Ameriprise Financial, Inc. : Health Savings Accounts: A good option for young adults?

10/16/2012|  Suzanna de Baca

Health Savings Accounts (HSAs) are designed to let those who enroll in low premium, high-deductible health insurance plans save money tax-free. The contributions made to an HSA can be used to pay for healthcare expenses like prescriptions, eyeglasses and co-pays not covered by the health plan. Funds in an HSA also accrue interest and roll over from year to year - which can help save for future healthcare costs - unlike flexible spending accounts (FSA), which come with a "use it or lose it" requirement.

HSA's have become increasingly popular among people under the age of 40, but they may not be the right choice for everyone. Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial, suggests asking the following questions before enrolling in an HSA plan.

1. Do you understand an HSA? HSA plans are designed for people who are willing to assume more financial responsibility for their health costs, with the benefit of having extra cash for other financial needs and goals. Both HSA and most traditional healthcare plans require a minimum deductible before the insurance benefits kick in. In 2012, the minimum deductible amount for those with an HSA plan is $1,200 for an individual and $2,400 for a family - quite a bit more than the deductible on traditional plans. It can take a year or more of saving in an HSA to build up enough reserve in the account to feel fully secure using higher deductible insurance but if you don't often visit the doctor, it may still be a better plan than a lower-deductible, higher premium traditional plan. 

2. Are you healthy? Those who select a low premium, high-deductible health plan usually do so because they don't require a lot of medical care - typically young people who are relatively healthy with no pre-existing conditions. Since people in this category likely have lower health care costs, a traditional health plan may not make sense as pre-tax funds from an HSA can be used to pay for ongoing prescriptions and other costs that are generally added to traditional plans.

3.Can you financially afford to save in an HSA? Before you sign up, calculate how much you're willing and able to put into your HSA account and stick to a deposit plan. The most important part of maintaining an HSA plan is to grow the account so it will cover your out-of-pocket health care costs, including the high deductible should you require hospitalization or have a health emergency. Keep in mind that individuals can't have both an HSA and an FSA and money that accrues in an HSA can't be withdrawn for non-health related expenses.

4. Do you prefer to manage your health?HSAs allow consumers to have more control over decisions regarding their health care. This type of health plan typically doesn't require a pre-authorized list of preferred providers. But you do need to remain diligent about your health and responsible for the health care decisions you make. You may want to speak with your care provider before signing up for an HSA. HSAs are also portable, which means if you leave your current employer, the money saved in the HSA goes with you - though you'll likely need to sign up for a new plan when you transition to a new employer.

5.Are you covered by a parent?The Affordable Care Act allows parents to keep their dependent adult children on their health plan until they are 26. But, these dependent children can't create or use HSA funds to pay for medical bills if they aren't also claimed as a dependent on their parent's tax return. If the HSA holder can't claim the child as a dependent, then he or she won't be able to spend HSA dollars on services provided to that adult child.

Decisions about health insurance should always be made with care. Life and family events like a death, birth, adoption or divorce can also impact what's right for you. Though there's no one size fits all plan, a little bit of research and planning goes a long way when choosing.