How to Save Money with High Deductible Health Insurance
Learn how to cut your health insurance costs and keep your finances healthy without sacrificing quality care.
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How Much Can You Contribute to a Health Savings Account?
There is an annual limit on how much you and your employer can contribute to a Health Savings Account. As long as you’re covered by a high deductible health plan, you can contribute up to $3,050 if you have single coverage or up to $6,150 if you have a family plan, for 2011.
A unique feature of Health Savings Accounts is that there’s no deadline or requirement to spend money in the account because it simply rolls over from year to year. If you leave your job, your HSA goes with you and you can spend from it if you become uninsured or choose a policy that isn’t a high deductible health plan. However, once you’re no longer covered by a high deductible health plan you can’t make any new contributions to a HSA.
The only downside is that if you withdraw money from a HSA for non-medical expenses (like a vacation) before age 65, you’ll get hit with income tax plus a stiff 20% penalty. After age 65, withdrawals are taxable but there’s no penalty.
Who Should Choose a High Deductible Health Plan?
The low cost and Health Saving Account tax advantages that come with a high deductible health plan sound great—but how do you know if you’d come out ahead by using one? You need to weigh having a potentially higher annual deductible against having guaranteed higher monthly premiums.
Take Emily, a single mom who has a new job with a hotel chain that offers 2 health insurance policies, a traditional and a high deductible plan. The first thing Emily should do is consider the financial worst-case scenario for both options by adding up each plan’s annual premium, deductible, and maximum out-of-pocket expenses.
Let’s say the traditional plan at Emily’s job has a $1,000 deductible and the maximum she could have to pay out-of-pocket for the deductible, premiums, and other expenses totals $6,500 per year. On the other hand, the high deductible plan would require Emily to pay a $3,500 deductible, but the total of all her annual expenses, including the deductible, couldn’t go over $6,000 per year.
So, even though the high deductible plan could require Emily to pay more upfront, on an annual basis, it could still save her $500 a year in the worst-case scenario. Additionally, if she uses an HSA to pay for her qualified medical expenses, she’d have some nice tax savings on top of that. In fact, one of Emily’s workplace benefits is that her employer will make a one-time contribution of $750 to her HSA and then kick in $200 every year after that.
The annual out-of-pocket savings, tax benefits, and employer contributions can make a high deductible health plan very economical when compared to other insurance options.