Health Savings Accounts (HSAs) have been available to the general public for about two years now. These tax-exempt accounts are gaining favor mainly due to the escalating cost of traditional health insurance premiums. The possibility of reducing premium costs from 20 to 50 percent and putting dollars away into a tax-exempt HSA is appealing to more and more people.

The HSA Account:  This IRA-type account, used for qualified medical, dental and vision expenses, is owned by the insured individual and can be funded up to $2,700 per year for individuals ($5,450 for families) in 2006.  Many accounts can be fully funded just by the premium savings of switching to the qualifying high deductible health plan (HDHP).  The account can be funded by either the employer or employee; whoever funds it will get the deduction. Monies not used are retained in the HSA to be used for medical expenses in the next year. With proper planning, it is possible to save thousands of dollars in insurance costs while at the same time building a tax-exempt account to pay future medical expenses. At age 65, the HSA can continue to be used tax free for qualifying medical expenses or can be withdrawn for other purposes and be subject to ordinary income tax rates.

The qualifying high deductible health plan (HDHP): These plans are required in order to open up an HSA. They have higher deductibles than a traditional health plan and less first dollar coverage, which is why the premiums are significantly lower. These high deductible plans will work to protect you against the major medical expenses while you use the HSA dollars to pay for the smaller expenses. With this combination, you don't end up wasting premium dollars asking an insurance company to pay for your $70 doctor's office visit. Most of us won't go broke paying those doctor's office charges, but being in the hospital for a week certainly would cause a financial hardship. That is where the HDHP comes in; it protects you from the catostrophic bills. Self-insuring yourself for the smaller bills using an HSA will help most people come out ahead.

Who should consider owning one? Currently, the biggest market for HSAs is self-employed individuals and small businesses. Those currently paying for their own health insurance are easily convinced of the benefits and savings. HSAs are great fits for family businesses as well, because they don’t come with the limitations on business owners that other employee benefit plans have. Bigger businesses are starting to seriously look at HSAs, but are slower to act than their smaller counterparts, many offering them now as an option. Employees whose employer is paying all or most of the employee cost, but are being asked to pick up all or a significant part of adding their family members should consider an HSA. Putting the family on a HDHP along with the HSA could save anywhere from $100 to $400 per month. These accounts also make sense for the young and uninsured; the premiums for a HDHP for someone in their 20s or 30s are considerably lower than traditional health insurance.

In summary, HSAs may not be for everyone, but they can provide significant cost relief for many people. Because of the escalating cost of healthcare, we have added the consideration of these accounts to all of our financial plans.  If you are responsible for paying for your own healthcare, take a serious look to see how an HSA might benefit you; but speak with someone knowledgeable, as there is considerable misinformation about how these plans work.  In my opinion, it is either the HSA concept or universal healthcare, because what we are doing now certainly cannot be sustained.

		Daniel J. O'Toole is an employee benefits specialist with Wealth Management Partners in Okemos