HSAs, Auto Insurance, and Uncle Sam

A few months ago I went to get an oil change and wound up hanging out all morning while they did other things to my car – truth is I know as much about nuclear warheads as I do about the inner workings of my car, but it was the kind of stuff that gets old and has to be replaced when you hit 80,000 miles or so.

It cost me around $500 and, get this, my auto insurance didn’t pay a dime! Stunning, right? Of course not. My auto insurance, like yours, is there in case I have a wreck.

What if I could sell you an auto insurance plan that would allow you to pay a $35 “copay” every time you had to get some work done on the car, and maybe gave you a couple oil changes for free each year? What do you suppose that would cost?

Here’s the deal – your auto insurance is a lot less than it would be if it paid for all of your routine maintenance. And guess what? Health insurance is the same way.

Imagine a health insurance plan that gave you “collision coverage” by putting a cap on your expenses at a pre-determined deductible each year (for our example, let’s call it $5,000). Rather than paying for oil changes and new tires, it simply gives you the peace of mind of knowing that whatever happens, you’ll never pay more than $5k for your family’s medical needs each year. Do you think your premiums would look different?

The idea behind health savings accounts is pretty simple. Everyone needs protection against the big-boy expenses that come with American healthcare, but most people are paying WAY too much in premiums because they are paying for services they don’t really use that much. The HSA concept is that you lower your premiums by getting catastrophic health insurance coverage and take care of the front-end stuff on your own (though that front-end stuff typically counts towards your deductible). You then take some or all of the money you save on your premiums and put it into a tax-advantaged health savings account (HSA). Let’s outline a few key concepts on the HSA itself that will help get some common misconceptions out of the way:

· The money has a triple tax advantage: It is not taxed going in, it grows tax free, and it is not taxed when you use it for qualified medical expenses. And the IRS definition of “qualified medical expenses” is actually broader than your insurance policy’s definition. Without confusing the issue, suffice to say you can use HSA funds to pay for things that may not be covered by your insurance policy, like dental or chiropractic care.

· You cannot use it to buy an iPad without paying the income taxes plus a significant penalty.

· Your HSA is yours, it does not belong to the insurance company.

· Your HSA funds roll over year to year – this is not a use-it-or-lose-it deal.

The goal is to get to the point where you have 100% of the funds needed to cover your deductible in your health savings account. Then you’re totally good to go. You know, it’s kind of like putting some money away each month for new tires, routine maintenance, and the other inevitable expenses that come with your car so you’re not freaked out when it’s time to pay for your 80,000 miles checkup… but doing so with tax free money.

To be eligible to open and contribute to an HSA, you have to have a qualified health insurance plan, meaning one that meets certain criteria. (That’s where I come in!) The deductible must be high (but not too high) and the plan cannot offer “first dollar benefits” (think copay and drug card) before the deductible, with the exception of preventive care.

In short you lower your health insurance premiums, lower your taxes, and put a cap on your total risk exposure each year. If you can overcome “Copay Anxiety,” the HSA probably makes a lot of sense for you.

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