As a licensed health insurance agent, I often get asked if an HSA is a good alternative to higher cost traditional health insurance. Usually people have heard that HSA’s are cheaper, but in reality they don’t actually know what an HSA is. So, let me first define it, then I will answer the question.
HSA stands for Health Savings Account. This should not be confused with an FSA or cafeteria plan. They are very different. A health savings account is not a health insurance plan. It is a savings account that works in conjunction with an approved health insurance plan. This is important because not all health insurance plans are eligible for an HSA. A health savings account is tax free account that is usually interest bearing. Most times the interest is minimal because the purpose is not to earn interest. Funds can be with drawn from the account to pay for approved medical expenses. If you withdraw funds from an HSA for a reason other than medical expense, you will be charged tax and a penalty fee (similar to a 401k).
Health insurance plans that work with an HSA have a high deductible (the amount varies by state, but it is usually above $2000 per person). Because of this higher deductible, the overall monthly premium of the health insurance policy is lower than traditional health insurance. The theory is that you put the money that you are saving from the higher deductible into the HSA to be used to cover the medical expenses until you meet the deductible. Doing this makes the overall cost of health insurance much lower in most cases.
The problem that I often see is that people pocket the extra savings and minimally fund their HSA. When medical expenses come, they don’t have the means to cover them, or they are unable to cover them from their tax free HSA. Therefore the overall cost of insurance becomes greater than even traditional health insurance.
The answer to the first question, is an HSA a good alternative to higher cost traditional health insurance, is simply, maybe. If you are disciplined and contribute regular healthy amounts to your HSA, it will overall provide you with a reduced overall cost of health insurance. If you are unable to discipline yourself, an HSA will in the long run cost you much more.