In 2003, the United States Government instituted a program known as a Health Savings Account (HSA) as part of Medicare Prescription Drug, Improvement, and Modernization Act. HSAs allow citizens with a high-deductible insurance policy to pay into an account earmarked for medical expenses. The main selling point of these accounts is that they can be contributed to, up to a certain annual limit, without taxes. Withdrawals can be made tax-free as well, providing that the funds are used to cover medical expenses. In any other circumstances, there are typically penalties involved for withdrawals.
Eligibility for a Health Savings Account
In order to qualify for a HSA, an applicant must be currently enrolled in an HAS-eligible, high-deductible health plan (HDHP). This means that your plan must be based upon a high out-of-pocket deductible. Typically, high-deductible plans are purchased by those who rarely get sick or can easily afford high up-front payments. HSAs are not open to those listed as dependents on another person’s tax return. Additionally, persons covered by other non-HSA eligible plans or persons eligible for Medicare benefits are not eligible for a HSA.
Benefits of a Health Savings Account
Many HDHP policy holders view HSAs as a great way to save money, tax-free, for potential life emergencies. From a broader perspective, supporters of HSAs believe that HSAs incentivize a more prudent attitude towards the consumption of medical services.
The most commonly cited benefits of HSAs include:
- Provide an easy way to save for medical expenses
- Keep more money in the pocket of the consumer in the form of taxes
- Reduce the demand for non-critical medical procedures
- Potentially save money in the event of a serious accident
- Funds in an HSA may be invested into CDs, stocks, mutual funds, etc.
- Provide incentive to spend less money
Drawbacks of a Health Savings Account
While there are several benefits for HSAs, they are not necessarily for everyone. Many critics often point out that, due to the high-deductible plan requirement, HSAs only benefit the young and healthy while driving up prices of healthcare. Critics also say that poor, uninsured persons will not benefit from these incentives.
Other common criticisms of HSAs may include:
- Most HSAs are held by upper-middle class people and do not benefit the poor
- HDHPs can weaken or degrade the quality of health by disincentivizing routine healthcare
- There are tax penalties for withdrawing funds
- Potential to lose funds due to market fluctuations