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Health Savings Account or Copays?

• Copays versus no Copays   • Savings versus Benefits

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To have a health savings account and have its tax benefits, you first have to have health insurance that meets certain criteria, i.e., a qualifying plan. Copays are not allowed in an HSA-qualifying plan because Congress wants to encourage the purchase of lower cost health insurance. Copays increase plan cost. The only exception is that copays for preventive care are allowed.

Most insurance, other than health insurance, does not have copays, but has a deductible which the insured must pay first, then the insurance company starts to pay. A copay works like this. If there are covered expenses, instead of having to pay the entire deductible each year before the insurance starts to pay, a small payment is made by the insured for a particular service, e.g., a physician office visit or prescription, and the insurance pays the rest of the charge.

Key Points:

• The only reason to open an HSA account is to get a tax deduction.

• The tax deduction is for what you deposit, not for what you spend.

• The savings account has nothing to do with the policy except that you need that type of policy to be eligible to open the account.

• The policy is from an insurance company. The account is from a bank or other financial institution.

The copay therefore increases the claims cost to some degree for the health insurance company. Consequently, the insurer must charge a higher premium for coverage that includes that sort of feature. Generally, coverage without copays costs less than coverage with copays.

To encourage everyone to buy lower cost health care coverage, the Congress has made available a special tax break for anyone who buys health insurance which has no copays for medical treatment. There are also some other criteria the plan must meet, e.g., the range of allowable deductibles. (Copays may be allowed for preventive care.) This incentive is called a health savings account (HSA).

If the tax break is not available or of no use, and the monthly premium is significantly more than HSA health insurance, is it really worth paying more each month for a plan that has copays? The answer may be different for different situations, e.g., an employer who can afford to provide maximum benefits for employees or individuals buying their own insurance.

The employer may buy a plan that includes copays as an employee benefit, but why would an individual in good health pay more per month to have copays which are rarely used? From the insurer's point of view, outside of a law forcing insurers to issue coverage, why would an insurance company want to sell a plan with copays to an individual in bad health?

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Qualifying HSA health insurance plans are "lower priced" merely because they have more out-of-pocket expense than plans with no or low deductibles, and perhaps copays. They are relatively high deductible plans and therefore cost less per month. However, there is an upper limit on how high the deductible and annual out-of-pocket can be. Before the passage of the law authorizing health savings accounts, they may have been called "catastrophic" health insurance.

If the monthly savings, or other amount of your choosing, are deposited into a health savings account, the amount deposited is tax deductible (up to certain limits). Amounts paid out of the account for medical, dental, vision, and other qualified expenses are never taxed. Note that the tax deduction is for saving, not for spending.

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