Is a Health Savings Account right for you?

Patient record form with stethoscope iStockphoto

(MoneyWatch) This fall is the time when most employers roll out changes to their benefit plans and workers are required to make their choices for the upcoming year. Employers are again stepping up their efforts to offer their employees more plans that allow them to get more involved in their health care choices.

One trend that continues to take hold is the drive to get employees to choose high-deductible health insurance plans. In fact, some large employers are planning to make high deductible health plans the only option for their employees.

As its name implies, high deductible health insurance plans come with high deductibles and are primarily designed to provide affordable coverage for major health and medical expenses. These plans come with significantly lower premiums and are a good option for younger and/or healthy workers with no significant conditions that require ongoing medical care.

When you choose a high deductible heal plan, it is typically paired with an account (called a Health Savings Account, or HSA) where tax-advantaged savings can be deposited. In fact, more employers are offering to make contributions into an HSA as an incentive to get their employees to enroll in the high deductible plans. Most employers and employees can lower their premiums by 40 percent with a high deductible HSA-qualified health insurance plan compared to a conventional co-pay plan.

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When you're covered under a high deductible health insurance plan, you'll have to pay out-of-pocket costs for routine doctor's office visits or trips to the emergency room until what you have paid equals the amount of the deductible.

To help you to pay these out of pocket costs, you open a Health Savings Account, or HSA, into which you and your employer can make tax free contributions to cover the amount of the deductible.

The HSA contribution limit for 2013 is $3,250 (up $150 from 2012) for self-only coverage and $6,450 for family coverage (up $200 from 2012). People age 55 and older can contribute an additional $1,000 over these limits. In 2013, the high deductible health plan must have an annual deductible of at least $1,250 for self-only coverage and $2,500 for family coverage.

Money in an HSA can be invested in funds similar to an IRA. All withdrawals of contributions and investment earnings are tax-free when taken out to pay for qualifying medical expenses, such as deductibles and co-payments.

If you don't use the money in the HSA for a given year it is not forfeited and can remain in your HSA and accumulate to build a fund you can use to pay for your future health care costs - even for such costs in retirement.

While a high deductible health plan can lower your overall costs for health insurance but still have you covered for unexpected and large medical costs, be careful to make sure you have the cash on hand to pay the initial out of pocket costs. You'll need to come up with the cash to pay out-of-pocket costs, either from your HSA or from your own savings, to satisfy the deductible before your health 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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