A Health Savings Account is a tax-advantaged bank or savings account combined with a low premium-high deductible insurance policy. It provides a financial planning approach to managing the cost of healthcare. It is designed to encourage the participant to take control of his/her healthcare decisions by building a reserve to fund first dollar medical costs. If the owner and family stay relatively healthy as most Americans do (73% have less than $500 in medical costs each year) the account grows and can eventually be used as a second retirement account. Following are some features of an HSA.
Reduce Health Insurance Premiums
By establishing a high deductible plan which protects against catastrophic loss, the participants can cut their premiums by as much as 40-50 percent over a traditional group or "doctor copay" plan. Most people never recover those premiums they pay for these first dollar expenses.
Reduce Federal Income Taxes
Contributions to an HSA up to $6,150 for a family and $3,050 for an individual can be deducted from federal taxable income. Contributions are not subject to withholding, estimated taxes or other employment taxes such as FICA.
Earn Interest Tax Free
All interest, dividends, and capital gains earned in a Health Savings Account are tax deferred and when used for qualified medical expenses are tax-free. And since any unused funds roll over to the next year, as your account grows, additional self-directed options such as mutual fund investments are available.
Can Be Used As A Second Retirement Account
Money remaining in an HSA after age 65 can be used for anything (even non-medical expenses) and withdrawals are treated just like an IRA. Money left in the account continues to accrue earnings on a tax-deferred basis. Prior to age 65 funds withdrawn for non-medical expenses are subject to a 10% penalty.
Pay For Expanded Medical Services
Pre-tax dollars can be used to pay for medical services not covered by traditional health plans. Some examples are laser eye surgery, dental, eyeglasses, acupuncture, kids' braces, long term care premiums, and more. For a more extensive list of covered items see HSA Qualified Expenses list.
Who Is Eligible?
One of the biggest changes included in the new legislation is the expansion of eligibility to everyone, no longer just the self-employed. However, in Colorado at this time, while some group carriers are entering the market, their pricing and completeness of coverage are somewhat lacking. Hopefully, as competition increases, pricing will become more reasonable. The individual market presently remains the most competetive and economical, which means there is medical underwriting involved and pre-existing conditions and general health will be considered. We will continue to monitor this situation and hopefully will be able to recommend viable group plans as they become more competitive.
