John M. Hoffman CPA

Favorite Tax Planning Ideas

Health Savings Accounts - "HSAs"

HSAs are a great way to help control the cost of medical care. An HSA is available only to folks with “high deductible” health insurance plans. While other states have had insurers that would offer these policies for quite some time, only recently have they become available in Massachusetts. Let me walk through my specifics as to how I changed health insurance policies and combined this with an HSA to help me control costs and keep those costs tax advantaged.

My Blue Cross health insurance policy was going to raise my monthly family plan premium from $1,597 to $1,997 – an increase of 25%. My insurance agent suggested that I consider a high deductible plan. We switched to a high deductible plan with Blue Cross with the same co-pays that my old policy had, but added a $3,000 family annual deductible That means that for my family, we pay the 1st $3,000 per year of what would otherwise be covered medical expenses out of our own pocket. Once we exceed the $3,000 amount, Blue Cross pays just as it always had. The result is that my premium dropped to $1,212. So as compared to what I would have been paying, my premiums are $785 less per month.

This represents an annual savings of $9,420 on the premiums and my additional cost is $3,000 per year for out of pocket – if I spend that much. This certainly sounded like a “no brainer” to me.

Now here is the good part. Because I now have a high deductible health insurance policy, I am eligible to open a Health Savings Account (HSA). As a married taxpayer, I am allowed to fund my HSA account with as much as $6,150 (2011 amounts - $3,050 for single taxpayers). I get a tax deduction for putting the money into the HSA account and the HSA account can earn interest tax free. When I withdraw money from the HSA account I must use it for medical expenses, otherwise the withdrawal is taxable.

I can use this HSA account money to pay those annual deductible amounts. I can also use this HSA account money to pay for things like dental, vision, contact lenses, or the likes that are tax deductible medical expenses but perhaps not covered by my health insurance. I can allow the account to accumulate for future years. I can use the money to pay for my health insurance premiums.

In my case, my family health insurance premiums are already tax deductible. Fortunately I do not incur enough out of pocket medical to be able to itemize and deduct such expenditures. Now, the HSA allows me to pay for those things like dental with pre-tax dollars.

So, as you can see, the HSA in tandem (as a requirement) with a high deductible health insurance policy allows me to keep my medical costs down and tax advantaged.