Understanding The Benefits Of An HSA
For many of us, the end of the year means choosing a new health plan or reviewing the details of the one you already have. If a Health Savings Account has come across your desk and you’re wondering if it’s the right choice for you, this basic explanation might help clear away the fog.
Employers are increasingly offering high-deductible health insurance plans, sometimes pushing them on workers. If your company is getting on that bandwagon, you ought to consider signing up for a Health Savings Account, or HSA, which works hand-in-glove with a high-deductible plan. Many firms with high-deductible plans offer HSAs, but if yours has a plan and no HSA, you can get an account on your own at a financial institution.
An HSA is a triple tax-free account that can help you shoulder rising out-of-pocket medical costs. Your money goes into the account before it’s taxed, grows tax-deferred and can be withdrawn tax-free to pay unreimbursed medical expenses, including your deductible and health costs that aren’t covered by your plan.
And here’s the little-known bonus: You can also use an HSA to boost your retirement savings.
HSAs vs. FSAs
Don’t, however, confuse an HSA with the similar-sounding health care FSA, or Flexible Spending Account, as nearly 75% of people responding to a recent Fidelity Investments survey did.
While you can use both accounts to pay health bills, there are two big differences: 1) An HSA lets you roll over any money you don’t spend by Dec. 31 and 2) After age 65, you can withdraw money for nonmedical expenses without owing a tax penalty. (Those withdrawals are taxed as income, as with traditional IRAs). An FSA, by contrast, is a use-it-or-lose it account; if you don’t spend the money you’ve put in before year’s end, it disappears. (Some employers allow a grace period of 2 months and 15 days after the plan year to use up the money.)
To take advantage of an HSA, you can’t be enrolled in Medicare or claimed as a dependent on another person’s tax return and your health plan must be what’s known as a Qualified High-Deductible Plan. That means its annual deductible must be at least $1,250 for individuals, $2,500 for families.
– via Forbes
Pros And Cons
There are going to be benefits and drawbacks to any new health plan, but thankfully the HSA Pros and Cons are pretty straightforward.
If you’re worried about saving tax dollars, the pros are quite evident. But let’s explore the subject from both sides.
Health Savings Accounts offer a way to save for – and pay for – healthcare expenses. There are many advantages to having a Health Savings Account, including:
- Others can contribute to your HSA. Contributions can come from various sources, including you, your employer, a relative and anyone else who wants to add to your HSA.
- Pre-tax contributions. Contributions made through payroll deposits (through your employer) are typically made with pre-tax dollars, which means they are not subject to federal income taxes. In most states, contributions are not subject to state income taxes either. Your employer can also make contributions on your behalf, and the contribution is not included in your gross income.
- Tax-deductible contributions. Contributions made with after-tax dollars can be deducted from your gross income on your tax return, which means you may owe less tax at the end of the year.
- Tax-free withdrawals. Withdrawals from your HSA are not subject to federal (or in most cases, state) income taxes if they are used for qualified medical expenses.
- Earnings are tax-free. Any interest or other earnings on the assets in the account are tax free.
- Funds roll over. If you have money left in your HSA at the end of the year, it rolls over to the next year.
- Portable. The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, change employers or retire. Funds left in your account continue to grow tax fee.
- Convenient. Most HSAs issue a debit card, so you can pay for your prescription medication and other expenses right away. If you wait for a bill to come in the mail, you can call the billing center and make a payment over the phone using your debit card. And, you can use the card at an ATM to access cash.
HSAs also have a few disadvantages, including:
- High deductible requirement. Even though you are paying less in premiums each month, it can be difficult – even with money in an HSA – to come up with the cash to meet a high deductible.
- Unexpected healthcare costs. Your healthcare costs could exceed what you had planned for, and you may not have enough money saved in your HSA to cover expenses.
- Pressure to save. You may be reluctant to seek healthcare when you need it because you don’t want to use the money in your HSA account.
- Taxes and penalties. If you withdraw funds for non-qualified expenses before you turn 65, you’ll owe taxes on the money plus a 20% penalty. After age 65, you’ll owe taxes but not the penalty.
- Recordkeeping. You have to keep your receipts to prove that withdrawals were used for qualified health expenses.
- Fees. Some HSAs charge a monthly maintenance fee or a per-transaction fee, which varies by institution. While typically not very high, the fees do cut into your bottom line. Sometimes these fees are waived if you maintain a certain minimum balance.
– via Investopedia
Do you have an HSA? If not, do you think it would be a wise addition to your monthly expenses?