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How an HSA Works

Posted on Tuesday, July 13th, 2004 by

Health Savings Accounts ( HSA) -Self Employed Health Insurance Facts

How the new Health Savings Account insurance policy works – Health Insurance for the Self Employed  Health Savings Accounts are gaining importance with the self employed

IMPORTANT POINT: By far, the most common misconception about the new Health Savings Account Plans is that people can just use their existing Health Insurance policy because it happens to have a “high deductible.” In most cases, this is incorrect—the law requires a specially defined type of insurance policy, known as the HDHP (high deductible health plan).

Although it “sounds like” an ordinary policy with a “high” deductible, that is not the case. The required HDHP policy has special features not found in most policies issued prior to the advent of the HSA(except for the MSA-qualified policies).

You must be sure you have an HSA-qualified policy! Our national network of insurance agents specialize in these policies. Here’s the general rule of thumb: If you do not already have an (old) MSA-qualified policy, you probably do not have an HSA-qualified policy.

We’ll be glad to help you analyze your current policy—but be advised—chances are, you’ll need to consider replacing your current insurance policy with a new HDHP properly issued policy. We’ll be glad to help. (At the risk of being redundant—that’s what we do! We do not make money helping people establish the savings accounts only!)

When Congress originally designed the MSA law (in 1996), it did so with the idea that each person or family funding a savings account for medical expenses should always be required to carry insurance as a back-up in the event a “catastrophic” type of medical situation were to arise. We believe this to be a wise requirement; otherwise, some individuals would be under the false and mistaken impression that they could “save” their way to financial freedom from the high cost of Health Insurance (ok, that would be true if there never were any major medical expenses incurred).

The insurance policy required—by law—is by its nature a “catastrophic” type of coverage. It requires a “high deductible” and allows no “co-pays” to be included in the coverage (at least not until the deductible has been satisfied). This does not mean, however, that the actual insurance policy only covers “big expenses,” i.e., those incurred in the hospital. In general, most of the HSA-qualified policies are actually comprehensive major medical policies that just happen to have a “high deductible” to satisfy the HSA federal law mandates.

NOTE: The new HSA law actually allows for some preventative type of expenses to be covered not subject to the deductible. The size of the deductible depends on the number of people actually being insured. If there is only one person to be insured (an adult) then it is classified as a “single” plan (even if the person is married). If the policy covers two or more people, it is classified as a “family” plan.

With both the single and family plans, there is a minimum and a maximum deductible amount established by Congress. Those numbers are listed below for the tax year 2003:

Minimum Deductible

Maximum Deductible

Single Plan



Family Plan




Here are the new HSA numbers for the tax year 2004:

Minimum Deductible

Maximum Deductible

Single Plan



Family Plan




With the new HSA law, the “maximum out-of-pocket” amounts have been substantially increased. For singles, it is $5,000 and for family plans it is $10,000 (indexed for future inflation). This can be a source of needless confusion. The “out-of-pocket” maximum is simply a combination of the deductible PLUS any “co- insurance” AFTER the deductible.


Family plan with $5,100 deductible that pays 80/20 of the next $5,000 AFTER the deductible would have a total out-of-pocket of $6,100 in covered expenses (20% of the next 5,000 in covered expenses is $1,000 PLUS the $5,100 deductible) . Remember, only covered expenses count toward the deductible AND co-insurance.

IMPORTANT POINT: ONLY the deductible amount is factored in when determining your maximum HSA savings account contribution for the year. For this reason, it may not make a lot of sense to substantially increase the out-of-pocket maximum too much beyond the deductible–unless, of course, there is a significant reduction in premiums!

INTERESTING TIDBIT: One of the most popular plans on the market actually offers a “50/50” co-insurance option. It’s popular because it offers significant reductions in premiums while still limiting the total out-of-pocket to a reasonable amount, typically between $800 (single) and $1,200 (family) beyond the deductible.

Important Note About The Family Plan Deductible

With the family plan HSA policy, the deductible takes on a special feature—it is a per family deductible, and not “per person”. Almost without exception, every other policy on the market covering a family has a deductible “per person” so the HSA plan deductible feature truly is unique…and required by law (this is one main reason why not just any “high deductible” insurance policy qualifies as an HSA approved policy). With a “per family” deductible, covered expenses incurred by each person accumulates and is credited toward the one “family” deductible.

Why a “big” deductible is really “no big deal” For an enlightening discussion regarding deductibles and their use in Health Insurance , please click here to read an article written a couple of years ago by C. D. Richard, a leading HSA proponent with approximately 25 years experience as an insurance agent specializing in small businessbenefits.

What type of expenses are actually covered under the policy? Some people believe that because there is no “co-pay” that the Dr. visits and Rx drugs are “not covered”. This is incorrect (at least with most HSA-qualified policies–there are a FEW such policies that allow you to “carve-out” certain out-patient expenses, such as Rx drugs–our network of agents do NOT endorse or recommend such policies).

With most HSA-qualified policies, Dr. visits and Rx drug expenses are “covered,” they are just not reimbursable until such point as the deductible is satisfied for the year (only covered expenses accumulate toward the deductible so be sure you know what expenses are actually covered under your insurance contract).

Other covered expenses generally include the same covered expenses you would expect to be covered under a high-quality comprehensive major medical policy, including but not limited to, physician’s services in and out of the hospital, diagnostic testing in and out of the hospital, hospital charges, surgical expenses, transplants, etc. Of course, exclusions and limitations apply. For instance, dental and vision expenses are typically not covered under the insurance policy (but are allowable expenses for tax-free withdrawals from the savings account).

Your customized proposal will include a link to the actual benefits/limitations of the plan that our network-affiliated agent proposes for you. DISCLAIMER: Not every HSA-qualified policy offered in the market place is the same! You would be well-advised to compare, line-by-line, the numerous benefits, exclusions, and limitations of each individual policy you may be considering. Quotes that are returned by our network member agents will be from companies believed to have the highest quality policy provisions on the market, in addition to their A-excellent A.M. Best ratings (or higher).

What about underwriting and “pre-existing” conditions? Unless you are applying for employer-sponsored coverage, i.e., group insurance, your insurance policy will be an individually underwritten policy. As such, issuance of coverage is subject to underwriting on a case-by-case basis.

Premiums and ultimate offers are determined by the age, sex, location, and health factors of each person or family to be insured—just as with any other “individually underwritten” coverage. Depending on the laws in your state, coverage for certain conditions may be excluded or modified, a higher premium may be charged, or coverage could be completely denied. The good news is that because of the nature of the policy, underwriting tends to be somewhat relaxed. Some conditions that would be excluded under a traditional policy are often not excluded under the HDHPpolicy, for instance.

Usually, there is no physical exam required; however, each company reserves the right to request a physical exam (typically a “paramed” exam) should they feel it necessary as a prerequisite to assessing the risk. In most cases, underwriting consists simply of the completion of an application being forwarded to the company for review.

Today, more so than ever, insurance companies are taking a hard-line approach to keeping future expenses in line. In general, therefore, you should expect that most “pre-existing” conditions will be ridered-out, or excluded, from coverage, at least for a minimum period of time. Example: Existing hernia–likely to have an exclusionary rider.

EXCEPTION: Exclusionary riders are prohibited by law in some states. In those states, an insurance company may be more inclined to simply DENY the application altogether.

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