Choosing between an HSA and a traditional health insurance plan is not always easy. Both types of coverage have advantages in certain situations, although having an HSA means you are responsible for covering all your medical expenses. Knowing the basics about HSA’s can help you choose whether this type of coverage works for you.

What Is an HSA?

An HSA is a tax-exempt account that you can use specifically for medical expenses. To have an HSA, you must be enrolled in a high-deductible health insurance plan and not be covered by any other health insurance plan (except for permitted coverage, such as Medicare, Medicaid, or health insurance from an employer with fewer than 50 employees). This type of coverage is sometimes referred to as a “catastrophic” plan.

To have an HSA, you must be enrolled in a high-deductible health insurance plan and not be covered by any other health insurance plan (except for permitted coverage, such as Medicare, Medicaid, or health insurance from an employer with fewer than 50 employees).

You can set up an HSA at a bank of your choice and deposit money into the account on a pretax basis. This means that you won’t pay federal income tax on that amount of money, and some employers also let you set aside part of your paycheck before taxes are taken out. If you withdraw the money for nonmedical expenses, you’ll have to pay federal and possible state income tax on that amount and a 20% penalty.

What Is Traditional Health Insurance?

Traditional health insurance plans also cover preventative services at 100%. This includes doctor visits and laboratory tests. According to Mr. Insurance LLC, you usually have a yearly deductible that must be met before the insurance company covers your medical expenses. Once you meet the deductible, your insurance company pays a percentage of covered services, and you pay a percentage. The percentages vary depending on your plan.

Although traditional health insurance plans also cover preventative care at 100%, there is usually a yearly deductible that must be met before the insurance company will start to cover your medical expenses.

The Pros And Cons Of Each Type Of Coverage

HSA offers significant tax benefits because you can avoid paying federal income tax on the money you put into it. You also have greater control over your health expenses since you’re responsible for paying all costs up to the deductible. You can even use after-tax dollars to pay for your health care. Traditional insurance plans typically have lower monthly premiums, but you’ll be responsible for all expenses up to the deductible unless the service is covered at 100%. Even after you meet your deductible, your portion of costs will vary depending on your plan’s percentage cost-sharing arrangement.

One drawback of an HSA is that you can’t contribute to them once you enroll in Medicare. If you anticipate having higher health care expenses later in life, a traditional insurance plan might be better. One disadvantage of traditional insurance plans is that the monthly premiums are typically higher than for an HSA. Another drawback is that once you meet your deductible, you will have to pay more out-of-pocket for additional services until you meet your out-of-pocket maximum.

Should I choose an HSA or traditional health insurance plan? That answer depends on how much you want to spend monthly on premiums and how comfortable you are with assuming responsibility for all of your health care expenses up to a certain amount each year.