USA Today reports:
Even if you eat lots of leafy greens, exercise daily and have replaced your evening highball with a cup of herbal tea, you’re almost certainly going to pay more for health care next year.
In 2011, the average premium for employer-provided health insurance will increase nearly 9%, according to Aon Hewitt. Hewitt estimates that the average worker’s contribution to the premium will rise 12.4% to $2,209. The average worker’s out-of-pocket costs, such as co-payments, co-insurance and deductibles, will rise 12.6% to $2,177.
One way to lower your out-of-pocket costs is to contribute to a flexible spending account. These accounts, funded with payroll deductions, let you use pretax dollars to pay for medical and dental costs that aren’t covered by insurance. These accounts are still widely available, but if your health plan’s deductible has increased, maybe it’s time to consider a health savings account instead.
Like flex accounts, health savings accounts allow you to pay for out-of-pocket expenses with pretax dollars. But unlike flexible spending accounts, you don’t have to forfeit money you haven’t used at the end of the year. Instead, you can roll over unused funds for future years.
So why doesn’t everyone set up a health savings account? Well, there’s this: To be eligible, you must first enroll in a high-deductible health insurance plan. For 2011, the government defines that as an insurance plan with a $1,200 deductible for an individual, or $2,400 for a family.
More than 8 million Americans are covered by a high-deductible plan with a health savings account, according to America’s Health Insurance Plans. But if you select this option, you must have the resources to pay your full deductible before your insurance kicks in. Some health care advocates worry that the growth of these plans will encourage workers who can’t afford the deductible to postpone medical care.
If you can handle the deductible, though, a health savings account provides a way to reduce your out-of-pocket expenses. Most employers that offer high-deductible plans offer a health savings account, and some even contribute to employees’ accounts. If your employer doesn’t offer a health savings account, or you don’t like the one it provides, you can set one up on your own at a bank or credit union.
Health savings accounts are typically funded through monthly, tax-deductible contributions. But most plans will also let you make a lump-sum payment to your account, says Karen Frost, strategy leader for Aon Hewitt. Workers with an uneven income, such as those who work on commission, may prefer that option, she says.
For 2011, an individual can contribute up to $3,050 to a health savings account; for a family, the cutoff is $6,150.
Reasons to consider a health savings account (HSA) over a flex account:
•Money for retirement health care expenses. If you enjoy exemplary health and rarely touch your HSA, you can use money from your account to pay for medical expenses when you retire, says Helen Darling, president of the National Business Group on Health. That’s significant, she says, because even with Medicare, retirees often have large out-of-pocket medical costs.
•Portability. If you leave your job, you can take your HSA with you. That’s not the case with a flex account: If you depart before you’ve spent the money contributed during the year, you’ll have to forfeit the balance.
Once you leave your job, you can continue to take tax-free withdrawals from your HSA to pay for eligible medical expenses, even if you’re no longer enrolled in a high-deductible plan, according to the Treasury Department.
However, you can’t contribute to an HSA unless you’re enrolled in a high-deductible plan. And if you use the money for non-medical expenses before age 65, you’ll have to pay taxes and a penalty. In the past, the penalty was 10%; next year, it will increase to 20%.
•Lower premiums. In most cases, the higher your deductible, the lower your monthly premiums. But to determine whether the trade-off is worth it, you need to sit down with your enrollment documents and a calculator, Darling says.
You should also take a full inventory of your health care needs. A high-deductible plan coupled with a health savings account could save you a lot of money if you’re single and rarely go to the doctor. But if you have a large family with health problems, you could end up with sizable medical bills.