November 18, 2009

How Does an HSA Actually Work?

It seems that this is the time of year that people do the open enrollments for health benefits at work. Health Savings Accounts (HSA) are fairly new and it seems more and more people are signing looking into up for them. I've been using an HSA for a couple years now and I think it is a great option. Whether or not it is your best choice depends on the other options and your own situation. I think one reason people may be hesitant to get an HSA is over confusion about how they work.

Since HSA's are new to people it may not be obvious how they work in comparison to traditional health insurance. My friend was looking at an HSA but he was unsure about who billed who or what he paid and when he paid it. I've been using an HSA for a while so I know from my own experience how it works. I figured it might be helpful to go through the process of billing and explain the actual logistics of paying with an HSA. I'm using example numbers below and your actual numbers will vary.

Where The HSA money Goes

For my HSA I get to decide how much money I want to put into the HSA. The money comes out of my pay check pre-taxes. That is an important detail since it means I'm not paying any taxes on the HSA money and it reduces my taxable income. The money goes straight into the HSA account right out of my paycheck.

The HSA account is very similar to an IRA account. I have control over the HSA money myself and I can write checks out of it or use a debit card to make withdrawals. The funds in your HSA do not expire at the end of the year and can be used later in life. The HSA funds are yours for good and can be transported to a new job or used in retirement.

Paying For Medical Service, before Deductible is met

This is generally how it works for me with my HSA.

The HSA has a $2400 deductible. Before you've paid that deductible all your costs are paid out of your HSA. So this is how a typical billing works:

1. I go to the doctor and get needed care.
2. I don't pay anything at the doctor office. They just bill me later.
3. I get a notice in the mail that the charge from the doctor was say $200 and that they've also billed my insurance. I don't pay yet, but instead I wait to hear what the insurance company says.
4. Next my health insurance company responds to the doctor and says the negotiated rate is $100. I then get an adjusted bill for the $100.
5. I pay the doctor $100 using my HSA funds.

It works like that until I hit the deductible. Before you meet the deductible you're responsible for paying all the costs. The insurance company tracks how much I've paid. You should also statements showing how much you've used and what you've paid.

After the deductible is met

Then after the deductible I pay just 10% of the costs. After the deductible is met the process basically works the same but I only pay 10% of the costs and the insurance pays the other 90%.

So for example after I have paid the deductible I get an ear infection and I go to the urgent care clinic. They treat me and send me home, I get a bill in the mail for $150. Then insurance responds and says they'll pay $100. Insurance pays $90 and then I'm told that I'm responsible for the other $10. I then use my HSA to pay the remaining $10 to the clinic.

What if you owe more on a bill than is in your HSA? You can pay the bill with your own money and then reimburse yourself later with the HSA.

Here is an example: Say its the start of the year and and you just signed up for an HSA this year and you've only had $250 pulled out of your paychecks. Then you appendicitis and need to go to the hospital. You end up with a hospital bill of $3000. You are required to pay the first $2400 of that to cover the deductible and then the next $60 which is 10% of the remaining $600. So you owe $2,460 today. However theres only $250 in your HSA. You can pay the $2460 out of pocket right now and then pay yourself back later using your HSA. So you use the $250 out of the HSA to drain it to $0, write a check out of your own cash for $2,210 today. Then 6 months later your HSA is back up to $2500 so you write yourself a check out of the HSA for the $2,210 to reimburse yourself.

What if you overpay?

With bills going back and forth its not hart to lose track and pay an incorrect amount. I've ran into situations where I over pay and then the insurance company refunds the money. We don't even always know if we've overpaid until a check from the insurance company shows up.

If you want more information on HSAs then check out the Treasury Departments page on HSAs. They have a ton of information thre with FAQs and guides.

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