Health Savings Account Long Term Savings Explained:

A health savings account can actually save you more money over the long term than what you may expect. Even though you are required to have a high deductible insurance plan for eligibility with your HSA, the amount of savings that you can experience can greatly outweigh your deductible costs.

Since your contributions to your HSA are tax-free, and any money you spend from your HSA to pay for your medical expenses or health insurance premiums are also tax-free, your savings can quickly mount up.

It can be difficult to understand how paying more for a deductible can save you money over the long term, particularly if your current health insurance deductible is just $500. In order for a health insurance plan to be HSA eligible, it must have at least a $1000 deductible. This can make an HSA seem unattractive at first glance, but upon further scrutiny, it is possible to actually save more money by purchasing what looks like the more expensive plan.

We will illustrate this savings below, using both a low deductible health insurance plan that is not HSA eligible, and a high deductible health insurance plan that is eligible. These figures are an example and are not based on any particular health plan. Your amount of savings may differ based on your location and your individual health care plan.

First, we'll look at an example of what a low deductible, higher monthly premium insurance plan would cost per year, with one claim for $1500. This example plan has a $500 deductible and a co-insurance of 80/20, which means that the policyholder would have to pay 20% of the expenses. There are no tax savings for this plan since it is not HSA eligible.

Out-of-Pocket Expenses on $1500 Claim = $700 (includes $500 deductible) Monthly Premium = $250 ($3000 per year) Non-Covered Medical Expenses = $550 Subtotal of Medical Expenses = $4250 Federal Tax Savings = 0 State Tax Savings = 0 Net Expense = $4350

Now, we'll take a look at a high deductible plan, which has a $5250 yearly deductible, and no coinsurance, with one $1500 claim. This example uses a 28% federal tax bracket and a 5% state income tax bracket. The maximum contribution of $5250 for a family plan has been made to an HSA in this example, and the funds from the HSA are being used to pay for these expenses.

Out-of-Pocket Expenses on $1500 Claim = $1500 Monthly Premium = $219.66 ($2636 per year) Non Covered Medical Expenses = $550 Subtotal of Medical Expenses = $4450 Federal Tax Savings = $1470 State Tax Savings = $263 Net Expenses = $2717

The amount of savings for your high deductible plan, as opposed to a low deductible plan is $1633. This is a significant savings.

In addition to the savings illustrated above, the ability to use your HSA to pay for procedures that are not normally covered by a low deductible health insurance policy can quickly outweigh any downsides of a high deductible plan.

For example, a low deductible insurance plan may not offer coverage for routine dental procedures. This means that you will have to pay for these services out of your own pocket, with income that is subject to taxation. If you had an HSA, you could use income that is tax-free to pay for the procedure. The difference, although it may seem slight, can add up over time. As more states begin to offer state income tax-free status on HSA contributions and payments, your savings can only increase.

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