, with most HSA plans, the deductible is all
inclusive - hospital, doctor, prescription etc..
There are certain benefits which are handled
separately so make sure to read the full plan
brochure. If you really want a great
introduction to health insurance, start
here
first, otherwise let's look at the exciting
half...the medical savings account.
Now
let's look at the exciting part for...the HSA savings account.
By
the book, Health Savings Accounts are tax-favored
accounts set up to pay for certain medical
expenses and to allow for the build-up of savings
to pay for future medical expenses. Accounts
are set up with banks and certain other qualified
financial institutions.
Let's
dig a little deeper...
You
are allowed to fund this account with up to 100%
(deductible is doubled for 2 or more people on one
policy i.e. family) of your plan's
annual deductible (pro-rated for less than a year)
with pre-tax dollars. This account is set up
at a separate institution than the insurance
company. The largest administrators with the
best options are FirstMSA and MSABank. Go
here
to get more information if you already have the
insurance set up or want to investigate further.
Money
not used rolls over year to year. In fact,
it earns interest tax-deferred. Past a
certain limit, you can also choose to invest the
excess depending on the bank or institution you
choose to go with. You can continue to add
up to 100% (up to certain limits) of a year's deductible...year after
year. This money is separate from the
premium you pay each month to keep your health
insurance in place. You own this money just
like an IRA or savings account. This is the
first part...funding and growing pre-tax.
The
second part is where this plans actually surpasses
an IRA...
For
certain medical, dental, and long-term care
expenses, payments made from your established and
funded account is not taxed or
penalized. At 65 you are able to withdraw
this money penalty-free but subject to income tax.
If you withdraw the money for non-eligible
expenses before the age of 65, it will be subject
to a 15% penalty and income tax.
So to sum it up... |
