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Changes Looming for Health Savings Accounts

Piggy bank on pile of coins

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A Health savings account (HSA) is one of the best health insurance options available today.  Similar to an IRA, an HSA is an investment.  Individuals can contribute and withdraw money for qualified medical expenses at their discretion, all while growing their wealth to prepare for future medical costs.  And by pairing a health savings account with a high deductible health plan, individuals can save up to 40 percent on health insurance premiums.  It’s a great way for consumers to control their health care spending.

Unfortunately, new healthcare legislation will enact changes that will water down these helpful health plans.  Starting on January 1, 2011, people with health savings accounts can no longer use their HSA funds to pay for over-the-counter medicines.  Purchasing medications like pain relievers, cold remedies and cough syrup can really add up, especially for large families, but the new law dictates that such expenses must be paid out of pocket.

Another change looming in 2011 is that the penalty for withdrawing money from an HSA for non-medical expenses doubles from 10 percent to 20 percent.  So if one mistakenly spends HSA money on an unapproved item, like over-the-counter medication, for example, he’ll be penalized at double the current rate.

Regardless of these changes, health savings accounts are still a very attractive option to many individuals, especially now that the government has mandated that all people purchase health insurance.  Because of this, there will be many new entrants to the health insurance market, including millions of “young and invincible” consumers who previously chose to go without insurance to save money.  It’s likely that such people will want to keep their costs down and will opt for a high deductible health plan with a low monthly premium.  Choosing a high deductible plan will make more people eligible for HSAs, and therefore increase the amount of people enrolling in health savings accounts.

That could be a good thing for both the individuals and the tax-paying public.  When consumers are the key decision makers over how their money is spent, incentives will be aligned throughout the health care system to create better value.

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