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Law, culture, and Catholicism...up in smoke!

Monday, January 30, 2006

Health Savings Accounts

I don't recall whether or not I've blogged on this topic before, but regardless, I'd like to state for the record that I'm a big fan of Health Savings Accounts (HSA). HSA's were enacted as part of President Bush's 2003 health care reform bill, but in my experience, hardly anyone has them yet and most still know nothing about them.

Here's the basic idea: Instead of purchasing traditional health insurance through one's employer, an employee purchases a high-deductible health plan (usually $1000 deductible for a single employee) through his employer. Because of the high deductible, such a plan involves a smaller monthly cost to the employee. This savings is then "passed through" before taxes to the employee's very own HSA. Each year, the employee can deposit up to the amount of his deductible ($1000 in the above example). So, for example, if our employee needs health care services costing less than his $1000, he may pay those amounts out of his pre-tax HSA dollars. Additionally, it should be noted that HSA funds can be spent on any legitimate medical expense, this would even include things like Tylenol or Nyquil. If our employee really gets sick and uses up his entire $1000 deductible, then the high deductible health insurance plan takes over. But the beauty of the HSA is that if our employee remains healthy and doesn't incur many medical expenses, any amount in his HSA after the end of the year remains his and may continue to grow.

An HSA, like an IRA, is merely a tax umbrella, and an employee's HSA funds can be stored in different types of accounts (such as money markets, bonds, or stock index funds). Accordingly, if a healthy 25-year old employee invests his HSA money in a high growth stock index fund, after thirty or forty years, his HSA account will likely have a substantial sum of money in it after growing for so long in a tax deferred account. In retirement, the HSA is treated just like an IRA, so if our employee wants to spend it on non-health care expenses, he will finally pay taxes on the money. HSA's, also like IRA's, are transferable to the account owner's beneficiaries upon death.

Now that I've whet your appetite, go read more on HSA's here at the U.S. Treasury Website. And if you're still not convinced, feel free to keep throwing your money away on high monthly premium health care plans. In 40 years, when my HSA is bursting with money, I'll try not rub it in.

Also, see this article at NRO. The following paragraph is what initially prompted this post:

Full tax deductibility of health-care spending would accelerate the use of Health Savings Accounts (HSAs), which are probably the best thing to happen to health care in a generation. Created by both President Bush and the Republican-led Congress, these accounts allow individuals to create tax-free nest eggs to cover routine out-of-pocket medical costs. Were HSAs to be used more commonly, the same dynamic that determines how most people spend their money — trying to obtain the highest quality at the lowest price — would finally come to American health care. That would reward the best doctors and hospitals, and squeeze inefficiency out of the system.