We previously blogged about how HSAs are helping Americans with their immediate health care costs, and we stand by that, but as more than one reader appropriately noted, HSAs come with some obligations.

You have to have an emergency fund for unexpected expenses.

Now, we know you’ve heard all of this before, so bear with me as I briefly outline the reason an emergency fund is so crucial to your financial stability as it relates specifically to your Health Savings Account.

If you, or someone in your family, gets even a relatively minor illness (an appendicitis, for example) or experiences even a minor medical emergency (falling off a ladder and breaking an arm, for example), you could be required to pay as much as $5,800 in unexpected expenses (depending on your policy).

If you don’t have that money available on hand, you will be incurring unexpected debt at interest rates you cannot control, which can damage your financial security and limit your progress on reducing your debt.

Are you kidding – I have to save money AND pay down debt at the same time?

It may sound counter-intuitive to divert money into savings while you are trying to reduce debt, but as we’ve noted here, if you don’t have the savings for the unexpected expenses that can (and usually will!) occur while you are paying down your debt, you’ll have to assume further debt, which only compounds the problem.

HSAs are high-deductible accounts, which means you save every month on premiums and taxes. Use those savings each month to build an emergency fund or add to the one you have. Even if that amount is small, $30 or $50 each month, it will build up over time. Divert the cost savings into your emergency fund to ensure that you have what you need for unexpected medical costs.

In the end …

With rising health costs, many small businesses are finding HSAs the only way to provide health insurance for their employees while keeping health insurance costs under some level of control. We expect this trend to continue into larger businesses as well. Sure, we all want health insurance, and it’s especially honorable of those small businesses who help provide it for their employees, but the fact is that we also have to do our part to protect ourselves financially.

Many Americans are feeling the pinch these days from ever-increasing health care costs, and a comprehensive solution to this problem still needs to be found. That being said, a health savings account (HSA) can ease the burden of high deductibles in the here-and-now. Anyone under the age of 65 who purchases an eligible high-deductible health insurance policy – either through an employer or on their own – can set up an HSA, which supplements high-deductible health insurance policy coverage through the use of tax-free, user-contributed savings.  For the 2009 tax year, a policy qualifies as high-deductible if it meets both of the following conditions:

•  The policy’s annual deductible is at least $1,150 for an individual or $2,300 for a family.

•  Yearly out-of-pocket health care expenses do not exceed $5,800 (individual) or $11,600 (family).

 Eligible policyholders can add funds to their HSA account by contributing up to $3,000 per year in pre-tax income (up to $4,000 per year if you’re 55 or older). HSA users also earn tax-free interest on their contributions, and fee-free withdrawals can be made at any time for health care expenses. Employers can contribute funds to HSAs as well, and unlike a flexible spending account there is no “use by” deadline tied to an HSA. 

Even though there are substantial tax and savings benefits to an HSA, it also contains drawbacks in the form of limited usage and contribution amounts. Users who withdraw HSA funds for any purpose other than health care are hit with heavy penalty fees, and the yearly maximum for contribution amounts is relatively small compared to the astronomical cost of a major medical procedure not covered by insurance. Despite these limitations, however, HSAs provide eligible policyholders with a long-term, cost-effective way to offset out-of-pocket health care costs.