HSAs (Health Savings Accounts) have been very much in the news lately but what are they and should you consider an HSA? Essentially, an HSA allows you to pay nearly all medical, dental, and vision out-of-pocket expenses with pre-tax or tax deductible dollars. This is done by coupling a qualifying high-deductible medical insurance policy with a tax free savings account (the HSA account itself). HSAs are available to nearly everyone and have more liberal and attractive provisions than Medical Savings Accounts which they replaced. There are a number of requirements but the resulting benefits are many:
- Virtually all medical, dental, vision, and related out-of-pocket expenses can be paid with tax deductible dollars whether or not the expense is covered by insurance!
- You have complete freedom of choice of doctors and other providers
- You have more choice in how you use, spend, or invest your health care dollars
- Your medical insurance costs are significantly less than for traditional medical plans
- Money contributed to the HSA Account and not used by the end of the year can roll forward and grow tax sheltered, essentially becoming a “medical IRA ” which can be used for future retirement income. This is true even if you already have a regular IRA.
In order to have an HSA Account you must have a High Deductible Health Plan (medical insurance policy). In addition, you must be under the age of 65, not enrolled in Medicare, and not be covered under another non-qualifying medical insurance plan.
High Deductible Medical Insurance Policy – a qualifying insurance policy must meet certain requirements, which include:
- a deductible of at least $1,050 for a single person ($2,100 for a family)
- maximum out-of-pocket amount per year of $5,250 for a single person ($10,500 for a family); this includes the deductible and any co-insurance
- no "first dollar" expense (i.e. not subject to the deductible) other than preventive care such as women’s gynecological exams and lab, and men’s PSA testing.
HSA Account - a tax exempt account with a qualifying financial institution (usually a bank, but not all banks will offer HSA accounts) in which you accumulate money to pay for medical expenses. Features and requirements of the HSA Account are:
- Contributions are tax deductible if contributed by an individual and pre-tax if contributed by an employer
- Annual contributions are limited to the amount of your annual health insurance deductible (or $2,700 single/$5,400 family if your deductible is higher than that amount); there is a additional “catch up” contribution amount of $700 if you are age 55 or older.
- Withdrawals from the HSA account are income tax free if they are used to pay for qualifying medical expenses. These typically include your deductible and co-insurance, if any, but can also include any expense the IRS recognizes as an allowable medical expense, such as dental, vision, chiropractor, certain over-the-counter drugs, etc. HSA money cannot be used to pay for ordinary health insurance premiums.
- Any withdrawals, prior to age 65, that do not qualify as eligible are subject to income taxes and a 10% penalty tax.
- At age 65 and older the money can be used for any purpose with no tax penalty; it will, however, be subject to income tax.
HSA plans can be set up by individuals who have qualifying individual health insurance policies, or can be sponsored by an employer who has in place a qualifying group policy. In the case of an employer sponsored plan, contributions to the HSA account can be made by the employee, by the employer, or by both (up to the annual limit). In any event, the money contributed belongs to the employee, can roll over from year to year, and goes with the employee if employee terminates employment. Typically, when an employer implements an HSA plan, they will fund at least part of the HSA account contribution out of premium savings resulting from changing to a higher deductible plan.
CAVEATS
While HSAs can be a great way to help hold down medical and health insurance costs, there are several things to watch out for:
- Contributions are pro-rated if you start or leave a plan mid-year. For example if you start a plan on July 1st, you can only contribute half of the amount you otherwise could for that year
- The single deductible only applies if you are insured as an individual – if you are insured as a family, the family deductible must be met before any insurance benefits are paid, even if one person in the family goes over the “single” deductible. This is different than almost all traditional health insurance policies.
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