You’ve probably heard of Flexible Spending Accounts.  You can put money aside for certain kinds of expenses, like child care, or, yes, healthcare.  The big problem, and the hitch in figuring out whether to use them, is the fact that at the end of the year, if you have not spent the money you have saved, then you forfeit it.

Because of the forfeit rule, many people won’t consider setting up those accounts. Why would they risk losing their savings? 

Then, in 2003, the federal government designed a new type of account, called a Health Savings Account, to make it easier for some people to afford health insurance. Those who are eligible can reduce health insurance premiums and save tax dollars, too.  They do that by choosing a high deductible (also called catastrophic) health insurance plan, and pairing it with a Health Savings Account (HSA).  And the big plus: there is no risk of forfeiting the money saved in the HSA.  The money is saved from pre-tax dollars so no income tax is due on those dollars – that can save you a lot of money.

To be sure we understand… these are not the same as a previous kind of account called a Medical Spending or Savings Account.  Those no longer exist.  No, these have the word HEALTH in them – Health Savings Accounts.

Here’s how they work:

HSAs go hand-in-hand with a high deductible health insurance plan. A high deductible insurance plan commands lower premiums because you, the insured, are expected to spend more of your own money when you visit a doctor. The idea, then, is to choose a high deductible plan, pay a lower premium for the insurance, and put the difference into an HSA to pay for the care the insurance won’t cover.

How high does that insurance deductible need to be? For 2010, an individual must choose a plan with a deductible of $1,200 or more. The deductible for a family must be a minimum of $2,400.

Here’s an example of how it works. Say you have a choice between a $500 deductible plan that costs $1,000 a month, or a $2,500 deductible plan that costs $500 a month. It’s tempting to choose the lower premium, but scary to think of getting hit with $2,500 out of your pocket. So choose that higher deductible and its lower premium, then save $2,500 during the year in an HSA using before-tax dollars. It will save you several hundred dollars in taxes, plus you’ll have access to that savings account for any potential healthcare expenses.

The money is yours to keep year to year, employer to employer, location to location, until you need to withdraw it for your medical expenses. It won’t be forfeited for non-use. Further, you never pay taxes on that money as long as it’s used only for medical expenses.

As you incur a qualified medical expense, anything from a doctor’s appointment, to a medical test, to prescription drugs or a bottle of aspirin, even some complementary or alternative forms of medicine, you can use money from your HSA as long as you aren’t reimbursed by your health insurance.

How can you be sure an HSA is a good choice for you?

HSAs are a good choice for some people, but make little sense for others. If healthcare is not a big expense for you, an HSA may work well. You’ll be shifting the bulk of your health dollars to money you can save and use later when you really need it. You will send less to insurance companies where it will just disappear if it never gets used.

Most people who have higher medical costs won’t find an advantage to using an HSA. Often the higher deductible plans are accompanied by higher co-pays and other limits, so any advantage in use of the HSA is lost on those expenses. There may still be some tax advantage. You’ll need to crunch some numbers, or ask your accountant, to see if an HSA will save you money.

As is true for so many of these plans, there are plenty of rules and limits about who can participate, who can contribute to your account, how the money may be used, and how much can be saved or spent. Ask someone in your employer’s human resources department to help you with the rules, and to help determine if an HSA makes sense for you.

If you decide the idea has merit, you can usually set one up at your bank or through your credit union.  Most health insurers offer them, too, but since you have no idea whether you will always keep your insurance policy with one insurer, it’s better not to set one up through their company.

The government has put out a good list of HSA basics and frequently asked questions. You can find that information at: http://tinyurl.com/hsaccounts