They are designed to get the millions of Americans who have no medical insurance coverage to be able to afford to have catastrophic medical insurance on them. The money saved in taxes is often enough to pay the premium.
HDHP is just a fancy word for "catastrophic medical insurance". It is insurance that only kicks in after the insured has paid a good chunk of the medical expenses themselves. I like it because it meshes with the reality that people are just going to have to budget money for medical expenses. This gives the customer the best of both worlds. They control the first few thousand dollars of medical expenses each year. This brings the forces of the market economy to bear upon the out-of-control medical industry, which in the long run, is the only solution that is going to work for the US.
It astounds me that people have no problem paying $125 a month for mobile phone coverage. $400 a month for a car. $50 a week for fuel. $50 a month for cable TV. Yet balk at paying $20 for a medical co-pay. They have no problem paying almost $10k a year on the previous items, but only have max of $2500 a year out-of-pocket for medical care with their insurance.
The Good
- The deposits are tax free. This lowers your taxable federal income. For some people, this can make a huge difference by dropping you into a lower bracket.
- The withdrawals (for medical expenses only), are tax free.
- And the earnings are tax free.
- If you are over 55, you can make additional "catch-up" contributions.
- The money can be invested in the same places as an IRA, such as mutual funds. It doesn't have to be stuck in a low-yield money-market fund.
- Money can be contributed year after year.
- Any money you do not spend continues to grow, tax free. No "use it or loose it" about it.
The Bad
- Your annual contributions can not exceed the annual deductible of your insurance.
- For 2005, your annual contributions can not exceed $2,650 if you have single coverage and $5,250 for a family. For 2006, these amounts are $2,700 and $5,450, respectively. These amounts will be increased for inflation in future years.
- You can't pay the insurance premiums from the account.
The Ugly
- Unlike an IRA, an HSA is not covered by ERISA. So the funds are not shielded from liens, theft, and judgments.
- Some states, such as California, do not grant any tax break for your HSA.
- You can't have one if you already have medical insurance like an HMO.
Why HSA's are needed
One of the problems with the way medical care is paid for (or not paid for) in the US is the simple fact that so many people consider it a secondary expense. So when it comes to budgeting money for medical care, savings for medical bills is often the first thing to be cut out of the budget. Other things take priority. It doesn't rank up there with rent, food, utilities, etc.
So when people do get medical insurance, often subsidized by their employer, they don't want it to impact their monthly budget above and beyond the premium amounts. People that have no employee subsidized coverage find that the similar low/no deductible insurance is too expensive.
By simply having a few thousand dollars set aside explicitly to pay for medical care, and combined with affordable HDHP insurance coverage, the average American can rest easy knowing that they are not going to loose everything should there be a medical emergency.
The future is already here!
The days of employer paid medical insurance are coming to a close. The premiums are getting too high. The fact is, we need to come up with a better way to pay for our medical care. The HSA is it. I would not be surprised to find that more and more employers are going to switch to HSA policies in the future, demanding their employees take responsibility for their own medical care. This has already happened for retirements. Traditional pensions are no longer around, having been replaced by 401Ks.
I also can see where welfare might kick in for those who are smart. I would like to see the government help pay the premiums of those who are out of work and have (a) a funded HSA, and (b) HDHP coverage. Perhaps it can be done on a loan basis, like a student loan. That way the person can still have medical coverage while looking for work, or on medical leave.
Business Opportunity!!
I smell a business opportunity here. Since people find it hard to set aside money for medical expenses. Then perhaps they would be willing to subscribe to a service that withdrawals a fixed amount per paycheck and make the contributions to their HSA. And also pays the medical expenses from their HSA before giving the claims to their HDHP company for payment.
That way, they get the best of all worlds. The money never gets into their hands to spend on other things like cable TV, credit card bills, etc. Yet, they have affordable medical insurance.
An IRA for those who can't have an IRA
One thing that I've noticed about an HSA, is that it appears to me that it can function as an IRA who those who do not qualify. There are two reason for this.
The contributions for an HSA do not have to come from earned income. You can fund it through investments and savings.
As far as I can tell. You don't HAVE to spend it. In other words, you can max out your contributions, pay your deductable expenses from your taxed income, and leave the contributions in the HSA to grow tax free.
Man, that is hard to beat. I have not seen anything, anywhere, that say that if you have an HSA, you must use it to pay your medical expense. It only says that the HSA funds can only be used for medical expenses.
So, lets say you start maxing out your HSA contributions and are financially diciplined enough not to touch them. Then how do you eventually benefit? Simple. After you retire, use the HSA to pay the co-payments on your Medicare expenses (if Medicare survives that long). Even if there is no Medicare, you can spend the money for other expenses. and simply pay the tax them plus a 10% penalty. That is not too bad of a price for being allowed to make tax free contributions AND tax free growth for a long time.
Perhaps by the time you retire, the laws will allow you to tap your HSA for other things without penalty, or perhaps even without tax.
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