With each passing year the costs of health insurance sprint higher and higher. In recent years the annual increases in health insurance costs have outpaced wages, inflation, and the stock market, and there is reason to believe that this trend will continue in the coming years. As health insurance costs continue to place added strain on household budgets and the economy as a whole, some cost reducing strategies have emerged in order to combat this condition. One of those strategies is a High Deductible Health Plan in conjunction with a Health Savings Account.

A High Deductible Health Plan (HDHP) is a health insurance plan that has lower premium payments and a higher deductible than most conventional health plans. In short, a HDHP saves you a lot of money unless you become sick, in which case your out-of-pocket expenses can be thousands of dollars per year, or more. HDHPs generally provide coverage only for expensive, and usually serious, conditions.

It is for that reason that HDHPs are commonly referred to as catastrophic health insurance plans. While HDHP coverage in the event of a catastrophic condition is important, and can save a family from financial ruin, the insured are left unprotected in the event of less serious conditions. HDHPs do not insure you against the very real possibility of thousands of dollars in out-of-pocket expenses, so the Federal Government has provided a way to help individuals and families save money for that purpose. Those who participate in qualified High Deductible Health Plans are eligible to open a tax advantaged Health Savings Account.

Unlike traditional savings vehicles, a Health Savings Account allows taxpayers to make tax free contributions to the account. In other words, any funds contributed to the account are not subject to income tax. The tax advantages come at a cost, however, and account owners can only use the funds in the account to pay for qualified health expenses.

Contributions to a Health Savings Account come in the form of deposits from the account holder or, in many cases, from their employer as part of their compensation package. Under 2007 law, there is a statutory limit on deposits, and the maximum annual contributions to a Health Savings Account are $2850 for individuals, and $5650 for families.

Withdrawing money from a Health Savings Account is very similar to making a withdrawal from a traditional savings or checking account. In fact, some Health Savings Accounts provide checks or debit cards that can be used to pay for services at the point of sale. As long as the payments are used for qualified expenses then the funds will remain untaxed.

Examples of qualified payments are deductibles and co-payments, as well as expenses that are generally not covered by health insurance, including but not limited to things such as dental, vision, chiropractic, and many over-the-counter medications. Funds that are not used for qualified expenses become subject to income tax and also incur a 10% penalty. Disabled persons or persons over the age of 65 can withdraw funds from their Health Savings Account for any reason without penalty, although only funds used for health expenses will remain tax free.

The advantages to a Health Savings Account in conjunction with a High Deductible Health Plan are obvious, and together they can provide protection against catastrophic illness at an affordable premium rate. However, these accounts are not for everyone and interested parties should carefully consider their options before enrolling.

Everyone can appreciate the allure of lower premiums, but can you afford a $1000 or $2000 payment in order to have an important test or procedure done? It is the opinion of several prominent health associations that utilization of a Health Savings Account is likely to benefit only the young and healthy, and as people get older they are more likely to be harmed than helped.

In order for a Health Savings Account and HDHP to effectively protect you from loss while still serving your day-to-day health needs, it is imperative that you have funds available to help cover out-of-pocket expenses should you incur them. People who do not have available funds tend to delay treatment in fear of a medical bill that they may not be able to afford, and such delays can have an adverse effect on their long term health. That reality is the reason that a Health Savings Account is so important to people who subscribe to a High Deductible Health Plan, and it is the reason that the Federal Government has a vested interest in assisting those savings through tax advantages.