Health Savings Accounts 101

by admin on 10/12/09 at 5:15 pm

Health Savings Accounts (HSA’s) can be a great way to save for medical expenses on a tax advantaged basis. Just like it pays to be informed of the various policy options when comparing car insurance it can also pay off to know the basics of the different types of health insurance plans when beginning your search for health insurance. Here are the basics of using a Health Savings Account.

Deposits

Once you join a qualifying health insurance plan, you will want to make contributions as soon as possible. Deposits can be made by anyone: an employer, yourself, or any person who wants to put money in your account. The yearly maximum for individual contributions is $3,000 and the maximum for family contributions is $5,950. While you don’t have to contribute the maximum amount each year, some health savings accounts do require a small monthly contribution. If you’re not certain how much you truly spend on medical expenses, go with a smaller amount (that you know you will use) and carefully track your expenses for the next year. That will put you in a great position to take advantage of the tax savings the next year.

Use of HSA Funds

For ease of use, a health savings account will generally provide you with a debit-type card or checkbook. Then, you’ll use that method to pay for your medically approved expenses. You don’t need to worry about getting approval from the person who oversees the plan. However, keeping your receipts just like you would for any other tax deductible item is wise. Of course, you need to be established in an HSA before you incur expenses, or else they will not qualify for reimbursement.

Withdrawals can be made for any reason, but if they are made for non-qualifying medical expenses, expect to pay a 10% penalty. For those aged 65 and over or disabled, the penalty is waived and only income tax is paid.

Rollovers

You’ve also got the option to add funds from your IRA to your health savings account. This is a one time deal and there are caps on how much you can contribute. Employees can have a one-time transfer opportunity from a health reimbursement account or their flex savings accounts. Again, this is tax free, but a one time deal. So use it wisely.

Beneficiaries

When a participant in a health savings account dies, the money from their HSA is reassigned to the beneficiary of the account and if the beneficiary is a surviving spouse, the transfer is tax free. Ask a qualified agent if you have any question about assigning beneficiaries on your health savings plans.

Benefits

As with any type of health insurance benefits, there are reasons why a plan might be right for you. With a health savings account, you are entitled to deduct all of your contribution from your taxable earnings. Also, you will earn interest on the amount of money that sits in your health savings account. One of the biggest benefits is that this interest is tax free! And don’t worry because there are no penalties or taxes when the money is used to pay for qualifying medical expenses.

Also, unlike a Flex Spending account, health savings account monies remain in the account at end of every year and earn interest tax-free for future medical expenses. The most important reason to consider a health savings account is the HSA-eligible insurance plan with a lower premium than a plan with higher premiums and lower deductible.

Drawbacks

Critics have rejected HSA’s as only benefitting younger, healthy people and making the health care system more costly for everyone. Since people with health savings accounts pay smaller premiums and more from their own pocket, insurance expenses are spread among a smaller number of people, therefore making health care plans more expensive.

There is also concern that low-income people will opt for the HDPD plans (designed for HSA’s) that have lower premiums and sacrifice necessary health care because of the higher deductible. Still, no one but you is really qualified to decide if this is a good plan for your needs. Consider both the significant tax savings and your ability to pay a higher deductible out of pocket when making this important decision about your family’s insurance funds. Finally, be sure that you take the time to compare the plans, options and providers out there. While your job may offer a group insurance, it may be worth your while to look into more affordable private insurance options too.

photo credit: D Sharon Pruitt