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Who do HSAs Make Sense For?

Many people who get their health insurance through their employer aren’t aware of the true cost of health care.  Employers generally subsidize a majority of the cost so the premium you pay via payroll deduction isn’t even close to the full amount.  If you’re curious what this number is, ask your HR department or look for the amount as part of your total compensation package.

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HSA Basics

HSAs, also known as health savings accounts, have risen in popularity over the past few years because along with High Deductible Health Plans (HDHPs) they can vastly reduce the monthly premium you and/or your employer pay.  A higher deductible means lower premiums and that could mean huge savings for you and your employer. Salaries and health care are generally a business’ two biggest expenses.

The basic premise behind the HDHP/HSA combo is pretty simple: you cover the small things like when you get sick and need antibiotics and the insurance will cover the big things like broken bones (after you hit your deductible).

This way you are insuring against things that are unlikely to happen while paying out of pocket for little bumps and bruises here and there without involving a third party like an insurance company.

Why Are HSAs Catching On?

Not everyone has heard of HSAs but large numbers of employers are starting to offer them because frankly they can save everyone a lot of money. Most employers even offer an HSA contribution on your behalf in addition to reduced premiums in order to incentivize employees to switch.

If you’ve been faced with the decision of opting for an HSA/HDHP combo there are probably a lot of questions racing through your head. HSAs are more risky than traditional plans but they are also a lot less costly. So how do you know if the HSA option is right for you?

HSAs Are Great When You Never Get Sick

In the best case scenario, HSAs work amazingly well if you never get sick.  If you never see the doctor, then you can take your employer’s contribution and the monthly premium savings and add it straight to your HSA account every year.

After a few years, you could potentially have a very large nest egg built up that is triple tax free when used for medical expenses.  The other cool thing about HSAs is the money stays with you (not your employer) and you can use it at any point in your life.  So even if you’re the model of perfect health right now, you can invest that money for 30-40 years and use it when you’re old and gray.  Money in your HSA can even be applied to deductibles and co-pays if you decide to switch back to a traditional plan in the future.

HSAs Still Work if You Get Sick Here and There

A lot of people are scared to switch to HSAs because of the fear of getting sick and having to pay that deductible.  But what a lot of them fail to consider is the premium savings and employer contribution (if applicable). Your monthly savings are generally pretty significant when you switch from a traditional PPO/HMO plan to an HSA/HDHP combo so you can add that savings to your HSA every year. In addition, you can contribute money to your HSA so that if there is a gap, you can pay for it with tax free dollars.

Ultimately though, it’s all a numbers game. HSAs definitely have more risk but there can be large potential upside.  HSAs are the only retirement account that is triple tax free: the money you put in is tax free, the money you take out is tax free and the investment gains are tax free.

You can calculate your yearly savings by opting for the HSA (just add up the employer contribution and premium savings) and compare that to the HDHP deductible. That way you know what your break even point is. Or in other words, how long you have to go without any major medical care before the HSA/HDHP combo saves you money.

The Downside of HSAs

HSAs might not make sense is if you have some type of chronic medical condition. In that case, you’re probably better served by traditional health plans since your care is being subsidized by other members who don’t get sick as often. HSAs might also not be a good idea if you know you will be needing expensive medical care in the near future.

When you have a copay, you know how much it will cost to visit the doctor but it can be difficult to find out the cost of medical care when you are paying yourself. Also, the desire to keep money in an HSA may prevent some people from seeking medical care when they need it. Plus, if you take money out of your HSA for non-medical expenses, you will have to pay taxes on it.

Before making the switch be sure to look at how much you spent on healthcare over the last few years to see if an HSA makes sense for you.

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Photo Credit: Flickr

Harry Campbell Harry Campbell is an aerospace engineer by day and personal finance blogger by night. He runs his own personal finance blog at Your PF Pro and is a freelance writer. Harry's expertise includes retirement, credit cards, home buying, higher education and side hustles like ridesharing. His work has been featured on Zillow, Credit Karma and CreditCards.com. Harry currently resides in Newport Beach, CA and enjoys biking and playing beach volleyball in his spare time.
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