Health Savings Accounts: A Good Decision?

November is the month when most of us re-enroll in various employee-benefits plans. This year's debate: Whether newfangled health insurance is good for patients.

An increasing number of people now have the option of signing up for a plan with a high deductible (which often cuts premiums) and pairing it with a special savings account (to cover that deductible). You get big tax breaks as long as you spend the savings on health care.

Supporters believe these plans will get patients to focus on costs. Critics think they are a lousy deal for those with lower incomes, who will face four-figure deductibles, and the sick or families, who will burn through any savings each year.

This is a crucial debate. But what often gets lost in the rhetoric is this: If you're young, healthy or wealthy, health savings accounts, or HSAs, can help to defuse a looming time bomb -- the six-figure, out-of-pocket health-care tab that experts believe most of us will face during retirement. Because the young and healthy generally don't spend much on health care today, current savings can pile up for later. The wealthy, meanwhile, can max out their savings and hope they don't need it all before they retire.

To open an HSA, your insurance will need a minimum deductible of $1,100 for individuals in 2007 and $2,200 for families. The government generally won't let individuals deposit more than the lesser amount of $2,850 or the insurance plan's deductible; families are limited to $5,650 or the deductible. Those who make deposits on their own can subtract them from gross income on their tax returns, whether they itemize deductions or not. People who make deposits through employer payroll deduction put in pretax money.

You can invest deposits, and you avoid taxes on withdrawals, too, if you use them for qualified health expenses. Plus, anyone of any income can participate. All of this can make HSAs more lucrative than many retirement plans.

Given the expected size of the coming retirement health-care tab (and the fact that fewer employers are covering retired workers), it would be foolish not to give these new plans a hard look if you have access to one. Examine premium savings, deductible levels, coverage limits and whether your employer puts money in the HSA. Many employers offer a Health Reimbursement Arrangement, an HSA cousin. But only employers can deposit money, and they generally keep it if you change jobs.

If the numbers make sense, then consider in what order you'll save. One option for the healthy but not wealthy: Max out any 401(k) employer match, fund an HSA, then save more for retirement if you can. If you're flush, max out the HSA and any retirement accounts, too. One risk: You get sicker and need all of the savings before you retire. Then again, it may be possible to switch to a plan with better coverage later.

The other potential hazard here is a moral one. If all of the healthy people switch to high-deductible plans, premiums could rise for sicker folks left in traditional plans. Or, big employers could someday point to the newfound popularity of the high-deductible plans and stop making the old ones available.

You may not want that on your conscience. Or, you may decide the best insulation against all possible outcomes is money in the bank.