- Health Savings Accounts (HSAs) continue to grow in popularity.
- HSAs offer many tax benefits to participants and may also be used for other expenses in retirement.
- Consider your personal health situation carefully before enrolling in an HSA.
As premiums and out of pocket costs for healthcare continue to rise, individuals are looking to take more control of their medical expenses. This has led to growing interest in Health Savings Accounts. HSAs are increasingly popular but often misunderstood.
To summarize, HSAs work differently from typical health insurance plans. First, they require a participant to be enrolled in a high deductible health insurance plan as defined by the IRS. This means the first funds paid for medical procedures are covered by the participant up to a certain cap. So, if your deductible in the plan is $2,000, the first $2,000 of medical expenses in a given period will be 100% covered by you. Any amount above the deductible will be split between you and your insurance company (also called co-insurance).
Example: If you had the $2,000 deductible plan outlined above with an 80/20 coinsurance set up, and incurred $7,000 of eligible medical expenses during the year, this would be the split between your expenses and the insurance company’s expenses:
|Coinsurance (20% of $5,000)||$1000|
|Insur Co:||Coinsurance (80% of $5,000)||$4000|
So what is the advantage of this setup? It allows the participant to pay for qualifying out of pocket medical expenses with tax-free dollars, since the contributions to an HSA are tax deductible (no matter how high your income is!). As with IRAs, there are limits to how much you can contribute to an HSA in a single year ($3,350 for single participants and $6,650 for family plans in 2015). Additionally, any contributions made by an employer into an employee’s account are also tax-free. Lastly, any growth on the money within the account will also be tax-free as long as the money is used for qualifying expenses when withdrawn (if not used for qualifying medical expenses, there can be taxes and penalties).
Besides the tax benefits, there are other major benefits to HSAs:
- All funds carry over from one year to the next within the account, making them a little more “flexible” than flexible spending accounts
- Accounts are portable, meaning they can be rolled over from one plan to another
- Once a participant hits 65, the account turns into an IRA and can be used for any type of retirement expense (with tax free withdrawals still available for qualifying medical expenses)
These benefits make HSAs extremely valuable tools for managing healthcare costs, and at worst, can help provide an additional tax-deferred savings vehicle for retirement. However, people who benefit most from HSAs tend to be those who are relatively healthy and who are comfortable meeting initial medical expenses out of pocket. Be sure to consider your personal situation before making the leap into an HSA.
If you are interested in exploring an HSA and want to discuss if you would be a good fit for one, please feel free to email me or call the office at (610) 695-8070.