How health savings accounts can save you money

Close up of a medical insurance form iStockphoto

(MoneyWatch) If you are reviewing your health plan choices for the upcoming year, consider a so-called high-deductible health insurance plan with a health savings account (or HDHP, in the industry's cumbersome jargon).

Because of that high deductive, these plans cost less and can save you money. These are designed to provide affordable coverage for major health and medical expenses for folks who can afford some up-front medical costs. As a result, HDHPs are ideal for younger, healthier workers who have no significant pre-existing health conditions. They also come with the option to open and contribute to a health savings account, or HSA, which allows you to save pre-tax money and withdraw it tax-free when spent on qualified medical expenses.

The cost of a HDHP is relatively low because the insured must first satisfy a high deductible. For individuals, that figure ranges from $1,250 ($2,500 for family) to $6,250 ($12,500), depending on the plan purchased in 2013. The main appeal of such plans is that premiums can be 40 percent lower in a high-deductible HSA-qualified health insurance plan than those in a conventional co-pay plan.

Of course, until you meet the deductible threshold in these health plans, you'll have to pay out-of-pocket costs for routine doctor's office visits and trips to the emergency room for minor ailments. But some high-deductible plans cover preventive services and programs, such as prenatal care, cancer screenings and smoking cessation services. In these plans, the deductible applies only to services that are not considered preventive.

HDHPs come with an option to open an HSA, where you can make a tax-deductible contribution in the amount of the deductible. The new, higher HSA contribution limit for 2013 is $3,250 for single coverage and $6,450 for family plans. People age 55 and older can contribute an additional $1,000 over these limits.

More than 13.5 million people now have HSAs with their high-deductible health plans, according to industry data. That's an increase of more than 2 million in the past year.

Money in an HSA can be invested in funds similar to an IRA. The investment earnings are tax-free when withdrawn to pay for qualifying medical expenses, such as deductibles and co-payments.

As an alternative to HSAs, some employers contribute to what's known as a health reimbursement arrangement, or HRA, which employees can use to pay for healthcare expenses that are not reimbursed by the plan. Workers don't contribute to HRAs, and unused funds are forfeited at the end of the year. Also, if you change jobs, you no longer have access to the HRA.

But be careful. Thanks to the 2010 health reform law, over-the-counter medications cannot be paid for with tax-free money taken out of any health care accounts, including an HSA or HRA.

While high-deductible health plans are an affordable way to get coverage for large, unexpected medical costs, you'll also need to have a plan to come up with the funds for the out-of-pocket costs (either from your HSA or from your own pocket) to satisfy the deductible before your insurance coverage kicks in.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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